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Plains All American Pipeline LP (NYSE:PAA)
Q3 2019 Earnings Call
Nov 5, 2019, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day and welcome to the PAA and PAGP Third Quarter 2019 Earnings Call. Today's conference is being recorded. And at this time I'd like to turn the conference over to Roy Lamoreaux Vice President of Investor Relations and Communications. Please go ahead sir.

Roy Lamoreaux -- Vice President, Investor Relations

Thank you Eduardo, Good afternoon and welcome to Plains All American's Third Quarter 2019 Earnings Conference Call. Today's slide presentation is posted on the Investor Relations news and events section of our website at plans all American calm. By to contains important disclosures regarding forward looking statements and non GAAP financial measures. The appendix includes condensed consolidating balance sheet information for PGP. Today's call will be hosted by Willie Chang, Chief Executive Officer and Al Swanson, Executive Vice President and Chief Financial Officer. Additionally, Harry Belafonte is president and chief Commercial Officer, Derek Jeremy global executive vice president commercial, and Chris Chandler, Executive Vice President Chief Operating Officer, along with other members of our senior management team are available for the q&a portion of today's call.

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

Willie Chiang -- Chief Executive Officer and Director

Thanks Roy. Good afternoon everyone and thank you for joining our call. Let me begin by hitting the high points of the information that we released this afternoon. We're pleased to report solid third quarter earnings results. As outlined on Slide 3 these results exceeded expectations in our fee-based segments and reflect the continuation of strong performance in our Supply and Logistics or S&L segment. As Al will discuss more in detail we have increased our 2019 full year adjusted EBITDA guidance by $100 million to plus or minus $3.075 billion. And we have decreased our 2019 growth capital program by $150 million to $1.35 billion. Additionally our preliminary guidance for 2020 adjusted EBITDA is approximately $2.55 billion to $2.6 billion. This is composed of $2.5 billion for our fee-based businesses reflecting fee-based growth of approximately $100 million which includes offsetting an estimated $85 million of expected impacts from the competitive environment. Our preliminary adjusted EBITDA guidance for our S&L segment is $50 million to $100 million. Our preliminary 2020 growth capital guidance is $1.35 billion and we expect meaningful reduction on our capital investment programs in 2021 and beyond as we complete our current capital program. Let me put our preliminary 2020 guidance into context with respect to the Permian production growth. During 2018 Permian production grew by approximately one million barrels a day and we expect 2019 growth of approximately 800000 barrels a day. For the full year 2020 we expect Permian production to grow on average approximately 500000 barrels a day which is about 100000 barrels a day on average less than our prior estimate as we have further calibrated the anticipated impact of producer capital discipline on drilling and completion activity. I would note that we expect 2020 Permian production to end the year 300000 to 400000 barrels a day higher than year-end 2019.

Additionally, our preliminary guidance for 2020 adjusted EBITDA is approximately 2.55 to 2.6 billion. This is composed of 2.5 billion for our fee based businesses, reflecting fee based growth of approximately 100 million, which includes offsetting an estimated 85 million of expected impacts from the competitive environment. Our preliminary adjusted of dog guidance for our SNL segment is 50 to 100 million. Our preliminary 2020 growth capital guidance is 1.35 billion and we expect meaningful reduction on our health. Hello investment programs in 2021 and beyond as we complete our current capital program, let me put our 2020 or preliminary 2020 guidance into context with respect to the Permian production growth. During 2018, premium production grew by approximately 1 million barrels a day. And we expect 2019 growth of approximately 800,000 barrels a day. For the full year 2020. We expect Permian production to grow on average approximately 500,000 barrels a day, which is about 100,000 barrels a day, on average less than our prior estimates, as we have further calibrated the anticipated impact of producer capital discipline on drilling and completion activity. I would note that we expect 2020 Permian production to end the year three to 400,000 barrels a day higher than year in 2019. Accordingly, our 2020 preliminary guidance reflects a moderated rate rate of year over year fee based growth. It includes the impact of the morn competitive environment, as well as a lower level of SNL earnings as new premium takeaway capacity is placed in the service. Then you take away capacity released infrastructure constraints, which have supported strong spot buying throughput and high utilization on our Permian long haul systems beyond 2020, our next wave of fee based growth is underpinned by multiple strategic, capital efficient and highly contracted projects that phase in the service from late 2023 to 2021. These are outlined on slides four through seven and highlight our focus on optimizing our existing systems and aligning with strategic partners throughout the oil value chain.

These projects are supported by long term third party commitments and provide solid visibility for fee based growth as we enter 2021 Additionally, these projects meet or exceed are targeted return thresholds. And we plan to fund them with non dilutive sources, providing strong growth in dc f4 common unit in 2021 and beyond. Now, let me share some brief comments on several of the projects. With respect to Permian long haul projects as shown slide five, we placed the cactus to pipeline into initial service in mid August, and an established connectivity to tapped angle side and Corpus Christi. The pipeline is mechanically complete. And as demonstrated it's designed capacity of 600,000 barrels a day and is currently meeting customer nominations for deliveries to these markets. On Wink to Webster we're advancing the project consistent with our expectations and expect the pipeline construction to begin before year-end. We have ordered the majority of the long-lead equipment. We continue to acquire right of way and we're targeting in-service in early 2021. The Wink to Webster JV has completed an undivided joint ownership arrangement with an undisclosed third party who has acquired 29% of the pipeline's capacity in the Midland to Webster segment of the project. The JV now owns 71% of this segment but the respective interests of the JV owners at the Wink to Webster JV level have not changed. I would note that our estimated net project cost remains directionally in line with the cost described on our previous earnings conference call which already accounted for this undivided joint interest arrangement. Beyond the Permian we continue to advance a number of projects that leverage our existing pipeline systems and hub terminals.

As shown in slide six, upstream of Cushing, where we are advancing potential expansion and optimization opportunities on our range Lynn and Western quarter systems that have the potential to provide pull through benefits to our systems downstream. Additionally, as previously announced, quite clips Completing a line conversion to NGL service and saddle horn is advancing a fully committed 100,000 pearl day capacity expansion. As announced Previously, we provided an option to a third party for the first quarter of 2020 to hire a 10% interest from us in the saddle horn JV. Moving to slide seven, downstream of Cushing, we are advancing the red oak JV pipeline project. We continue to target bringing red oak into initial service and the first half of 2021. Additionally, the diamond expansion and cap line reversal is progressing. We are preparing to order Longleat equipment required for the project and continue to advance efforts to secure additional committed volumes. I will note that we have extended the in service timing for the light service to the first half of 2021 to better reflect our current estimates for establishing full connectivity of diamond into the cap line system before turning the call over to our I would also mention that our Red River JV expansion is progressing on schedule, and we're progressing the Cushing Connect JV with Holly Holly energy partners that we announced in October. Both of these demand pool systems are underpinned by long term third party commitments.

With that'll turn it back over I'll turn it over to Al.

Al Swanson -- Executive Vice President and Chief Financial Officer

Thanks Willie. During my portion of the call I'll share a brief recap of our third quarter results provide additional information on our guidance for 2019 and our 2020 preliminary guidance and review our current capitalization liquidity and leverage metrics. Our third quarter adjusted EBITDA of $731 million represents a year-over-year increase of 15% driven by solid fee-based performance and strong S&L performance. Moving to Slide 8. Our third quarter fee-based results of $635 million exceeded expectations and on a sequential basis were driven by higher than anticipated Permian gathering volumes and the early start-up of Cactus II. These fee-based results represent a year-over-year increase of 13% and an increase of 9% over the second quarter 2019. Our S&L performance reflects favorable crude oil differentials in the Permian Basin. Slide nine provides an overview of our updated fee-based guidance for 2019 our preliminary fee-based guidance for 2020 and our estimated growth capex for both years. We expect to generate more than $1 billion of cash flow in excess of distributions for 2019 resulting in full year common unit distribution coverage of more than 200% and per unit results that exceed our prior expectations.

Additionally we have reduced our 2019 capital program by $150 million to plus or minus $1.35 billion reflecting some shift of capital investment to 2020 as well as some optimization of project scope and lower costs. With respect to our 2020 preliminary adjusted EBITDA guidance let me build on a few of Willie's comments. From 1Q 2017 through 3Q 2019 we nearly doubled our Permian tariff volumes averaging quarterly growth of approximately 230000 barrels per day. This includes more than 95% growth on our long-haul systems which for the first three quarters of 2019 have operated at effectively 100% utilization. Our 2019 results also benefited from accelerating the Cactus II pipeline into initial service in mid-August. We expect Cactus II and our total Permian tariff volumes to continue to grow in 2020. In total our 2020 preliminary adjusted EBITDA guidance reflects year-over-year fee-based growth of plus or minus $100 million and S&L margins consistent with our long-held and public expectation for increased crude oil lease gathering competition and narrowing regional differentials particularly in the Permian. As we indicated at our Investor Day presentation in June our 2020 fee-based growth is expected to be partially offset by lower utilization of spot capacity on several long-haul lines primarily in the Permian Basin. Accordingly our 2020 fee-based adjusted EBITDA guidance absorbs an estimated $85 million impact primarily from these factors.

Looking forward, we believe this amount captures the large majority of the expected impact of competition, including narrowing differentials and changing clothes for the next several years. Furthermore, we have meaningful, meaningful contractual support across our systems, and we do not have material contract renewals for several years. 2020 preliminary guidance also includes the impact of approximately 100 million dollars of asset sales we expect to complete in early 2020, which includes an assumption that the purchase option is exercises on saddled with respect to our capital program or 2020. Preliminary topics guidance plus or minus 1.35 billion assumes approximately 300 million of our net net cap x is funded the project that within the red OJV entity and therefore is not included in the $1.35 billion dollar amount. Consistent with our targeted financing structure our 2020 capital program is expected to be funded with excess distributable cash flow and asset sales and the balance with long term debt. We do not expect issue common equity to fund our 2020 capital program. We may consider additional preferred equity depending on funding requirements and market conditions before move being from slide nine, I would point out that over the last several years, we have funded over $4 billion of capital investments with asset sales and XF and L over performance.

As mentioned previously, we have incorporated $200 million of asset sales in or into our 2020 guidance. And we continue to evaluate additional divestiture opportunities if successful policies would be used, consistent with our capital allocation levers on capital investments, pay down debt or return capital to our investors. Moving on to our capitalization and liquidity, as illustrated on slide 10. A quarter and we had a long term debt to adjust the D with our ratio of 2.8 times, which has benefited from SS SNL over performance over the last 12 months. As described on our last earnings call, we expect our leverage to take a bit higher in 2020 as we complete our capital program, where we remain focused on continuing to migrate leverage with a moderated at Now contributions down within our targeted long term debt to adjusted EBITDA range of 3.02 3.5 times. As a reminder the rating agencies make certain adjustments for their leverage calculations including for our preferred equity securities. The current adjustments add roughly 3/4 of a turn. So the 3.25x midpoint of our target range would currently equate to roughly 4.0x on a rating agency basis. Reducing our leverage to these levels is consistent with our objective of achieving mid-BBB credit ratings over time. In September we completed a public offering of $1 billion of 3.55% senior unsecured notes due December 2029. We intend to use the proceeds in the fourth quarter to retire our $500 million notes due in December and $500 million notes due January 2020 which together had an average interest rate of 4.2%. I would also note that in mid-October one of the rating agencies changed their outlook on our credit rating from stable to positive reflecting progress we have made. We expect to end 2019 with significant committed liquidity and well positioned to continue to finance our growth investments in 2020. We look forward to providing an update on our progress and provide full 2020 guidance during our year-end conference call in February.

With that I'll turn the call back over to Willie.

Willie Chiang -- Chief Executive Officer and Director

Thanks Al. Thus far in 2019 we've delivered solid fee-based results enhanced by strong S&L execution in a period of favorable market conditions. In addition we've continued to advance our ongoing efforts to improve the safety and reliability of our operations with strong performance in those areas year-to-date. Looking forward we've aligned ourselves with long-term industry partners across the value chain which allows us to build and optimize capital-efficient projects help solve industry needs and secure returns that meet or exceed our hurdle rate above our weighted average cost of capital. We remain focused on continuing to grow our fee-based business through the completion of our current capital program and ongoing optimization efforts while maintaining a strong balance sheet and credit profile.

As Al mentioned we will also continue to look at portfolio optimization and additional potential asset sales. Acknowledging the headwinds described throughout our call, we believe we're well positioned for 2020 and beyond initiatives described throughout the call drive cash flow as we complete our current capital program, which will allow us to further balance our capital allocation levers, including leverage reduction and returning capital to unitholders in the next few years. A summary of our performance versus our 2019 goals is included as well as key takeaways from today's call shown on slide 11 and 12. We look forward to updating you in February with our full 2020 guides. And before I turn it over to Roy, do you want to make a clarification when I talked about our cactus to pipeline, it is mechanically complete. I may have referred to it as 600,000 barrels a day of demonstrated design capacity. The correct number is 670,000 barrels a day of design capacity.

With that I'll turn it back to you Roy.

Roy Lamoreaux -- Vice President, Investor Relations

Thanks Willie. [Operator Instructions] Additionally Brett Magill and I plan to be available this evening and tomorrow to address additional questions. Eduardo we're now ready to open the call for questions.

Questions and Answers:

Operator

[Operator Instructions] We'll now take our first question from Jeremy Tonet at JPMorgan. Please go ahead, sir.

Jeremy Goebel -- Executive Vice President, Commercial

Good afternoon.

Willie Chiang -- Chief Executive Officer and Director

Hi, Jeremy.

Jeremy Goebel -- Executive Vice President, Commercial

I want to start off with capital allocation philosophy. And you touched on it a lot of different ways during the call but just wanted to bring it back in light of kind of where the share price sits right now and how it's kind of declined and how you think about stacking capital for the projects that you have if they could be scaled if they could be JV-ed portfolio optimization and thoughts on whether buybacks at any point in the future could make sense just kind of given the levels where it's trading at right now how that all kind of plays together.

Willie Chiang -- Chief Executive Officer and Director

Jeremy this is Willie. Let me make a couple of comments then I'll ask Al to add to it. I mean clearly we've got a capital program that's going on for this year and next year. We need to continue to allocate capital to complete that. Priority one is to get that done. We always look at ways that we can improve the returns of projects. As you've seen we've brought additional partners into that. We'll continue to look at that. But we really hit a point of inflection in 2021 where the cash flow starts kicking in from the completed capital projects and our capital load starts dropping. So at that point it gives us more flexibility to do things. And then the other thing we're looking as Al talked about we continue to look at potential asset sales and even some other ways to additional cash to give ourselves some more financial flexibility. So that's kind of the base case. Depending on if we get some excess earnings from S&L and/or asset sales there's a possibility for shareholder return. We would only buy shares back if they were value compelling. We have had discussions with our Board on it and we would be able to move quickly on it. But at this point our focus is really to get our capital projects done and get ourselves moving where we can get some of the cash in the door. Al?

Al Swanson -- Executive Vice President and Chief Financial Officer

Willie I think you hit it. Clearly it's one of the prongs of our capital allocation strategy. As Willie mentioned we've had discussions with our Board. We think we could implement a program very quickly. It's just right now we're prioritizing leverage and funding what we think are very highly strategic and accretive projects. But there will be a time when we'll prioritize it if it makes sense at the time when we get there.

Jeremy Tonet -- JPMorgan -- Analyst

That makes sense. That's helpful. And there's been a lot of talk in the marketplace as we've seen over time with the Permian takeaway competition kind of ramping up and seems like we're at the precipice of it right now with some competitor pipes entering service. And so just want to see if you could provide any more color on 4Q Transportation. Looks like the guide embeds a little bit of a step-down there. And so just want to see given that we're partway into the quarter right now what level of comfort do you have as far as kind of hitting that number. Just any color you can provide there would be helpful.

Willie Chiang -- Chief Executive Officer and Director

Jeremy let me ask Jeremy Goebel to address that.

Jeremy Goebel -- Executive Vice President, Commercial

Jeremy first of all to answer the second part of your question the near term. What we were doing is reflecting a surge in production. We saw spot capacity and regional differentials across multiple pipes and multiple regions that supported spot capacity. We forecasted in Q4 additional takeaway capacity from regions coming on. Cactus II came on which is different than some that rolled in but some of the spot capacity we value differently in the fourth quarter. As we go through the quarter we feel comfortable where the projection is. Going into next year and beyond I think Al touched on it during the call and Willie did as well that our forecast for next year reflects our view of what regional differentials are and what we view spot capacity and allocation will be. It steps up year-over-year as the surge in production we're seeing now that's come into our system maintains. One thing to take away from the call is we've been preparing for this environment for several years.

We've been firming up our lease supply. We've been ensuring we have the right upstream and downstream connectivity to provide our customers the utmost connectivity and most efficient way to get from the wellhead to the market. In addition that termed up lease supply gives us opportunities to make sure that where we have slack we can optimize utilization of our pipeline systems. On top of that we have substantial long-term commitments that I think both Willie and Al talked about. That's why we get excited about the projects we do. We have long-term industry partners long-term contracts. That combined with our marketing position gives us an ability to make sure our pipes stays full and optimize their capacity.

Jeremy Tonet -- JPMorgan -- Analyst

That's great. That's all for me. Thanks for taking my question.

Willie Chiang -- Chief Executive Officer and Director

Thanks.

Operator

[Operator Instructions] We'll now take the next question from Shneur Gershuni at UBS. Please go ahead, sir.

Shneur Gershuni -- UBS -- Analyst

Hi, good afternoon, everyone. Just wanted to actually talk about Permian takeaway capacity for a little bit here. Some of your peers have mentioned the high cost of using DRA and how much capacity it's added to the overall Permian takeaway system. So with spreads seriously compressing and probably expensive to use DRA do you have a sense of how much capacity could be taken out of Permian takeaway capacity as a result of sort of taking out this peak capacity of sorts?

Chris R. Chandler -- Executive Vice President And Chief Operating Officer

Yes. Shneur this is Chris Chandler. The short answer is we don't have an estimate of how much capacity could be taken out if DRA usage was stopped but it is something that we optimize on a daily basis. We take into account things like power cost pipeline flow rate and crude quality. And it's a continuous optimization. And really in some cases some of our more recent pipelines have been designed to utilize a baseload of DRA. So it's unrealistic that DRA would be removed completely from use in our pipelines.

Willie Chiang -- Chief Executive Officer and Director

Shneur this is Willie. A good rule of thumb is plus or minus 20% on capacity for DRA just a general comment.

Shneur Gershuni -- UBS -- Analyst

Perfect. Okay. And as a follow-up question. I know that you've sort of given us an initial outlook on '20 and my question is about to be about '21. But as you sort of look at the projects that you currently have complete visibility on right now that you're building out and so forth. When I look at Slide 9 you sort of have plus '21 with capex being meaningfully lower in '21 versus the current year and it sort of seems to be suggesting that there could be some incremental EBITDA growth in '21. Are we looking at something that can be pretty meaningful in '21 in terms of just the continued ramp? When you sort of think about the capital you're putting in place for '20 how much would still be ramping at the end of '20 and into '21? Do you have some sort of sense on that?

Willie Chiang -- Chief Executive Officer and Director

Yes. Shneur I would look at it as these capital projects kicking in and getting the benefit of it. So it is a meaningful amount that would start ramping up in 2021.

Shneur Gershuni -- UBS -- Analyst

All right, perfect. Well, those are my two questions. Thank you very much, guys.

Willie Chiang -- Chief Executive Officer and Director

Thanks.

Operator

We'll now take the next question from Tristan Richardson at SunTrust.

Tristan Richardson -- SunTrust -- Analyst

Just had a question the new development on Wink to Webster. Can you talk a little bit about how the UJI came about? And typically it seems like we've seen your equity partnerships focused on large customers that can bring volumes to bear. Kind of curious how this one came about.

Jeremy Goebel -- Executive Vice President, Commercial

Good afternoon. This is Jeremy. Look we are always looking to optimize. If you remember at this time there were several competing projects for similar routes. Saddlehorn is an example when merged with Grand Mesa. This is optimizing long-term takeaway to ensure that there's sufficient takeaway to meet producers' needs but at the same time making sure the industry is capital efficient. Wink to Webster and its partners had a fully committed pipeline but for the long-term benefit of the downstream refiners the producers and the owners of the pipeline system felt it made sense to merge the projects together and come up with a capital-efficient solution. You'll see us continue to do that in all the projects. Look at the White Cliffs project that we're reversing and turning into NGL service. I mentioned Saddlehorn Grand Mesa the Red River project Diamond Capline. All of these projects are taking existing capacity or bringing partners together that have potentially competing projects and trying to be capital efficient. So I think Wink to Webster was just another one where rational minds come together in the industry and take two projects and put together as one.

Willie Chiang -- Chief Executive Officer and Director

Tristan I would characterize this as really a great example of what we mean by driving capital efficiency across both ourselves and the industry.

Tristan Richardson -- SunTrust -- Analyst

Appreciate it. And then Al you mentioned preferred equity as a potential tool in the toolbox. Could you talk about sort of maybe bookends sort of what kind of conditions you think that would make sense as a funding mechanism. Is it a balance sheet consideration? Just trying to think of what would set the stage that that might be the best option.

Al Swanson -- Executive Vice President and Chief Financial Officer

Yes. Clearly we view that our leverage will tick up in 2020 as we fund this capital program. So we view that as a funding tool. It'll be kind of done in concert if we were to do it in relation to how much assets we may identify to monetize any changes in our capex program if any and kind of the way we look at the preferred security with the 50-50 kind of equity-debt weighting that the rating agencies ascribe to it versus our cost of capital. And I think ballpark we have $800 million to $1 billion kind of in our basket that we could utilize so. But the security also is subject to market conditions in that. So we do view that as one of the things we'll be monitoring. And if we need to to manage leverage or fund our program we'll look to access that market.

Tristan Richardson -- SunTrust -- Analyst

Appreciate it. Thank you guys very much.

Operator

We'll now take the next question from Gabe Moreen. Please go ahead.

Gabe Moreen -- Mizuho -- Analyst

Hi, good afternoon. Two questions for me. One is in terms of the year-on-year Permian growth forecast of 300000 to 400000 barrels a day whether that is conservative or aggressive I guess time will tell but it seems a little bit more of a conservative number as compared to some I think some other stuff that's out there. Can you talk about to what extent that's been developed in conjunction with talking to your producer customers versus whether that may be a PAA internal viewpoint?

Jeremy Goebel -- Executive Vice President, Commercial

Sure. This is Jeremy. We continually look at our forecast. It's continuous based on dialogue with customers our own internal views. It's dialogue that our customers are having with the market. It may prove conservative. We basically look at in this case it's almost a run rate say in the 375 current rigs that are running continue to run through 2020 is the perspective. To be honest with you 2018 ended with more production than we thought and so it began this year. So while activity continued to decline this year our 2019 exit rate is higher than we had forecasted at the beginning of the year simply because of the momentum from 2018. It's quite possible that that happens again. We expect 2019 to exit around 4.65 million barrels a day. In this forecast that Willie was working from which is really a constant activity forecast and no efficiencies built in gets you to roughly five million barrels a day exit next year. That growth will be different by different operators. I mean you'll see some of the integrateds will far exceed historical growth rates and you'll see the levered E&Ps that have substantially lower.

So it doesn't necessarily mean anything specific for specific operators. It just means that look that's our respective view of this activity level the core assets and we view well performance will continue to slightly increase as lateral lengths get longer. On a normalized basis it seems like it's fairly flat. So the impacts of parent-child relationships we think our customers are working through it that and well spacing etc.. So we continue to see the incremental well be better than the last well a lot of it because of getting smarter. And so as we said none of that's built in. What we've got is a continuation of current activity and that's what yields that number.

Harry N. Pefanis -- President Chief Commercial Officer And Director

And based on current the kind of current price environment as well.

Jeremy Goebel -- Executive Vice President, Commercial

Correct.

Willie Chiang -- Chief Executive Officer and Director

And Gabe this is Willie. To make sure I was clear when I described it. I gave two numbers. One was 2020 average versus 2019 average which is the 500000 number which is a little lower than we expected before. And then the 300000 to 400000 number was year-end 2019 to year-end '20 which reflects the back end of 2020 starting to taper off.

Gabe Moreen -- Mizuho -- Analyst

Got it. And then my follow-up question really is around some handholding around S&L the $50 million to $100 million. To what extent you're protected on the downside if relationships get really out of whack in terms of Permian barrels selling at a premium because of MVC commitments and the like relative to Gulf Coast prices how you feel that $50 million to $100 million might be your downside in a scenario like that?

Jeremy Goebel -- Executive Vice President, Commercial

This is Jeremy. I would look at it as that's our current reflection of all the impacts of S&L S&Ls in Canada S&Ls in the Rockies S&Ls in the Permian. So we feel like we've got a good handle on those attributes. With respect to the Permian we can be the beneficiary being a pipeline operator and owner of capacity to multiple markets plus the ability to sell into Midland. So to the extent that that happens there's ways for us to benefit as well. So I think our length in this situation will help us take advantage if that turns out to be. And we'll continue to look for opportunities to optimize around our asset base our S&L footprint and through our marketing affiliate.

Harry N. Pefanis -- President Chief Commercial Officer And Director

So that number Jeremy touched on this. But really it's a reflection of when we look at our contractual commitments and our contractual position in 2020 and our volume forecast and like he said rolling in the NGL as well we think that's a pretty fair reflection of the opportunity set in 2020.

Gabe Moreen -- Mizuho -- Analyst

Great, thanks, everyone.

Operator

We'll now take the next question from Michael Blum at Wells Fargo. Please go ahead.

Michael Blum -- Wells Fargo -- Analyst

Thanks. My question really is about the asset sale approach for next year. I guess would that be discrete assets or would you also consider JV-ing the existing assets? And I guess within that context specifically with Red Oak are you sort of set at the current JV structure or is that something that you'd also be willing to sell down into as well?

Willie Chiang -- Chief Executive Officer and Director

Let me go ahead and take this one Michael. I don't want to get too specific on asset sales. We've talked about the option on one of the pipelines. That's specific. We've been working a number of potential opportunities. And I would answer it's really all of the above. As you've seen us implement over time we do have some additional things we are looking at but it's probably premature for us to give you specifics on that or give you a number on that. Jeremy you want to add something?

Jeremy Goebel -- Executive Vice President, Commercial

Yes. I think Willie captured it. We're opportunistic. And we like our assets and won't sell them unless that there's valuation that we're comfortable with. But in addition your question specifically on Red Oak P 66 and Plains are always looking to optimize the ownership the strategic alliances. It may be that we keep it this way. It may be that we bring someone in. It all will be based on the opportunity set.

Michael Blum -- Wells Fargo -- Analyst

All right, thank you. That's all I had.

Operator

We'll now take the next question from Keith Stanley at Wolfe Research. Please go ahead.

Keith Stanley -- Wolfe Research -- Analyst

Hi. The Q3 EBITDA was very strong in the Transportation segment and your updated guidance it implies kind of a tick down in the fourth quarter in Transportation and in Facilities and volume's pretty flat. Just anything unusual going on there is it just conservative in Q4 looking forward?

Jeremy Goebel -- Executive Vice President, Commercial

I believe this question was asked earlier but I think very simply there were Cactus II came online and we have a surge of production from it. In addition because we were the first project online all of our Permian outlets all maintained full while Cactus II was at elevated rates. So we wouldn't expect that spot capacity on those volumes. In addition there were some opportunities in the Rockies and others that had spot differentials. Red River pipeline was running at elevated levels. But our reflection next year is to step up $100 million from this year in spite of that as projects come online as Cactus II fully ramps and toward the end of the year as Red River and Saddlehorn MVC step up. So we feel like next year reflects it but Q3 was an instance where we had Cactus II full and every one of our Permian pipelines is full in addition to some Rockies opportunities and Red River.

Harry N. Pefanis -- President Chief Commercial Officer And Director

On the Facility side also there's a lot of spot activity that's hard to forecast. Natural gas assets for instance significantly overperformed relative to the guidance we had out there. So those are the types of things a little harder to anticipate quarter-to-quarter.

Keith Stanley -- Wolfe Research -- Analyst

Got it, And just one quick follow-up on the sell-down of Wink to Webster the 29% interest. Can you just confirm the party who acquired that interest has not disclosed that publicly to the market yet.

Jeremy Goebel -- Executive Vice President, Commercial

To our knowledge they have not disclosed that.

Keith Stanley -- Wolfe Research -- Analyst

Okay, thank you.

Willie Chiang -- Chief Executive Officer and Director

Thanks, Keith.

Operator

And we'll take the next question from Colton Bean at Tudor Pickering Holt & Co. Please go ahead.

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

Just to follow up on the $50 million to $100 million of S&L next year. Could you give kind of the high-level breakdown of contribution between the Canadian NGL business and crude marketing?

Harry N. Pefanis -- President Chief Commercial Officer And Director

We don't go into that type of detail on the guidance to tell you the truth.

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

And then I guess as you look at that number the assumption is that would be consistent with pretty tight spread environment on crude?

Harry N. Pefanis -- President Chief Commercial Officer And Director

Yes. Correct. Next year is going to be competitive.

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

Got it, well I guess do you see any impacts on the NGL side of the business. I mean the Edmonton spread has come in. So is that that's all kind of dialed in here in that $50 million to $100 million?

Harry N. Pefanis -- President Chief Commercial Officer And Director

Yes. It is.

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

Perfect. And then just on the $85 million I think you referenced...

Harry N. Pefanis -- President Chief Commercial Officer And Director

The Edmonton spread is on a short-term basis the Canadian diffs have gotten weaker because of Keystone. Not sure that that's something that persists on a long-term basis.

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

Got it, Okay. Is that on the crude side or...

Harry N. Pefanis -- President Chief Commercial Officer And Director

That was on the crude side actually I was speaking to. On the NGL side the differentials have compressed as well.

Willie Chiang -- Chief Executive Officer and Director

See Colton the reason we don't try to give too much more transparency is there's so many variables in the market that it really gets into a reconciliation nightmare on what might happen. So I think we'll just stick with our answer on the $50 million to $100 million and you know the components of what we do.

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

Understood, And just on the I think it was $85 million that you referenced in terms of Permian headwinds next year for Transportation. Can you just characterize where in the system that's hitting? Is that primarily long haul or are you seeing any impact closer to the wellhead?

Willie Chiang -- Chief Executive Officer and Director

Yes. I'll let Jeremy touch on this. The $85 million was really across our system. And it includes Permian long haul as well as some lower tariffs on some Rockies pipelines.

Jeremy Goebel -- Executive Vice President, Commercial

Yes. I think Willie covered it. It's primarily long haul but are a reflection of what we think the rates through Transportation intra-basin transport any changes to contracts we have within the basin our view of what spreads are across the region was all impacted into that number.

Willie Chiang -- Chief Executive Officer and Director

As we've talked before we've got this complex system that can get to different markets. When everything is constrained everything's full going up to Cushing primarily. And with a lot of new pipelines that have been built the volumes now are actually going to the Gulf Coast market. So a good portion of that reduction on long haul is on our basin system going up to Cushing.

Jeremy Goebel -- Executive Vice President, Commercial

Yes. And I would also add to this that when you think about our system and the movements within given basins a lot of that is on long-term contracts just as the takeaway pipe. So when you think about it our guidance next year reflects the combination of our views of intra-basin long-haul regional differentials etc..

Operator

We will now take the next question from Pearce Hammond at Simmons Energy. Please go ahead.

Pearce Hammond -- Simmons Energy -- Analyst

Just one question for me. I'm curious if you have any update on the Eagle Ford terminals Corpus Christi the JV with Enterprise. Any changes there? I know there was some talk about maybe Enterprise selling their portion.

Jeremy Goebel -- Executive Vice President, Commercial

Thanks Pearce. This is Jeremy. Business as usual in the Eagle Ford JV with Enterprise as a partner. We're excited. We're shipping two to three cargoes a month. And the terminal started up in September and our customers are very happy. So I think that's the only update I have for you.

Harry N. Pefanis -- President Chief Commercial Officer And Director

So we have not been in the loop on what Enterprise is doing with their ownership.

Pearce Hammond -- Simmons Energy -- Analyst

Thank you.

Operator

We will take the next question from Ujjwal Pradhan at Bank of America. Please go ahead.

Ujjwal Pradhan -- Bank of America -- Analyst

Good evening. Thanks for taking my question. First one from me. Would you be able to talk about what led to the reduction in your 2019 capex and then 2020 coming in line with 2020 sorry 2019 as you previously stated. Is that because of delays in project construction timing or is that just the lower contribution from JV?

Chris R. Chandler -- Executive Vice President And Chief Operating Officer

Ujjwal this is Chris Chandler. As we shared earlier we have reduced our 2019 capex to $1.35 billion. To answer your question it's a mix of timing adjustments project scope reductions and cost optimization. So some of those have flowed through to 2020 as well but a cause might be something like improved results from competitive sourcing versus our initial estimates. We're also looking at optimizing line size number of tanks number of booster stations exact routing of the pipeline things like that. So capital efficiency is something we're always pursuing so our ability to bring that number down for both 2019 and 2020 is a good thing obviously.

Ujjwal Pradhan -- Bank of America -- Analyst

Got you. And maybe wanted to touch briefly on recent market concerns related to potential future federal legislation or any kind of presidential directive against fracking on federal lands. Have you considered what could be the scope of a potential throughput impact based on where your assets are?

Willie Chiang -- Chief Executive Officer and Director

Yes. This is Willie. It's hard to comment on that. It's something that's further out there and there's a lot of uncertainty on what might happen. What I can tell you is I can give you one statistic that if we look at the acreage dedications that we have we've got less than 20% that are on federal lands. So from what I've been hearing from the producer community there's some flexibility for people being able to move things around but I think it'd be premature for us to quantify direct impacts before we know what might happen.

Ujjwal Pradhan -- Bank of America -- Analyst

That helps. Thank you.

Operator

We will now take the next question from Jean Ann Salisbury at Bernstein. Please go ahead.

Jean Ann Salisbury -- Bernstein -- Analyst

Hey, just one more on the $85 million impact in your guidance next year mostly I think due to lower utilization of spot capacity. Can you just comment on if this is still anticipating material spot barrels to flow or is this actually pretty close to the take or pay I guess what I'd call floor level?

Harry N. Pefanis -- President Chief Commercial Officer And Director

A lot of the volumes on legacy pipes don't have MVCs. So it's sort of a combination of what moves on MVCs what's dedicated to our gathering systems and where we think those volumes naturally flow because of demand pull where there's not an MVC.

Jean Ann Salisbury -- Bernstein -- Analyst

Okay. I guess I meant more outside of the flows to Cushing.

Jeremy Goebel -- Executive Vice President, Commercial

No. That's across our system right? We have legacy assets that aren't new construction. And whether it be in the Rockies or the and so a lot of our assets are demand pull. There's historical shipper industries controlled by refiners. They ship on those pipelines to feed their refineries. A lot of the newer construction has MVCs and this reflects that component. So what Harry is talking about is our plan this $85 million reflects the net impact across the pipelines based on our flows and based on our view of what our MVCs are the net impact to the business unit. That's the fee-based pipeline business unit.

Jean Ann Salisbury -- Bernstein -- Analyst

Okay. That's helpful. And then as the only midstream operator who will have exit capacity from the Permian to Cushing Houston and Corpus can you share your thoughts on what you think is the relative attractiveness of the three destinations to shippers once there's plenty of capacity to each one?

Jeremy Goebel -- Executive Vice President, Commercial

Sure. Cushing has a substantial refining complex and they like neat barrels. And to the extent you see lower activity in the Rockies and the Mid-Con and there's a shortage of barrels that's what would pull the quality of the neat Permian barrels and pull barrels that way. From a Corpus standpoint the ease of access and the competition for water I think there's substantial new capacity and that market is working as an export market. Houston there's in addition to Corpus having some refining capacity Houston has a bigger refining base but it also has substantial exports. Nederland is in a similar function. So we have customers. And Jean Ann if you looked at a map of our system when we're done with all the projects in 2021 if you look at slides five or 6 you can see we could take a barrel from the Permian Basin and get it to St. James Nederland Corpus Cushing Wichita Falls or Houston. So our intent is not to tell to our customers where the barrels go but to ensure that they have access to all of them. And pricing in our terminals can reflect those options. Makes our assets stickier for the long term and that's the ultimate plan and what we're developing for.

Willie Chiang -- Chief Executive Officer and Director

Jean Ann the only thing I would add on that is I would just highlight that Cushing's demand there is a demand for WTI quality right the medium quality is there. That is the hub for a lot of the Mid-Continent refineries. And as we go forward. We've always kind of predicted that crude segregation is going to get more important as the aggregate barrels get lighter. And I think we're going to continue to see more of that but there's going to be a continued pull on 45 and lower gravity at Cushing.

Jean Ann Salisbury -- Bernstein -- Analyst

Thank you. I appreciate that.

Operator

We will take the next question from Sunil Sibal at Seaport Global Securities. Please go ahead.

Sunil Sibal -- Seaport Global Securities -- Analyst

Hi, good afternoon, guys. And thanks for the clarity. Most of my questions have been hit but I did have a couple of clarifications from points discussed. First on the federal land drilling I think you mentioned 20%. Was that referring to your current production coming from those kind of lands or is it more related to your acreage dedications with regard to the federal lands?

Willie Chiang -- Chief Executive Officer and Director

My comment was on the total acreage of what we have in the Permian.

Jeremy Goebel -- Executive Vice President, Commercial

So it wouldn't impact existing production.

Willie Chiang -- Chief Executive Officer and Director

Right.

Sunil Sibal -- Seaport Global Securities -- Analyst

Okay. Got it. And then on the capex side so seems like from your last update between 2019 and '20 a $300 million reduction in capital. And then I think you talked about another $100 million or so of asset sales. So net-net when we think about leverage exiting 2020 you're talking about a $400 million difference versus where you were when you provided guidance last time. Is that correct?

Willie Chiang -- Chief Executive Officer and Director

Chris you want to take that?

Chris R. Chandler -- Executive Vice President And Chief Operating Officer

You're correct on the capital number and you're correct on the asset sales number that you referenced. So consistent with our capital allocation strategy we look to self-fund our capital investments and also reduce leverage as we have the opportunity to.

Willie Chiang -- Chief Executive Officer and Director

But Sunil of the 2019 and 2020 numbers right there's a timing component a cost savings and an optimization component. We haven't given you the breakdown on that but some of that will be capex that will shift from 2020 to 2021 as well.

Sunil Sibal -- Seaport Global Securities -- Analyst

Okay, got it. Thanks.

Operator

We will take the next question from David Amoss at Heikkinen Energy. Please go ahead.

David Amoss -- Heikkinen Energy -- Analyst

Thinking about the question that Shneur asked earlier on 2021 can you just talk about how you expect your return on invested capital to change as we get further beyond your guidance now through 2020. Should there be some meaningful improvement in capital efficiency in 2021 and beyond?

Willie Chiang -- Chief Executive Officer and Director

Yes. Al?

Al Swanson -- Executive Vice President and Chief Financial Officer

Well it's hard beyond 2021 it's hard to say what our return on capital will be for projects that we don't have vetted and all that. I think I can speak to the projects that were on the slides Willie walked through and there's a number of them. And I think in total they aggregate to over $2 billion of invested capital. We feel very good about the returns we're going to get from those projects highly contracted with third parties with natural shippers long-term MVCs and returns that meet or exceed our hurdles which is 300 to 500 basis points over. So we feel very good about the returns we're going to get on what we're investing in today. Beyond that it's a little bit harder to opine. Our view is is that we need to earn those return hurdles or we shouldn't make the investments. So bottom line is we're trying to be as disciplined as we can with our capital dollars. They're precious. And ultimately we again we feel very strong about the returns we're going to see and the growth we're going to see in 2021 as we complete these projects.

Willie Chiang -- Chief Executive Officer and Director

And then David if I would add also as you think about some of the asset sales that we've done asset sales sold at good values that should be accretive to the projects we're doing. So I think directionally there's a lot of positive desire on taking return on capital employed up.

David Amoss -- Heikkinen Energy -- Analyst

And then one follow-up. Just if you wouldn't mind expanding on moving Capline back a little bit in terms of timing what's the cause of that?

Chris R. Chandler -- Executive Vice President And Chief Operating Officer

That project is progressing largely as expected. We're in the process of purging Capline itself and removing linefill. That's going well. That's to prepare for both inspection and reversal activities. And then the new section of pipe is an extension of Diamond of course from Memphis Tennessee to Byhalia Mississippi. That's approximately 40 miles. We are taking a little extra time to make sure we've chosen the best route that has the least impact on the community. And we're in the process right now of optimizing that route and obtaining the right of way for that extension.

David Amoss -- Heikkinen Energy -- Analyst

Just one last one if you don't mind that process on the 40 miles when do you feel like you'll be secure in knowing that that's done and you could proceed with your project?

Chris R. Chandler -- Executive Vice President And Chief Operating Officer

That should come fairly soon. We're preparing to order long-lead equipment. We're in the middle of detailed engineering. So there'll always be route optimization until we buy our last piece of right of way but we have on the schedule to start construction in early 2020. So that of course requires that the route be locked down for those sections.

David Amoss -- Heikkinen Energy -- Analyst

Get it. Appreciate it. Thank you.

Operator

We will take the next question from Christine Cho at Barclays. Please go ahead.

Christine Cho -- Barclays -- Analyst

Hi, everyone. I just have one question on your capex. So your capex for next year that you assume $300 million pro rata debt at Red Oak. And I think you said that's project-level debt. Are you guys evaluating project-level debt for Wink to Webster? And if so could your capex come down next year even further?

Al Swanson -- Executive Vice President and Chief Financial Officer

Christine this is Al. No we are not with regard to Wink to Webster. On these equity investment JVs we've historically treated as investment and reported our capital investment as to contributions in. Clearly the reason we're doing the disclosure around the Red Oak is to make sure that whether it's debt inside of the JV entity or contributions from us that we're full disclosure on what the true investment is net pro rata to us but we are not looking at Wink to Webster project financing.

Operator

This concludes today's question-and-answer session. At this time I'd like to turn the conference back to the speakers for any additional or closing remarks.

Roy Lamoreaux -- Vice President, Investor Relations

And thank you all. We appreciate you joining us today and we look forward to providing you an update in February.

Operator

[Operator Closing Remarks]

Duration: 54 minutes

Call participants:

Roy Lamoreaux -- Vice President, Investor Relations

Willie Chiang -- Chief Executive Officer and Director

Al Swanson -- Executive Vice President and Chief Financial Officer

Jeremy Goebel -- Executive Vice President, Commercial

Chris R. Chandler -- Executive Vice President And Chief Operating Officer

Harry N. Pefanis -- President Chief Commercial Officer And Director

Jeremy Tonet -- JPMorgan -- Analyst

Shneur Gershuni -- UBS -- Analyst

Tristan Richardson -- SunTrust -- Analyst

Gabe Moreen -- Mizuho -- Analyst

Michael Blum -- Wells Fargo -- Analyst

Keith Stanley -- Wolfe Research -- Analyst

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

Pearce Hammond -- Simmons Energy -- Analyst

Ujjwal Pradhan -- Bank of America -- Analyst

Jean Ann Salisbury -- Bernstein -- Analyst

Sunil Sibal -- Seaport Global Securities -- Analyst

David Amoss -- Heikkinen Energy -- Analyst

Christine Cho -- Barclays -- Analyst

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