Q2 2021 DCP Midstream LP Earnings Call
[music].
Good day, and thank you for standing by.
To the DCP Midstream second quarter 2021 earnings conference call.
At this time, all participants are in listen only mode.
After the speaker's presentation, there will be a question and answer session.
I ask a question. During this session you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded in for you.
Require any further assistance. Please press star zero and I would now like to hand, the conference over to your speaker today, Mike Foreman and director of Investor Relations. Please go ahead.
Thank you Shannon and good morning, and welcome to the DCP Midstream second quarter 2021 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 that our discussion today 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 related SEC filings, we will also use various non-GAAP financial measures, which are reconciled for the most comparable GAAP financial measures and the schedules in the appendix section of the slides Wouter van Kempen, CEO and Sean O'brien CFO will be our speakers today and after their remarks, we will take your questions with that I'll turn the call over to Valerie. Thank you Mike and good.
Morning, everyone. We appreciate you joining us today and hope you're all safe and well on today's call. We will discuss our second quarter and first half results for 2021, and our outlook for the remainder of this year before.
Before getting to debt I would like to say, thank you to team DCP for delivering another strong quarter of results compared to the last 15 months. The second quarter was relatively quiet instead of managing through unprecedented events and responding to historic volatility, we focused 100% of our time and efforts on executing on.
Our strategy, providing safe and reliable operations for our customers accelerating progress on ESG, and sustainability and investing and our employees and our culture.
Our second quarter results and highlights demonstrate the strength of our diversified portfolio and transformation we've undertaken over the last 5 plus years and the earnings power of the DCP business model, which was recently recognized by Moody's with a full turn upgrades.
For the quarter, we generated $333 million of adjusted EBITDA, and $225 million and DCF, representing 21% and 21, 9% increases versus Q1 as volume strength across the portfolio.
But in the quarter, we generated a record $132 million of excess free cash flow, which was the fifth consecutive quarter generating positive excess free cash flow, which we define as cash flow after paying our distributions and funding our capital programs.
This strong quarter and fast start to the year, coupled with a favorable commodity environment and producer activity and such confidence that we will meet the upper end of our financial guidance the.
And the DCP business model strategy and track record of execution as the partnership well positioned as we look towards for second half of the year as.
As we aim to close the year with a strong second half and build momentum for 2022. We're also taking steps to position DCP for long term future as we accelerate our ESG and sustainability efforts, which brings me to our next slide.
On Monday, we published our second annual sustainability report resiliency and evolution, which highlights for sustainability performance from the 2020 calendar year announced his forward looking goals on greenhouse gas emissions reductions and inclusion and diversity and outlines our strategies within a variety of ESG.
<unk> efforts.
Importantly, we substantially increased our disclosures by aligning with SaaS B sustainability accounting standards Board the energy infrastructure Council ERC and the GPA Midstream Association ESG reporting tablet the latter of which we helped to create as a participant and a joint ESG working group.
Before I review the highlights of our report on our set some context.
The United Nations expects the global population of 7.7 billion people to increase to almost 10 billion and about 2015 with the potential to peak at $11 billion by the centuries and.
It's 1 of the largest natural gas processors and natural gas liquids producers and the United States DCP plays a critical role in meeting the rapidly increasing energy demands of a growing global society that is constantly striving for enhanced living standards.
From creating electricity fuels and heat sources to provide and feedstock for countless consumer and industrial products and natural gas and Ngls to DCP processes and transports are a fundamental pillar to improving quality of life, both here and the United States and abroad and.
This is why our company purpose is building connections to enable better lives.
We know and hydrocarbons continued to fuel our global society with increased long term demand for natural gas for decades to come and we also know because we have a duty to ensure that our role and the energy value chain is as clean as responsible and sustainable as possible.
And we've established a sustainability counts on the energy transition team focused on building and executing long term strategies to ensure our company sustainably enhances value for our stakeholders and that we are a proactive participants and the energy transition. Our counsel has established concretes 3 year strategies to drive our sustainability performance.
And and our newly published report.
Outline how well the team executed last year.
At DCP 2020 was not defined by the challenges we faced.
Buddy achievements, we celebrate including our financial and strategic execution as well as our ESG performance.
Several highlights of our team's hard work during our company's most trying time include a 46% decrease and recordable injuries since 2016 with an industry lead and TRA of zero point 44 and 2020.
16% reduction and scope, 1 scope 2 greenhouse gas emissions and a 23% reduction and methane emissions since 2018.
And we established a companywide inclusion and diversity committee and we increased diversity on our board of directors.
Achieved and employee engagement survey score of <unk> 76 per ton.
And <unk>, which was above the industry and represents a 3 percentage point increase since 2018 and as a company, we donated $1 million to our community partners, including 325000 to local food banks during the COVID-19 crisis. We're proud of the progress that we've made we're excited about set and <unk>.
Forward looking targets, which brings me to slide 5.
Looking forward, we must continue to evolve and proactively meet the needs of our employees our customers our investors and communities. There is a remarkable opportunity for our company to thrive and ensure the sustainability of DCP for the long term.
Me and a strong midstream company for over 90 years and by successfully enhancing our ESG outcomes. We ensure we can operate as a leading midstream business for decades more to come.
And our reports you'll find that among many targets and aspirations for improvement we've highlighted several new forward looking goals, we have 2 goals for emission reductions, including debt by 2030, we will reduce our total scope 1 scope 2 greenhouse gas emissions by 30% from 2018 baseline and Thats by 2050.
We will achieve net zero greenhouse gas emissions.
And we plan to achieve those targets for 3 strategic horizons focused on cleaning the core.
Adjacent to the core and build core.
Clearly the core means continuing to improve our emissions profile through increased efficiency and modernization of existing operations and we know that we're going to spend most of our efforts here over the next decade and.
Adjacent to the cohort focuses on expanding our business portfolio, and where dcp's existing intellectual social capital is relevant to compete and complementary business lines that improve our outcomes and provide solid returns and this include Kevin include carbon capture and sequestration and on our emerging technologies.
And beyond the core is a strategy to ensure that DCP is positioned well for the rapidly changing energy ecosystem and Tomorrow's energy solutions.
In addition to our emissions reduction targets. We've also established formal inclusion and diversity goals and decent.
By 2028, and <unk> 31, ensuring our workforce, our leadership and our succession pipeline represents gender and racial demographics of the local communities and which we operate and secondly, we continued to invest and our people and are committed to maintaining at least satisfaction and belonging scores above the industry.
Mark over the next 5 years, and finally on an annual basis and <unk>.
Sure and good representation of veterans and our workforce aligns with national demographics.
On a line, but our focus on safety reliability transformation efficiency and culture. These goals are about continuing to do what is right, while strengthening our company and where.
Proud to back our words up with action on.
And on Monday, We also announced the renewal of our $350 million accounts receivable securitization facility with the addition of ESG linked <unk>.
This is a first of its kind agreement within the entire energy industry as we have leveraged our annual pricing against our safety performance relevant to our peers at year over year reductions and our greenhouse gas emissions intensity rate on.
Our goal is to demonstrate accountability to improving our sustainability performance as always we welcome your feedback on our report our targets and our strategy looking forward and with that I'll turn things over to Shaun to run through the second quarter financial results. Thanks powder and good morning on slide 6 I'll hit the key drivers to our.
Our strong second quarter performance, we generated $333 million of adjusted EBITDA and $225 million of DCF, which were significant improvements from the first quarter as the industry rebounded from the impact of winter storm jewelry and Q1.
Volumes across our G&P business continued to strengthen through the quarter, which allowed us to maximize the impact of the favorable commodity environment sandals and southern hills volumes were up 26% and 10% versus Q1 as the pipelines benefited from growing G&P volumes and increased third party ethane recovery early in the quarter as.
As expected, we realized higher costs and sustaining capitals deferred maintenance work from Q1 took place and the second quarter.
There was an increase in spend quarter over quarter, we will continue to aggressively manage our cost and capital as we finish the year, we're committed to maintaining the savings we realized in 2020, while managing the impact of inflationary pressures on the business.
We saw a slight increase and leverage for the quarter moving from 4.1% to for 2 times do debt due to the timing of working capital, which was primarily a result of collateral posted associated with our 2021 and 2020 do hedging programs. We fully expect this to normalize over the next 2 quarters and position us to finish the year in <unk>.
And with our 4.0 times guidance now.
And now moving to slide 7 and I'd like to provide and update on our second half outlook. We continue to see favorable indicators as we move into the second half of the year G&P volumes were up 6% quarter over quarter and trending favorable to Q2.2020 after normalizing to account for the large contract exploration and the Eagle Ford that took effect on January 1.
We're seeing producers accelerate drilling plans, resulting in improved volume outlooks, specifically and the DJ and Permian as we close the year.
Within the logistics business, we continue to forecast sand and southern Hills at high utilization rates at Southern Hills continues to benefit from the steady supply of volumes from our mid con business as well as the growth, we're seeing coming out of the DJ Basin.
On sand Hills, we are currently seeing third party ethane rejection and natural gas prices have increased over the last 2 months in this environment Dcp's commercial team has done an outstanding job working with our customers to incentivize some level of ethane recovery to generate incremental value for DCP and our customers.
As for the rest of the year, we do anticipate volumes on sand hills, continuing to improve and there remains potential upside with increased ethane recovery over the last 5 months of the year. The commodity outlook has stabilized and the forward curve remains strong with all 3 commodities trading at higher prices and we realized and the first half of the year. This will.
Provide a nice tailwind given our unhedged equity positions and while we will see increased costs and sustaining capital relative to the first half of the year. We are tracking in line with our full year expectations.
With favorable volume trends, we're seeing and assuming the forward curve remains strong we are well positioned to meet the upper end of our financial guidance and with that I'll turn it back over to router. Thanks, Sean So to close this up on slide 8 the DCP team continues to deliver strong results and has and is well positioned to meet our 2021.
Our diversified business model and execution on our long term strategy continued to deliver value for unitholders.
Last 5 plus years, we build on a stable fee based logistics business generating almost 60% of earnings we permanently removed $150 million cost from the company.
We executed capital efficient supply loan capacity short strategy and all of this while retaining favorable commodity upside.
This transformation execution sets us up well to generate significant cash flow during these favorable commodity environment, but in the first 6 months of the year, we generated nearly the same amount of excess free cash flow as we generated and all of 2020.
Our capital allocation priorities remain unchanged as we are committed to reducing our absolute debt and strengthening our balance sheet.
Looking forward, we're seeing favorable indicators, we just has us optimistic to deliver towards the high and for 2021 financial guidance and we're very well positioned as we enter the second half of the year and look to build momentum heading into 2022, as we transition to returning additional value to unitholders.
We'll take the next step into DCP journey, as we accelerate and continue to drive step change improvement Lee is G and sustainability fronts, we've set aggressive targets that I am confident that the DCP team will deliver on.
And we're incredibly proud of vehicle implements of our team to date and we're excited to continue our sustainability journey for decades to come with us and look forward to taking your questions and Shannon Please kick us off.
Thank you as a reminder to ask a question you will need to press star 1 on your telephone.
Withdraw your question press the pound key.
Please stand by while we compile the Q&A roster.
Our first question comes from Jeremy Tonet with Jpmorgan. Your line is open.
Hi, good morning.
Good morning, and good morning, Jeremy.
For the guidance out there just wanted to confirm the deck commodity price deck being used there is that kind of unchanged from what you said last quarter and so if you kind of mark to the strip.
Get to something a bit higher and just wanted to see exactly what's baked in for ethane expectations their recovery pricing and D. C. Southern hills volumes picking up there and that's helping as well.
Yeah sure. So I think youre thinking about it right Jeremy what we've done for the second half of the year and look I'm excited that we went to the high end of the guidance. Obviously that includes if you think about Q1 that includes <unk>.
More than covering well more than cover and the euro impacts, but specifically to the price deck.
If you take the current strip, you're going to get some more upside than probably what we have baked in right. We sort of have a view where it's in line with what we've seen and the first half of the year, maybe and slightly better than that but current spot. If that holds for the remainder of the year you definitely have some upside to the guidance that we gave but but definitely.
And we baked in some favorable price uplift and the second half of the year could be better on the ethane recovery rejection side of the fence I'll remind you we came into the year, assuming full recovery, obviously that it's been sporadic Q1, we didn't see a lot we saw a little bit and Q2 and I want to be clear. This is third party because.
Of our value chain, we have been and recovery.
The whole time, so the barrels that we control we have been and full recovery, but on third party you saw a little bit we did some and we incentivize some recovery early in the quarter people went back into rejection mode. I think that are and I talked about gas has just been screaming so that kind of pushes people and their economics back into probably rejection.
And also by the way if we see recovery.
Quick back on the remainder of the year all boats rise that would be upside for us. We are assuming rejection third party rejection for the remainder of the year. So a couple of good things that could go our way a spot prices continue to hold and we see something a little stronger than our outlook.
And then obviously as we move into recovery, that's upside above and beyond what we thought what we baked in.
Got it that's helpful. So spot and ethane recovery upside to the top and the guidance you laid out there. So that's great to hear.
And maybe just kind of pivoting towards producer conversations at this point, you know commodity prices moving up here.
<unk> have really been kind of disciplined on on production growth, but the privates are a bit more active and then it seems even with the publics I guess, if the leveraging is going down maybe theres more kind of activity picking up there, especially as we go into 'twenty..2 just wondering if you peel the onion, a little bit more with your producer conversations and how you see things.
Trending across your footprint there.
I can start.
Jeremy with some of the big producers Youre spot on so.
There's obviously a lot of optimism they like the environment that theyre seeing but the discipline continues and I actually think that's a pretty good thing because we are seeing some rigs some rig increases we are seeing some activity on.
And obviously the growth that we did assume and areas like the DJ and the Permian are not only happening this year the way, we thought and a lot of cases, they have been accelerated a little so that's good and I think that bodes well for the second half of the year.
And I can talk a little bit, but we are seeing more around the small guys.
And I'm not as big of a driver, but you definitely are seeing more activity. There as you think about 'twenty 2 and that's sort of the picks we were trying to set we feel like we're going to exit the year pretty strong based on what we're seeing from our producers what we're hearing and I think that discipline will continue but it will drive I think a nice even keel growth.
Outlook on volume outlook for 'twenty, 2 and I think that's really good for our industry at this moment, so definitely significantly better than what we would've thought.
6 or 8 months ago.
That's really helpful and just 1 last quick 1 on.
When it relates to <unk> and given there's a lot of pending legislative efforts out there that could change the picture, but just wondering specifically as it relates to DCP, if you could build a bit more about what specific initiatives.
Be pursued if the right policy support comes through there.
Yes, so maybe I'll take that 1 so if we think about <unk>. It really is probably I spoke about cleaned for solar.
And those are the tangible projects that we have where we already are kind of doing things around modernizing our our footprint asset reliability.
And.
And then you got the adjacent to the core Cc U S and for US probably more Ccs is really going to be around adjacent to the adjacent to the core.
We are already doing a significant amount.
Amount of carbon capture and sequestration and in our southeast New Mexico business to date, and we have additional opportunities to do that in new Mexico, and Colorado and Michigan. If you think about and gas processing plants are fairly significant aggregation points for carbon and if we can find a way where.
Both from a regulatory regime.
At the federal level thing 45, skus as well as kind of a speed to the ball and state levels and I've been thinking about hey, how do you get class 6 wells.
Permanent and a.
And in the reasonably fast time period, you can build a good returning business day or why are we would earn above our range and weighted average cost of capital and take a very very significant amount of carbon and scope 1 emissions out of your footprint and so it's something that the team is looking.
At.
Quite diligently and Theres a lot of opportunity and we're already doing it. So it's something that for familiar with we do need to have 45 Q2 b.
Going up a little bit from where you're sitting today, we do expect that there is bipartisan support for.
And then you are kind of thinking about how do you can get from a permitting point of view how can you can you get things in place and an expedient manner.
Got it makes sense hopefully the railroad commission gets a primacy there and that would help with the classics wells a lot. So thank you for all your thoughts there that was very helpful. Thank.
Thank you Jeremy.
Our next question comes from generic Shani with UBS. Your line is open.
Hi, Good morning, guys just wanted to clarify 1 of your responses to prior questions on guidance, you had sort of said theres extra cushion with respect to commodity pricing.
And you also have some extra cushion with respect to volume is just given how strong and the bonds were this quarter as well too.
I would tell Ya cheniere, where I see the potential cushion and I was alluding to it.
Is on the pipelines potentially and if we end up going into into full recovery.
That that would bode very well for sand Hills I mean, we're seeing good capacity utilization on both bikes were very happy with but there is some upside there.
It's still look volumes have come back strong I think we have some growth for my written remarks, the remainder of the year is there some upside I think we've baked in mostly what the big guys have told us but.
There's there's always potential that things had come in and a little bit stronger, but I'd keep an eye is the bigger thing I think is recovery and then of course, if commodity stays scream and like the spots that would be upside for the company as well.
Okay. Thanks for that clarification, let me.
And just pivot to the questions that I had.
Just curious if you do end up and the.
And kind of in excess of <unk> type of mode, and Texas cash generation.
You've sort of labeled your priority is reducing.
And reducing debt.
Talk about.
On the Moodys upgrades, and so forth or the outlook upgrades and so forth and debt does remain a priority just kind of curious those like kind of.
You have been putting off maturities as they come up but when I sort of look at your capital structure right. Now most of your debt is trading above par and obviously you guys. It gets treated for your performance.
Curious if you'd be looking at other parts of your capital structure.
For example, the genius sub notes, which do trade at a discount and do you actually have pretty high coupons, but debt become kind of a focus kind of it and between maturity explorations.
And now you.
Startup and and Sean you can you can jump in as well.
Think in general.
Follow on my belief that this is the perfect time to set the company up well for the long term and that means getting to a very strong balance sheet. So.
We are very committed to for <unk> leverage by the end of this year and I think if things stay as is and that's kind of what Sean was talking to if you have commodity prices like they are today.
Our continued guidance.
Good management around for liability highly managed cost capital things like that you'll get through and excess free cash flow profile for our we should be somewhere industry and a half range.
And 2022 and that provides you a massive amount of flexibility.
And half is kind of a key number for us, it's really where we want to be.
And after debt Youre, absolutely right. There is a tremendous amount of flexibility and that flexibility can be anywhere from hey are we going to raise the distribution going to get dollars back to our unit holders that way is there a way to buy back units is there something to do around the preferreds that you are talking about some of our.
Those are trading at a premium as well as you know some of them are a little bit below but we also get significant equity credit down, which we have to we have to balance those 2 things together, but I think the key takeaway here and short run and continuing to get the balance sheet right. This is the perfect moment, we will get this company to a very very soon.
Strong balance sheet with investment grade.
Type of metrics and after debt commodity space like where we are today, you've got massive massive flexibility in 2020, 2 and beyond and that's that's pretty exciting.
Perfect.
The color there.
And maybe just to pivot and I was looking kind of in your appendix. It's around the hedging that's been in place it looks like you've added from 'twenty 2 hedges right now and I think you are now at about 41% hedged versus 15% last quarter is.
Is that kind of enough is that kind of where you kind of need to be at this point right now and.
Also as <unk> been layering on the hedges for especially on the GAAP side, just given the basis issue from last quarter with winter Storm Yuri have you sort of adjusted the way that you are putting your hedges on and and so forth yes.
Yes, so 2 things on that first question.
No.
I Couldnt have said it better I mean I think.
Couple of things this price run up has given us the ability cheniere.
Cheniere. So those 22 hedges when you really think about them.
Our at pretty significantly higher prices and 'twenty, 1 and so if you just if you are just going to mark hedged and hedge theres, a pretty good cash flow pick up they're going to the pricing and the 'twenty 2 I do think youre thinking.
Everything we've said, thus far puts us a little more bullish around outlooks for next year. So I do think we will not go and it would be as hedged as we were in 2021, I mean, we're about consistency and cash flow is taking advantages and knocking and a good rates, but I do think we feel really good about where we're at and 'twenty 2.
We probably will.
Feel like that we probably are where we need to be at the moment. So yes to that question.
And in terms of the Yuri the equity hedges.
And did not pose any problems they have longer duration.
Obviously, there are they are not impacted by the volatility like jewelry was all about volatility around spot prices and gas daily prices and like a 5 day period or.
So the longer term hedges always performed well that was more around.
Selling the product that you had in those days and obviously the product wasn't there so and we have by the way to answer that question we have added.
We've taken some different approaches that day.
Safeguard the company. So that we will have will be and a better position. If you were to see another type issue.
Issue like that in the winter.
Perfect really appreciate the color today guys.
Thanks, and thanks generic.
Our next question comes from Michael Bluhm with Wells Fargo. Your line is open.
Thanks, Good morning, everyone.
Just 2 quick ones for me 1 I Wonder if you can just give us your outlook.
And specifically what youre seeing there from.
Producer activity level and all.
So I guess a related.
Your view, how southern hills volumes will sort of trend here for the rest of the year and into next.
Michael So far Southern Hills showed a bunch of impact.
And are positive improvements going into Q2, and a lot of that is that mid con and was obviously affected by Europe, but we're seeing we're not seeing massive growth, but we are seeing the mid continent kind of hold the line, which is probably a little better than what it is.
And I were talking coming into the year than where we would've been and you are seeing that southern hills is a little different than sand hills in the sense that the majority of the volumes do come from.
Barrels or gas that we control so so far southern hills outlook improved pretty good and Q2, I think we expect it to improve even more in Q3 and Q4 and that is partially driven by a slightly better mid continent outlook than we would have thought and the DJ is just.
Just going through the roof right the DJ its doing quite well and youre seeing some pretty good stuff.
In terms of that feeding southern hills as well so good outlook on southern Hills and definitely <unk>.
Volumes and areas like the mid continent, and the DJ catching up I think I said on the last call things started a little slow and the year and then you had you're right. We're definitely seeing things catch up to where we had anticipated mid con and probably slightly better than what we would've thought.
Got it.
Second question I wanted to ask was about the market clearly and I think it's been.
Pretty active.
More active lately.
And the midstream space looks like companies both low.
Pick off some assets that fit their portfolio and also does that.
And just where it makes sense is there anything from your perspective.
And to get your general perspective on that.
Is the assets that you're on today, where do you want to be do you see divestitures do you see anything you might want to add.
Yeah. Good question Michael on Mike.
And Youre right. There is you see a little bit more activity at the same time I don't think you are seeing the type of activity yet thats, what youre seeing for instance on the producer side of the house, where you've seen more broad scale consolidation.
And there are definitely some assets coming to market, where people are trying and guidance <unk>.
<unk> asset transactions for us.
I'm, absolutely not saying no to that and any way shape or form I also I'm, not saying that hey, we're having 10 things here on on.
On the table that are very actively looking at from an acquisition point of view from a divestiture point of view, we are pretty happy where on a portfolio sitting today. So we're not running any active projects that are either I do continue to believe and <unk>.
And Sir.
And your questions and your colleagues questions multiple times over the last 6 to 12 months debt the midstream industry as a whole needs to consolidate and I think that is something that is very very important and continues to be some pretty significant overcapacity and various areas and I don't see that overcapacity.
And fully utilized anytime soon so.
If you get into a more mature state of this industry, which we clearly are you went from the big growth cycles into a much more mature harvesting cycle than I do think M&A on a broader scale is something that is tremendously important.
Are you going to see us do that I, obviously cannot buy and on that I do believe that DCP as I've said before has earned the right to vehicles holiday there I think we.
And if you think about what we have done around optimizing our asset base lowering our cost upping, our reliability and honest.
Spoke about our sustainability performance.
Our cash.
And <unk> bond scope to create <unk> gas.
Actions and things like that.
I do believe that we know how to take assets and optimize them but.
And it's also M&A is not a strategy I think M&A and say.
And and execution on our strategy potentially but we'll see where it goes.
Thanks Robyn.
Thanks, Michael and thanks, Michael.
As a reminder to ask a question. Please star then 1 on you touched on the telephone.
Our next question comes from Spiro <unk> with credit Suisse. Your line is open.
Hey, Patrick Hey, John.
First question on propane.
Curious can you just opine a little bit on from the strength, we're seeing and that that market right. Now I'm. Just curious I guess, how sustainable you think that is and as Shaun on the hedge position for for 2022 that 74 cents a gallon.
It seems to suggest maybe that gravitate closer to 80 percentage of Alere and more hedges, but you mentioned that sort of big step up and the hedge position.
From 'twenty to 'twenty, 1 'twenty 'twenty 2 can you share roughly what your sort of propane hedge position is from a price perspective in 'twenty, 1 and let me correctly start and then hand it over 2 to show on Spiro and <unk>.
General around propane and like.
And I hope Youre, taking a look right now where inventory levels are sitting compared to a 5 year average and were obviously fairly low for starting to get close to the end of the summer and.
And going into <unk>.
And into winter.
Yes, I feel pretty good about things right now I think we also no debt.
You don't get a winter start kicking in in November and December and quickly you're going completely on the other direction, but.
Obviously.
White household where things are today, and then show and maybe you can talk about that.
<unk>.
Spiro and terms of 'twenty 2.
Think we're.
Obviously propane was constructive so if you think about 'twenty 1.
We were the biggest opportunities for hedges and 'twenty, 1 up and gas obviously, we've been able to do some stuff. Since then as you think about 'twenty, 2 ngls and crude and constructive but were still pretty pretty lightly hedged on the NGL side.
We probably have about no more than 1 fifth or 20% of those types of hedges on the books for NGL and propane would make up a chunk of that so theres still a fair amount of propane upside as we think about 'twenty 2.
80% Mark I think it's about right I think thats, where we would probably if we gave a number on 22% are on 2022 right now we'd be about 80% for year hedged as you think about 'twenty, 1 we're closer to 90%. So that's my comments earlier about leaving some of that position open.
Because we're a little bullish was alluding to that 10% delta, but still a lot of room on propane, we've been able to get some of those hedges on obviously, the heavier and of the barrel, we've been able to get some hedges on as well, but a lot of room still left if propane has to run.
Okay. That's helpful and just to make sure and if you can provide it.
Just try and compare that 74 cents, a gallon hedge position and 2022 for propane is there a similar number you can provide for 2020, 1 kind of where you are hedged right now.
For for propane specifically, yes.
Yeah.
Sure Mike.
Yes, that's perfect I'll follow up on that later and then just on ethane.
And I understand you don't really have the ability for obviously recover or reject and make that decision and each time, but it sounds like commercial team working hard there to incent more recovery.
Guess, what would it take to grab more out of the stream from here or is it simply a function of lowering the tariff downstream to make them more economic.
That's more complicated and that and.
Have you been able to quantify at all kind of what the upside is if you ever get to a full recovery scenario, what that could mean from an earnings perspective.
So a couple of things the big lever is obviously huge.
Youre incentivizing people by lowering the rate the frac spread the good news is I know the frac spread hasnt been conducive to recovery, but let's.
The positive is that's because gas is run and so as NGL gas just happened to run more than than ethane.
In terms of the upside for the company I don't know if we've ever given a number spirit, but I can tell you. It's tens of millions of dollars for the remainder of the year. If we can get into full recovery. That's the benefit of having a very stout value stream right, having the pipeline getting to be able to make money and various chunks of the value stream.
And it could be a couple a couple of tens of millions of upside for us. If we were to go into full recovery for the remainder of the year.
Great and helpful. As always thank you gentlemen.
Thanks.
If you wish to ask a question on time. Please press Star then 1 on you touched on telephone. Our next question comes from Tristan Richardson with <unk> Securities. Your line is open.
Hey, good morning, guys and just.
Appreciate all the comments on.
And what Youre seeing near term and and even looking out into 2022, just thinking maybe a bit longer term.
Since you've kind of achieved some of those medium term targets getting the balance sheet to 3 handle.
And just thinking about capex.
You've noticed noted on past calls there are some niche and capital opportunities here and they're out there, but I guess, just thinking about 'twenty 2 and beyond.
As we kind of go in and out of potential commodity cycles.
DCP has everything it needs from from an earnings engine perspective too.
To sustain multiple commodity cycles, and and keep the balance sheet exactly where you'd like it or are there project opportunities.
Spanning the downstream business further et cetera that youre thinking about longer term.
Yes, Chris and let me, let me take that 1.
I think.
And what's first and foremost the most important thing as a commodity business to go through commodity cycles.
The balance sheet fortified so.
We're running.
Internally, we're running obviously a lot of different ducks and.
But where when I look at most debt is kind of the downside model and say okay. If.
And we get into a prolonged low commodity environment are we comfortable running the balance for the company, having the balance sheet to get through debt continuing to generate excess free cash flow and continuing to obviously base day to distribution and the answers to all of those are yes.
And which is a great great thing if you think about this industry over the last 10 plus years and the cycles, we have seen for for many companies, including ours that answer was fairly often unfortunately, no because for the industry must leverage fairly highly so getting to debt is absolutely first and foremost the most important thing for.
Because after that you've got enormous flexibility. If you talk about what are the different kind of piece of pieces of puzzle that you would like to have.
I think we've made a tremendous improvement to the business model over the last decade. If you think about where we were at 90 plus percent gathering and processing business and massively commodity exposed and now we are much more vertically integrated company, but would we like to have more of that the answer is.
Absolute yes, I do believe and and we believe as a management team that having a well have 2 water type of business is going to be important call. It for the next 10 plus years kind of that longer term nature and looking at so.
We made good improvement there, but could that more to be done. The answer is probably yes. So those are things that we continue to look at and say are there opportunities.
Around that and so.
And then I think the other piece that you harvest there will be some investment opportunities, where we believe you can make a return like around Ccs and to monitor business models.
That's what we're pursuing but yes, it's a great question and it's something that we're looking at spending a lot of time on short answer get the balance sheet really really strong we have line of sight for that now you have mass and flexibility.
And see what you can do to move the business for downstream.
Thank you. Our next question from James Carreker with US capital Advisors. Your line is open.
Yeah.
Hey, guys. Thanks for the call.
Just wondering if you can expound on some of the working capital tie up that you've seen year to date.
And the confidence and that reversing as any of that related.
On 2 disputes relating to Yuri and could some of that drag into 2022.
Yes, James this is Sean.
Yes, yes, yes, and yes, but I'll give you some clarity because price the price movement.
It's been so strong since we do have hedges in place for 'twenty, 1 'twenty, 2 and a little bit of 'twenty..3 there is collateral requirements on those those those hedges and obviously price run ups are good things for DCP and the industry, but it does put some temporary collateral requirements on the company 60% of that particular.
And collateral requirement rolls off by the end of the year. So yes, we do see that 1 obviously, improving and that and thats assuming prices stayed really strong.
But 60% of that will be gone, because we will realize those hedges and again realized.
Pretty strong environment and then on Yuri.
Mentioned in Q1.
We've done a pretty good job coming out right out of your weighted about 90% of our collections in hand.
We've been able to improve on that I think we picked up another roughly $20 million since the since Yuri.
Since Q1, there are some disputes still outstanding those those probably I think youre thinking about it right those could be longer term.
But we definitely see the working capital situation improving.
Significantly between now and the end of the year, but I think some of those Yuri disputes.
We're very confident and the revenues we booked.
But obviously some of those are going to get held up and maybe have to get litigated over time, but we'll keep you and you and.
And the loop on that but not a big driver and I think some of that helps itself by the time, we get to the end of the year, a little bit of carryover into 2022.
Okay and then.
Just a clarification I guess I think your year to date working capital usage has been around $200 million. So if it's not your is it is there any.
Item or set of items, that's driving the big use of capital.
Yes, it would be temporary.
It's the collateral on the hedges is the biggest driver.
On net working capital right, but I guess.
I thought I saw that the collateral is about $200 million and then separately working capital is about $200 million.
Yes, so you've got you've got some normal timing. This was a heavy payout period for the company. So that's just going to happen normally but the big.
I would call it temporary drivers are going to be the collateral on the hedges and the euro collections.
Got you.
I can follow up with 1 more.
I think I saw 1 of your parents announced the resumption of.
Our frac for at Sweeny, and I know you guys previously had that option for Fracs, 2 and 3 does the resumption of debt.
Construction.
For your potential ownership for some of those Fracs block on the table now that your balance sheets and better shape any opportunities around that.
But you see.
Well, we obviously know Phillips 66 fairly fairly well as you as you alluded to.
And we used to have and ownership options for Fracs, 2 and 3 and cited at.
And last year during kind of massive COVID-19 time, not to exercise that we haven't had any.
Conversations since again and earlier, our real focus is around getting the balance sheet right.
And could that could that come back to the table at some moment.
As I said, we know Philip 66 fairly well, they know us fairly well and.
And then and if that's something that makes sense.
<unk> could come back or are we just keep it where it is right now and so I would say there's no active conversations around it.
Alright, thank you.
Thanks James.
Our next question comes from Christopher Free with Mizuho Securities. Your line is open.
Hi, how are you and this is Chris on for Dave.
Just wondering as your kind of thoughts on the consolidation and the DJ Basin.
Sorry for the producers and I know that they also have some midstream capabilities.
And I'm, just kind of wondering how that impacts the <unk>.
Outlook for for the detail.
I think it's not that big of an impact for us if you think about it.
The 3 companies that are coming to get our side there that are all on various way shapes or forms.
We have customer relationships with them at the same time, even combined they will be 1 of our smaller overall customers. So they're still to focus on some of the main customers that we're having there done on larger than them at the same time.
We do see it as a good thing when producers come together and kind of focused our effort. They call stops I think and direct and the and more of their dollars and up to 2 G&A, our overhead for corporate functions, but due to the drill bit.
And all of those where we have contracts in the DJ basins. They are and life of lease dedicated acreage. So there really is not a competitive issue if someone has a small midstream business themselves.
Say, hey, we can take stuff off of that acreage and directed somewhere else contractually that is that it does not allowed to and from a possible. So net net I look at it as a.
And as it probably a small positive for us.
Got it thanks, and then just as far as the cost expenditures.
For the rest of the year.
Should we expect more deferred costs from.
Q1, some chunkier kind of timing at the end or was that low.
And your debt, where do you stop.
And of course, there is definitely still some catch up we obviously Q Q2 was higher than Q1, but.
The run rates that we've had so far this year are just very very very low. So the good news is we may recall back when we gave guidance.
We took $120 million plus out of our cost base in.
In 2020, and we said we were going to hold on to all of that.
And we still were on par, but and feel confident about that but there is still some dollars to catch up on Uri was a big event it really set.
Some of our projects back and we're and catch up mode and Youll see that continue through the second half of the year that will also impact sustaining capital.
Got it I appreciate it guys.
Thanks.
Thank you and I'm currently showing no questions at this time I would like to turn the call back over to Mike <unk> for closing remarks.
Thank you all for joining US today, if you have any other follow up questions feel free to reach out and give me a call and with that have a good day.
This concludes today's conference call. Thank you for participating you may now disconnect.
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