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Crestwood Equity Partners LP  (NYSE:CEQP)
Q1 2019 Earnings Call
April 30, 2019, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning and welcome to today's conference call to discuss Crestwood Equity Partners First Quarter 2019 Financial and Operating Results.

Before we begin the call, listeners are reminded that the Company may make certain forward-looking statements as defined in the Securities and Exchange Act of 1934 that are based on assumptions and information currently available at the time of today's call. Please refer to the Company's latest filings with the SEC for a list of risk factors that may cause actual results to differ.

Additionally, certain non-GAAP financial measures such as EBITDA and adjusted EBITDA, and distributable cash flow will be discussed. Reconciliations to the most comparable GAAP measures are included in the news release issued this morning.

Joining us today with prepared remarks, are Chairman, President and Chief Executive Officer, Bob Phillips and Executive Vice President and Chief Financial Officer, Robert Halpin. Additional members of the senior management team will be available for question-and-answer sessions with Crestwood's current analysis, following the prepared remarks.

Today's call is being recorded. (Operator Instructions)

At this time, I would like to turn the call over to Bob Phillips.

Robert G. Phillips -- Chairman, President and Chief Executive Officer

Thanks, operator and good morning to all of you that could join us. We know it's busy morning in the industry, so we are moving along.

First, I want to congratulate our employees for delivering another great quarter of results for our investors. I continue to be impressed with the ability of the diversified Crestwood portfolio to consistently produce reliable performance quarter-in, quarter-out above our internal estimates, as well as market forecasts, despite the inherent volatility in the industry and the growing competition in the basins that we operate in.

I think it's a testament both to our core acreage dedicated to our systems and plants, the strengths of our customers and our ability -- the optionality to optimize those assets by our NGL, crude and gas teams. But above all, it was another quarter of safe operations, along the pipelines in the plants and terminals, and at the construction sites.

This morning, we are pleased to discuss our first quarter results and provide a little more color on the recent Powder River Basin acquisition, which is another big strategic step for Crestwood, as we have promised to only acquire additional assets, if they fit our disciplined -- financially disciplined growth model, which is number one in our core basins, number two, delivering returns above our weighted average cost of capital and number three, and most importantly, accretive to DCF per unit, while leverage-neutral or leverage-enhancing over time.

This acquisition clearly fits all three guidelines for us. We're very happy to get it closed and happy to take over operations of this next great growth basin for Crestwood. So over the past few years, Crestwood has generated a lot of momentum through our ability to execute on this strategy. And we are very pleased to say that the first quarter was no different.

Our continued solid operational execution of our plan, combined with the strengthening energy market drove first quarter adjusted EBITDA to $115 million. That was a 13% year-over-year increase and well above consensus estimates. Distributable cash flow was $68 million. That was a 28% year-over-year increase. And this resulted in a very healthy coverage and leverage ratio of 1.6 times coverage and 4.1 times leverage respectively.

During the first quarter, we exceeded our internal budget across all three of our operating and reporting segments. And we expect those continued favorable fundamentals to remain intact during the remainder of 2019.

As you know, on April 9th, Crestwood subsidiary, Crestwood Niobrara acquired from Williams remaining 50% interest in our Jackalope assets, which are located in the core of the Powder River Basin. We paid $485 million for that interest. We funded the acquisition with fully committed financing, including the issuance of $235 million of incremental, asset-level preferred equity led by our preferred partner group, which was led by GIP, and as well, we use borrowings on our revolving credit facility.

Based on this financing structure and the attractive valuation that we paid for the assets, the transaction is immediately accretive to DCF per unit. And it also allows Crestwood to increase our targeted DCF per unit growth rate from 15% previously to now over 20% through 2020. And as you know, we increased our guidance accordingly.

As you will recall, we also acquired -- we had acquired that initial 50% interest in Jackalope from a first reserve affiliated company called RKI Exploration & Production for approximately $108 million way back in July of 2013.

Looking back to 2013, the Powder River Basin was primarily at deep Niobrara play and the acquired Jackalope assets were generating only $12 million of cash flow in gathering only 45 million a day of gas. Clearly, over the years, Chesapeake and other E&P operators in the Basin, have begun to produce much better wells, test other benches and determine that there's over a mile of economic stacked pay in the reservoir and the acreage that's dedicated to us. It's very similar to the Delaware Basin, and some of the other basins where we enjoy the benefit of the early development of the significant amount of stacked pays.

There is currently about 25 rigs operating in the Basin right now, and production is flowing from the Turner formation, as well as the Hartman, the Sussex and the Frontier among others. Current gathering volumes on our Jackalope system were about 150 million a day and Chesapeake, our primary producer, has recently added a sixth rig.

During 2019, Chesapeake will be targeting the Turner formation primarily with plans to complete roughly 65 wells. But also they're continuing to delineate the rest of the play and so we'll know a lot more about the other formations as we go through this year and next.

As a result, we expect that to drive a doubling of volumes in 2019 versus 2018. And that was the basis for our forecast that the asset will generate about $100 million of cash flow this year and with that kind of rig program alone, we would expect cash flows to grow to approximately $150 million in 2021, thereby solidifying the accretion of the acquisition in our forecast.

As you can see, this clearly was a key strategic transaction for Crestwood and one that now positions the Company to be one of the largest wellhead gatherers and processors in the emerging high-growth Powder River Basin. Crestwood also expects to provide Chesapeake with enhanced customer services, and we hope to be able to attract incremental third-party volumes to our system, as the acquisition allows us to lead both the commercial and the operational functions at the asset level. As well, we expect to be able to operate the system significantly cheaper than it'd been previously operated and that will drive accretion as well.

We think this is going to afford us a real competitive advantage in securing incremental organic expansion opportunities and really differentiate Crestwood as investors look for exposure to the fast-growing Powder River Basin. We're very excited about our investment in the Powder River Basin and how it positions the Company for future growth. Across our other gathering and processing assets, we're also very excited about the business fundamentals and the outlook there.

Let's turn to the Bakken, the Arrow system, our biggest asset, continues to outperform our internal expectations as producers continue once again to drill bigger and bigger wells. I know that's been our theme over the last several years but these wells come in bigger and bigger. As a result, we are getting higher volume, even without significantly growing rig rate on the reservation.

During the quarter, we did connect 19 wells to the system and we expect our producers to complete and connect another roughly 80 additional wells throughout 2019. On the Arrow system, our project management teams worked tirelessly during the quarter to continue the construction of the Bear Den II processing plant as well as incremental debottlenecking projects across the entire Arrow system. We're on track to put the Bear Den II plant in service by the end of the -- sometime during the third quarter of 2019 and once Bear Den II goes in service, we expect to see a meaningful step up in cash flow generated by the Arrow asset as we'll now be processing 100% in the gas that we gather. Today we are currently offloading a significant amount of that, but expect to bring that in-house.

Now to the Delaware Basin. We currently have five rigs operating on our Nautilus system, which is the shale production, and we expect development activity to resume on the Willow Lake system, which is up in the northern part of the Delaware, largely in New Mexico during the second half of 2019. A big event for us during the summer of 2019, our Chevron Phillips Chemical sales contract delivered through the EPIC system will reach a step up in volumes and a step down in price. And we expect that CP Chem contract to drive incremental volumes through our Orla processing plant as will then be able to offer our customers very favorable transportation and fractionation fees to get their NGLs to the Gulf Coast. So a competitive advantage coming soon on the Orla system there in the Delaware.

Now to the Storage and Transportation segment. It's important to note that we'll receive our final distribution step up to 50% as part of that Con Edison Stagecoach joint venture, which we entered into back in 2016. That step up occurs on July 1 and will result in incremental cash flow of about $10 million a year in the second half of 2019. Also in the S&T segment, our COLT Hub had another great quarter. We continue to see favorable spreads that resulted in increased crude by rail loading volumes to the East Coast and the West Coast refinery markets and COLT is also on track to generate approximately $20 million in 2019. So a great contribution by our crude team and our COLT Hub asset.

In the Marketing, Supply and Logistics segment, we finally saw a cold winter match up in the Northeast with our -- with our buy and store strategy and that drove margins nicely up across the segment. And in addition, I have already mentioned, but I'll mention again our crude marketing team did a great job during the quarter, generating incremental margin opportunities by utilizing excess storage and transportation capacity at the COLT Hub in the Bakken.

So before I hand the call over to Robert, I want to reiterate how pleased I am personally not only with our first quarter execution, which gets us off to a great start toward achieving our 2019 financial goals and objectives, but just really how strong and solid the Crestwood strategy is in this market right now. We know it's been difficult for the industry to attract investors back to the industry. We think investors really appreciate financial discipline and patience and execution on the strategies that we lay out. And I think Crestwood has continued to do that for our investors quarter-after-quarter.

We remain absolutely committed to maintaining a strong balance sheet through financial discipline. We're going to continue to have conservative capital allocation strategies, and I think the Powder River Basin acquisition is a perfect example of the type of acquisitions that we will actually pull the trigger on. And, of course, we continue to be very committed to executing our growth capital program, which is a number of organic projects that our project management and engineering teams are managing right now, and we continue to stay relatively on budget and on schedule for those projects.

All of these combined will drive the future growth of the business and we expect to be able to do that without having to access the public equity markets. So it's a little bit of an unusual model, but Crestwood is showing the industry how we can effectively grow with financial discipline, without having to sell stock in the open market.

And as I said before, we think Crestwood is very much an execution story. We can continue to deliver on these capital projects safely on time, on budget and our long-term cash flow will grow and meet our targets, and we will be in a great position to be able to return capital to our investors at some point in time in the future.

And with that, happy to turn it over to Robert to give you a deep dive into the first quarter financial results and some commentary on our updated 2019 guidance outlook, which we delivered at the same time we announced the Powder River Basin acquisition. Robert?

Robert Halpin -- Executive Vice President and Chief Financial Officer

Thank you, Bob. I'm very pleased with the financial results we delivered in the first quarter of 2019. Our first quarter adjusted EBITDA was $115 million, up 13% year-over-year, compared to $102 million in the first quarter of 2018. Our distributable cash flow was $68 million, which was up 28% year-over-year compared to $53 million in the first quarter of 2018.

As Bob mentioned, strong business fundamentals across all three operating segments drove this strong year-over-year growth and we continue to be very pleased with our operational execution, as our employees continue to remain focused on efficient, cost effective and most importantly, safe operations.

For the first quarter of 2019, we declared a distribution of $0.60 to our common unitholders, resulting in distribution coverage for the quarter of approximately 1.6 times. As of March 31st, Crestwood had approximately $1.8 billion of debt outstanding, including $1.2 billion of fixed rate senior notes and $593 million of outstanding borrowings under our revolving credit facility. This resulted in a leverage ratio at the quarter of 4.1 times.

On April the 11th, Crestwood successfully issued $600 million of senior notes due 2027 at 5.625%. The offering received very strong demand from our investors, which enabled us to upsize the deal at a solid long-term cost of capital. The proceeds from the offering were used to reduce outstanding borrowings, under our revolver, including approximately $250 million that was used as part of the consideration for the Jackalope acquisition. Pro forma for the bond issuance, Crestwood had approximately $250 million outstanding under our revolver as of March 31, 2019.

In conjunction with the Jackalope acquisition, Crestwood recently provided updated guidance to reflect the increase in cash flows, and capital from Williams' 50% interest in the Jackalope system. After making this adjustment to our outlook in 2019, we are now guiding adjusted EBITDA to be in the range of $500 million to $530 million and distributable cash flow to be in the range of $275 million to $305 million.

At these guidance ranges, we would expect our full year distribution coverage ratio range to increase to 1.5 times to 1.7 times and our year-end leverage ratio to remain unchanged between 4.0 times and 4.5 times. I want to note that our adjusted EBITDA range of $500 million to $530 million, excludes $20 million of Powder River Basin cash received in excess of revenues recognized. I would like to highlight that because, while we do not factor this cash flow in our reported adjusted EBITDA, we will receive the $20 million in cash in 2019 under the rate structure in our gathering and processing agreement with Chesapeake. And as a result, we will adjust our calculation of distributable cash flow available to common unitholders for this difference going forward as it provides a more accurate depiction of Crestwood's true available cash.

In addition, when reporting our financial leverage ratio, we will make the same adjustment for actual cash flow from Jackalope, instead of what we reported adjusted EBITDA, which is in accordance with the covenants in our credit agreement.

Now moving on to the growth capital. In 2019, we expect to invest $425 million to $475 million on growth capital projects, primarily to meet our growing producer volumes in our Bakken and Powder River Basin systems. For the remainder of 2019, in the Bakken, we expect to invest approximately $175 million to complete the Bear Den II processing expansion to build out the Enerplus water gathering system, as well as for incremental compression and pipeline expansions on our Arrow system.

In the Powder River Basin, we expect to invest approximately $185 million on our Bucking Horse II expansion as well as to expand the Jackalope gathering and compression system. Crestwood expects to fund the remaining 2019 growth capital via excess cash flow and excess availability under our revolving credit facility. Based on the timing of capital expenditures and our producer volume ramp ups, Crestwood expects quarterly cash flow to remain relatively stable in the second quarter and then begin to incrementally grow each month beginning in the third quarter and thereafter.

As we continue to execute on our 2019 plan, we believe the Jackalope acquisition shows a continuation of our disciplined growth strategy and gives us meaningful scale in an emerging growth basin that will provide Crestwood with a multi-year inventory of low-risk growth opportunities. We are experiencing robust business fundamentals across our three operating segments and we are highly confident in our ability to execute our capital program to ensure we meet the growing needs of our customers.

Based on our updated cash flow outlook, Crestwood is confident in our ability to achieve a leverage ratio between 3.5 times to 4 times by the first half of 2020, while generating peer-leading DCF per unit growth. We have a lot of momentum building at Crestwood based on our multi-year track record of execution and delivering on our financial targets. Crestwood remains absolutely committed to our current strategy. And we believe we're very well positioned to continue generating substantial value for our unitholders going forward.

With that, operator, I think we're ready to open the line up for questions.

Questions and Answers:

Operator

Thank you. (Operator Instructions) First question is Dennis Coleman, Bank of America/Merrill Lynch. Please go ahead, sir.

Dennis Coleman -- Bank of America/Merrill Lynch -- Analyst

Yes. Hi, good morning. A couple from me, please. I guess, if we can start in the Bakken by our count -- the wells put on line were a little lower than we expected, I guess, we were just flat-lining or even balancing the 100 expected. Were there weather impacts or anything like that you might talk about?

Robert G. Phillips -- Chairman, President and Chief Executive Officer

There were, Dennis. Thanks for joining us. We had a pretty strong winter again. It wasn't quite as bad as the winter of '14 when we first took the business over. But our operations team up there has done such a remarkable job of learning how to effectively keep operations going despite shut-ins, when temperatures are minus 20 and below. It's really difficult circumstances.

I think when we look at our first quarter, the flow assurance and the throughput was nothing short of amazing and that was always our -- our first job is to make sure that the systems run, the people are safe and that we can be helpful with our producer customers and helping them keep their production on or get production on, when it comes offline due to the weather.

So number one, when we look at the throughputs, it might been off a little bit. By virtue of the weather, weather maybe a little bit more under our forecast, not a whole lot due to the fact that when you're in those type of winter conditions, it's just really tough to lay pipe and install pumps and compressors. So little bit impact on the debottlenecking projects.

As far as the well connects, the producers were impacted similarly. They've got a long list of well connects, I'm going to let Diaco, who manages that business for us, talk a little bit about what the customers have forecasted for the rest of the year. But when these guys move it from quarter-to-quarter, I mean these are wells that are planned, they are drilled just a matter of getting the frack team -- the frack completions team to the pad and then bringing some production offline to protect that against the fracture stimulation job. So all of that together, we might have been in single-digit percentage under what our forecast was, but we still got a strong lineup set for the rest of year. Diaco, you want to comment on the number of wells, we expect to have completed rest year, who the big producers are, and how impressive their recent well results are?

Diaco Aviki -- Senior Vice President, Business Development and Commercial, Bakken and Rockies

Yeah, absolutely. Thank you, Bob. In the Bakken, we are forecasting north of the 100 wells being completed rest of the year. We've been working with our customers very closely to look at when our processing constraints come up into service with Bear Den II, and they've lined up a lot of their wells in line with when we're going to have our cost and capacity. So you'll see back-end of 2019 with the heavy load of new wells. What they're doing in the Bakken's absolutely amazing. They're optimizing the completion designs by adding additional fracks, looking at the cluster spacing and then really bringing in some really nice EUR, high IP wells.

Robert G. Phillips -- Chairman, President and Chief Executive Officer

Particularly WPX and -- but we're really excited about XTO coming on this year for the first time in years, they're really starting to develop the acreage.

Diaco Aviki -- Senior Vice President, Business Development and Commercial, Bakken and Rockies

That's right. Absolutely. We got six rigs running on the infrastructure right now.

Robert G. Phillips -- Chairman, President and Chief Executive Officer

Yeah. Dennis, Diaco brings up a point that I think you know about -- but -- and I think everybody else does too. I mean the basin is constraint to a certain extent. There's not a lot of excess gas processing capacity. There seems to be ample NGL takeaway capacity, because a lot of us are using rail, like we are in addition to delivering NGLs downstream into the one-off pipeline system they've been great to work with over the past few months. But we also continue to take the extra NGL barrels out by truck and rail that using the COLT Hub as our -- exit in our marketing strategy. Others in the basin, other gas processors doing the same thing.

Overall, there's -- the limiting factor is just processing constraints right now and these producers know that. And so to the extent that they might have had significantly more wells in the first quarter and they push those out later in the year, it really is trying to coincide their completion strategy with not only the Arrow debottlenecking, when we bring that Bear Den II plant on stream and have the extra processing capacity and to a certain extent, the extra NGL downstream capacity as well.

Does that makes sense Dennis?

Dennis Coleman -- Bank of America/Merrill Lynch -- Analyst

It does. And thanks for all that detail. It's helpful and clearly looking for a nice -- a nice move up in the second half of the year. So I guess if I can shift more to the funding strategy and also just sort of the -- maybe a little bit about the first reserves, some of the questions I've got from investors, as the share price moves up and with obviously the sectors had a nice run, but Crestwood has had a very nice run in the first quarter, should we think any differently about the First Reserve shares?

And then I guess the second sort of related question, but a little bit different, also as the share price moves up and now sort of funding between common units and you've made it clear you don't intend to issue any common units, but how do you think about that balance of common yield of mid-6s versus the preferred shares that you're putting out there at over nine?

Robert G. Phillips -- Chairman, President and Chief Executive Officer

Well, those are two or three great questions. I'm going to first answer the question you didn't ask. I forgot to thank our preferred partners in the Powder River Basin acquisition GFE, Apollo and TPG (ph). They stepped up and made a significant additional investment in Crestwood and in our Powder River Basin position and so we are really appreciative of their support. They've been with us for a long time. We've got a great relationship with them and we really appreciate them stepping up and allowing Robert and the finance team to thread the needle and Will and the deal team to complete the acquisition.

With that kind of long-term equity investment support, we can continue to grow and expand our portfolio without having to access the equity markets. And I think this transaction structure is an absolutely perfect example of how we've done it before and how we'll continue to do it without having to access the public equity markets, but I know Robert is going to have more to talk about there.

On the First Reserve question, I can't tell you how much we appreciate the now nine-year partnership that we've had with First Reserve and another nine years that we expect to have going forward. We have been great partners. They have been very supportive of everything that we've done over the last nine years. And let me just walk you through a couple of the steps, where we've seen other examples of private equity sponsors in this business get weak and get out or bailout or make the wrong moves, but in every step of the way, going all the way back to the initial investment in a $5.50 per Mcf gas market, we started out with First Reserve and then the market changed in '12 and '13 and we pivoted to rich gas areas and then market pivoted again.

In '14, we went to $100 crude and then it collapsed, and then we saw it go to $25 crude in February of '16 and through all of those cycles in the business, they stayed with us, they were steadfast, they were totally focused on creating long-term value, they helped us make great decisions and repositioned the Company beginning in '15 and '16 with the Simplification merger where First Reserve was one of the very first, if not the first, private equity sponsors to volunteer to give up their IDRs, they did it first. And we didn't have to explain the economic benefit of that or the strategic consequences of being the first to get out there and give up the IDRs for long-term growth. And so that really set the basis for what all of our investors are enjoying today, which were on a run of about two years in row of the best total return in the sector.

None of that would have been possible, if First Reserve hadn't been totally supportive of the management team to make the simplification decision back in '15 to sell part of our best assets to Con Ed and delever the balance sheet in '16. To help us with Delaware Permian investments by forming a new joint venture in 2017 and then steadfastly staying behind us and supporting our expansion program in '18 and now supporting as the GP, this great acquisition that we've made in '19 in the Powder River Basin.

I can't tell you how great a partner they've been. They've been in the investment nine years. They expect to stay in the investment another nine years. We all know what the five-year plan looks like. We know we're creating value and we know that we've positioned Crestwood uniquely in this business to be successful. There an investor just like the rest of us, the General Partner is a partnership between First Reserve and the management team. We are very, very long in our view of this and we're really excited about where we are. So I expect First Reserve be my partner nine years from now. Robert?

Robert Halpin -- Executive Vice President and Chief Financial Officer

Yeah, I'll -- maybe I'll expand on a couple of points and answer the second part of your question, Dennis on kind of the funding plan and kind of how we think about our cost of capital.

I think to reiterate Bob's comments on the First Reserve side, I think what you said is spot on. As we look at our five-year outlook, we have a perception on what we think we can achieve from a value creation standpoint. Certainly the Powder River Basin is additive to that as we've updated our guidance outlook, now a 20% growth objective through the year end 2020 timeframe. So, I think, we see a tremendous amount of upside through a continuation of executing on our plan and as a result, I think we're all fully aligned and committed to capturing that value, delivering on that for our investors going forward.

To your second point on cost of capital, every investment opportunity we look at has to meet the criteria that Bob alluded to in his intro remarks and that is, it needs to be additive to our strategic outlook, needs to be additive to our core growth portfolio, so needs to be a bolt-on or an expansion of our existing assets where we see growth opportunities. And it clearly needs to fit nicely above our weighted average cost of capital from a return standpoint,

I mean it needs to be immediately accretive to DCF per unit and immediately accretive to the balance sheet. I think the Powder was a good example of that and I think that will be the what the types that we look for going forward. As we look to fund those opportunities, we obviously look at all the avenues of availability of capital that we have to us and we put on a financing structure that we think creates the greatest value in line with those three objectives.

Over the past several years, we believe the self-funding model has worked very well. We think our unit price has reflected that and I think in the 2019 and 2020 timeframe, we're committed to that. But we are getting to a position where we think that our cost of capital is materially improving and becoming a competitive advantage to us relative to others out there, and if there are good opportunities that fit within our strategy to utilize that advantage, obviously we're open minded to that. But we're committed to what we're doing today, and we expect that will drive meaningful value for the next 24 or 36 months.

Dennis Coleman -- Bank of America/Merrill Lynch -- Analyst

That's great. Thanks, Bob, for all of that color. I appreciate it. I'll turn it over to someone else.

Robert G. Phillips -- Chairman, President and Chief Executive Officer

Thanks, Dennis.

Operator

The next question is from Tristan Richardson, SunTrust Robinson Humphrey. Please go ahead.

Tristan Richardson -- SunTrust Robinson Humphrey -- Analyst

Hey, good morning guys. Appreciate all the commentary. I just had a quick one on the Delaware. On the second half ramp and completion activity on Willow Lake you guys are expecting, is that entirely driven by your NGL solution and space opening up there or do we need to see residue gas economics also improve for that second half ramp to come?

Robert G. Phillips -- Chairman, President and Chief Executive Officer

Well, it's a great question, because it's one of the biggest challenges the industry faces right now. There's no doubt that over the last several months that gas prices in the Delaware Basin have reached all-time lows and I think it's not a surprise, if there was actually a day where you have to pay somebody $9 an Mcf to take your gas away. That has had an impact on the industry over the last couple of months.

The impact is kind of threefold. Number one, and this is largely for the small, medium sized independents, not the majors. Producers have begun to shut in marginal gas production because of that very, very low record low netback. So there have been some shut-ins that's impacted volumes and throughputs. Number two, that's going to impact their drilling plans currently, but the market foresees that basis differential narrowing or tightening nicely in the second half of the year as we get closer to the pipeline projects that are going to relieve the constraints and when those pipeline projects are in service and some of that gas starts to flow again, then I think we will see less shut-ins and we'll see a little bit more aggressive development plans.

Third and finally is, the NGL markets are beginning to firm up nicely. It's been interesting the first big basis blowout was oil about a year ago or nine months ago and then came NGLs as the industry recognized the shortage of frack space at Bellevue. And then finally, gas third (ph) and so we've made it through all three commodities. Gas will tighten just like NGLs did six months ago and crude did a year ago, and producers will get back to producing full bore and get back to their delineation program. So it's really kind of all the above.

Now having said that, we're fortunate Shell is our primary customer. They were major and so they drilled through these cycles. They are in their execution phase of their manufacturing development phase. And so Shell actually is picking up their activity, which we're pretty pleased about. They've told us to expect a little bit more rig activity and they really like the rock that we have where our Rock is located. It's right on top of Anadarko and BP. So it's really good rock and everybody can see the results and so we're excited about having Shell and their long-term development capability kind of continued to drill through these downturns.

But, yes, you're right, the extreme gas prices over the last 60 days have begun to have an impact, in particularly, for the smaller guys, they are going to show the marginal production, instead of sell it for a loss, and they are going to slow down the rig activity a little bit, but we expect it to pick up in the second half of the year.

Tristan Richardson -- SunTrust Robinson Humphrey -- Analyst

Helpful. Appreciate it, Bob. And then Robert just on your comments on the current quarter, just the notion of a generally stable 2Q, is that a function of where you see volumes currently across your growth areas before the major projects drive that second half ramp?

Robert Halpin -- Executive Vice President and Chief Financial Officer

Yeah, Tristan, it's a little bit of -- I mean it's a combination of a couple of factors. One, I think it is from the volumetric standpoint, the real unlocking of growth potential in the Bakken is largely attributable to getting the Bear Den processing expansion in service. In the Powder, we're actively under way building our Bucking Horse II plant. We're at full capacity today through the balance of the year. So we'll have a ramp in gathering volumes. You won't really see the processing volumes really pickup there until we get that second plant into service.

So I think we're pretty stable in the volumetric side, and there is still a little bit of seasonality in our business. That's always been there attributable to our NGL business. I think those factors are the primary driver of my commentary. Our story of -- kind of our growth objectives is really linked to getting those two projects in service in the Powder in the Bakken, and in the volumes are there behind it to drive meaningful growth from there.

Tristan Richardson -- SunTrust Robinson Humphrey -- Analyst

Helpful. Thanks, guys, very much. Appreciate it.

Robert G. Phillips -- Chairman, President and Chief Executive Officer

Thank you, Tristan.

Operator

(Operator Instructions) We have a question from Ned Baramov, Wells Fargo. Please go ahead.

Ned Baramov -- Wells Fargo -- Analyst

Good morning and thanks for taking the questions. On the minimum revenue guarantee provision in the Chesapeake contract, it seems that based on Chesapeake's projections, the minimum revenues will be achieved by the second half of 2021. So a two-part question on this. First, could you maybe provide a rough indication of what the gathering and processing fee looks like once it resets in late 2021 and then two, could you talk in very rough terms about the trajectory of cash flows from the Jackalope assets after 2021?

Robert Halpin -- Executive Vice President and Chief Financial Officer

Yeah, happy to do that, Ned. So I think we haven't given any indications around the specifics of the commercial structure and I think we are not at liberty to do that just given our contractual relationship and the confidentiality associated with that. Speaking to your timing point, we are in agreement obviously doing a lot of close work with Chesapeake around their development plans that we would expect them to have worked through the cumulative revenue guarantee by the latter part of 2021 and therefore would see the rate revert to the lower tiered rate from thereafter.

As we look at our growth outlook, we guided to being at $150 million of annual cash flow by the 2021 timeframe. I think what we would expect thereafter, with their five and six-rig program is that we would see a continuation of growth from there, but the trajectory of that growth would not be as robust as we're seeing between now and year-end 2021. So I think overall our guidance for the asset is, we've looked at, call it at a 10% to 15% kind of growth trajectory over the five-year period, compound annual growth rate. I think that's generally in line, if you kind of do a linear estimate from where we expect to be by 2021.

Ned Baramov -- Wells Fargo -- Analyst

Okay. This is great. And then another question on the Jackalope transaction. This was a competitive process obviously. So did the operatorship by Crestwood deter more aggressive bidding by private equity, and maybe what are some of the best practices in this process that you could apply in consolidating some of your other JVs down the line?

Will Moore -- Senior Vice President, Strategy & Corporate Development

Yeah, thanks, Ned. This is Will. This was a unique process given that you're already in the investment since 2013 and so. We went through this and one is The Williams to maximize value here, but also know that we were kind of at a ace in the hole with the operatorship. And so, I think when they went out to the process and the values that they received, a lot of those that were above us included operatorship, which we control. And so Williams decided to go with us because it's a much cleaner transaction at a value that made sense for them, but I do think we got it at a relative value that made a lot of sense for us, given where we are seeing other transactions trade at. So I think when we look at our existing -- other existing JVs and potential consolidation, I think that playbook can be used again here and allows us to kind of control our own destiny even though it is a very competitive market out there.

Ned Baramov -- Wells Fargo -- Analyst

That's great. Thanks, Will. That's all I had.

Operator

There are no further questions at this time. I'd like to turn the floor back over to Bob Phillips for closing remarks.

Robert G. Phillips -- Chairman, President and Chief Executive Officer

Thanks, operator and thanks again to all of you that could join. I know there's a number of other companies coming out right now and later this morning. This is an important time for us. We really enjoy pulling our quarter together and looking back to see what worked and what didn't work and what's really satisfying for the management team, the leadership team here at Crestwood is, we put a plan in place every year and then we execute on that plan. And we just love it when the plan comes together and things work the way they're supposed to. That's not by accident. We have a bigger diverse portfolio and a lot of these assets have good quarters and average quarters, and I think the diversity of the portfolio is what allows us to consistently produce results that are above our expectation and market expectations.

Having said that, our eye is clearly on the long-term growth strategy of this Company, which starts at Bakken, where we've made significant investments in debottlenecking our Arrow gathering system and the big investment of Bear Den II processing plant will really drive the big increase in year-over-year cash flow starting in the second half of 2019 and a full year of 2020.

Now it includes the Powder River Basin. Not only the roughly $400 million (inaudible) capital program that we announced last year, which includes the debottlenecking of the gathering system as well as the construction of the Bucking Horse II plant, but now we have 100% of that through the acquisition. So we're really pleased that our partner stepped up to help us acquire it and that they're going to help us step up and continue to fund or finance that growth program.

We're excited about the turnaround in the Delaware in the second half of the year. It is really tough to see a lot of things happening on the time schedule that we want, when gas prices are at negative numbers that's not any fault of ours, that's just the business, but that basis will tighten as well and when it does, we'll be through all commodities, we'll start to see infrastructure get built out and prices in fees and spreads will begin to normalize. Again, it will get back on track in building up our pipes and plans in the Delaware.

And then finally, the Marcellus, it oftentimes gets lost in these calls, but it is a Steady Eddy contributor to our bottom line, big step up on a percentage basis in our share of the cash flow that deal we negotiated back in 2016, when we made the big step to delever the balance sheet and get us in the right position to be successful. So all of this is part of the long-term plan and I'm really pleased with how our guys have executed on that plan, and Robert and the finance team have been able to finance this plan with great discipline and conservative capital allocation.

One final thing that I wanted to touch on is the importance of our organization and the things that we stand for mission, vision and values and that's ESG and sustainability. We've talked about it a little bit over the last couple of quarters, we're making a significant investment and being the leader in our peer group in ESG sustainability. Just recently had our sustainability committee approve the filing of our first Corporate Responsibility Report.

We expect to file that CSR in June. It's going to the full board later this week for approval. We're really excited about it. It comes on the heels of months and months of a materiality assessment that we have conducted internally, which we've been surprised ourselves about how far along and how developed we are in terms of having top-notch, top quartile, if not the top leading ESG operating principles in the business. So we're excited about getting that filed to show not only our current investors, but other investors that are looking around the invest -- in the industry to invest in the midstream space that still believe in the infrastructure investment thesis that there are companies out there, that are committed to being a safe and being a good neighbor and being a responsible pipeline company in this industry.

We don't mind being small, but we want to be the best small company in our space and our big investment in ESG sustainability, I think, will begin to differentiate Crestwood from some of the others in our peer groups. So we're excited about getting that filed in June.

And with that, operator, I think we'll close the call. And again, we thank everyone for joining us this morning.

Operator

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a good day.

Duration: 46 minutes

Call participants:

Robert G. Phillips -- Chairman, President and Chief Executive Officer

Robert Halpin -- Executive Vice President and Chief Financial Officer

Dennis Coleman -- Bank of America/Merrill Lynch -- Analyst

Diaco Aviki -- Senior Vice President, Business Development and Commercial, Bakken and Rockies

Tristan Richardson -- SunTrust Robinson Humphrey -- Analyst

Ned Baramov -- Wells Fargo -- Analyst

Will Moore -- Senior Vice President, Strategy & Corporate Development

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