Q4 2019 Earnings Call
Ladies and gentlemen, today's conference is scheduled to begin shortly please continue to standby and thank you for your patience.
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Ladies and gentlemen, thank you for standing by and welcome to the fourth quarter 2019, DCP Midstream earnings Conference call. At this time all participants are in listen only mode. After the speakers presentation, there will be a question and answer session.
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I'd now like 10, the conference over to your Speaker today, Sarah Sandberg Senior director of Investor Relations. Please go ahead.
Thanks, Karen good morning, and welcome to the DCP Midstream fourth quarter 2019 earnings call today's call is being webcast and I encourage those listening on the phone to be the supporting fine which are available on our website at DCP midstream Dot com.
Before we begin I'd like to point out that our discussion today includes forward looking statement actual results may differ due to certain risk factors that affect her business. Please review the second finding the Doctor described for you to forward looking statements and for a complete lifting of the risk factors. Please refer to the partnership latest I see see filing.
Also use very non-GAAP measures, which are reconciled to the nearest GAAP measure and scheduled in the appendix section of the slides that are been kanban, CEO and Sean or Brian CFO will be our speakers today and after their remarks, we'll take your questions with that I'll turn the call over the dollar. Thank you Sarah Good morning, everyone. Appreciate your door joining us for today's call.
As we ever 29 team, we've made commitments to our or stakeholders worksite to discuss our strategic execution on these goals and our outlook for 2020.
Looking to our full year results, we deliver DCF above the midpoint over 2019 guided range driven biofocus financial discipline on operational excellence or increasing fee based cash flows are DCP two porno transformation.
2019, that's been a pivotal year for DCP, we eliminated or IDR split for terms and shrink complete stakeholder alignment with a minimal impact or financial metrics.
We utilized our excess coverage and almost 210 million of noncore asset sales to cellphones approximately 40%. The were 29 teen girls comfortable we delivered on our commitment to reduce cost year over year. Despite increased charges from our voluntary separation program new growth and continued focus on DCP two porno.
And we did all this while maintaining best in class safety metrics, resulting in a second lowest told them recordable injury rate in the history of this company.
We saw record volumes up result from a logistics and marketing segment, driven by record Sands Hills, Quanta, Lubi and sort of southern Hills earnings coupled with strong NGL marketing margins.
In fact, our logistics and marketing segment crossed the threshold to generate more than half of our earnings in 2019, representing a significant shift in our transition to a fully integrated midstream service provider.
Well the GM beside overall volumes increased from 2018 Anoro gone to bypass its online in the DJ basin, bringing our total available capacity to 1.4 Bcf per day to better serve our customers you know going or two facilities underpinned by minimum volume and margin commitments, which helped to increase or 2019.
Gross margins to 65%.
When combined with our strategic hedging program or 29 deemed fee based on how its cash flow well nearly 80% reducing volatility around her business on balance sheet.
These fee based gosh wells were bolstered by the Gulf Coast Express pipeline into fourth quarter, and we expect to see earnings from Southern Hills extension into the DJ Basin in 2020.
Finally, our DCP two board old transformation continues to optimize our margins and drive costs down. In addition to our portfolio wide real time optimization opportunity integrated collaboration center, where I see see we know remotely operated 20, all four facilities from our Denver office diesel.
So these are being remotely operated and optimized by highly skilled people to increase efficiencies standardized celebration in a way that is unique to DCP across the midstream industry.
Building on boss successes, the powerful combination of where I see see I'm remote operations, resulting in over 30 million of new margin uplift alone simplifying DCP 2.00 ability to drive incremental improvement year over year.
We also saw improved efficiencies and productivity from Digitization across the organization gobbled when all her efforts drove a 15% reduction in headcount Oh, Wow, our asset base expanded and our safety outcomes remains best in class.
In all our team continues to deliver on our operational financial and structural commitments to driver company forward, an increase unitholder value.
Looking to a 2019 financial execution on slide five we delivered solid results in 29 team, our adjusted EBITDA increased 10% year over year adult of $1.2 billion.
Our DCF 762 million blended above the midpoint of our guidance range I'm represent the represented an 11% increase from 2018.
Before we discuss our sustaining capital number I want to note football historically, we have referred to this as maintenance capital. We believed that the terms sustaining capital more accurately describes the dollar amount needed to maintain cash flows from existing assets.
The metric will continue to be calculated in exactly the same way and we will now use the term sustaining capital moving forward.
In 2019, as a result of divestitures and a growing logistic asset base, which requires less sustaining capital we spend $83 million just below our 2019 guidance range.
On the girls comfortable side. This includes all capital projects that increase volumes beyond the existing base levels and it includes well connects to new incremental volumes and large capital projects in 2019 or growth capital exceeded the high end of our guidance range due to our opportunity to increase or ownership of human Shine connector.
Our project timing and cost increases on some projects, we're committed to being responsible stewards of capital and these projects remain in our target five seven times EBITDA multiple range.
Additionally, as shown by government in the next few slides, we're guiding to 30% reduction in growth comparable year over year. So I'll turn it over to shown to walk you through the details over a year the fourth quarter and our 2020 guidance. Thanks downturn. Good morning on slide six you'll find our 2019 financial results versus 2018.
And business highlights from the fourth quarter in 2019, we delivered strong financial results growing DCF by 11%, while overcoming a year over year commodity price decline of 108 million.
We generated 156 million increase in our logistics and marketing marketing optimizing and growing our sand and southern Hills earnings.
Capturing favorable pricing spreads within our Guadalupe pipeline asset and adding new cash flows from our Gulf Coast Express asset.
Our GNP margins were also favorable to last year growing by 38 million driven by record year for our DJ basin assets and solid volume growth from the Delaware Basin, we delivered on our commitment to driving our cost trend lower more than offsetting increases associated with new asset growth inflation and investments in our DCP 2.0 try.
Information, we're excited to announce the 2019 costs were down $22 million from 2018, and we're committed to continuing that trend in 2020 with a goal to lower cost buys them more stepped down.
Now turning to a few fourth quarter highlights.
First we placed the O'connor to bypass into service, bringing total DJ basin capacity to 1.4 Bcf per day.
Additionally, the southern Hills extension via White cliffs came on mine, providing additional NGL takeaway from the DJ Basin.
With a solid 2020, DJ volume outlook from our producers we're already seeing good volume growth on Southern Hills in the first quarter with continued volume ramp up expected throughout the year.
Due to permitting delays that we have now remedy the front range pipeline in Texas Express expansions are now expected to be placed into service in the first half 2020.
And finally, we executed an additional 54 million of dispositions in Q4, bringing our total 2019 proceeds from noncore asset sales were approximately 210 million.
Now moving to slide eight I'm going to highlight some details of our 2020 guidance.
For 2020, adjusted EBIT range is 1.205 to 1.34 or 5 billion and our DCF rain to 730 to 830 million translating to a distribution coverage target of 1.2 times or better.
Our guidance ranges are inclusive of the 2019 IDR elimination transaction. The now results in total annual distribution of 650 million I'll point out that the midpoint of our guidance ranges for adjusted EBITDA, and DCF demonstrate approximately 6% and 2% to present respective growth above 2019.
Warrants.
We are targeting is sustaining capital range of 90 to 110 million and a growth capital range of 550 to 650 million, reflecting an approximate 30% reduction in growth capital from 2019.
At 400 million two thirds of our 2020 capital program is driven by our Sweeny fractionator fractionator option not due until later in 2020.
And with these results in our expected asset sales, we anticipate ending 2020 with the leverage ratio of approximately 4.0 times.
The bottom to slide you can see our commodity price targets that drive the midpoint of our guidance ranges. We set these targets in mid January based on the forward at that time, and we do understand that they are now higher than the current price outlook. However, even if we were to marked at current prices, we would deliver a 1.1 times distribution coverage ratio.
Pricing is one variable among many that influences our result.
We're not a knee jerk company, rather we're confident in our proven ability to effectively manage through challenging environments and deliver on our commitments.
To highlight that we deliver 2019 DCF above the midpoint of guidance, despite realized commodity prices well below our target guidance.
And on the right side of the slide a highlight a few of the key assumptions for 2021st we anticipate being completely equity self funded for the 60 earned ROE and we expect to be fully self funded in 2021, which battery will discuss in a minute I.
I mentioned earlier in 2020, we plan to see a continued reduction in costs driven by efficiencies from improved reliability and continued innovation efforts to help mitigate sustained lower commodity prices. Additionally, we're expecting solid growth the cost or cross our logistics assets with both on the NGL and gas pipelines, partially offset.
By lower anticipated earnings on our Guadalupe asset as long term well priced contracts replace spot sales.
Finally on the GMP side of the house, we expect overall volumes to be relatively flat with growth anticipated in the DJ Delaware basins offset by declines in the mid continent, partially due to asset divestitures.
Slide nine shows our current fee based margin in hedge position our fee based gross margin percentage for 2020 is now 70% underpinned by our significant.
Cash flow and we've been able to layer on opportunistic hedges in 2020, bringing our total fee in hedge percentage up to 79% the highest level. We've been at this early in the year.
With that I'll turn it back over to better Thank you Sean.
We started no decade, I'll highlight how substantially this company has already.
Parties guidance numbers are going to take us.
In 2015 at the beginning of a deep downturn, we knew we had to radically transform our business. If we were going to should be sustainable in the long term. Our team has achieved significant success in executing our strategy as illustrated by the impressive changes in our portfolio mix growing fee based margin percentage and growth metrics, but our investments.
And assets like sand and Southern Hills Fromten from branch in Texas Express, including a subset subsequent expansions and extensions Gulf Coast Express several new facilities in the DJ Basin, we've transitioned into a fully integrated midstream service provider compared to 2015, we have now inverted the ratio.
All of our portfolio mix in 2015, 60% of our adjusted EBITDA came from GMP and now in 2020, 60% of our adjusted EBITDA is expected to come from our logistics and marketing segment.
By the end of the here, we expect to further reduce our commodity risk and balance our portfolio, while driving a 21% increase in DCF and a 25% increase in adjusted EBITDA since 2017.
In 2018, we heavily invested in our reliability and DCP 2.0 transformation to drive long term outcomes, resulting in lower base calls all while absorbing increases as our portfolio has continued to grow.
Nobody owns 2020, our asset base will have increased by 7% or 1.2 billion from 2017 at the same time, we expect our costs to rise at less than half of that base, while including an absorbing inflation.
We've also rightsized to high graded our portfolio by divesting non core assets in places like Wyoming, Louisiana, the northeast the Barnett and the mid continent.
Across our footprint, we continue to strategically dry vertical integration and sold for broad industry needs from the well have to the Gulf coast markets, resulting in an optimized portfolio higher fee based earnings and increased volumes and cash flows looking back over to his journey, we have a lot to celebrate as a team.
Looking forward, we face potential headwinds from commodity prices, we have to ride strategy into ride team in place to continue our strong momentum and extends our track record of delivering strong results even in challenging times, which brings me to slide 11.
Here I'd like to provide additional clarity into our path to fully self funding model looking to our growth capital outlook 2020 represents the final tranche of almost 3 billion ballpark multi year organic build cycle, culminating in sweeny fractionator later this year.
We expect a 30% reduction in growth capital spending 2020, as we bring the Shyam connector to front range in Texas Express expansions lay some tool load and sweeny fractionator from line.
Through continued targeted divestitures and excess cash flow, we expect to self fund over half our growth capital this year.
Our next year, we anticipate base growth capital of up to 150 million and sustaining capital of up to $110 million. As we have recently shared a 2019 and 2020 growth projects are expected to produce approximately 270 million of annualized adjusted EBITDA, which 90% this fee based.
So take this growth our DCP 2.0 innovation results and potential asset sales and we anticipate being completely self funded including all capital needs in 2021.
As we look to how our capital allocation model will then evolve we will move class a primary focus on organic growth and seek to reduce leverage return increased capital to unitholders and explore potential consolidation opportunities in all we have clear line of sight to fully self funded model in the short term.
And sustained success in the long term.
So let me wrap it up on slide 12.
We knew that 2020 would be a challenging environment with a variety of macro influence us commodity prices have already proven this thesis our past and future success comes down to driving strategy built around operational excellence and sustainability, our solid financial execution and advancing our DCP 2.0.
Formation efforts in 2019, and 2016 and in 2014, our team has demonstrated a remarkable ability to execute on cost control cash preservation capital efficiency and a variety of other levers we can pull to meet our commitments a DCP.
A promise made is a promise kept and we will continue to return secure and competitive distribution. We will continue to improve the results from our asset base and we will continue to deliver solid financial outcomes in any commodity environment. We are a much stronger company entering this decade, we're excited to continue.
Due to driver strategy forward to increase stakeholder value now looking forward to taking your questions. So Catherine please kick us off.
Thank you as a reminder to ask a question you'll need to press star one on your telephone to withdraw your question press the penalty.
And our first question starts with Spiro Dounis with credit Suisse. Your line is open.
Hey, good morning, better more Sean why don't you.
You mentioned good morning, I'd add John you mentioned the ability to last year exceed expectations, Despite I guess commodity being a little weaker than expected.
We take a you know admittedly very simplistic approach and mark to current market.
Due to the tape here. It does suggest the lower end of your 2020 EBITDA guidance. So just hoping you could expand on that thought and maybe walk through some of the offsetting variable said.
We're not appreciating it something that analysis.
Yes, I think Spiro a couple of things you look at 19, and we are highlighting that because youre at same time in 19, when we would have given you guys. The guidance what ultimately ended up.
Manifesting was a much lower commodity environment, and we exceeded and did very very well some of the drivers in 19 of the same drivers are going to see in 2020 batter alluded to a bunch of them. We arent that we are guiding cost to go down we continue to focus and accelerate the 2.0 transformation is how we lowered costs. A 19, it's how we're going to continue to lower.
Boston 20, those levers can be prices not the only mechanism that moves in highly variable that moves in our forecast. So we'll continue to focus and drive costs down.
Well get some questions I'm sure later around maybe moving some of this so high volume or capital that is not in our base plan. So thats an ability to drive some capital numbers be capital efficient take those numbers down I think what people might be missing a little bit in the models and it's pretty overwhelming is the amount of new cash flow that is coming on in 2020.
And connector full year ago Gulf Coast Express the late them offload full year Bossi too we expanded sand hills in 19 were getting a full year of that so high white cliffs growth the cost coming down we see some growth in some key GNP areas like the DJ in the Permian and then front range in Texas Express you'll see.
Some some growth there those are monumental numbers think about that 270 million about or talked about so one thing I'm confident of is our ability to manage through this cycle. We're set up quite well, even if you want to Marcus to the low end of the commodity we're still at a one one or better but I can guarantee you were going to deliver above that and we and we proved that.
In 19 from all those measures I, just mentioned yen Spiro, maybe maybe to add a little bit today is a Mike yes, we were not surprised that people are saying hey.
Quality is a bit different today, Dan is much you guys put in your midpoint, Mike we agree completely with that.
Let me add at least give you a little bit of kind of insight in how the process works for us and for a lot of companies probably works you go to as management you put a budget together, but we tend to do as we turn to take a moment in time and Thats, where we take the Mark and we think the forward and say okay. This is going to.
To be our commodity price deck, and we're not going to go above that are below that and put kind of our vision through it. We just say hey, both us the market fell off and that probably put it we did that in early January we go to our board we get our we get our.
But yet a proof that our budget includes commodity prices for NGL for gas and for crude so thats. What we did obviously in the last three plus weeks or so some pretty significant things happened at a macroeconomic environments, including things that none of us all coming like a corona virus.
With that said, we are staring and looking at that taped the same way you do we probably even more than you do and this team is not sitting still there's a multitude of things that are happening within this company looking at hey, what can we do to be more efficient artist certain things around capital that we can maybe move out.
Are there things that we can do around sustaining capital that's maybe even smarter and that's kind of gives us another way to kind of reduced SMB more efficient around cost around margin around the variety of different things.
We have and we have a lot of tools that are available to us and so yes I appreciate your comments and say hey, we're sitting and maybe we simplistically sit there and just mark you assuming that all else face stays the same.
I can guarantee you and I think this team has proven in 14 16 to 19 that if something goes the wrong way for US we will find other ways and our job is to find other ways to continue to do things. Our job is not the swing our strategy would every price fluctuation that may be moving up or down our job is to fight.
Actively managed through it deliver results and this team has shown year on year on year on year on year that that is what we're doing and Spiro I got I'd be remiss, if I didn't add one last thing and its and its prevalent in our slides. The company has moved more and more to fee were 70%. This year, we were 65% last year and.
And we've been able to get some pretty good hedges on late last year, even a little bit early this year. So we're going in you're saying you. How do you manage through this were 79% fear hedged.
Puts us in really good shape as we head into 2020.
Understood. That's very helpful. Appreciate the feedback there and then just stopped 20 on Capex looks like a material decline again looks like you're going down to your sort of base level.
I guess Im just wondering how set in stone is that figure I know you guys retain some optionality on bringing bay corn back at some point if the market warrants it but is there anything else in the hopper there that could materially move 20 on Capex higher.
At this stage.
Absolutely don't see that I'm sure we have big horn that we could bring back Theres other project, here's the way I kind of looking at that spare on I think we've had these discussions and number of times there are.
There are some pretty significant over built in a variety of places in this country. Both in the logistic side of the equation as well as on the on the processing side of the house, that's why you've seen us kind of.
Do offload agreements utilizing someone else's capacity at very attractive rates, but all of us having to do any any major capital investments on late them too is a great example of that the offloads that we're doing into Delaware basin are good examples of that so.
We continued to kind of look as that.
We don't want to on the last pipeline, we don't want to own the last processing plant, we like to be supply long and maybe a little bit asset short in an environment, where there is excess capacity.
That said Theres only things that you potentially good do.
I am the way I kind of look at that right now is probably more entry to do things logistic side, probably less entry to do things on the processing side of the house unless it comes with some pretty good DMD.
And volume guarantees.
Very helpful. That's it for me Thanks, gentlemen, Thanks Bureau.
Thank you our next question comes from.
Gershuni with CBS Your line is open.
Good morning, everyone.
Good morning.
Just maybe to follow up on Sparrows first question, a little bit here I don't want to beat a dead horse about this guide.
But so it's clear from your response and in your prepared remarks, if you understand that Youve got an expectation that's kind of above where where people are thinking of and so forth in.
And your response to speak to you had mentioned about the fact that.
Just stand still in sort of assume that that's there, but when you presented your original plan or does it include a downside case on scenario in an upside case scenario on commodities and you're you're effectively you you've got a plant you already to execute or Dakota virus. His body parts to change in your now scrambling to to come.
Some offsets.
You seem confident about so its offsets any sense on.
Putting a dollar number around what was offset.
So the let me start veneer about can talk about.
Long term management of the board, but clearly we bring in eight case for approval navigate some insight into that process, but we there are many slides always it's a prudent thing around what could go wrong headwinds what could move the needle and to be honest once in a while you can get to talk about some things that could go our way right.
So we have upside down sides, we have mitigating actions ready to go one thing and that are alluded to it that this company has gotten very very very good that is a proactive mentality around managing whether it's 14 15, 16 19 or now 20. So we're well equipped I think we set the company up really.
Well in 2020, all those projects I rattled off earlier Shinier are very solid projects. Those cash flows are coming online as expected.
And there's things we can do we were lucky enough to have a pretty good playbook at the end of the day, but with the board we definitely show the board some things that could go wrong, what would we do they went wrong what could we accelerate and so forth. So absolutely I don't know batter wants to add some things no I think thats the right thing it.
We we spent a lot of time looking at upsides and downsides, We don't run this company no in Hey, the world is going to be stable, we haven't seen stability I think in the in the oil and gas sector for many many years. So I think we're very used to saying hey, some stuff is going to potentially hit us.
In the face and what are we going to do about at the moderate a variety of different things that we can do as Sean mentioned I think there is a pretty good proven track record around this company from making sure that we execute the playbook, we did not have to reduce our distribution like many many others in our industry in the vast majority in the industry because.
They call it got caught by surprise I think there's a lot of things that we're going to do good around this I also would like I spoke a little bit about governance, and how we set our budget them with the board.
I do that governors governance is how people in this company are incentivized. So the numbers that were showing you hear today, there's a lot of reasons for every person in this company to try to find a way to make those numbers because that is how they are being incentivized.
So in some of your mitigating options I mean are we talking about something that can sort of be a partial offset of like and $20 million are we talking something that.
Yes.
I would I did its definitely more than $10 million to $20 million veneer and if you think about what we looked at in 19 batter alluded.
19 from up from when we gave you the guidance in early 19 to where we ended up price.
Commodity didnt hanging in it was 100 million plus the of a negative and those things that we weren't able to execute on more than offset that so we're not living in the world of $10 million to $20 million.
Divestitures are very large numbers you saw 210 last year.
Cost down $22 million, a lot of margin improvement tied to DCP 2.0 in the aggregate. These numbers are large and obviously we met we're focused on those every day. So yeah. We're not pulling levers that are just going to add five or $10 million and we've proven we can do that.
All right maybe as a quick follow up question here.
Just on some of the good.
You have a slide out talking about how your fee based position has changed.
You know kind of where you're at right. Now I was wondering if we can sort of talk about kind of on a go forward basis.
When I sort of about 21 of your line you've got the Sweeny Frac coming on online like here is there a way to cross the 75% threshold.
Opportunity.
Senates.
Patrick negotiations or their economic outlook on acreage dedication that that you can use to sort of reset.
Is your asset sale program.
Selling.
Based assets are you trying to focus on selling commodity based assets are we just talking about Michigan assets, just kind of wondering what levers we have that pull that came.
Can you to make progress on moving forward to fee based from from body.
Yes, I think you mentioned your list is very comprehensive you mentioned mentioned all of them and those are the those are the drivers that we utilized significantly I mean, you look at batteries as all bode very eloquently stated that we used to be 60% GMP and thats totally totally transformed obviously entrants and now were 60% GNP.
ER logistics going forward all those things the majority of our growth is going to be fee base that comes online you mentioned Sweeney, but don't forget you're getting the full year Gulf coast, you're getting shy in you're getting growth in front range, Texas Express Sandhills Southern hills things of that nature. Some of the growth in the DJ we have fee like compose.
Tenants in terms of minimum so that stuff has not fully come into fruition into our numbers, what you're seeing is a snapshot of 2020 that we'll continue to grow most of the I think what you were alluding to most of the divestitures that you've seen us do tends to pull away more commodity sensitive type assets and again, we're replacing them with more.
The based assets. So if we were to give you guidance, we don't for 2021 them and beyond around that fee number I think you're thinking about the right way substantial growth there.
Continuing to rightsize the company, it's interesting 19 was a pretty significant.
Volatile year around commodity and we produced some pretty stable results throughout that even with the portfolio. We have today, but all those levers or how we're going to grow that fee Hey engineer, maybe to just one really short thing to add that I. Appreciate you have gotten highlighting some of the good because there has been a tremendous mendis amount of good things that.
I think the teams and the employees here at DCP have done that's our job trying to figure out what the good as while we mitigate that.
I think this team also has shown that we can mitigate the bad.
Turning them into good guys I think 2019 chosen.
I appreciate that one last thing you Sean you went through my entire life, except one it was contract renegotiation is that an option that you can look at this will also.
Does that absolutely an option it's limited to certain areas. If you really think about where the companys move should near.
A lot of the we did a lot of that back in 15 16, there are still some areas areas like the mid continent, we're focused on doing that maybe.
The Eagle Ford went predominantly fee portions of the Permian So.
It is by the way an area is the impacts not going to be as big as you saw in 15 16, but it is one of our goals in 2020 is to continue to take commodity out of the contracts through renegotiations with our customers.
Perfect I really appreciate the color. Both you guys. Thank you very much.
Thanks and here.
Thank you and our next question comes from Michael Blum with Wells Fargo. Your line open.
Great Good morning, everybody.
Michael.
I just had a couple of quick questions one.
On asset sales. So first I guess is multi part Im wondering if you can give us a sense for how we should think about.
Overall blended all the stuff you did in 2019.
Like a blended multiple that you sold that and then on the.
Hundreds of 300, you're looking at for Tony Tony.
Just a sense, obviously not going to tell us what assets they are but just.
General idea.
Are you pruning the GNP side of the business I mean, how should we think about during their and and same question on multiples.
Yeah, you know.
I can't give you exact kind of multiples, but for 2019 realized I think look you should look at that we find a way to do this thing.
Either at a non dilutive or accretive way because clearly we found a way to sell $210 million assets in 20, and 2019 and still beat our Dcs. So we've absorbed some of that.
And do that but I think overall, we tend to go after as that.
Don't happen very good earnings profile for us so the multiples tend to be a little bit a little bit higher and thats kind of work in our favor. So I think in general that's kind of what I would like to say about that.
For for 24 2020, but are we looking at than at 100 300 million.
No I think you can fairly assume that is GMB assets.
That is where we tend to have pieces in the portfolio debt that we like the least.
I'll bet with that sat there very very limited assets, but if you look at what we've done over the last five six years or so it done to be small assets.
Don't don't that in many cases are older of cost profile that is higher for us and we don't have significant volumes running through so thats why you should see it logistics assets, absolutely do not see us go out and sell any of logistics assets. We like those a lot to have very very high you.
Position, they tend to give us stability as well so I would say focus more on the GMP side of the us.
Okay, Great and then second question is just.
So you referenced.
So here in the slide on slide six that.
New took $22 million of cost out of the business.
29 team you said would be a similar amount and we should think about roughly similar mountain 2020 is an absolute dollar figure or is that should we think about as a percentage of your total over them or just want to make sure I understand that right.
The 20 twos in absolute decline from 18 to 19 in terms of the similar trend I would look at it as a percentage we are we're targeting pretty meaningful percentages and I think the impressive thing is that.
Unfortunately costs are not a one way street every year you have inflation, you're paying raises you are adding some assets.
And we continue one of the big things accompanies done Mike over the last few years is we are investing in transformation in 2.0 quite a bit so the ability to to do all of that and taken absolute reduction.
Is pretty impressive and I think some of that also is exponential the more we get into the 2.0 the more benefits the more costs will go down. So as you think about 2020, it's a similar percentage that we'll be able to reduce.
Or at least targeting to reduced 2020 costs and the important thing is directionally go down again from 2019.
Got it. Thank you very much guys. Thanks. Thank you.
Our next question comes from Jeremy told me Tonet with JP Morgan Your line is open.
Hi, This is James on for Jeremy.
Just wanted to ask in terms of the 2020 guide.
How should we think about I guess volume centsfifty across the low and high end of your guidance.
Particularly with the sand hills in Southern Hills.
Other pipes come online and.
It does your decision to kind of not proceed with the southern Hills, especially this time factor into that at all.
I can give you will calm color James on the volumes, maybe I'll, let bout or talk about the strategic decision on our southern hills in terms of volumes.
Sandhills, we are expecting to see growth I mean, we added some capacity in 2019.
The only the only thing that took away some of those volumes and it's an economic decision on the pipelines was we increased and I mentioned this we increased the projection.
Side of the equation as we went through 19, but thats an economic decision we feel very good about the sand hills volumes very good about southern Hills, I'll, let bout or talk about the strategy. There and then if you think about the regions.
I think we've had a relatively conservative volume outlook is relatively flat for the company. In 2020, there are some pockets of growth obviously, the DJ would be one of those we continue to set records in the DJ through 2019 Q4 was very strong.
Another really positive outlook is the Delaware you know the southeast southeast New Mexico area of the Permian, We saw really good exit rates and we're seeing pretty good volumes and in 2020 already is were start the year. So.
Eagle Ford's hanging in there I think we would guide you to relatively flat and then of course, the mid continent I've talked about a couple of times is an area will continue to see declined but I'll, let battered maybe talk about southern hills in the decision there James on Southern Hills, if we continue to like to project a lot, but you got to look at this all about.
Yeah.
Capital efficiency, not overbuilding us not want to own the last five to last processing plant and the same theme that we've been talking to all of you a lot about in the last year our show so.
If you think about when we started talking about this southern hills extend our expansion. It was really kind of somewhere in the third quarter solve last year. Subsequently you saw us announced the lead them to offload not moving forward with the Big Hayward facility. If you think about how we look at kind of overall kind of.
Takeaway capacity out of DJ Basin. Originally we were looking at things like Hey, Big Horn was going to go out there laid some to what's going to go out there between the two of them you may be had 50000 barrels now one of those is not going to get built so you're basically generating 20 or 30000 barrels of space Offtake awake.
The out of to DJ Basin, then you take a look at ethane rejection environments, and we kind of look at things and so you know what ethane rejection is going to probably continue to be here for quite some time, given where we are from a commodity point of view. So thank all of that together and you say between the front range of the Texas Express Hassan.
Extension or expansion between to southern Hills expansion in the DJ We don't need it right here right now so why build it why don't we put it in backlog, we weighed a little bit maybe we wait a year and then we build it.
And we take it from there this has absolutely nothing to do when our volume outlook on but we expect to think to come out of the DJ Basin. That's still looks very very good to us really as about you know certain plans are not being built that creates capacity in the system ethane rejection creates.
Good capacity in the system, then if thats. The case why go out why spent that money now let's be capital efficient.
That makes sense.
And then you touched upon it but just the ethane rejection in the 48 cents price assumption you guys have as our factor of level is there a factor of ethane rejection in there.
Yes, even at the level, even in our assumptions James assume we exited the year the highest level. We were added in 2019 and Weve got in our models as we look at 2020, we have we're staying at those levels. So we are pretty high levels of rejections about or his comments that is even baked in to into our target prices.
Great. Thanks for the for me thanks.
Thanks.
Our next question comes from Elvira Scotto with RBC capital Your line is open.
Hey, good morning, everyone I'm wondering to follow up on the asset sales.
For 2020.
Have you already identified the assets where are you in the process of selling and does any of the guidance that you provided incorporate asset sale.
So asset sales are not incorporated we think that asset sales.
You never know if you can pull them off so thats why we don't put him in India based forecast, it's upside only the same way for 2019 upside only thats kind of our philosophy.
Yes, Hey, you never know if youre going to have.
Harrison and sellers meet at the right pricing so.
All right.
Defined absolutely are we working things absolutely.
Okay, Yeah that makes sense and then on your sustaining Capex I'm thinking I guess, you did 83 million in 2019 versus your original guidance I think was 90 to 110 million.
In 2020 year, providing that same guidance of 90 to 110 million can you just walk through that sustaining capex number why that hasn't changed versus your 2019 guidance.
So I think a couple of things we have added some assets, albeit they are newer and they're more.
The pipeline type assets, which tend to have a little bit lower on the maintenance front.
But you know Elvira we have some seasonality there are some core component to that maintenance.
That sustainability capital that's tied to regulatory that's tied to some safety projects. So I think we have a little more slated in 2020 than what we added 29 team one of the reasons, we were able to bring that number down significantly in 19 are you is some of the asset samples we are getting better wrap batter talks about a lot of this new tech.
Acknowledging that we're utilizing on our assets that gives us the ability to be much.
More intelligent about where we spent money where we putting the money can we get ahead of catastrophic failures that saves us a significant amount of money, but the guidance ranges would have gone up a little bit I think primarily due to some investments and some things that we have slated in 2020.
To start traditional DHS type program.
Okay. Thanks, and then just the I guess see.
Bigger picture question. When you talk about capital allocation you list organic growth reduce leverage return capital to unit holders and then potential consolidation can you expand on that a little bit, especially around potential consolidation is that asset acquisitions or dcps hiring a business our company.
DCP selling itself.
[laughter] Wow that's.
That's a lot there elvira.
Let me let me, let me take one thing gotten off the table youre not going to wake up one day and see DCP is acquiring someone else for a big multiple I guarantee you that that is not what is going to going to happen, but what we're doing and we've spoken a lot about what we're doing around our transformation is doing this.
Company, and creating it's kind of lean manufacturing model being the safest most reliable low cost midstream service provider because this industry like unlike other industries has always lymphoma, hey, but does my neck growth project. Both my next growth project, and we know that Thats Super cycle of growth is coming to an end.
We saw that coming internally, we've been talking about that since 2017. Since 2018. That's why we started this digital transformation. That's why we're trying to make this company a lean manufacturing model, Indiana. What you can do is that as you hope that youre more efficient on other people and you can potentially full assets in there and that's what we're talking about.
So we're talking about hey, when you apply what we have and change that.
And for other companies or assets within that model and be more efficient and got synergies that way.
Do not expect again I want to make sure to do not do not expect to wake up and GE DCP midstream is buying one of their neighbors at a 30% premium I can guarantee you that is not much you will see.
Got it okay. Thanks a lot.
Thank you Agora.
Thank you. Our next question comes from Chris.
Hi, low fee with Jefferies. Your line is open.
Hey, good morning, Ron.
Morning.
Thanks, Thanks for taking my questions, Sean just curious if you could help me.
Understand slide slide 14, a little bit better you made a change and how your for training some of the hedge positions most them I'm focused on just the use of the phrase targeted average hedge price, but the NGL.
And I'm, just I guess I'm wondering to two things.
How do we interpret if.
Prices are different than your target and does that change any of the sensitivities you provided in the financial guidance just any of it.
I think and kudos, Chris for picking up on that change, but where we have hedges were trying to show you the prices, where we have substantial hedges in place.
What gets a little complicated is you know with crude and with gas it tends to be very straightforward, obviously on the on the barrel for NGL.
We're not we either opportunity sometimes to hedge the heavier ran because it correlates with crude a little better maybe there is a run in propane we can go out and get those so.
We don't have a significant amount of those hedges out in place. So we're just trying to show you our target versus showing you the composite ethane, where one particular price would be we don't think thats that helpful. You need to really look at the total composite barrel and where our targets are.
So thats why we have that change on there if we get the opportunity to get some additional NGL hedges on we could may be modified a little bit, but we didnt want to be misleading by two showing one element or one component of the NGL barrel and it would have no no change on the sensitivities I don't believe.
Okay, and so that the volumes you. If there are those actual hedge positions you hold today or does that include.
Target hedges for products now I don't know those are actual those are actual in.
And again, we saw some run up on a couple.
A few of the components of the NGL barrel, we were able to go out and get some hedges on either late last year, but we're trying to give you a good proxy aware and if we continue to page, where where we would be on a total NGL composite perspective.
Okay.
If I switch gears, a little bit and think about it I guess in context of commodities you had an earlier discussion with spiro on generic about.
It seemed like levers that were available to you that you could pull that would be supportive to your financial performance in a low price environment and I guess Im wonder if I understood that correctly and why those would be levers you will always be pulling or why they're only available in a low price environment and then I guess, maybe put the opposite leash on like.
What gets you to 13 45.
In EBITDA year, what needs to happen from here to achieve that level.
So.
The top end of the range clearly always has some price elements right I mean.
So thats only one component, but again, if you think about the levers that we're pulling we're always working on improving the business. We're focused on cost you look at the core guidance. Chris There is cost reductions in terms of can you go harder it things can you move quicker when we look at 19.
And we keep reiterating this we saw some pretty some pretty dampened prices in 19, and we didnt hit the low end of our guidance, we were able to hit above the DCF guidance and pretty close to the EBITDA and those there is always union Yang I mean, just one variable can go down sometimes there's positive outputs or outcomes from a come.
Body going down.
Sometimes there's things that we're going to drive a little bit faster give us the opportunity to move some things in a little bit quicker get some projects on mine a little bit quicker. These are all the same levers that we pulled that accelerated our base case in 19 and as a matter said that we were we did not become aware that prices in the current environment.
Were below our mid point when all the reports came out yesterday, we were watching that pretty closely we're aware of it assume we're working on other levers or.
Or accelerating things that we're working on anyway.
You had to help us mitigate through this environment, yes.
Chris Mike I think your question is around pay or you guys sitting still when prices are good and the now you feel you need to run hard.
I think before this call I look if gas prices in crude prices they were up 3.5%. So our people taking their foot of the accelerator today no absolutely not the Mike. This happens every day, we see these big swings in like this has been a big commodity swing industry for quite some time now again and I love our job is to continue to aid.
They execute our strategy and keep focusing on executing the strategy not go.
But every price fluctuation up or down kind of start changing the base.
At the same time, we've seen some pretty significant movements here you see some pretty significant macroeconomic things happening kind of starting you know around middle or end of January and that obviously gives you kind of some heightened scrutiny around pace, but what does that change at a macroeconomic level from a supply demand point of view thing.
It is likely Corona virus, and therefore, hey, our other levers that we can book or what should be pull harder on certain level.
Okay. No. That's helpful. I mean I appreciate it I think we all last year.
We're sort of reintroduced the Guadalupe pipeline that you guys haven't the contribution there was obviously.
Quite quite spectacular relative to I think what was built into your baseline. So I. Appreciate I think theres. Appreciate that there are elements of your asset profile that do provide sort of internal hedging on either basis or or price, but I guess thinking that that was.
More of a hedged out scenario going forward that maybe you'd have less flexibility now. It's why that's that was really out of the spirit and the question Yeah, Here's the way I look at it Chris Hey, I don't underestimate the creativity to flexibility that's not 50 of our team to find tape. What's the next Guadalupe let us to next thing that we have said we didn't think about.
Our debt kind of went our way because many many times when when stuff things go against you there's something else in your broad based portfolio did actually may go.
Create a little bit tailwind so.
Our job is to kind of five dose to work doesn't do it to work really hard and as I said earlier.
2200, plus teammates here at DCP are highly incented to get to the numbers that we showed you today.
Okay I do have one final question, if I could and that's just I look at slide 19, I look at the capacity that you list and the JMP regions. It looks like processing capacity in the mid Con came down about 210 million cubic feet, a day quarter on quarter and I'm. Just curious the footnote indicate to you list only active plant capacity.
So I guess I'm I'm curious on or was that a plant idling was that part of the asset sales you've already done is that part of the potential slate that you're contemplating some of its helping yes, let me I'll have Sarah get back to you with the exact details, but my assumption would be between rock Creek between the latter Creek between.
Another plant that we shut down there the carney system divestiture I would say that is most likely what is driving that but cerebral confirmed for you.
Okay. Thanks, guys. Thanks for times one.
Thanks, Chris.
Thank you our next question comes from.
Gabe Moreen with Mizuho Your line is open.
Hi, Good morning, everyone. Most my questions have been asked and answered just wanted to ask about pref issuance potentially for this year at how you're thinking about it to stats large extent is dependent on how well the asset sales may or may not go.
It's not totally depending on the asset sales gave but we do look at the prep market. It started pretty strong at the beginning of this year.
So we've seen some positive transactions. It is a lever is one of the levers we will stay focused on.
Okay and then just one quick follow ups for me in terms of a follow up to Michael's question on M&A I think founder you said.
So there's probably going to be concentrated on GMP clearly there was a good assets a few on part of which traded hands in December for what looks like a really nice multiple.
Did you contemplate maybe piggybacking on that and if you got some sort of similar multiples like mid teens EBITDA would you ever part were telling them assets for yeah. That's my question.
No. It's I think one thing is really interesting and I don't know off.
Uhhuh yesterday royalties that there is a bit of a discrepancy in if you look at how we're trading.
I'll end buyer you sit there and say the implied valuation if you give a market valuation to Alan on Omar portfolio, and then what would the implied valuation be given where we're trading at than our valuation as GMB would be trading really really low in comparison to honor people and one way to may be crystallize that is to sell and.
Alan on us.
No it's as we'd like to an element business and we think it is we've worked really hard we showed you how we move that part of the portfolio short you can piggyback and trying to sell something and is that going to crystallize the value of the overall logistics business I, probably don't think so the other thing, but it does it really is going to make you may.
More GMP centric once again and I don't think Thats, what we want yes, we looked at that we think about that.
Probably not likely.
Thanks Robert.
Thank you guys gave.
Our next question comes from James Carreker with with U.S. Capital Advisors. Your line is open.
Hi, guys. Thanks for the call.
Just a couple of housekeeping items I think you guys have a 600 million dollar debt slug to next month any color on.
How you're looking at that.
Yes. Good news is James we don't have any towers throughout the period, we do have that maturity coming due in.
Q1 of this year markets are good our debts trading wells, so things are looking pretty good on that.
So your expectation is to do an offering or or cover with the revolver.
Yes, we've got a lot of options on the revolver and ultimately doing yield covering with an offering sure.
And then you guys mentioned Guadalupe earnings are down as.
Some of these.
Contracted rates start kicking in.
Do you guys have a duration for.
What the average contract is on Guadalupe.
And.
I guess as well just leave it there.
Yes. So the good news is weve. These contracts tend to be five years. These and then those options were not available historically they are not at the spike rates, but threats very very strong rates, we've turned that asset into a very strong annuity of fee based annuity that will be with this for five years I think thats a that was a terrific play.
No I appreciate that color and then I guess one last item.
You mentioned, Sean earlier, I believe even at the low end of your guidance would provide for 1.1 times.
Coverage, but obviously that does hit more so I guess some of your leverage metrics and whether you use your.
Thank metric or an all inclusive debt to EBITDA or something so metric that includes depressed it is.
It does creep up a bit so just wondering how you are kind of thinking about that.
Do you pay attention to the other metrics or is it just kind of this bank revolver.
Calculation.
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'cause it certainly seems like you want to bring it down but.
There are certainly some headwinds facing the business.
So couple of things we did say so yes, we are focused on the bank banks very important but we every slide I have James has all the three rating agencies on it as well so I'm staring at all of them.
Mike.
And one thing I want to remind you. The one one is that just says hey, we take the current spot. The company does nothing to mitigate that that is not going to happen. We're very focused on our levers. We're focused on our coverage as matter said the distribution safe and men were all incentivized as he mentioned to drive and deliver these results which are produced.
Strong so I do stared the other metrics assume we're going to mitigate a bunch of that.
Yes, I only ask because I think.
I think consensus from investors coverages, becoming less and less of a focus.
Whereas leverage and free cash flow generation or the next new thing and so to the extent it those are metrics that you guys followed yeah. We.
Ill briefly and then James over usually we do unlike and Thats why we gave you got some outlook and say Hey, where are you going in 2021, and you know a this company has been significantly free cash flow positive in kind of a traditional way of talking about it the way we look at free cash flow positive is after paying the distributions and we.
We see that were completely fully self funded beta distribution Bayer sustaining capital Bay, our growth capital in 2021, and I think that has a great great outcome.
Okay appreciate the color.
Thanks, James James.
And our next question comes from Tristan Richardson with Suntrust. Your line is open.
Hey, good morning, guys appreciate all the commentary perspective.
Just on sand Hills.
Your comments around growth appreciate that just thinking about the contract portfolio. We think of maybe some of the movements in 19 is somewhat one off but particularly with new contracts associated with expansion could talk about average tenor today and if theres any upcoming re contracting or more short term deals that may come up.
In the near term.
Yes, no tourism as well to appreciate that.
Our.
I think we've been fairly open amount is the largest contract up we have on incentives is what ourselves DCP, we have some pretty good insight and that's the second largest contract is going until the mid Twentys Thirtys Thats very very significant contract and then we have a slew of contracts that go until middle of this decade. So.
Other short term deals that we do at same at that time. So everybody is doing deals, but we do not see any recontracting risk kind of average duration of our portfolio is quite lengthy deep until this does this coming decade.
Very helpful. And then just a quick follow up you guys talk about in your slide sort of assumptions for 2020 years potential.
Benefits of any shift to ethane recovery.
Is that a potential driver in 2020 towards the high end of the guide or or just kind of bringing that up.
So what Sean I think mentioned earlier is that we do not have any kind of benefits from additional ethane recovery into our current guidance that we have so that is truly us.
As an upside.
Very helpful. Thank you guys very much.
Great. Thanks Kristen.
Thank you and I'm showing no other questions in the queue I'd like to turn the call back to cerus MBR for any closing remarks.
Thanks, Catherine and thank you everyone for joining us today, if you have any questions. Please don't hesitate to recap.
Ladies and gentlemen, this concludes today's conference calls.
Thank you for participating you may now disconnect everyone have a great day.
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