Q4 2020 DCP Midstream LP Earnings Call
Okay.
Ladies and gentlemen, thank you for standing by and welcome to Q4, 'twenty and 'twenty DCP Midstream earnings conference call at this time, all participant lines and a listen only mode and.
After the Speakers' presentation there'll be a question and answer session to ask a question. During this session you will need to press star one on your telephone. Please be advised that today's conference is being recorded if you require any further assistance. Please press star zero and would now like to hand, the conference over to your speaker today, Sarah Sandberg Senior director of Investor Relations. Thank you.
Please go ahead Madam.
Jess and good morning, and welcome to the DCP Midstream fourth quarter, 'twenty and 'twenty earnings call today's call is being webcast and I encourage those listening on the phone to view the supporting slides, which are available on our website at DCP midstream Dot com before we begin I'd like to point out today and that our discussion includes forward looking statements actual results may differ due to certain.
Risk factors that affect our business. Please review the second slide and the deck that describes our use of forward looking statements and for a complete listing of the risk factors. Please refer to the partnership's latest SEC filings. We will also use various non-GAAP measures, which are reconciled to the nearest GAAP measure and schedules and the appendix section of the slides that are then kempen CEO.
And Sean O'brien, CFO will be our speakers today and after their remarks, we'll take your questions with that I'll turn the call over to value. Thank you Sarah Good morning, everyone. I appreciate you joining us on our call today.
And after a incredibly challenging year, we are really proud to reflect from our performance from our teams throughout 2020, we were able to navigate a double black Swan event that visa rate and demand plunged oil prices into negative territory and fundamentally change the way we operate as a company.
Team rose to the challenge to produce extremely strong financial and operational performance as a result of our multiyear strategic evolution or Covid, and domtar and mitigation plans and a focus on sustainability and sustainability and operational excellence, which I'll walk you through on slide three.
Over the past decade, we've transitioned the company into a fully integrated midstream service provider, we and our logistics and marketing segment generating 61% over 'twenty and 'twenty adjusted EBITA and these are stabilized our cash flows and allowed us to capture more earnings and lower extended value chain and <unk>.
<unk> and the years, leading up to 2020, we optimized existing infrastructure as part of our supply long capacity short strategy, keeping our utilization rates high and minimizing our capital spending and.
And 2016, we launched our DCP two <unk> digital transformation, which has revolutionized our company.
Our investments over the past several years enabled us to deploy proven and fourth industrial Revolution technologies to achieve substantial improvements and our processes and operations, resulting in enhanced operational excellence and efficiencies.
We are also focused on margin optimization and increased productivity by the utilization of digital twins of our assets and our integrated collaboration center and significant enhancements to our reliability and predictive maintenance across our footprint as a result of our ICC and our operations team this year and represented our.
Best operational reliability, and the company's history relevant to plant runtime and plant based recoveries and major equipment malfunctions.
Underpinning our business continuity and was our pandemic response plan and ensure the health of our work force and communities, while maintaining safe and reliable operations and to protect the health of our business. We took early and aggressive action that resulted in over $1 1 billion increased cash flow year over year.
And by reductions and cost reductions and capital in a measured reduction over distributions to secure and liquidity generate excess free cash flow and ultimately reduce debt.
Before we detail our financial performance I want to mention a few other highlights from 2020.
And we made significant improvements to our emissions profile and our Permian asset as a result of improved reliability and continued operational discipline.
Following our inaugural report in 'twenty and 'twenty, we expect to highlight the details of this reduction and other ESG metrics and our second sustainability report, which will be published this summer.
Our sustainability efforts were recognized by GPA midstream this year through the awards of environmental Excellence and energy Conservation and we look forward to continued ESG improvements and the.
Lastly on the operations side of the business the Cheyenne connector and relate them to offload came on line in 2020, increasing needed residue gas takeaway and processing capacity and the DJ basin.
All of this hard work culminated in our financial results you see and slide four.
For 'twenty and 'twenty, our assets generated a 4% increase and adjusted EBITDA year over year totaling one point to five $2 billion, and a 12% increase and DCF compared to 29 totaling $850 million and exceeding the high end over 'twenty and 'twenty guidance range.
And we introduced excess free cash flow as a financial metrics within our guidance during 2020 and exceeded the midpoint of our range with $237 million generated and excess free cash flow this year.
Inclusive of working capital adjustments, we used this excess free cash flow to pay down $300 million of debt and we closed our 'twenty and 'twenty with zero borrowings on our bank facility and a leverage ratio of three nine times better and a four point out times guidance target.
Total capital and was down 74% year over year with gross capital of $205 million slightly exceeding the high and over range driven by increased cost on the Cheyenne connector and all.
And so we're tremendously tremendously proud of our team's execution and we look forward to carrying this momentum into 2021. So let me turn it over to Shaun to walk you through the details of the fourth quarter full year, and our 'twenty 'twenty one guidance.
Thanks, Wouter and good morning.
Looking to the fourth quarter, we generated adjusted EBITDA of $289 million and DCF of $178 million, which represents a 2% increase over Q4 2019.
Commodity prices and prices and dampen volumes pressured our margins. However, we more than offset these headwinds through $20 million of improved cost and sustaining capital savings and higher NGL pipeline throughput driven by better than expected ethane recovery and a 46% increase and volumes on southern hills compared to Q4 2019.
Partially offset by third party ethane rejection on sand Hills.
We guided on our November call call Q4 represents a one time increase in costs as deferred projects were brought back online and our January results already show a cost run rate similar to mid 2020, demonstrating our ability to maintain our efficiencies year over year.
Now looking to our full year results on slide six the team's hard work enabled us to overcome the substantial headwinds in 2020 and grow DCF by 12% year over year.
Although commodity price exerted $144 million negative impact on our business. This was fully offset by our $145 million reduction and cost year over year exceeding our $120 million goal.
Looking to our G&P business as a result of pricing and other dynamics, our producer customers drastically reduced their capital, resulting and a $19 million adverse impact from volume declines that we saw increased volumes and the DJ basin, and Permian where margin per wellhead Mcf from the highest this growth was offset by mid continent and south declines.
Accounting now for over 60% of our adjusted EBITDA in 2020, our logistics and marketing segment grew margin by $76 million driven by a full year of Gulf Coast Express the expansions on front range, and Texas Express and NGL marketing.
These segment drivers more than offset lower earnings from Guadalupe.
Our risk based prioritization of projects, coupled with bold product replacement drove sustaining capital expenditures below the low end of our guidance range.
Our excess free cash flow generation and allows us to pay down our debt by $300 million and increased our liquidity to $144 billion, we reduced our leverage exit to exit and continue to focus on debt reduction as our top capital allocation priority.
As a result of our strong financial execution Fitch revised our outlook to stable and September with S&P following suit and December resulting in a stable outlook from all three rating agencies.
To close our remarks on 2020 and want to offer my thanks to the team for delivering strong results that enabled us to improve our balance sheet. During this town downturn.
Now moving to slide seven I want to highlight some details of our 2021 guidance, but we have a conservative outlook on pricing and volumes as we continue to face uncertainty due to COVID-19, we anticipate a solid year with potential for substantial pricing upside our 2021 adjusted EBITDA range is one one.
Two to $1 $2 $6 billion, and our DCF range of 710 day $810 million.
We're targeting a sustaining capital range of $45 to $85 million and our growth capital range of $25 million to $75 million, reflecting and over 50% reduction and total capital from 2020.
And finally, after paying 325 million downwards and distributions our excess free cash flow range is $310 million to $460 million, representing and over 60% increase year over year.
At the bottom of the slide you can see the commodity price assumptions that drove the midpoint of our guidance ranges and our sensitivities to help you adjust expectations based on your commodity outlook if.
If you were to Mark to current improved prices, our DCF would be at the top end of our guidance range and our leverage would improve beyond our target demonstrating how well positioned we are to benefit from improved pricing.
Pricing is one variable among many that influenced our results. So when we give an overview of our key assumptions on slide eight.
First with a favorable capital outlook, we anticipate being completely self funded and 2021, meaning we expect to retire our $500 million September maturity with excess free cash flow, eliminating any need to access capital markets.
75% of our earnings are fee based and 2021 underpinned by growth and our logistics assets and we.
<unk> been able to layer on opportunistic hedges, bringing our total fee and hedge percentage up to 88% our highest starting well importantly.
Importantly, approximately half of our equity equity linked this edge offering increased stability, while also allowing for potential upside of $50 million to $90 million based on current forward and spot prices as.
As we stated we plan to maintain the cost reductions achieved last year with 2021 costs equally weighted between the first and second halves of the year and peaking in Q2 due to planned maintenance.
Lower costs were driven by efficiencies from improved reliability and continued innovation efforts to help mitigate dampened volumes and anticipated margin compression due to overcapacity across the midstream industry.
We expect slight growth across our logistics segment, driven by increased ethane recovery and a full year of earnings from the Cheyenne connector, partially offset by lower anticipated earnings on our Guadalupe asset as pricing spreads tightened.
Finally on the G&P side of the house, we expect overall volume to slightly decline with growth anticipated in the D. J basin offset by declines and the south and mid continent.
We expect contract roll off and the Eagle Ford and East, Texas and I'll also note that the late them to offload is not expected to be a driver of earnings and 2021.
And all of the external environment continues to be tremendously dynamic, but we are confident and our team our portfolio and our financial position and look forward to delivering a very solid year and 2021 and.
And now I'll turn it back over to Valerie Thank you, Sean and looking to slide nine.
Building on our DCP two <unk> efforts following the completion of our multiyear capital program. We have now sustainably lowered our cost basis and minimized our total capital expenditures, all while maintaining our leading safety metrics, delivering our best reliability and outcomes and lowering our emissions specific.
Two our cost reductions and expectations, we lowered year over year cost by 14% and 2020 and our team is fully committed to maintaining those efficiencies moving toward our 2021 total capital spend is down 88% from 2019 and represents less than half and for 2020 expenditures.
<unk> and <unk>.
Line put our capital allocation strategy, we have transitioned from a primary focus from organic growth to harvesting returns from our premier portfolio of assets, resulting in an expected, 62% increase and excess free cash flow year over year, enabling debt reduction and improved value for our unitholders.
So let me wrap it up on slide 10.
And we're taking a conservative approach. We believe we have a very solid year ahead of us as a result of the focus areas you see on this slide first and foremost we are always committed to operational excellence and we'll continue to prioritize our best in class safety performance above all else.
As we just discussed we will continue the momentum we created in 2020 relevant to cost efficiencies and capital reductions, we will utilize our increasing excess free cash flow to retire our upcoming $500 million maturity and strengthened the balance sheet.
Our DCP, two porno initiatives, including incremental advanced technology adoption will be re prioritized in 'twenty and 'twenty. One. Additionally, we will enhance our sustainability outcomes by building on our 'twenty and 'twenty progress and emissions reductions across our footprint and advancing our ESG initiatives.
And all of 'twenty 'twenty has proven the strength of our asset base the power of our digital transformation and stability of our cash flows and the creativity and unbelievable great of the DCP team.
We are now off to a great start in 2021, and I'm confident and the earnings power and all of our assets as we can.
Could recover from this downturn, we are well positioned to build on our success benefit from improved commodity prices and increase unit holder value and with that I want to say, thank you again to our employees for their hard work and to our investors for their continued commitment to DCP and I look forward and taking your questions. So.
Justin please kick us off thank.
Thank you Sir.
As a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound key after you ask your question. We please ask that you mute your line to avoid background noise. Please standby, while we compile the Q&A roster and once again that is star one if you'd like to ask a question and.
Our first question comes from Michael Bluhm from Wells Fargo. Your line is now open.
Thanks, Good morning, everybody.
So just had a question about the NGL pipelines and if I look at the.
If I go from EBITDA and DCF, taking the mid point from 'twenty and 'twenty to 'twenty and 'twenty, one guidance, there's about $100 million.
Delta there and it looks like at least 60% of that is as equity earnings and so I just want wondering.
And wondering if you could just speak to the outlook for sand Hills and 2021 and.
Especially in light of the fact that your guidance commentary you said that your risk.
But the higher NGL volumes due to ethane recovery.
Yes, I think Michael a couple of things to think through and I'll recap 2020, we were in rejection for most of the year and I'm being specific the sand and southern and we went into full recovery in Q3, and then we saw a partial recovery and Q4.
As we think about 2020 to 2021 sand hills is relatively flat.
From a volumetric perspective, we do expect recovery, we do have recovery baked in.
And the sand hills side of the equation and but we're still expecting to be pretty flat from a volumetric perspective 2020 to 2021.
So high is a little bit different story, we have some growth there we had the expansion that came in.
We're seeing.
One theme, we're seeing Michael is the volumes we control.
We can't and we stayed and recovery for example, and all of Q4, we expect to be and recovery for all of 2021, Some third party volumes.
Gone into rejection and stadium rejection, that's more prevalent on sand hills, and and in Southern Hills, So from a volumetric perspective sandals relatively flat.
And there are some offsets there will be and recovery. Some third parties may not be and then so high we do have some volume growth related to our expansion last year and the fact that we control more of those barrels and the decision on whether it goes into recovery rejection, but overall, a pretty pretty solid outlook for.
For 2021 on the NGL side of the specifically the pipeline side of the equation.
Got it thanks.
Very helpful. And then just I wanted to share. This correctly. So I believe you do have a debt maturity in 2021 and would your plan and be too.
Pay that off or refinance it.
Our plan is to pay it off.
And.
And I'm pretty excited Michael we took $300 million of debt off the books in 2020.
And we still want and we think it's still important to continue to shore up the balance sheet. So in 2021 when that $500 million comes due in September we'll use excess free cash flow, which as we mentioned is growing by over 60% between 'twenty and 'twenty one and.
And if.
And that doesn't cover it all will use our revolver for any remaining piece, but our plan is to delever and take as much of that off the books as we can.
Great. Thank you very much thanks.
Thanks, Michael.
Thank you.
And our next question comes from Shneur Giussani from UBS.
Your line is now open.
Hey, good morning, everyone.
I was wondering if I can start off.
And I actually looked at your expectations for cost this year to be kind of flattish.
When I think about your peers.
They were able to maintain about $50 to 80% of share reductions from last year, it looks like you're expecting to get.
And as close to 100 per cent of that.
I presume to point out was kind of part of this is that kind of continued focus for this theory for DCP to point out what you continue to improve on the cost side to offset any of the variable costs that would go up.
Is there a pivot this year, where you focus on revenue enhancement in terms of optimization on margins and so forth and just wondering if you can share with us the focus of DCP two point over this year.
And what element is baked into your or targets are baked into your guidance for this year.
I appreciate that Cheniere and Theres, a lot and so I'm going to try to just take a couple of things here.
First of all as it pertains to two cost we set a tremendously aggressive goal last year $120 million of cost out and we beat that handily.
And even while spending a little bit of extra money in the fourth quarter. As we all told you we were going to do it in November to make sure that we were setting ourselves up nicely from 2021, and even in the fourth quarter, and where we spend a little bit of extra money, we still actually reduce cost by $20 million versus 2019. So.
Cost is always Trump incentive for us if you kind of think about the discussions we started probably 18 to 24 months, where we sat a super cycle of growth has kind of come to and ads and we need to create a lean magnify manufacturing platform and the industry.
And that can that can operate in a very lean and safe and reliable manner and I think the team has been focused on that DCP. Two pointed out has been a huge part of that but it's to focus full and the culture of 1800 people within this company to always think about how can we do things smarter, how can we do it better and yes, the digital transformation.
Information and DCP two <unk> is a huge enabler of that so we will continue to focus on that I'm Super proud of the team being able to maintain those savings and we're going to spend more money on DCP two point no I'd put it in my prepared comments.
Because we believe there is more to be done, but we're going to do that within guidance. The realm of keeping all the costs that we saved year over year. So I think that is a great thing and then you asked about revenue enhancement Hey, we're always looking at ways to revenue for revenue enhancement, how can we optimize our assets.
DCP to Portola as Ikea and the ICC. The integrated collaboration center is a huge part of that you see about what's going in the market today and work out and spot prices are yesterday today tomorrow to rest of this month and there is an unbelievable opportunity to optimize your asset base rapid fire really quickly and to enter.
To start benefiting from that that's what our ITC is doing and combination with working with our operations teams and the field. So yes, we are.
We continue to see and lump from DCP two point old cost side from the revenue side and then also on the on kind of if you think about NRG transitions.
And things like that and we're working very hard we and our DCP ventures team around things is there.
And obviously this is all about on the one hand about compliance, but on the other and it's all about how can you create revenue opportunities out of this and we're working on both very very hard.
Okay.
Great and ill definitely appreciate all the color about her.
And maybe just a technical question with respect to ethane and rejection.
When I sort of looked at the third quarter ethane trade it at a fairly high.
Thermal equivalents, he premium trended down and the fourth quarter, we saw the volumes and we saw I guess rejection on your system.
And the fourth quarter.
We're back up in terms of thermal equivalents between now and I was wondering if you can tell us based on your experience where producers tend to reject versus recover ethane is there kind of like a flip point.
And 130% equivalent and 340%, where it sort of flips over and I'm. Just wondering if you could give us any color as to when we should anticipate producers and the Permian flipping between ethane rejection and ethane recovery.
If you have some experience on what percentage that would be helpful.
So she and here I can I can give you some generalities I can't give you everyone's and were not privy to everyone's exact thermal equivalent or frac spread tar.
<unk> targets, but a couple of things I can tell you and I was alluding to it earlier.
We base.
The thermal equivalent and then there's a formula that we have internally debates in the value because we are a fully integrated midstream company, there's more to it right. There's the downstream value to get the ethane all the way through to the Gulf coast and that and that that is a positive for companies like DCP that has that infrastructure. So reason I bring that up is.
And I mentioned it earlier, we were in recovery and all of Q4, and we expect to be and recovery for.
Barring some if you look at some interesting stuff that's happening and the market today with gas just going crazy, but and <unk>.
Generally speaking that's the math we run it.
<unk> version of the thermal equivalents frac spread plus we work into the equation, what's the value of the downstream barrels and the downstream earnings that we would make every other producer has their own.
Wage and many of them don't have those extra components, so theyre going to be and rejection and thats. What we saw even thermo equivalents aside we there'll be and rejection and times when probably companies like Gaza and recovery, we have a feel.
Our marketing arm and it sits in Houston definitely probably has a pretty good indicator. When some of these guys are going to flip and then the last thing I would tell you as well.
And in some interesting periods you may recall over the last half decade, we did some things due to flip producers into recovery with summit with some short term incentive rates that augmented that thermal recovery equation, but I think we have a pretty good feel but I don't know that we know exactly at what point. These guys are good and may.
Maybe shneur wouter here to add one thing to that none of the producers behind our systems have contractual rights to tell us we would like to have recovery from rejection, but we always we have a lot of third party midstream merchant plants that deliver into the sand and southern hills system and those are done.
And once that Jon talks about we don't always have insight and book, a third party midstream or has and their contract with our producers and we do notice some producers and third party plants to flow into sand and southern hills have the rights to reject or recover.
Okay.
Makes perfect sense, and I assume that the fact that gtx and PHP, our online that doesn't change any of your experiences at all.
No no.
Perfect Alright, guys. Thank you very much I appreciate the color today and public safety.
And are you just.
And thank you and our next question comes from Spiro <unk> from Credit Suisse. Your line is now open.
And battery, Shawn Hey, guys good.
Morning.
Morning.
First question is just on the hedging strategy. It seems like there's a considerable amount of upside or you're on both spot and forward curve. So just curious if you guys could talk a little bit about your plan to fill the remaining hedge book here for 'twenty, one and what the plan is for 2022.
Yeah.
So a couple of things Spiro I mean, we.
We do have a disciplined hedging strategy.
Strategy, so its not a trade book.
And you can always second guess it but we are really pleased with them.
The amount of hedges, we have been able to get up and on the system.
I'll take the opportunity to remind you that our fee grew by 5%. This year, So we're 75% and the third or fourth year and a row because of the logistics business, you've seen that grown and we have about half of our position and hedged we use.
We have targets, we have a very disciplined approach, but that has left us with about half the position open. That's what's driving you heard I think both outer and I mentioned that we have to pick your price, but between spot and forward there could be $50 million to $90 million of incremental upside and I will I would I would let you know that since we set our budget, we've been able to get.
Some additional hedges on.
I'll give you a little color crude's been constructive.
Propane plus portion of the NGL barrels being constructed we haven't been able to do ethane, we're keeping an eye on it and boy if ethane runs and that's a really good day for this company.
So we have a very disciplined plan.
Mentioned 2022, we've been able to get out there and get some 'twenty two hedges, obviously not to the degree or magnitude of 2021, but.
The company is set up very very well I think it's a really good mix of fee based hedges that give us cash flow stability with the with some pretty substantial upside I mean, if spot prices stay where they are it's going to be a very good year for the company.
Well, Shawn just a quick clarification and one thing you said there he set of ethane and runs its going to be really strong. So as we think about that 50 to 90 pick your price. If there was an ethane right up it sounds like it would be incremental on top of that 50 to 90, just want to understand the sensitivity no no no sorry, what I was what I was saying is I mean, it could be because.
It could cause a good run above current pricing by point spirit was that ethane is one of the.
If you think about US materializing net 50 to 90 ethane is a big component of that because.
The heavier and of the barrel has run and crude has run already and we've been able to hedge some of that.
Understood. Okay that makes sense second question, just maybe get your latest view on assets.
And you were fairly active.
And.
There are some early signs.
Alright.
Potentially so just curious as you pursue delevering and maybe even look to accelerate it.
And your assets you have to come back into the strategy.
Spiro.
But we're always be always looking at our kind of opportunistic assets that you can sell.
I think we've said multiple times on.
Publicly that they are probably one or two assets in the company that may not be kind of a perfect match and strategically may fit tremendously well, but they're good assets and that means that if there is a buyer who says hey, do you want to pay value photos asset and it fits better with them than with us.
And what will probably enter and some to negotiations and discussions but.
We are definitely.
Not at this very moment, having active discussion so don't expect something to kind of come up and next week or in the next month. We also as you know, we never bake asset sales and a budget or guidance I know, there's people who rely on proceeds from asset sales to kind of work the balance sheet or other things.
We will work to balance sheet.
And with what we're doing operationally 24, seven and if we sell something its going to be over and above and it's going to be gravy.
At this very moment nothing that is active but with the market getting a little bit better pay who knows if there's people who say we would like to we would like to do something with DCP and we're always open to that.
Got it I appreciate all the color. Thanks, guys. Thanks, Spiro and thank you.
Thank you and our next question comes from Jeremy Tonet from Jpmorgan. Your line is now open.
Hey, Good morning, guys. This is James on for Jeremy.
Just wanted to dig into maybe the GNP assumptions here for the 'twenty One guide.
I guess I'll start off.
I know, it's a short sample size, but in the month and a half to start the year I guess, how are you guys seeing activity across your footprint.
And then the second part maybe with <unk>.
And north volume is expected to grow 5% to 10% this year.
And that is.
Assuming that was budgeted back in December.
Do you see foresee maybe upside to volumes there.
Given the move and commodities.
And just given producers there how are conversations progressing there I guess to start the year.
A couple of things James.
And we indicated obviously and our guidance to areas, where we think we're being a little conservative but that's our style. One is commodity one is volume so let's talk about the volumes on the volume side first.
You referenced the north the North was one area, where we do expect.
Potentially to see a little bit of growth next year, and nowhere near where the levels pre COVID-19 would have been but it is an area that we think will hang in there, we'll see a little bit of growth. Your question around is commodity pricing.
Raising the outlook.
Look I loved and 40 days in there are some really good signs and they're really some good signals across.
Both around commodity and some other some other indicators, but I think and.
And battery can chime in too I think we're seeing more discipline, which is a great thing out of the big guys. They are not just <unk>.
Moving they're focusing on free cash flow, they're focusing on things. So I think it's a little too early to say that.
And just say that that would drive incremental volumes, but that would be upside for the company would be substantial upside and I want to give you. One other example, and the north and my remarks, I mentioned that lead them.
Wait them was not going to be a big driver of earnings. It would have been it was when we decided to do that massively capital efficient project.
A couple of years ago, and got it and play but it was predicated on a lot of volume growth and we're seeing that diminished if we get more volume growth that late and project goes from a not a big driver and earnings for the company to a big driver. So I just wanted to give you that example of upside.
And I think the Permian is another area you can keep an eye on.
We're hearing some good signals there again producers are showing discipline and the ones the big ones anyway.
But those are the two areas, we'll keep our eye on I think Eagle Ford I talked about the contract role there and our expectations of volumes coming off mid continents in.
Pretty perpetual base decline don't see much changing there, but there is upside I think it's a little too early to bake it into the models, but we'll keep our eye on it yes, James maybe to add just a couple of things on this and Mike Shawn and I together and the rest of the team we've over a decade off.
Up cycles and down cycles, and this one feels a little bit different from a potential up cycle point of view that people don't come Roaring back immediately and then kind of start crashing and destroying our own bharti again, so I definitely when I talk to our producer customers I would say I hear.
And a little bit more bounce and their P&L and little bit more optimism, but a lot of discipline and saying hey, we're going to deliver free cash flow, we're not going to go out and just kind of throw rigs back in the field and creating a significant supply push and that is I think the last thing that this industry needs is that before we have good.
Line of sight to demand recovery.
And obviously things are feeling a little bit better, but we're still a long ways to go to full demand recovery and I think the good thing about the producers is yes. There is some optimism around zone and other things, but theyre very measured around what they want to do and that's exactly how we have set up our year.
Pretty conservative and let.
And that probably gives you a little bit more upsides and downsides from where youre sitting here to date, but we also know there is a long way to go and this year and maybe 2020 has taught US one thing it is that.
And a long cycle business like ours can have a lot of very short cycles really really quickly. So I hope that kind of gives you a little bit of insight for Sean on IRC.
No it does and I appreciate the color and the break down there.
Second question shifting to leverage it seems like you guys are targeting.
Pretty pretty flat year over year at the four times range and I would note and the slide decks that you say three five times kind of the IAG.
Ratings for the rating agencies have kind of set the Gulf War.
I guess.
What is the timeline maybe to achieve that and should we.
I assume that any uplift and commodity prices that you guys laid out and.
And the guide should be allocated to deleveraging first and foremost.
Yes, so to start with the last portion of your question yes.
And I don't think we through the number out there James but you know that upside.
Would get you more than halfway towards that goal. So look we see that.
And again, if the commodity stays constructive and and you see some volume response.
Without getting too specific I think youre going to be knocking on the door that goal and look I know that and I do a lot of outreach. We know a lot of models habits. There very quickly again, we're being conservative holding serve and one of the toughest environments, what I mean by that staying around the same leverage metrics I think is a pretty conservative outlook is good.
Really good sign that means we do have not only upside on cash, but we will utilize that cash to continue to strengthen the balance sheet. So I can't give you an exact date, but the reality is we could get there if we see constructive environment very quickly, but I definitely think we have line of sight to get there and I hate to give timely.
But our goal is definitely over the next sometime in 'twenty two hopefully sooner.
But once again, you see that $50 million to $90 million of upside we're going to be knocking on the door of that our goal. Yes, I think maybe kind of numbers that I have and my head James as you know.
And if the 50 off the current forwards you put debt on the midpoint of the guidance you get to eight.
And if you start looking at our leverage at that time I think you are somewhere between three six and three seven and so that gets you probably 80 percentage goal few beliefs of commodity is going to be better orders from from a volume upside.
I'll, let you could you could get there pretty pretty quickly but who.
Who knows where this year goes again I want to go back to a year ago, where we had an earnings call around this time and.
And 30 or 45 days later, the world completely changed from us and literally the world changed from Us So I think for us being being conservative.
And.
As a good way to run your business and provide you for a much more upside than doing it the other way around.
Got you and that's great to hear I appreciate the color and I'll stop there. Thanks.
And thank you and our next question comes from Chris Tillett from Barclays. Your line is now open.
Hey, guys I was actually going to ask you about the balance sheet.
You've just spent some time talking about that and answering those questions. There. So I appreciate that and I guess, maybe just one more quickly from me.
Net.
And the high and low ends of the guidance.
And do they contemplate the commodity sensitivities that you guys had talked about or is are those ends more around sort of operationally and how things might move.
Typically there.
And Chris there are more weighted towards commodity.
So and that that's how we have done it for the for the 11 years I've been here. So yes short answer it's more predicated on commodity ranges.
Okay.
That's it from and from Me then guys think alright. Thanks.
And thank you and our next question comes from Tristan Richardson from Julia Securities. Your line is now open.
Hey, good morning, Thank you for all the detail around the assumptions and guidance and I. Appreciate it I think just to follow up on that last question and then.
Conversely.
And to get to the low end and the guide do we need to see.
The world kind of go back to some of that demand destruction and type of environment that we saw last year.
Yes.
Helpful and then.
No.
It's a short answer and I'm like yes, Mike.
Some some really bad things need to need to obviously happened.
Makes sense and then Shawn to your comment about kind of the high and and low and more representing the commodity so.
Should we think the high and does not really include any accelerated volumes either in the Permian or the north above what you are talking about today.
Yes.
Yes, that's a fair assumption, but.
Again back to my 11 years and this business. There is always a court. There is it may not be a perfect one correlation and theres always a lag right, but if pricing stays at that level.
Obviously interest and it's just a phenomenal world right youre going to benefit from that at some point youre going to see hopefully demand come back youre going to see volumes come back. It's a really really good day and I think that's one thing that.
That we've talked a lot about the earnings power of these assets we've been in this dampened environment for so long.
<unk> you.
Forget man these assets when pricing is constructive and volumes.
We're nowhere near the volume level, we were back pre COVID-19, just a year ago. We got those volumes at these prices. These assets performed quite quite well. So the answer is there would be more potentially on the volume side.
And it just shows the earnings power of the assets we have.
Really appreciate it. Thank you guys very much thanks, Chris and thank you.
And thank you.
And our next question comes from Gabe Moreen from Mizuho. Your line is now open.
Hey, good morning, everybody I know that spear.
Spiro, Australia about selling assets from maybe about or you've been more vocal and noticed most about industry consolidation.
Wondering where you think things stand there and whether the recovery I guess, a little more optimism and spring and peoples steps.
<unk> per hinders midstream consolidation.
Well I think I think I'd be more vocal around consolidation from our point of view that I believe that and we believed and the company's strategy has been around hey, B supply long capacity short Caribbean and lean manufacturing.
Profile for our company because you cannot always grow as an industry and super cycles of growth come through and so we want to make sure that we were ready for when that happens and obviously, we didn't think COVID-19 and bus stop.
Stop it as quickly as it did we thought it was going to be much more of a gradual kind of thing, but we wanted to be ready for when the inevitable super cycle of growth.
And two to have a really lean manufacturing type of company that you can do things with run them really well yourself, but potentially is there something you can do and and industry consolidation cycle.
As it pertains to Hey, do you see more do you see less.
I think everybody is looking at the same facts and the facts are that there is.
And industry, that's probably was built for 14 and 15 million barrels of crude oil production.
A day, we went to $10 million, we are hovering around 11, and I think most of US things, it's not going to be massively above 11 guy in and for the remainder of this year. So that means there is some overcapacity that means there is no reason to go build new assets and Youre going to start looking at hey are there ways to create.
Commercial synergies optimization, and cost synergies and things alike, and and M&A tends to fit well in the model at the same time, we all know that M&A is really really hard correct M&A is not a strategy. It is and it's the way you execute on this strategy.
And so are there things going to happen I think the likelihood of consolidation is greater today than it was in 15 and 16 and when we also spoke about consolidation. So I would say the likelihood is a little bit greater today than than at that time, but its heart and.
And you also I think are dealing with the fact that you're not going to wake up one day and.
Right and <unk> DCP midstream is buying and competitor.
2030, 40% premiums that is not the weighted this market needs to consolidate it needs to consolidate on kind of a merger of equals type of basis, no premium low premium kind of things. So all the synergies that you create or going to the respective shareholder groups of each of the companies and again that is hard.
To do but is it something that and my personal belief needs to happen and as industry, absolutely and we'll see how it plays out and I think the good thing Hey, DCP set up very well and like I think this team has proven beyond a reasonable.
<unk> doubt that we know how to execute how to streamline how to take cost out and how to look over the horizon and I think thats a good thing that's a good thing if we continue to stay where we are it's a good thing if the world goes into consolidation cycle.
Thanks router and then maybe if I could follow up just in sort of the latest on Guadalupe and I know you've termed out some of that widespread with longer term contracts, but you also say there is a 'twenty one versus 'twenty headwind just can you just talk about.
How much is contracted there and for how long and sort of what the delta impact yes.
Yes.
And.
Real quick Gabe on the history, obviously and 19.
Basis, just blew out.
And we and it was a windfall right here's an asset that may 10, and $15 million per year. We made four five times of that 19. So what we did and I think it was the smart move as we created and annuity.
And so we went out and and we hedged somewhere between ranges gave 70% to 90% of that position over and over the next five years two things to think about the percentage hedge declines as you go out the curve. So we're a little less hedged every year and.
And it was a backward dated curve, so youre pricing goes down a little bit, but what we did is we converted something that was only generated 10 or $15 million a year of income into a really strong annuity, but it does decline year over year.
Both from a hedge percentage and from a price hedge percentage. So it does leave us things run up and the short run as you know, we're a little less hedged probably in 'twenty one than we were in 'twenty and 'twenty two versus 'twenty, one, but it's a set it and forget it and we have locked in those cash flows.
And I think that was the important thing for the company and we did it at a time when pricing was very high.
Okay. Thanks, Paul.
Thanks.
And thank you and our next question comes from James Carreker from U S capital.
Your line is now open.
Hi, guys. Thanks for the question.
I was wondering if I could circle back to a comment you made earlier on.
Later to offload not really representing a big earnings driver. This year I was wondering if we could.
And maybe flush that out a little bit is it.
Is it neutral to earnings as it and does it actually Oh.
A drag or I guess, what does it take for that to be.
Significantly accretive to earnings.
Yes, it's not a drag James and he was funny as I was as I was going through the written remarks, I thought someone might take it that way I think the way I can make it very simple.
And I'll give you a little history, two or three years ago, everybody thought volumes, we're going to grow exponentially and we did the smart thing instead of building a half a billion dollar plan or whatever it would've cost. We did this offload agreement and took advantage of capacity that was available.
But the point and by the way I want to point out we're honoring we have some MVC as we're honoring all of our <unk>. We have the volume to honor that kicked in late December early January but really the way to think about it when I say, it's not upside what I was sort of getting a feel and people's models is that they had a big windfall.
Because of late them and the way to think about it is volumes are not growing at the rate that we thought when we went into that contract.
We had a better volume outlook for the DJ still growing still private when the best areas. We're in one of the highest return areas. We're in but the way to think about it when I said, it's not going to be and big earnings driver and 21, that's really around volumes.
If we see volumes take off and therefore.
We have to lay them off load going where and bypass mode and and so forth.
It's going to be very good for the company that's not in our guidance, but it's not losing money, it's holding serve and I felt that some people had in their models that it was going to be big upside.
Got you and I appreciate that and then.
And maybe just a technical question on the on the volume outlook presented and the presentation just to clarify that is year over year volumes or is that relative to an exit rate of 2020 year over year.
Year over year Gotcha.
And then just on the sand hills drop and volumes in Q4 was a bit of a surprise.
Have you guys talked about how much of sand hills.
Throughput is kind of your own volumes versus how much is.
Subject to third party ethane rejection.
We haven't talked about in terms of the percentages, but what I can tell you is based on our expectations going into the quarter, we stayed and recovery.
The volumes that we can that we drive and third party went into rejection.
And it was though.
Essentially all third party was rejecting or was it a no.
The largest the largest third party that puts volumes on that pipeline went into full rejection and I think the only thing James that we've ever said about hey, Bob we are the DCP is the largest shipper on our sand hills pipeline.
Okay.
That's all I had thank you.
Thanks James.
And thank you and we have a follow up question from Spiro <unk> from Credit Suisse. Your line is now open.
Hey, guys. Thanks for taking the follow up just one quick one on slide nine it looks like your excess free cash flow is a bit second half weighted if you look at the 21 figure there and just curious is that a function of capex, maybe declining and the back half of the year or is that earnings ramping up I'm. Just wondering if you give us a little more clarity on our.
<unk>.
It's really driven by our belief that.
We're still and a pretty uncertain world right now we're trying to figure out how is COVID-19, our vaccinations going when is the world starting to open up are we going to see any kind of setback zone.
British South Africa.
Variances and stuff. So we really believe that kind of the second half is where recovery is going to take place and that's why the numbers are reflects a day or.
Got it thanks again guys.
Yes. Thank you.
And thank you and I would now like to turn the call back over to Sarah Sandberg for closing remarks.
Just want to say thanks to everyone for joining US. Please give me a phone call. If you have any questions and have a great day.
And thank you ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
And then.
Yes.
And.
Yes.
Yes.
Yes.
And then.
Great.
And then.
Okay.
Okay.
Yes.
Okay.
Okay.