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Energy Transfer LP (NYSE:ET)
Q1 2019 Earnings Call
May. 9, 2019, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings, ladies and gentlemen and welcome to the Energy Transfer First Quarter 2019 Earnings Conference Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions)

It is now my please to turn over to your host, Mr. Tom Long. Thank you sir, you may begin.

Thomas E. Long -- Chief Financial Officer

Thank you, operator and good morning, everyone, and welcome to the Energy Transfer first quarter 2019 earnings call, and thank you for joining us today. I'm also joined today by Kelcy Warren, Mackie McCrea and other members of the senior management team, who are here to help answer your questions after our prepared remarks.

As a reminder, we will be making forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. These are based on our beliefs, as well as certain assumptions and information currently available to us.

I'll also refer to adjusted EBITDA, distributable cash flow, or DCF and distribution coverage ratio, all of which are non-GAAP financial measures. You will find a reconciliation of our non-GAAP measures on our website.

Let's start with a brief summary of the quarter. In addition to delivering another strong quarter with record adjusted EBITDA of $2.8 billion for the first quarter. We successfully executed on several key initiatives; including the start up of the second phase in Bayou Bridge. The opening of our first office in China and we are benefiting from the completion of multiple major growth projects.

As for our first quarter performance, consolidated adjusted EBITDA was, up 40% over the first quarter of last year and pro forma for the merger of ETE and ETP, DCF attributable to the partners of ETE as adjusted also increased almost 40%. We continue to see strong performance in all of our major businesses and reported record operating results in the NGL and refined products and crude oil segments.

Distribution coverage for the quarter was 2.07 times, which resulted in excess cash flow after distributions of more than $850 million for the quarter. For 2019, we continue to expect to generate between $10.6 billion and $10.8 billion in adjusted EBITDA, and we also still expect to spend approximately $5 billion on organic growth projects. We have been conservative in our assumptions for commodity prices and spreads in our 2019 forecast. If spreads and pricing stay at current levels for the balance of the year, and our growth projects ramp up as budgeted. We expect adjusted EBITDA to trend toward the higher end of our guidance range.

Before going into a more detailed discussion around first quarter earnings, growth CapEx, guidance and liquidity update, I'll start with the latest developments on our growth projects. In March, we announced that we had signed a project framework agreement with Shell that provides the foundation to further develop the Lake Charles LNG export facility toward a potential final investment decision or FID. In addition, the parties have been actively engaged with LNG, engineering procurement and contracting or EPC companies. Over the last several months and the last week Lake Charles issued an invitation to tender to US and international consortia to bid for the EPC contract.

The project if sanctioned through an affirmative FID would convert Energy Transfer as existing Lake Charles LNG import and regasification terminal to an LNG export facility with a liquefaction capacity of 16.45 million tons per annum. The project is fully permitted, uses existing infrastructure and benefits from the abundant natural gas supply and proximity to major pipeline infrastructure; including Energy Transfer's vast pipeline network.

On Orbit, which is our joint venture with Satellite Petrochemical USA Corp, but which we are constructing a new ethane export terminal on the US Gulf Coast to prevent ethane to Satellite. We continue to make progress on the construction of the project in both the US and China. And we continue to expect the export terminal to be ready for commercial service in the fourth quarter of 2020.

In last month, we were excited to open a new office in Beijing, to continue to expand into new markets and add to our export capabilities to Asia. This strategic move allows us to better leverage the increasing business opportunities in the export of much needed energy products to China and other Asian markets, and to facilitate growth projects across our diverse platform of assets like the Lake Charles LNG export facility, the Orbit ethane export facility and the Nederland and Marcus Hook terminals.

Next on Bayou Bridge 24-inch segment from Lake Charles to St. James began commercial operations at the end of March. And in April, we announced a non-binding open season to solicit shipper interest for expanded joint tariff transportation service received from certain connecting carriers onto Bayou Bridge pipeline system. This would provide shippers with a cost effective alternative to access the St. James market from multiple basins.

Now looking at Mariner East system, on April 23rd, we resumed operations on ME1. As a reminder, we placed the initial capacity of ME2 into service on December 29th of 2018, and volumes have continued to ramp up. With ME1 back online, the combined, the Mariner East system is expected to move approximately 230,000 barrels per day of NGLs through Marcus Hook with additional inbound transportation modes; including trucking and rail.

Total NGL volumes move through Marcus Hook is expected to be approximately 300,000 barrels per day for June. This demonstrates the strength of the facility and efficiently reaching the best local and regional markets for our customers. All modes of inbound transportation are essentially at capacity, which explains why we are expanding further. We continue to make progress on additional local area connections for ethane, propane and butane distribution.

We will be connected to a new power plant in Cambria County for ethane for Mariner East. As well as two local area of propane, butane distribution terminals along the system. Some of the truck volumes from areas not directly connected to the Mariner East pipeline, thus further demonstrating the strength of the netbacks through Marcus Hook.

As to ME2x 99% of the mainline construction is complete and at this time, we continue to target having the pipeline in service by late 2019. Looking at our Lone Star assets the 150,000 barrel per day Frac VI went into service in mid-February and has been full since March. Frac VII, we continue to expect it to be in service in the first quarter of 2020, and we expect it to ramp up very quickly. And on our 24-inch 352-mile Lone Star Express expansion will add over 400,000 barrels per day of NGL pipeline capacity from the Permian Basin to the Lone Star Express 30-inch pipeline south of Fort Worth, Texas. It is still expected to be in service in the fourth quarter of 2020.

On the Bakken pipeline in January 2019, we completed a successful open season to bring the current system capacity to 570,000 barrels per day. The new shipper commitments from the recent open season became effective owner before March 1st. In addition, Bakken pipeline receive sufficient market interest during the open season, such that the partners are also progressing with plans to further increase the system capacity by late 2020, in order to meet growing demands for additional takeaway out of the basin.

Looking at the crude projects in the Permian, we are no longer pursuing the Permian Gulf Coast pipeline, as it was initially announced. However, we will continue to evaluate participation in other projects and we continue to do everything we can to maximize the capacity on all of our Permian crude pipelines, as demand remains very strong. On PE1, 2 and 3 pipelines, which are part of our Permian Express joint venture with ExxonMobil, all continue to operate at full capacity. And we're almost complete with an expansion of our Permian Express system. The PE4 expansion will add an additional 120,000 barrels per day of capacity to our Permian Express pipeline system from Colorado City to Needle in Texas. And the full capacity of the project is expected to be in service by the end of the third quarter of this year. We have already secured sufficient commitments to make this project accretive.

Now turning to our processing plants in West Texas. The 200 million cubic foot per day Arrowhead II cryogenic processing facility went into service at the end of October and is running full today. During the fourth quarter, we approved Arrowhead III another 200 million cubic foot per day processing plant in the Delaware Basin. Arrowhead III is expected to be in service in the third quarter of 2019, and is projected to be full by year-end, bringing our total processing capacity in the Permian Basin to approximately 2.5 Bcf per day. To meet growing producer demand, we continue to expect to announce another processing plant in the Permian Basin shortly. We anticipate this plant being in service in 2020, and is already fully subscribed.

As we grow our gathering and processing assets in the Permian, we're also adding new takeaway capacity. The Red Bluff Express Pipeline went into service in May 2018 and the second phase of the pie is expected to be online in the second half of the year. Volumes during the first quarter averaged approximately 350,000 MMBtus per day and we expect those volumes to increase significantly by the end of the year.

The majority of these volumes are also flowing through our Waha/Oasis Header, thereby generating additional revenues downstream. As we have previously mentioned, our anchor shipper is Anadarko and their affiliate Western Gas exercised their option to buy a 30% interest in Red Bluff Express Pipeline effective January 2019.

From the products side, we previously announced the J.C. Nolan Diesel Pipeline, which will have an initial capacity of 30,000 barrels per day and will transport diesel fuel from Hubert Texas to a newly constructed terminal in the Midland, Texas area. We are in the process of completing a joint venture agreement with Sunoco LP or Sun for this project to be a 50-50 joint venture with Sun. The pipeline will utilize existing ET pipes, which it will contribute to the joint venture. Construction is progressing well and we expect the project to be in service before the end of this year.

Now let's look at the first quarter results in more detail. Today, I'll discuss ETs results, pro forma for the merger. Then I'll also walk you through ETO segment results for the quarter. As a reminder due to the merger of ETE and ETP last October, we have reevaluated our segment reporting and now report our investments in Sun and USAC as their own respective segments. In addition, Lake Charles is now reported in the interstate segment. Additional disclosure regarding quarterly results can be found in the ET press release issued yesterday or in the ET or ETO 10-Qs, which are expected to be filed later today.

ETs consolidated as adjusted EBITDA was, up 40% to $2.8 billion, compared to $2 billion for the first quarter, 2018. This growth is due to increase in all of our core operating segments with record operating performance in the NGL and refined products and crude oil businesses. On a pro forma basis for the merger ETs DCF attributable to the partners as adjusted was $1.66 billion for the first quarter, up approximately $460 million or nearly 40%, compared to the same period last year, primarily due to the increase in adjusted EBITDA.

Pro forma for the merger, coverage for the first quarter was 2.07 times. In April Energy Transfer announced a distribution of $0.305 per common unit for the first quarter or $1.22 per common unit on an annualized basis. This distribution is flat, compared to the fourth quarter of 2018, and will be paid on May 20th to unitholders of record as of the close of business on May 7th.

Turning to our results by segment and starting with the NGL and refined product segment, adjusted EBITDA increased to $612 million, compared to $451 million for the same period last year. The increase was due to record transport and frac volumes, as well as increased refined products terminal volumes, which was partially offset by $19 million impact from ME1 system downtime.

NGL transportation volumes on our wholly owned and joint venture pipelines were 1.2 million barrels per day, compared to 936,000 barrels per day for the same period last year. The increase was mainly due to higher volumes on our pipelines, out of the Permian Basin and North Texas regions, as well as increased volumes on our Northeast assets, due to the start up of the ME2 pipeline in the fourth quarter of 2018. First quarter average daily fractionated volumes increased to 678,000 barrels per day, compared to 472,000 barrels per day last year, primarily due to the commissioning of our fifth and sixth fractionators in Mont Belvieu, which came online in July 2018 and February 2019 respectively.

As to our crude oil segment, adjusted EBITDA increased to $306 million, compared to $464 million for the same period last year. The increase between the first quarter of 2018 and the first quarter of 2019 were primarily due to increased throughput in the Permian on existing pipelines, growth on our Bakken pipeline, as well as an increase of $124 million in margin, excluding unrealized gains and losses from the crude oil acquisition and marketing business, due to improved basis differentials between the Permian and Bakken producing regions.

Crude transportation volumes increased to a record 4.5 million barrels per day, compared to approximately 3.8 million barrels per day for the same period last year, primarily due to an increase in barrels through our existing Texas pipelines and volume growth in the Bakken. During the first quarter, volumes on our Bakken pipeline averaged approximately 540,000 barrels per day and demand for space on both our Bakken pipeline and Permian Express pipes remains strong.

For midstream adjusted EBITDA was $382 million, compared to $377 million for the first quarter of 2018, primarily due to higher throughput volumes partially offset by lower NGL and gas prices, which negatively impacted results by $45 million.

Gathered gas volumes were 12.7 million MMBtus per day, compared to 11.3 million MMBtus per day for the same period last year. This increase was primarily due to higher volumes in the Permian, growth on the Ohio River system in the Northeast, as well as growth in the North Texas region.

In our interstate segment adjusted EBITDA was $456 million, compared to $366 million for the first quarter of 2018. This increase was primarily due to additional EBITDA from the commissioning of Rover and capacity sold at higher rates on Transwestern, Panhandle and Trunkline.

Interstate transportation volumes were 11.5 million MMBtus per day, compared to 8.2 million MMBtus per day for the same period last year. Due to an increase of 1.6 million MMBtus per day from the Rover pipeline, as well as increases on Tiger due to production growth in the Haynesville Shale, higher utilization on Panhandle and Trunkline and an increase on Transwestern as a result of favorable market opportunities in the West.

In our intrastate segment, adjusted EBITDA increased to $252 million, compared to $190 million in the first quarter of last year. This was primarily due to a $29 million increase from commercial optimization activities, as a result of wider basis differentials, from West Texas to the Houston Ship Channel, an increase of $13 million in transportation fees, primarily due to the Red Bluff Express coming online, as well as the acquisition of the remaining interest in the RIGS pipeline in April of 2018. Our reported intrastate transportation volumes increased, primarily due to the Red Bluff Express coming online, increased utilization of our Texas pipelines, as well as RIGS now being treated as a consolidated subsidiary.

Moving on the Sunoco and USA Compression, which are now both reported as their own segments. For our investment in Sun, adjusted EBITDA was $153 million, compared to $109 million a year ago, primarily due to decreased operating expenses from Sun's conversion of 207 retail sites in West Texas to commission agent sites in April of 2018, as well as increased fuel volumes. And for our investment in USA Compression, we had a very strong quarter, adjusted EBITDA was $101 million driven by a positive market environment as a result of continued strong domestic natural gas production and the resulting midstream infrastructure investments.

Now, moving on to a CapEx update, for the three months ended March 31st, 2019 Energy Transfer spent approximately $650 million in organic growth projects, primarily in the NGL and refined products and Midstream segments, excluding Sun and USAC CapEx. And for the full year 2019, we still expect to spend approximately $5 billion on organic growth projects, primarily in the NGL and refined products segments.

Looking briefly at our liquidity position, as of March 31st, 2019 total liquidity under our revolving credit facilities was approximately $4.15 billion and our leverage ratio was 3.82 times for the credit facility. In March, ET and ETO are primary operating entity completed an exchange offer were about $4.21 billion of senior notes, we issued in exchange for approximately 97% of ET's outstanding senior notes. And in April 2019, we opportunistically issued 32 million of 7.6% Series E preferred units for gross proceeds of $800 million and used the net proceeds to repay amounts outstanding under our revolving credit facility and for general partnership purposes. As a reminder, these securities received 50% equity credit from all three rating agencies and represent an additional step in our plan to decrease our leverage ratio to 4 times to 4.5 times.

Before opening the call up to your questions, I just want to say that how pleased we are -- have reported another record quarter. This demonstrates our ability to consistently generate fee-based earnings, as well as a significant amount of excess cash flow, which you can find our excellent backlog of growth projects and a credit-friendly and accretive manner, and allow us to further organically strengthen our balance sheet. We have built this business to benefit from our diverse asset footprint and predominantly fee-based cash flows, which are enhanced by strategic expansion projects. We continue to see growth from fee-based projects like our recent Bakken expansion, Permian Express 3 and 4, Frac VI, ME2, Bayou Bridge, Red Bluff Express and others.

Our strong outlook for the year is primarily driven by our core businesses. We have leading footprints across the midstream value chain in nearly all of the major producing basins in the US, and we continue to find a significant number of accretive growth capital opportunities. We will continue to exercise disciplined when it comes to evaluating new projects and we remain very focused on safety and project execution.

Operator, please open the line up for questions.

Questions and Answers:

Operator

Thank you. (Operator Instructions) Our first question comes from the line of Christine Cho with Barclays. Please proceed with your question.

Christine Cho -- Barclays Capital -- Analyst

Good morning. If we could start with the crude segment. It was a pretty sizable increase on a quarter-over-quarter basis. Even though spreads were lower, and I don't think any incremental capacity was added. I think there were also some inventory adjustments last quarter that reversed this quarter. Was most of that in NGL or was there something crude? And I'm just trying to get a sense of what drove the higher numbers on a sequential basis? And how should we also think about like your hedging strategy that you're marketing subsidiary may put on for your asset?

Marshall S. McCrea -- President and Chief Commercial Officer

Hello, Christine. This is Mackie, our crude segment, of course, we continue to load up our capacity, fill up our pipes. But we have created additional capacity, we did a deal with Plains, we're now able to fully utilize our Mariner 1 capacity out of the -- which Falls area. So there are other areas where we've added capacity. And I think you mentioned the spreads weren't wide, they were really wide, one of the widest quarters in the last couple of quarters, including the first quarter. As far as inventory Tom, do you want address?

Thomas E. Long -- Chief Financial Officer

Yes, I'll take that. Christine, you're right, as you recall in the fourth quarter, we had a negative inventory adjustment and remember that inventor is probably about 9 million barrels and its operating inventory, I need to make sure I clarify that. And so you saw about $150 million negative in the fourth quarter, we did recapture about $98 million of that in the first quarter of 2019, but also recall in the first quarter of 2018, we had about $64 million or so of positive on that piece of it. So you can see, kind of, the movement from that standpoint, but yes we did recapture a little bit of the fourth quarter negative.

Marshall S. McCrea -- President and Chief Commercial Officer

And Chris I'll add one point too, we also -- excuse me, I'm sorry, we also brought on and fully loaded PE3, which we didn't have in the first quarter of 2018 and that was fully loaded and moving in the first quarter of 2019.

Christine Cho -- Barclays Capital -- Analyst

Okay. And just to clarify, the 9 million barrels of operating inventory that you just referred to. That was all in the crude, there was nothing in NGLs for that?

Thomas E. Long -- Chief Financial Officer

That is correct. That is correct.

Marshall S. McCrea -- President and Chief Commercial Officer

That is correct.

Christine Cho -- Barclays Capital -- Analyst

Okay, great. And then if I can just move on to the DAPL, the Bakken optimization that you guys are talking about. Is -- I'm assuming this is going to include at top two, but as well as DAPL, but it did. Should we think that any optimization just going to be pumping or is there potential for looping here. And can you remind us, if there are any regulatory approvals, you need for increasing capacity?

Marshall S. McCrea -- President and Chief Commercial Officer

Christine, its Mackie, again, you know, through our open season wins, so incredibly, well the market demand as everybody knows that the Bakken is growing on a daily basis. We're excited that we've -- really the only pipeline that can really offer multiple markets and some of the better markets on the Gulf Coast. So we certainly are diligently moving forward, we're going through a process of both local, state and regulatory to check all those boxes. We hope in the next several months to move forward on open season and we do believe that we can materially increase the capacity without any major modifications, without any line looping just adding horsepower on existing capacity, keep in mind, we're not adding pipes on that -- on an expansion potentially we would just be adding horsepower to increase our throughput.

Christine Cho -- Barclays Capital -- Analyst

Okay, great. And then last one from me. On the Mariner 1 system, if I'm not mistaken, I think even though you guys have put it into service, you guys still have to do some testing for salvage of a value, because the pipe is still old. What exactly is going on there and is there still a chance of a pipeline will have to be shutdown and if that's the case, is that something you can solve forward ME2X?

Marshall S. McCrea -- President and Chief Commercial Officer

No, no, this is Mackie again. No we're not aware of -- and there is all kind of rumblings around the country from different groups. But no, we're not, where everything we've brought Mariner 1 back on, we worked very closely with the PUC to do everything that they've asked the integrity of the 100% in shape and we're excited that systems back up and running.

Christine Cho -- Barclays Capital -- Analyst

Thank you.

Operator

Thank you. Our next question comes from the line of Shneur Gershuni with UBS. Please proceed with your question.

Shneur Gershuni -- UBS -- Analyst

Hi. Good morning, everyone. Maybe if we can go back to Christine's question about DAPL. In terms of adding pumps in horsepower, I think you mentioned in response to your question that you can materially increase. Are we talking about getting the system up to 700,000 or 800,000 barrels a day with just pumps?

And then secondly, if the open season is strong enough. Is there any small looping projects that could be done on the Southern end that can increase the capacity further to say 1 million and so forth. I was just wondering if you can sort of give us a runway of how this can be expanded?

Marshall S. McCrea -- President and Chief Commercial Officer

Yes, Mackie again, it's probably a little premature to give the exact volumes, but as we -- as I mentioned as we walk through the steps that are necessary to move forward on increasing our capacity, we are very optimistic that as I mentioned earlier, we have a tremendous amount of interest, we'll respond to that interest, well the open season will dictate kind of where we go, but we can add material volumes certainly at the levels that you mentioned with just an horsepower.

Kelcy L. Warren -- Chairman and Chief Executive Officer

Great (inaudible). Just go back to the question. I mean, well this is not part of what our expansion is today, but it if our open season goes extremely well then a small section of its should be referred to as looping. I think it would be a replacement. The customer MLP could impact take us to even larger volumes.

Marshall S. McCrea -- President and Chief Commercial Officer

Yes, sir, that's correct.

Shneur Gershuni -- UBS -- Analyst

Great. That is extremely helpful. And maybe as another follow-up, just you were talking about exports, but I was wondering, if you can talk about Nederland a little bit. Is there a potential for VLCC type of loading capacity out of Nederland? Any way to use kind of existing infrastructure to sort of keep the cost down. Just wondering if that's something that you're considering?

Marshall S. McCrea -- President and Chief Commercial Officer

Yeah, absolutely. We -- Nederland session incredible asset for us, we can move, we move so much of volume through Nederland, it's growing daily both all commodities, not just crude. But we are looking very hard and hopefully build announce in the not too distant future of VLCC project that is, kind of, in high demand with lot of our customers and we hope to get to the (inaudible) basin.

Shneur Gershuni -- UBS -- Analyst

Great, and just one final question. Tom, in your prepared remarks you talked about if conditions continue, you could potentially get to the higher end of your guidance range, it would seem that there's even potential to exceed that. How does that impact your leverage targets of getting below 4.5 times? Is that something that you see occurring either in the first or second half of 2019?

Thomas E. Long -- Chief Financial Officer

Yes. No, always a little bit cautious about, you know, the calculations. As you know, all the agencies, look at this a little bit differently and especially when you've got the number of joint ventures, we have, et cetera, that kind of fits into, so always a little bit cautious, but actually very, very good question. Even when you look at this first quarter and if you were to annualize that, you can get down to some numbers that are pretty low. In other words in that 46, 47 and 48 type range. So we're in a band there and as we continue to look out through the year and we can -- and you start off the question, right. In other words, spreads, commodity prices et cetera stay where they are, it's one of those that we'll be cautious here, but we're pretty excited about how quick we're deleveraging the balance sheet here, so.

Shneur Gershuni -- UBS -- Analyst

Great. I really appreciate the color. Thanks very much guys.

Operator

Thank you. Our next question comes from the line of Spiro Dounis with Credit Suisse. Please proceed with your question.

Spiro Dounis -- Credit Suisse -- Analyst

Hey, good morning everyone. Starting with -- getting out of PGC at this point and evaluating other crude pipelines. Can you provide a little more color there on maybe that types of projects, you'd be interested in. And how critical Nederland or Nederland connection would be for you to join another pipeline. And maybe just to be clear, it sounds like you are not pursuing a new development beyond maybe what's already been announced?

Marshall S. McCrea -- President and Chief Commercial Officer

This is Mackie, again. What we're pursuing is -- what's best for our unitholders and for our customers, and right now we're focused on the existing capacity we have, we're looking at expanding that capacity on our existing system by looping or adding horsepower. But in addition to that we stay in dialog with other companies where it might make sense to partner and move barrels from the fastest growing area in the world probably. And then to your point on Nederland, I've said it earlier, it's just an -- such an incredible asset, as you have. It's probably one of the bigger hubs around when you look at the -- all the 36-inch pipes coming in and out of that area. The connectivity to all of the refineries and all the markets along the Gulf Coast, and then of course our increasing capability to export products out of that area. So we will continue to look at every opportunity and every way we can to move more volumes out of the Permian basin to our assets along the Gulf Coast.

Spiro Dounis -- Credit Suisse -- Analyst

Understood, OK. And then just on the asset portfolio in general. Is there any appetite here opportunistically to capture some of the premium pricing. We're seeing in the private market by selling some assets. I know you guys value optionality, but alternatively, can you also provide -- maybe your latest views on the M&A market from an acquirer standpoint?

Marshall S. McCrea -- President and Chief Commercial Officer

Are you asking what's our appetite for acquisitions?

Spiro Dounis -- Credit Suisse -- Analyst

Yeah, I mean, I guess the horsepower, as you would be looking at to high grade portfolio or sell anything non-core here just to capture some of those higher prices. And then just stepping back more broadly, how you sort of view valuations in general?

Marshall S. McCrea -- President and Chief Commercial Officer

Yeah, we are pretty much done what you've said here, if you look at USA compression and some of the other moves that we've made to kind of move out the non-core. We will continue to look at any assets that we believe are non-core and that are worth more to someone else from than they are to us, so we're not ruling that out, but we've done so much of that already, but we will continue to review it.

Spiro Dounis -- Credit Suisse -- Analyst

Okay. Let's clean up one from me just on PE4 and sorry if you mentioned it. We are little surprised that, how quickly that's able to come online. Can you just speak to the timing around that, and then what's underwriting that project?

Marshall S. McCrea -- President and Chief Commercial Officer

You bet, we've been working on this for a while, it's similar to Bakken, where we're not looping any pipe all we're doing is adding horsepower. We're at 120,000 barrels a day in the third quarter, we already have a material amount of that sold under a term agreement and we are excited about that project coming on, especially this time providing customers and producers in West Texas more outlets for their productions.

Spiro Dounis -- Credit Suisse -- Analyst

Great. Appreciate the color. Thanks guys.

Operator

Thank you. Our next question comes from the line of Jean Ann Salisbury with AllianceBernstein. Please proceed with your question.

Jean Ann Salisbury -- AllianceBernstein -- Analyst

HI, good morning, CapEx the last few years, there's no doubt and elevated by Mariner East customer. And can you guys, kind of, a range of go forward growth CapEx once you've finished with that franchise?

Thomas E. Long -- Chief Financial Officer

Yeah. Really when you look out and -- I mean, like I said you stated that properly with lot of these large projects are starting to roll through. So as you kind of look out and we'll give guidance at least for 2020 later this year. But when you look at, I think you're probably at a run rate of -- the $3, maybe $3 billion to $4 billion, $4 billion just because of the share, scale and size of the company is probably a good run rate. But we'll update those and it could be a little bit lumpy as you know, we've been talking about LNG and stuff. So keep all that in mind as we look out, but I think that $3 to $4 range is probably a good number.

Jean Ann Salisbury -- AllianceBernstein -- Analyst

That's helpful. Thank you. And then what would it take to increase LPG export capacity from Mariner South, and is that something that you're actively looking at or marketing?

Marshall S. McCrea -- President and Chief Commercial Officer

Well, in fact, we are increasing the capacity as we speak. We haven't LPG expansion project that will come online in the third quarter of 2020, which is much needed for our customers and for ourselves. So we're moving forward on that, as well as that we just brought on gasoline export or created gasoline export capability and so we're pretty excited about everything that's going on, if Nederland increasing our capability of exporting all of our products.

Jean Ann Salisbury -- AllianceBernstein -- Analyst

Great, thank you. That's all for me.

Operator

Thank you. Our next question comes from the line of Colton Bean with Tudor, Pickering, Holt. Please proceed with your question.

Colton Bean -- Tudor, Pickering, Holt -- Analyst

Mackie, just a follow-up on the discussion (inaudible) access. I think you mentioned shipper interest and how that would impact your thoughts around incremental CapEx investment maybe on add comp. You just way the options there in terms of maybe looping some of the pipeline versus looking at a joint tariff structure with third-party pipes out there?

Marshall S. McCrea -- President and Chief Commercial Officer

Sure. We'll look at anything, but let me emphasize one thing; one, we couldn't move material volumes probably 800,000 or 900,000 day without any added loop on that comp. As Colt, you mentioned a moment ago. However, if the market interest and the demand is there and it's very likely will -- could be, then we'll look at it's looping pipe on that comp. But right now we'll wait and see, we'll kick off in open season, hopefully in the coming months and they will react to how the market responds.

Colton Bean -- Tudor, Pickering, Holt -- Analyst

That's helpful. And then just on the interstate segment. So let's think there's a bit of a sequential uptick there in operating costs. Can you guys just provide a little bit of a color there in terms of whether we should expect that to repeat or not?

Thomas E. Long -- Chief Financial Officer

Yes. And I'll tell you it's really tied to one item. And that's, ad valorem tax that we're seeing. And so as you look forward, I would say that is something that we'll continue. We are going to be looking at ways, obviously to always try to optimize the best we can. But that's what occurred and that is the go forward kind of a quarter-by-quarter.

Colton Bean -- Tudor, Pickering, Holt -- Analyst

Got it. Thank you.

Operator

Thank you. Our next question comes from the line of Jeremy Tonet with J.P. Morgan. Please proceed with your question.

Jeremy Tonet -- J.P. Morgan -- Analyst

Hi, good morning. Just wanted to start off with Waha touch a little bit more on this year. It seems like even just in the past few weeks 2020 to widen out by another $0.50, I guess, in the past few months here. And just wondering, if you could refresh us on your thoughts as far as how you think about terming out that capacity, looking to flip that opportunity to long-term contracts versus holding it back the open capacity is enjoying the spreads there. Any color on kind of how you're approaching that?

Marshall S. McCrea -- President and Chief Commercial Officer

You bet. This is Mackie again. As with all of our pipelines, we always we're trying to look at the future and rollover contracts, that are terminating and certainly our Oasis NTP cross-haul capacity. It does can open from time-to-time and we -- what our strategy is now is that we have the ability to start selling capacity latter part of 2020 and early part of 2021 (ph) (Technical Difficulty). Benefit for the next year or year and a half from a wider spreads and then about the time the second 42-inch is built when more likely not the basis will collapse that will have a lot of that already locked up. We, in fact, in the last several weeks have locked up fairly significant volumes in Oasis our way, since beginning the latter part of 2020, first part of 2021 for 10 years at healthy rates.

Jeremy Tonet -- J.P. Morgan -- Analyst

Great. And then I suppose on the crude oil side. Midland spreads have really widened out, again, I guess, some kind of than expected. With the second quarter here shaping up to at least to be as good as the first quarter. So just wondering your thoughts on terming out the crude oil side and again I'm trying to reconcile with these favorable market conditions, as well as the growth in fee-based earnings. What would prevent you guys from hitting the top end of your guide or exceeding it?

Thomas E. Long -- Chief Financial Officer

Yes, this is Tom Long again. And yeah, that's the reason why, when we look at the numbers and we look at spreads, as well as those commodity prices. We say that, you know, we could be on the high end of that range. And, listen, there's nothing more we would love to be able to get back on the next call and be walking that up. But let's see how that how the commodity prices and spreads play out, as well as the ramp up of the projects and then we'll obviously talking to you each quarter about that, so --

Jeremy Tonet -- J.P. Morgan -- Analyst

Got you. And then just a last one, I guess with Webster was there any interest in potentially working with that project there or is PE4 kind of, get you where you want to be, and if PGCs no longer in the fold, could that lead to kind of CapEx being a little bit lighter than what you guys anticipated before?

Marshall S. McCrea -- President and Chief Commercial Officer

As far as the CapEx, we're not changing it, Tom said it, we're around the $5 billion and that really had a long impact. Certainly we've taken some money out of -- on that, but we fulfill with other projects. But yes, we were very interested in looking at all projects that we could potentially bring value to our customers and our unitholders. We did have discussions at the end of the day, it just didn't make sense for us to participate in that project. And so, as I mentioned earlier, we're looking at other projects and other ways of looping and maximizing the capacity on our existing systems.

Jeremy Tonet -- J.P. Morgan -- Analyst

Great, that's it for me. Thanks for taking my questions.

Operator

Thank you. Our next question comes from the line of Keith Stanley with Wolfe Research. Please proceed with your question.

Keith Stanley -- Wolfe Research -- Analyst

Hi, good morning. Couple of questions on Lake Charles. Are you still thinking you could potentially be ready for an FID decision in the first half of 2020 with the new shale agreement, and I guess also the China situation. And would you look to build this all three trains at once or is it more likely you proceed in stages on the project.

Marshall S. McCrea -- President and Chief Commercial Officer

Great questions. We plan to build all three trains concurrently, kind of, sequencing of LNG offtake coming from first train, and then six months later offtake with the second train and so forth for the third train. But it's cost effective to build all three trains at the same time, we're confident that the market is there for all three trains with our (inaudible) Shell 50-50 partners in the project. Shell would take 50% of the offtake and Energy Transfer would market 50% of the offtake. And so we're confident that we'll be able to do that.

The China trade straight talks have, of course, created some issues with the China market. We have incredible amount of interest from the major Chinese LNG buyers, and so I think that's gone very well. But there's certain amount of reluctance to go -- to get to the goal line or go, past kind of certain stages based on, kind of, the instructions I think from the Chinese government. But the interest level is very high, the -- our project is very price competitive, the partnership with Shell provides great amount of credibility to the project. It is a Brownfield project with all the existing permits and infrastructure in place to launch the project.

So the reception from the Chinese market has been very good as it has been in Europe as well. So we're confident in the marketing. As far as the timing goes, as you probably saw the announcement of our launching of the EPC bidding process last week and that's a very significant milestone in terms of getting to FID. The bidding process takes quite a while, it's a big project and we want the bidders to have enough time to fully evaluate and provide the most competitive -- cost competitive bids that they can come up with. It will be a very interactive process. And so we expect that the bidding process will end up with the EPC bidder being selected sometime in the early part of 2020. And so the FID would logically come sometime after that -- after evaluating the cost competitiveness of the bids and obviously seeing that we have been able to place our 50% of the offtake under long-term contracts. So we're confident that we'll get to FID, but there is some major work to be done between here and there.

Keith Stanley -- Wolfe Research -- Analyst

That's very helpful. And then as far as the import contract and just the structure of the JV. What would happen with that contract is part of moving forward, if you do so?

Marshall S. McCrea -- President and Chief Commercial Officer

Yes. That contract will remain in place. So we'll continue to receive the payments under the regas contracts through the duration of the contract, which I think expires late 2029 or early 2030. So that stays in place, we've worked out under the project framework agreement with Shell, that all the issues with accommodating export project with the important project or the import facility today. So that's a lot of clarity with Shell, as they were the logical partner, because of their contract with us on the regas side. So all that's been worked out and we're very pleased with where we are today.

Keith Stanley -- Wolfe Research -- Analyst

That's great, thanks. And one quick one on Mariner you said ME2X are still targeting the end of the year. When do you expect to expand capacity on ME2 closer to what you've initially planned for that pipeline?

Thomas E. Long -- Chief Financial Officer

On ME2?

Keith Stanley -- Wolfe Research -- Analyst

Yes.

Thomas E. Long -- Chief Financial Officer

Yes, (inaudible) where we're at right now, of course, we got Mariner 1 and Mariner 2, and we'll have 2X, we hope by the end of this year. We are, kind of, stair-stepping the -- or we have stair-stepped our commitments, as we go through the next couple of years. We aren't specifically sharing with how high those commitments are going. But as we have expressed in the past, there is significant upside, the capacity that we have built in that we're building and we will continue to see that as a huge growth vehicle at Marcus Hook and move out of the Northeast.

Keith Stanley -- Wolfe Research -- Analyst

Thank you.

Operator

Thank you. Our next question comes from the line of Michael Blum with Wells Fargo Securities. Please proceed with your question.

Michael Blum -- Wells Fargo Securities -- Analyst

Thanks, good morning everyone. Tom, I wanted to ask you in your prepared remarks that at the end, you referenced a leverage target or I don't want to know, but what you mentioned from 4, 4.5, I think in the past you really just talked about 4.5, so just wanted to see if there is a subtle shift there in messaging and are you sort of now targeting a slightly lower leverage?

Thomas E. Long -- Chief Financial Officer

Absolutely, Michael. We are, I think the way that we look at it is -- the 4.5, but we realized that if you use a 4 to 4.5 range with the sheer size of our company that gives you a lot of dry powder, flexibility, et cetera. So we're going to continue to charge toward that, and of course, I can't emphasize enough that the ratings and our focus right now on really moving up to the kind of that mid-BBB type range. So to focus of ours, but yeah, 4 to 4.5 and that was obviously well thought out before we put that in, but that is our target, so --

Michael Blum -- Wells Fargo Securities -- Analyst

Great. And then earlier in the call I think, Mackie, you talked about the fact that you have an LPG export -- expansion under way that would come in, in the third quarter of 2020. How big is that?

Marshall S. McCrea -- President and Chief Commercial Officer

It's 150,000 barrels.

Michael Blum -- Wells Fargo Securities -- Analyst

Okay, great. Thank you so much.

Marshall S. McCrea -- President and Chief Commercial Officer

Hey, Michael, I mean 200,000 barrels, sorry.

Michael Blum -- Wells Fargo Securities -- Analyst

Thanks.

Operator

Thank you. Our next question comes from the line of Dennis Coleman with Bank of America Merrill Lynch. Please proceed with your question.

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

Yes. Hi, good morning all. Lot of good questions asked. With the -- in Pennsylvania, the progress on Mariner East 2 and X, that you talked about in this expandability. Could you talk a little bit more about sort of the scale of the opportunity at the Marcus Hook facility. In terms, would it be tanks, docks, what the capital might be?

Marshall S. McCrea -- President and Chief Commercial Officer

Yes. This is Mackie again. Yes, as we keep saying and with such an incredible asset that sits in such a great part of the country just don't compare with our competition and what we can offer both in the Gulf Coast and in the Northeast. But we have -- as with our pipes, where we have the ability to move, we'll have the ability to move up to 400,000 barrels or more a day in the markets. So we also had the capability of adding chilling and tankage to handle at least that much volume, we have four large docks, they can handle significant volumes on a daily basis from an export standpoint, and we have such a footprint there. There's also other things we can at Marcus Hook. So we wouldn't say, we're unlimited, but we have enormous potential of adding assets and adding throughput through Marcus Hook.

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

Okay. Thanks for that. And then, I guess, just a little bit more. It sounds like the China office is certainly at least in part -- geared toward the LNG in the offtake sales there, but are there other initiatives that you're working on, is that the VLCC offtake, as well or dock potential for dock at Nederland, what's the focus there in that office?

Marshall S. McCrea -- President and Chief Commercial Officer

All the above, it's -- that office will focus on increasing our business with China across all commodities. We had a team over there last week on the crude side to grow our business there. We have, as Tom mentioned our LNG team will be working out of that office and then there is a big focus on our ethane and propane and butane sales out of China. As Tom mentioned, there's so much potential in China and it's going to happen, it's just -- but with tariffs kind of slowing things down, it's not moving as quickly as we all would like both us and the Chinese companies. But we are moving forward on negotiating deals that hopefully will be executable form, once the tariffs are cleared up and we -- they will be at some point there will be, whether it's weeks or months, we don't know. But yes, we'll have an office very active in all commodities.

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

Okay. And then maybe just one detail on the LNG potential Lake Charles. In terms of where that -- where you're offtake might go. There was a mention of China, which we just discussed, but also I think Europe was mentioned, I mean would you expect it to be a balance or is it 75% to the -- to Asia, 25% Europe, any mix you can sort of guide to?

Marshall S. McCrea -- President and Chief Commercial Officer

Great question, I think obviously with the increase in Chinese demand, I think it's grown 35% to 40% in each of the last three years. So China will be significant part of the demand equation. We have interest in Japan. We have interest in Korea. Europe is also interested. So it's probably, I mean it's, we're in discussions with a lot of companies, but I would suggest probably two-thirds in Asia and one-third in Europe at this point.

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

Alright, that's helpful. That's it from me. Thanks.

Operator

Thank you. Our next question is from the line of Michael Lapides with Goldman Sachs. Please proceed with your question.

Michael Lapides -- Goldman Sachs -- Analyst

Hey guys. Capital allocation, so if I take -- if I assume EBITDA in the $11-ish billion range $10.5, $11 take whatever consensus is for next year. The midpoint of the growth CapEx, you kind of talked about, let's just say $3.5 billion, interest, a little over $2 billion it implies you've got a decent chunk of free cash flow next year, even after the distribution. How are you thinking about capital allocation in terms of the options of either increasing dividends or purchasing back -- repurchasing equity or retiring even more debt. Maybe even getting to a lower net debt to EBITDA level. How are you thinking about the options and what the market will reward you for? And then how are you thinking about the timeline of making decisions around those options?

Kelcy L. Warren -- Chairman and Chief Executive Officer

Yes. This is Kelcy and that's -- we're thinking a lot about this. We've -- and me particularly have been on the road with some of these guys and listening to the market, trying to understand what the market would like to see us do. What causes our unit price to perform better in other words. And really, we don't know, we do know this, so let's start with this, we made a commitment to the rating agencies to get to a certain number that we've been very vocal about that and that we are going to honor that commitment, so we're not going to see any distribution increases or unit buybacks or anything like that until we achieve that commitment.

We are -- previous question suggested that we're a chip shot away from that. I think that is probably true, we're doing very well. Now, when I ask people, when I go out and to on these trips, if we were to increase distributions do you think our unit price would go up? And the answer is no, we will go down, we'll shoot, if that's the case, then we can check that box. We're not doing that. Secondly, would buying back units no one even loves that, and thirdly what we're hearing is for most people is they just keep paying down debt and that's the best solution. Here's the problem. The problem is that is not a very long-term view of an MLP, and we've run this thing with the view of 30 years, at least when we think about the way we're managing it, and so I think some of these are short-term things that the market will shift it always does, and we will listen to the market and conduct ourselves appropriately.

Michael Lapides -- Goldman Sachs -- Analyst

Kelcy just a quick follow-up. Thank you for that. When you think about the lumpiness in CapEx and inherently CapEx in this business is extraordinarily lumpy. And you think about 2020 or 2021, do you think you're potentially spending significant capital that early on either Lake Charles or VLCC? Or is there a third potential project out there outside of those two that is really sizable relative to kind of normal growth projects like processing plants?

Thomas E. Long -- Chief Financial Officer

Yes. Listen, this is Tom Long. When you really kind of look out at the LNG is that, I think the first when you brought up. And just for the sake of discussion here, I know, Tom Mason was earlier talking about getting the FID and et cetera. But when you really look at the CapEx spend on that, it's a pretty even CapEx spend. So for the sake of discussion, if you are around $1 billion a year over four to five years or something like that. It'll be pretty evenly spent. So I don't -- I wouldn't look at that as a lump. I guess, it will say enough. As far as the other type projects, the reason I answered that question earlier as you kind of look out and you say, three to four, if you looked at, really kind of the approved projects right now that are out there that we're moving forward. Sure, you look at 2020, we're going to continue with these great projects. But as of right now, there's not really a big item that makes a big lump in those spend that you look out, but I mean don't -- I don't want to chime in front of Mackie here whatever (Technical Difficulty) his team has always got great projects out there, but I would say I wouldn't look at it is real lumpy, so --

Michael Lapides -- Goldman Sachs -- Analyst

Okay and then last one and I apologize for hogging a little time here. On a potential VLCC are you all in the (inaudible) permitting process already with the project?

Thomas E. Long -- Chief Financial Officer

No, we're not.

Michael Lapides -- Goldman Sachs -- Analyst

Okay. Thank you, guys. Much appreciate it. Thank you for taking my questions and congrats on a good quarter.

Kelcy L. Warren -- Chairman and Chief Executive Officer

Thank you.

Operator

Thank you. Our final question comes from the line of Christopher Sighinolfi with Jefferies. Please proceed with your question.

Christopher Sighinolfi -- Jefferies -- Analyst

Hey, good morning guys. I also appreciate all the time and color today. Tom, just real quickly, if I could piggyback on Jeremy's earlier guidance calibration question. You guys had noted, about $124 million increase year-on-year in the crude acquisition and marketing results last quarter. I'm just curious, if we could have a sense of the total absolute contribution from that activity last quarter, might be able to referred out from your 10-Q and that's out, but just would be helpful as we calibrate to the second half of the year?

Thomas E. Long -- Chief Financial Officer

Alright, so let me make sure I understand your question, you're trying, I think, is it more focused on mainly what we talked about earlier was is the, is that 9 million barrel of that operating inventory.

Christopher Sighinolfi -- Jefferies -- Analyst

You've -- I think you had noted in the release that excluding any of the unrealized gains and losses, about $124 million step-up from sequentially from last year for crude acquisition and marketing. So I just want to understand what the absolute contribution would be?

Thomas E. Long -- Chief Financial Officer

Yes, we don't split that out in the business, I know we put the $124 in there, but we really don't try to separate that marketing business inside of the over crude oil business that's not something that even in the Q1 when it comes out. You'll see us break out. So --

Christopher Sighinolfi -- Jefferies -- Analyst

Okay, alright. Then my quick follow-up is just the rationale for the -- you mentioned $800 million preferred offering. I guess, the decision to do pref to replace maturing debt instead of replacing like-for-like, you know, Shneur and Michael both had questions about your leverage. I'm wondering if that was the primary motivation given the partial equity treatment and if so, is this something we're likely to see do with future refinancings?

Thomas E. Long -- Chief Financial Officer

Yes, I guess the best way to probably really describe those is there is just one funding source. Clearly, we don't have any intention to do the pure equity piece of it. So it's a way to -- as you look out and you see this, like I say, the $5 billion of growth CapEx, it's just a way to fund the portion that's not being funded by the retained cash flow to continue to look at opportunities to get the leverage to a lower level. That's the way I best describe it? And as far as looking forward. Yes, it is a tool, if you will or let's say, it's a source of funding that we will continue to evaluate.

Christopher Sighinolfi -- Jefferies -- Analyst

Okay, thanks a lot for the time this morning, guys. Appreciate it.

Thomas E. Long -- Chief Financial Officer

Thanks.

Operator

Thank you. Ladies and gentlemen, I would now like to turn the conference back to Tom Long for closing comments.

Thomas E. Long -- Chief Financial Officer

Well, once again thanks all of you -- all for joining us. We -- it's always great to be able to talk to you about these record quarters, as they keep stacking up here and we look forward to talking to you with any follow-up questions you might have.

Operator

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

Duration: 62 minutes

Call participants:

Thomas E. Long -- Chief Financial Officer

Marshall S. McCrea -- President and Chief Commercial Officer

Kelcy L. Warren -- Chairman and Chief Executive Officer

Christine Cho -- Barclays Capital -- Analyst

Shneur Gershuni -- UBS -- Analyst

Spiro Dounis -- Credit Suisse -- Analyst

Jean Ann Salisbury -- AllianceBernstein -- Analyst

Colton Bean -- Tudor, Pickering, Holt -- Analyst

Jeremy Tonet -- J.P. Morgan -- Analyst

Keith Stanley -- Wolfe Research -- Analyst

Michael Blum -- Wells Fargo Securities -- Analyst

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

Michael Lapides -- Goldman Sachs -- Analyst

Christopher Sighinolfi -- Jefferies -- Analyst

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