Logo of jester cap with thought bubble.

Image source: The Motley Fool.

DCP Midstream, LP (NYSE:DCP)
Q2 2019 Earnings Call
Aug 7, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Q2 2019 DCP Midstream Earnings Conference Call. [Operator Instructions]

I would now like to introduce your host for today's conference, Sarah Sandberg, Senior Director of Investor Relations. You may begin.

Sarah Sandberg -- Senior Director of Investor Relations

Thank you, Gigi. Good morning everyone, and welcome to the DCP Midstream Second Quarter 2019 Earnings Call. Today's call is being webcast and the supporting slides can be accessed on the Investors section of our website at dcpmidstream.com.

Before we begin, I'd like to point out that our discussion today includes forward-looking statements. Actual results may differ due to the certain risk factors that affect our business. Please review the second slide in the deck that describes our use of forward-looking statements. And for a complete listing of the risk factors, please refer to the partnership's latest SEC filings.

We will also use various non-GAAP measures, which are reconciled to the nearest GAAP measures and schedules in the appendix section of the slides. Wouter van Kempen, CEO; and Sean O'Brien, CFO will be our speakers today. And after their remarks, we will take your questions.

With that, I'll turn the call over to Wouter.

Wouter van Kempen -- Chairman of the Board, President and Chief Executive Officer

Thank you, Sarah and good morning, everyone. We appreciate you joining us. On today's call, we will discuss our second quarter results, announce and highlight our growth projects, and provide an outlook into the second half of 2019.

Our team continued the excellent momentum of Q1, resulting in a strong first half of the year and solid progress toward our financial targets. In Q2, we achieved adjusted EBITDA of $278 million, and DCF of $173 million, representing a respective 12% and 18% year-to-date growth compared to 2018.

Our distribution coverage is 1.12 times for the quarter, and 1.28 times year-to-date. We have ample liquidity, and financial flexibility and our bank leverage ratio was 3.7 times as of June 30, demonstrating the strength of our balance sheet. Our earnings are underpinned by effective execution of our capital allocation strategy, and our operational optimization efforts, resulting in strong volumes, including double-digit year-over-year volume growth in the DJ Basin, and on Southern Hills, and Sand Hills.

We're excited to highlight several capital growth projects. First, last week we were happy to announce that we executed a very capital efficient and accretive long term offload agreement in the DJ Basin with Western Midstream Partners, which will provide up to 225 million cubic feet per day of incremental processing capacity for our producer customers. Second, we are increasing our NGL takeaway capacity on Southern Hills with a 40,000 barrel per day expansion, bringing our total capacity up to 230,000 barrels per day.

And third, as of last night, our O'Connor 2 plant is now in service, increasing our total processing and bypass capacity to over 1.3 Bcf per day in the DJ Basin. At the same time, we maintain our focus on effectively managing risk in both the short and long term. We significantly reduced our commodity sensitivity through a multi-year approach to become a fully integrated midstream service provider with a 50-50 balance between our fee-based logistics, and marketing segment, and our G&P segment.

We negotiated strong contracts within our G&P footprint including minimum volume and margin commitments, and we have navigated Basin bottlenecks and infrastructure constraints by leveraging strong partnerships to seize commercial opportunities, and move molecules. In all, we continue to make great progress on our DCP 2020 vision to become the safest, most reliable locals midstream service provider sustainable in any environment.

Slide five; details to recently executed long term offload agreement that will provide DCP with up to 225 million cubic feet per day of incremental processing capacity at Western's DJ Basin gas processing complex by the middle of 2020. As we continue to optimize our capital spending, this agreement offers a highly accretive solution at an attractive multiple, and we believe it's a win-win for all stakeholders in the DJ.

This incremental capacity is the fastest solution to meet our processing commitment to our customers and this agreement is a tremendous strategic outcome for DCP for three critical reasons; one, we're delivering on the promise of future cash flows while eliminating the need to spend capital on new processing capacity at a proposed Bighorn facility. This in turn allows us to significantly reduce our 2020 growth capital by utilizing this third-party infrastructure.

Two, we will continue to control the NGL barrels allowing us to capitalize on full value chain economics via connections to our DJ Southern Hills extension, Front Range, and a Cheyenne Connector for residue gas, and ultimately the Sweeny Fractionators on the Gulf Coast.

And lastly with permits and land already secured, we preserve the optionality to build future capacity via the Bighorn facility if customer demand requires it. As with the majority of our DJ Basin assets, this incremental capacity is supported by very strong producer partnerships and life of lease acreage dedications, and we maintain strong processing margins by our existing contracts. Coupled with the O'Connor 2 facility, we are providing our customers with over half a Bcf of new capacity in the DJ by the middle of next year.

Additionally, over the past several years, we've added multiple smaller bypass and offload capacity additions in the DJ Basin. And these additions have now totaled a meaningful sum. And together with the addition of the O'Connor 2 bypass and our newly announced offload, our total available DJ Basin capacity will be almost 1.7 Bcf per day by the middle of 2020.

Moving to the next slide, you can see that we continue to successfully execute a capital allocation strategy that integrates and balances our portfolio to drive increased future cash flows. With our slate of great projects coming online in the second half of this year, the majority of our growth capital spend was weighed in the first half of 2019, as we invested in Gulf Coast Express and the O'Connor 2 facility.

With that in mind, we remain comfortable with our growth capital guidance range for 2019. Now, let me quickly highlight some project update since our last call. In the Permian, the Gulf Coast Express pipeline is expected to come online slightly ahead of schedule with an anticipated in-service date at the end of September. In the DJ, we're excited to announce that we're increasing the NGL takeaway capacity on Southern Hills by approximately 20% of 40,000 barrels per day by the end of 2020 at a very attractive multiple.

Through the addition of incremental pump stations, this expansion is underpinned by future volume growth and the added capacity from the DJ Southern Hills extension, which remains on track to be in service in Q4 of 2019. The Front Range and Texas Express pipeline expansions are under way, and are now expected to be in service in Q4 of this year.

And lastly, the 600 million a day Cheyenne Connector is a waiting for approval and is now targeting a Q1 2020 in-service date. Put all of this together, and you will see that we are unparalleled in our commitments to our DJ Basin customers. We have reliable access to the full value chain of midstream services, and are the sole midstream company supporting all three major downstream expansions from a capital, a commitment, and an ownership perspective. Looking at our overall portfolio growth, the vast majority of our investments are focused on fee-based logistics assets. And combined with our existing premier footprint, we are well positioned to achieve our long-term strategic goals while also solving for needed capacity additions in these top tier regions.

Now, I'll turn it over to Sean to take you through our financials.

Sean O'Brien -- Group Vice President and Chief Financial Officer

Thanks, Wouter, and good morning.

Looking to Slide 7 on the heels of record earnings in Q1, we continue to make solid progress on our financial goals, while we work to effectively manage the business through a dynamic pricing environment. We achieved Q2 adjusted EBITDA of $278 million and DCF of $173 million, resulting in a distribution coverage of 1.12 times.

Our logistics segment continues to produce excellent results with margins up $45 million over last year, driven by growth from our Sand Hills, Southern Hills, and Guadalupe assets. And I'll remind you that Guadalupe acts as a natural hedge more than offsetting the adverse impacts from low Permian gas prices.

On the G&P side, earnings were down $7 million, driven by a decrease in Midcontinent margin and volume opportunities we saw in Q2 2018, partially offset by growth in the North. Overall costs were down $5 million prior to a $9 million non-recurring charge relating to the voluntary separation program or VSP, focused on accelerating our DCP 2.0 transformation. This VSP will drive full-year cost efficiencies in 2020 forward.

Year-over-year, lower commodity price impact was unfavorable by $27 million net of hedges. This is primarily due to NGL and crude price declines of 33% and 12% respectively over the same period of time. Despite these commodity price challenges, our cash flows increased year-over-year as our diversified portfolio continues to deliver solid earnings.

Now on Slide 8, I want to elaborate on our earnings outlook for the remainder of 2019 and highlight some of the key drivers carrying us into 2020. Following a strong first half of the year, we anticipate commodity headwinds and select takeaway constraints to impact the remainder of 2019. Partially offsetting these headwinds, our incremental cash flows from our predominantly fee-based growth projects coming online throughout the second half of the year, and coupled with our strong year-to-date coverage, we reaffirm our 2019 guidance ranges.

Specific to Q3, we expect commodity prices to dampen sequentially, and then rebound modestly in Q4 with the forward curve indicating lower expected prices than what was realized in the first half of the year. Cost will be higher in Q3 compared to the second quarter, due to increased plant reliability spend. G&P cash flows will benefit modestly as O'Connor 2 volumes gradually ramp up throughout the third quarter. Yet will be partially dampened, as volumes are temporarily constrained by delayed NGL and gas residue takeaway projects including the Front Range, Texas Express, and Cheyenne Connector.

Moving to Q4, Gulf Coast Express in the Permian will deliver a full quarter of cash flows. In the DJ, both the Front Range expansion and the Southern Hills extension will be coming online, providing needed NGL takeaway capacity and driving incremental margin growth. However, we still anticipate potential residue gas takeaway capacity limitations until the Cheyenne Connector project is placed into service in Q1 of next year.

Now looking into 2020, we will benefit from a full year of earnings from Gulf Coast Express, O'Connor 2, and the DJ Southern Hills extension, and a full year of labor savings from the VSP. Additionally, with the Cheyenne Connector and the new DJ Basin offload coming into service in the first half of the year, the DJ Basins constraints will effectively be eliminated.

Finally, in the latter part of 2020, we will enhance our fully integrated value chain as the Southern Hills expansion and the Sweeny Fractionators go into service in Q4. As mentioned, all of this builds to reaffirm our 2019 guidance range based on our solid earnings outlook in any environment.

Moving to Slide 9, I'll summarize the continued strength of our financial position and our effective approach to risk management. With $1.4 billion available on our bank facility, we have ample financial flexibility and liquidity. We're delivering on our commitment to self-fund our growth through strong year-to-date DCF, proactive debt capital market execution, and cash flows from non-core asset divestitures, including over $100 million of asset sales year-to-date.

On the risk management side of the equation in 2019, our margin is 77% fee based or hedged. To close, we're continuing our track record of maintaining a strong balance sheet, mitigating risk, and meeting our financial commitments.

And with that, I'll hand it back over to Wouter.

Wouter van Kempen -- Chairman of the Board, President and Chief Executive Officer

Thanks, Sean. In summary on Slide 10, our execution continues to drive solid results and a good outlook for the second half of 2019 and beyond. Our team delivered year-to-date distribution coverage of 1.28 times driven by growing volumes in our logistics segment, margin opportunities on Guadalupe, and growth in key areas within the G&P segment.

We are effectively managing commodity price volatility through our multi-year approach to diversifying our portfolio and focusing the vast majority of our investments from fee-based logistics assets. This is exemplified by our 12% growth in year-to-date adjusted EBITDA compared to 2018, despite an almost 25% decline in NGL prices over the same period.

Finally, our efficient capital allocation strategy points to a bright future of solid cash flows, and increased unit holder value. As we extend our integrated value chain throughout every segment of our business. With these themes in mind, we've laid an excellent foundation for the rest of this year, 2020, and beyond. I look forward to taking your questions now, and Gigi please kick us off.

Questions and Answers:

Operator

[Operator Instructions] And our first question is from Shneur Gershuni from UBS. Your line is now open.

Shneur Gershuni -- UBS -- Analyst

Hi, good morning, everyone. I was wondering if we can start off with the agreement that you signed with Western Gas. I very much appreciate the capital efficiency benefit of not spending capital. I just wanted to understand, or is there a revenue sharing agreement with Western Gas, where is your effectively subletting their plant and you're still earning some of the revenue that you would have had from Bighorn.

But you don't have to spend any capital to actually -- to earn that. I just kind of wanted to understand that. And then if you can also talk about -- if I remember correctly Bighorn was supposed to be a POP contract. Western plant is not -- is it still POP? I'm just wondering if you can walk through the mechanics of that for us.

Wouter van Kempen -- Chairman of the Board, President and Chief Executive Officer

Okay. Yes, Shneur, let me take that for you. And I think the way you should look at this is -- and let me take a couple of different things here. This is a 7-year agreement for 225 million a day of capacity. About 75% of that is covered on an MVC, and the remaining piece of that is if we need it, it's available to us.

The way you should look at how we kind of earn a margin on that, and how in the end WES earned some margin on that as well, is we pay WES a fixed fee per am [Phonetic]. We will continue to have our POP contracts which are deep in the money POP contracts, with our producer customers in the DJ Basin. So our producers -- we charge our producers a POP fee. That fee, even if current rate is above what we would pay WES in fees, so we will make a spread of the two of those.

The other piece that we're continuing to get, which I think is really, really attractive for us, is we continue to have access to all of the downstream economics as well. So the NGLs that are coming out of this plant, out of the offload agreement will go into the Southern Hills extension into the DJ Basin. That's why we're doing the Southern Hills expansion. So we will get transportation revenue on those.

And we will be able to push that through, for instance, the Sweeny fractionators that we expect to take an interest in later in 2020, and we'll earn a fee on that. We also control the residue gas, and when Cheyenne Connector gets approved by FERC and comes on line, the gas will find its way into the Cheyenne Connector and we will get a transportation fee on that.

So overall, it is very, very accretive to us. If you go into kind of the appendix, you will see that we will spend about $125 million of capital in field infrastructure to make sure that we can get the gas to the Latham plant complex and -- but what we are not spending is the additional $200 million that we would spend for the Bighorn facility.

And so it is very, very per capital efficient for us, if you think about what we spent on O'Connor 2, Mewbourn, Mewbourn 3 kind of plant programs like that, you're probably saving about $0.25 billion here overall. So very, very attractive for us, it reduces our 2020 growth capital very significantly. We continue to preserve the Bighorn option. And people have asked and say, hey, how close were you on Bighorn? We were very, very close on Bighorn. Bighorn literally was at the later scope [Phonetic], and we were very close on executing that until we start to having these discussions with Anadarko WES around this capacity being available. And in the end for us, we want to always make sure that you don't overbuild a basin, you want to -- between WES and ourselves, we are by far two largest processors in the basin and there was a great opportunity to not only create a win-win for the two of us, but I look at this as a win-win-win for ourselves, for our unit holders, for WES filling up capacity that was otherwise going to be excess capacity for them, and then for our producer customers, which is really important. This is the fastest way for us to get additional capital or a processing capacity online. So I think that answers all of your questions I hope. Does it Shneur?

Shneur Gershuni -- UBS -- Analyst

No. It did. And I would just -- and thank you for confirming that you're basically still earning return, get the downstream benefits and basically without spending all the money, which...

Wouter van Kempen -- Chairman of the Board, President and Chief Executive Officer

Yeah. And I think if you look at from a return point of view, so $125 million and like we tend to always say we do 5 to 7x type of multiples. This would probably be closer to the five than the seven. So it's pretty attractive for us.

Shneur Gershuni -- UBS -- Analyst

Or even lower. Okay. And then just wondering if we can talk about DCP 2.0 for 2020. You talked -- I think, Sean, you talked about VSPs, in terms of some cost efficiencies and so forth. I mean, are there targets that you shared with the Board in terms of how much you expect cost to actually come down further. And I recognize that you guys have already made a ton of progress. And then as part of that sharing of targets, you've been very successful this year in synthetically adding capacity through efficiencies. Are there more opportunities to do that and is there a target, you can share with us as well on that side too?

Sean O'Brien -- Group Vice President and Chief Financial Officer

So, hey, Shneur, it's Sean. I can start on the cost side of the equation. I'll just remind everyone that 2.0 efforts has done some really good things around the margin side with the ICC, and with some of the things we've been able to do on the pipelines.

It has shifted significantly. I think you're picking up on it right in 2019 to be more -- to also drive cost efficiencies. They are definitely targets, Wouter has set significant targets around the team. They're broad, but they are efficiency based. I can share a few numbers with you and I talked about that VSP, that voluntary separation program, that was a way to sort of accelerate some of the things we're doing.

But think about it this way, we are already -- if I think about where we came into the year versus where we are right now, the company is about 15% lower on head count. So that's pretty substantial improvement. That is, I would tell you, in-line with the goals that Wouter and the Board set for the company. In terms of longer term, our goal would be to get to around that 30% number reduction by the end of 2020.

So those are some targets specific to the goals and they're pretty substantial. We're doing that through adding digitization, automating things, changing our processes, remotely operating assets. I'm just giving you some of the drivers. But all of those things, the corporate functions are in the mix considerably. I think when you were here a while ago, we focused on mostly the operations.

But things are progressing well. You saw -- I think you're seeing some good cost trends. As I mentioned that one-time charge will not reoccur as we go through the year. And we're excited that the benefits continue to grow through the remainder of this year and into next year. In terms of asset consolidations, it's something we always look at. I know if you noticed, I mentioned $100 million of year-to-date sales. That was -- obviously, we talked about the propane business.

We did a small divestiture in Q2 of around $10 million. But these are things that continue to help the portfolio, reduce our costs. By the way, I'm sure, I'm going to get questions on maintenance capital. But as we divest these assets, our maintenance capital continues to go down. These are usually less efficient non-core assets, and that will help us on the maintenance capital side as well.

Shneur Gershuni -- UBS -- Analyst

Okay. I really appreciate the color, guys. I think I've used up my two questions. So I'll jump back in the queue and wait for the IDR question.

Wouter van Kempen -- Chairman of the Board, President and Chief Executive Officer

Thank you, Shneur.

Operator

Thank you. Our next question is from Spiro Dounis from Credit Suisse. Your line is now open.

Spiro Dounis -- Credit Suisse -- Analyst

Hey, guys. I guess, I'll take the bait on IDRs and since Shneur segued me right into it. So, one of your two sponsors recently removed them of course, and I think the implied multiple around that was 16 times. Just curious what your reaction was to that deal, maybe how you think about the process from here and then anything we should read into the timing?

Sean O'Brien -- Group Vice President and Chief Financial Officer

Yeah. So Spiro, obviously, I'm not a Phillips employee, I'm not a PSXP employees, so I have no insights in how they kind of look at their transaction. So I'm not going to comment on their transaction. I think, our message continues to be the same message. This is not going to be a question of -- if it's going to happen, it's going to be finding the absolute optimal timing for us to do this. So I think the great thing for everybody is that if you think about Enbridge, you think about Phillips, they clearly are very comfortable with doing something, and removing IDRs, because they’ve both done it.

So I think that that should give you a little bit of insight about, hey, how are we talking about this and what are we thinking about this. For us, it's all about making sure that we have the right coverage, and so that we can withstand a down cycle and one can argue that the way things are going right now, we're in a little bit of a down cycle, and we continue to have a close to 1.3x type of coverage here for the first six months of the year. So we continue to have really good discussions around this, and it continues to be -- It's a matter of when this is going to happen. It's not a matter of if this is going to happen. So stay tuned.

Spiro Dounis -- Credit Suisse -- Analyst

Understood. I appreciate that. And just thinking about new growth opportunities and capital efficiency, so I guess Phillips has been spending considerably on midstream. And I guess if there is a precedent here for some of those assets to make their way to you via the Sweeny frac, I'm sure some of those will also make their way to PSXP.

But just curious, out of some of the new projects that they've laid out, if you think there's another opportunity for you guys to maybe comment on some of those, and take options?

Wouter van Kempen -- Chairman of the Board, President and Chief Executive Officer

Yeah. I think we have been very, very synergistic in how we went to market together with Phillips 66. And I think there is a great benefit for this entity, if we find commercial opportunities that we can do together. And that doesn't have to be just with Phillips 66 and like, if we can find a great opportunity to do with Enbridge, we'd love to do that as well.

But if there is an opportunity for us to continue to direct the barrels towards the Sweeny frac and taken ownership interest in frac 4, we are very, very open to do that. If there is more opportunity to go even further down the value chain with them, I think we're very open to do that. We have discussions around this, a lot of different times. And part of this is, and you got to look at some of the bigger picture and what we're doing here. Why did we do, for instance, the Southern Hills extension into the DJ Basin.

That was to make sure that we have flexibility and control of all the barrels that we continue to produce and add in the DJ Basin. And that gives us flexibility to move them in pipelines that we own 100%, to direct those barrels, to fractionators that we think are very attractive in our portfolio where we potentially can take an ownership interest. And that's what you kind to see here also with the Southern Hills expansion that we're doing, and that is really all about the growth that we have in the DJ, and gives us the flexibility to work those barrels, and potentially leverage those barrels into more downstream investments.

Spiro Dounis -- Credit Suisse -- Analyst

Got it. That makes perfect sense. Thanks Wouter, I appreciate it.

Wouter van Kempen -- Chairman of the Board, President and Chief Executive Officer

Thanks, Spiro.

Operator

Thank you. Our next question is from Jeremy Tonet from JP Morgan. Your line is now open.

Charlie -- J.P. Morgan -- Analyst

Hey, good morning. This is Charlie on for Jeremy here. I was wondering if you could talk a bit about Mid-Con volumes kind of dropping a bit sequentially. Just any commentary from producer activities, and kind of expectations for the balance of second half of 2019.

Sean O'Brien -- Group Vice President and Chief Financial Officer

Yeah Charlie, couple of things. The volumes are definitely down, I mentioned it in my remarks, and also the margins -- the average margins were down because we're settling more of the product this year in Conway. We were able to get more of that to Bellevue last year, you get higher net-backs. We do see that easing up as some of the capacity and some of the infrastructure we're talking about comes online.

In terms about looking forward, the Mid-Con is an area that we continue to see volumes in that decline. It is in-line with the guidance that I gave at the beginning of the year. So there is no surprises going on and we weren't surprised in any way. We continue to see those volumes probably decline. There is either some infrastructure in some of the areas in SCOOP/STACK. But in lot of the other areas, we're into a base decline type environment.

On the positive side, I can tell you and more to come throughout the remainder of the year, it is an area that we continue to focus on consolidating assets getting more efficient, shedding infrastructure where we're not -- where volumes are declining, and we've had some really good progress and hopefully we'll be able to share more of that on the second half of the year. I think there is some exciting stuff. Basically that's just cutting our costs, lowering our maintenance capital and our proactive way to kind of be very efficient.

So you will continue to expect to see volume declines there, that was the guidance I gave earlier in the year and we're trending as -- along those lines.

Charlie -- J.P. Morgan -- Analyst

Great, thanks. One more from me. Could you comment on some of the producer consolidation we've seen in the news, and specifically in the DJ, maybe if at all how that might impact your growth outlook?

Wouter van Kempen -- Chairman of the Board, President and Chief Executive Officer

Yeah. Yeah. I think for us, I am like -- there was something out yesterday of two producers potentially combining, I can't comment on that. I think in the end, the acreage that we have here in the DJ Basin, continues to be tremendously good acreage. It's all on our life of lease. So in the end, a transaction doesn't switch what that acreage, where it would go to. So if companies combine, it will continue to go to DCP. And so overall, I think more consolidation, it's probably a theme that starts to make sense.

At the same time, when people consolidate, normally they tend to drill the acreage. Very few companies go and consolidate and try to add additional acreage and then just put it in inventory and do nothing with it. So I think for us, it continues to be a pretty good outlook here in the DJ Basin.

Charlie -- J.P. Morgan -- Analyst

Great, thank you.

Operator

Thank you. Our next question is from Gabe Moreen from Mizuho. Your line is now open.

Gabe Moreen -- Mizuho -- Analyst

Hey, good morning. Just a question in terms of outlook on Guadalupe. Now that GCXs is set here to come on. So your plan there to essentially leave that pipe open as far as volumes and marketing around it or any long-term contracts that you may be putting in there? And I guess is your expectations over the medium term as GCX fills up, the basis may blow out again, and when that may happen?

Sean O'Brien -- Group Vice President and Chief Financial Officer

Hey, Gabe, it's Sean. A couple of things, Guad had a record quarter in Q2, obviously tied to the wide base of spreads. Our strategy on Guad is still -- it's been the same. Obviously, it's been a little more exaggerated recently, but we typically hedge it out into the future, a portion of it -- we've a portion of it open.

I think you've alluded to some longer-term agreements. I know the marketing teams are working on that. We really like those, those are more annuities, right. You lock in sort of physical for a duration, and you lock in those cash flows. And I think they've worked on a couple of deals along those lines.

In terms of the outlook for Guadalupe second half of the year, we do see the first half as being stronger than the second half. That's driven by the comments you just made. With GCX coming online, we see Guad -- our earnings on that open position kind of diminishing little in Q4, and maybe even a little in Q3.

On the positive side, you got to think about it holistically, you've got GCX then coming online. So that's there -- we're going to start driving earnings on that pipeline. And what we've started to see in a very small way is the gas prices that we settle in the Permian, start to increase.

So if you think about the second half of the year, the net-net of all three of those things is favorable to the company. However, I think your point is Guad probably diminishes a little second half of the year on earnings, and that is true.

Wouter van Kempen -- Chairman of the Board, President and Chief Executive Officer

And maybe to add Gabe, to what Sean said. The marketing team has absolutely executed on a number of longer-term, multi-year deals at pretty attractive price. They may not have been as attractive and as high as some of the massive blow outs that we saw in basis spreads here in the second quarter, but they are very attractive prices that we've locked in for a multi -- a number of years. So that's kind of going to Sean's point of creating an annuity out of it, and I think that's a very good thing.

At the same time, there is -- I think everybody agrees, there is more pipelines that are needed other than GCX coming out of the Permian. So I wouldn't be surprised that somewhere in 2020, we see basis start to opening up again. And then we will be able to take advantage of that.

Gabe Moreen -- Mizuho -- Analyst

Got it, thanks Wouter. And then as a follow-up and sort of speaking of hedging, your approach to hedging NGLs right now given spot volumes, you talked about a little bit the forward curve, improving a little bit, but to what extent do you want to let things kind of see if they will improve versus in locking pricing right now for 2020?

Sean O'Brien -- Group Vice President and Chief Financial Officer

Yes. So I think on the positive side, we're actually a little more hedged in Q2 -- or I'm sorry, in the second half of the year than we were in the first half of the year. We have not put any NGL hedges on for 2020, Gabe, that's probably what you're alluding to. And the environment just hasn't been conducive to it. We do have a multi-year hedging program, we focus on that. We'll look for opportunities.

We do see the forwards telling us that things -- we actually saw July get a little bit stronger than June. So we're just starting to see a little bit of movement to the positive. And then the forward is telling us, Q4 gets stronger. And then with some of the infrastructure coming online later this year and next year, there is a lot of individuals and analysts that believe that 2020 will strengthen.

To the point of hedging, we will look for opportunities. We're always very proactive and try and get some 2020 hedges on when and if those prices come back. The last -- the other thing I do want you to focus on as well though, we got the 65% fee base this year on our core assets, that's up -- as you know, that's up massively from where the company was just 3, 4, 5 years ago. And we're not giving 2020 guidance yet, but that will grow. If you think about all the projects that Wouter highlighted that are coming online later this year and next year, the fee-based portion of this business will continue to grow.

And think about a Q2, where commodity was down. I think Wouter in his remarks said, hey NGL was down 25% versus last year, and we grew the company pretty substantially. So I think we have a good strategy in place. As it pertains to hedging, we will continue to look proactively for opportunities to put NGL hedges on, and I'm hopeful those will come through the remainder of this year.

Gabe Moreen -- Mizuho -- Analyst

Got it. Thanks, Sean. I appreciate it.

Operator

Thank you. Our next question is from Dennis Coleman from Bank of America Merrill Lynch. Your line is now open.

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

Good morning, all. Thanks for taking my questions. Most of mine have been asked, but a couple of detailed ones for me, if you would. It seems like there is some drift on the Texas Express, Front Range projects into the fourth quarter. Anything to read into that, matching customer flows, or just sort of normal delays, any commentary there?

Wouter van Kempen -- Chairman of the Board, President and Chief Executive Officer

Yeah. So that's a -- it's a third-party managed project, so we’re an equity owner in the project. We're not executing the pump stations that need to be set. But what basically happened, there were some regulatory delays in one of -- one specific county here in Colorado. Those have been solved now. And -- but that probably took a number of weeks to kind of get things -- the things done, couple of months, and that made the project basically slip from Q3 into Q4.

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

Okay. Great, thanks for that. And then another more detailed one on Southern Hill is additional 40,000. Is that -- we should assume that's contracted and is there any kind of terms that you might talk about if it is?

Wouter van Kempen -- Chairman of the Board, President and Chief Executive Officer

Yeah. So think about that really driven by a number of different kind of projects that we already spoke about. So the O'Connor 2 plant is now online in service as of today, which is great for our customers. We're very excited about that. You know, that's 200 million a day of capacity. So let's call that 20,000 barrels right there.

Those will flow into the Southern Hills extension. Think about the offload agreement that we spoke about. That's 200 million, 225 million a day. That's another 20,000-25,000 barrels a day. So just between the two of those, that it gives you 40,000 plus barrels a day, which kind of mimics the expansion that we're doing here.

And if you're looking in the details that we provided, Southern Hills today runs at 88%-90% capacity. So we are very kind of close to filling that Southern Hills pipeline up. That's why we're doing this project, and this is one of those projects that you should think about what we did with Sand Hills.

The first Sand Hills expansion was highly, highly accretive. Why? Because it’s just setting pump stations. It's the same over here. We're not adding pipe, we’re just adding two pump stations. So that creates those 40,000 barrels a day. And you should look at that project as probably a 2, 3x type of multiple. We always talk about, whenever you can set pump stations on a pipe and you have the volumes, those are great project because they are highly accretive.

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

That's great color. Thank you for that. Any permitting issues there that -- just watch items?

Wouter van Kempen -- Chairman of the Board, President and Chief Executive Officer

No, we don't expect any permitting issues happening there. So the pump stations will be set in the Mid-Continent. So, no, we are very comfortable on this. The -- the lead time. And, one can say, hey it's two pump stations why for Q [Phonetic] 2020. A, we think that's when we need it. But secondarily pump stations have a pretty long lead time. So just the leads for the pumps are probably 10-12 months. So that's why this will take a little bit of time.

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

All right, great color. Thank you.

Sean O'Brien -- Group Vice President and Chief Financial Officer

Thanks, Dennis.

Wouter van Kempen -- Chairman of the Board, President and Chief Executive Officer

Thanks, Dennis.

Operator

Thank you. Our next question is from Michael Blum from Wells Fargo. Your line is now open.

Michael Blum -- Wells Fargo -- Analyst

Thanks, good morning, everyone. Just a quick question for me. So I realize you're not giving any kind of 2020 specific guidance here, but it does sound like you've -- obviously with the Western deal you've done some capital avoidance. Can you just give us at least directionally a sense of where capex you think will trend in 2020, just kind of directionally? Thanks.

Wouter van Kempen -- Chairman of the Board, President and Chief Executive Officer

So yeah, Michael, Wouter here. So we have given guidance around a variety of projects that we've done. Okay. So one of the bigger projects for 2020 is going to -- is the option for take 30% ownership interest in the Sweeny fractionators, and we've disclosed how much that is. So assume that we're going to execute that one. The other project the Cheyenne Connector, we're continuing to wait FERC approval. So that one is slipping into next year; we hope Q1 2020.

We have an ownership option that we expect to exercise on that. And then think about part of the capital that we need to shut the field infrastructure for the offload to Western. Part of that will be spent in '19, part of that will be spent in 2020.

So you take all of those together, I think you can get a pretty good kind of idea of what we're looking at for next year, which is very -- significantly below what we are doing this year. So it gets us really close, very close, if not completely there from a self-funding point of view, which is very important to us.

Michael Blum -- Wells Fargo -- Analyst

Perfect. That's all I had. Thank you.

Wouter van Kempen -- Chairman of the Board, President and Chief Executive Officer

Thanks, Michael.

Operator

Thank you. Our next question is from David Amoss from Heikkinen Energy. Your line is now open.

David Amoss -- Heikkinen Energy -- Analyst

Hey, good morning guys. I just wanted to -- thinking about the agreement that you have with Western that you put into place and the $125 million you're spending on access to that plant, is there the potential that you can do other things that can benefit from that capital spend, anything you can give us in terms of the potential of the geographies that you'll be providing yourself access to?

Wouter van Kempen -- Chairman of the Board, President and Chief Executive Officer

Yeah, I'm trying to understand. Let me try to say something, hopefully I’ll take it in the right direction. In the end for us to make sure that we get kind of our gas to our various processing plants that we have in the DJ Basin, you've got to put money in for field infrastructure. So that's kind of what we're doing here for this $225 million a day.

We obviously, the way our system is set up, think about a variety of projects that we have done over the years, where we create great connectivity between plants. So, the Latham plant is actually right next door to some other plants that we have. So in the future, after seven years for instance, that field infrastructure that you put in place, can be easily directed to our own infrastructure, if we need it.

So I think that's how you should think about how we set up the system. We always try to set up the system in a very flexible way. So we can get the volumes, not just to one plant, but get them to that super system of different plants. So I think that's how you should look at this.

David Amoss -- Heikkinen Energy -- Analyst

Okay, thanks Wouter. And then one more, I'm just thinking about you guys kind of pointing to a five times multiple on that project. Just wanted to confirm that that's just on the processing capacity, it doesn't include the potential that you can make money downstream as well. And then is it fair that we assume that that's based on strip pricing at this point?

Wouter van Kempen -- Chairman of the Board, President and Chief Executive Officer

Yeah. So that 5x is on kind of full value chain economics, the way we kind of look at it. And then, yes, what we look at this kind of current strip pricing. So we are not looking at some crazy, crazy numbers in the future.

David Amoss -- Heikkinen Energy -- Analyst

Great, thank you very much. That's helpful.

Wouter van Kempen -- Chairman of the Board, President and Chief Executive Officer

Thanks, David.

Operator

Thank you. Our next question is from Selman Akyol from Stifel. Your line is now open.

Selman Akyol -- Stifel -- Analyst

My question was asked. Thanks.

Operator

Thank you. Our next question is from Jeremy Tonet from JPMorgan. Your line is now open.

Jeremy Tonet -- JPMorgan -- Analyst

Hi, good morning. Just wanted to kind of follow-up on some of the points talked about before. With regards to the DJ in egress, especially on the nat gas side, I was just wondering, in advance of Cheyenne coming online, are there other kind of initiatives to get the gas out of the basin? Do you see any other kind of bottlenecks there in just -- for the basin as a whole on NGL, crude oil side? How tight do you think things can get before new capacity comes on line, and is there enough takeaway capacity in general coming on the line out of the DJ right now?

Wouter van Kempen -- Chairman of the Board, President and Chief Executive Officer

So right now, especially -- right now things are tight. Okay. So and we spoke about this on prior earnings calls multiple times, that this is not just about putting new processing capacity in place. It's -- you've got to make sure that you can get the NGLs out of the basin, you can get the residue gas out of the basin, and then you can get into fractionators at the Gulf Coast.

And that's why I continue to say, and I mentioned this in my prepared remarks, that we are the only midstream company that is supporting all three major downstream expansions. It's not only about putting capital in, but we're taking commitments. We're putting ownership percentages in.

So if you think about that from an NGL point of view, between Front Range Texas Express and the DJ Southern Hills expansion and -- extension, and now the expansion. On Southern Hills, we are very comfortable for quite some time here, for years to come around, hey, do we have enough NGL takeaway out of the basin. From a residue point of view, that's really where the tightness is sitting.

That's why we went out with multiple companies to build the Cheyenne Connector. The Cheyenne Connector would give 600 million a day of -- of capacity out of the basin and we need that. CIG is -- the other main outlet is doing some expansions, which is helpful, but we need much more than that. So we really need FERC to act and hopefully act quickly, so we can get that that piece going. And then I think you were talking from a crude point of view, I think from a crude point of view, things look pretty good right now.

And then lastly, you need fractionation as well. And what we're doing with Phillips 66 at Sweeny and building significant capacity there. If you take all of those together, I think things look very good. I think for all of you to kind of think about, hey, how do we model this O'Connor 2 plant that is now in service as of today? We internally model probably about a 100 million a day for the remainder of this year to go through the plant. And that is not because of the fact that the gas is not there. The gas is absolutely there. The NGL takeaway will be there.

We are waiting to make sure that we get enough residue gas takeaway. We need to get the Cheyenne Connector online. Once that Cheyenne Connector is built and online, that will basically completely alleviate any issues that we have in the basin and hopefully that is happening here pretty soon.

Jeremy Tonet -- JPMorgan -- Analyst

That's helpful. That's it for me. Thanks.

Wouter van Kempen -- Chairman of the Board, President and Chief Executive Officer

Okay, thank you.

Operator

Thank you. And our next question is from James Carreker from US Capital Advisors. Your line is now open.

James Carreker -- US Capital Advisors -- Analyst

Hi, thanks for the questions. Just to follow up on 2020 capex, you mentioned the discrete capital projects and kind of guesstimating from there. I mean how should we think about the capital for kind of the singles and doubles, the well connects, field infrastructure, things of that nature in 2020 as we're kind of formulating a capex number?

Sean O'Brien -- Group Vice President and Chief Financial Officer

This is Sean, James. There is -- we haven't given 2020 guidance. But as you're trying to think through the next year, I would -- around the singles and doubles, I would not expect a significant deviation from where we have been. With one caveat on the down side, what I mean downside on the lowering is, we are -- we continue -- we've sold a few things this year. There is capital tied to those projects that we’re continuing to look at some small things here and there which will lower. But I would hope so, if you're trying to model going forward, until we give guidance next year.

James Carreker -- US Capital Advisors -- Analyst

Okay, thank you. That's all I had.

Wouter van Kempen -- Chairman of the Board, President and Chief Executive Officer

Thanks.

Operator

Thank you. At this time, I'm showing no further questions. I would like to turn the call back over to Sarah Sandberg, for closing remarks.

Sarah Sandberg -- Senior Director of Investor Relations

 Thank you for joining us today. If you have any follow-up questions, please don't hesitate to give me a call. Have a good day.

Operator

[Operator Closing Remarks]

Duration: 48 minutes

Call participants:

Sarah Sandberg -- Senior Director of Investor Relations

Wouter van Kempen -- Chairman of the Board, President and Chief Executive Officer

Sean O'Brien -- Group Vice President and Chief Financial Officer

Shneur Gershuni -- UBS -- Analyst

Spiro Dounis -- Credit Suisse -- Analyst

Charlie -- J.P. Morgan -- Analyst

Gabe Moreen -- Mizuho -- Analyst

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

Michael Blum -- Wells Fargo -- Analyst

David Amoss -- Heikkinen Energy -- Analyst

Selman Akyol -- Stifel -- Analyst

Jeremy Tonet -- JPMorgan -- Analyst

James Carreker -- US Capital Advisors -- Analyst

More DCP analysis

All earnings call transcripts

AlphaStreet Logo