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Summit Midstream Partners LP (NYSE:SMLP)
Q3 2019 Earnings Call
Nov 8, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to the Q3 2019. Summit Midstream Partners, LP, Earnings Conference Call. My name is Vanessa and I will be your operator for today's call. [Operator Instructions]. I will now turn the call over to Blake Motley Vice President of Strategy &, Head of Investor Relations.

Blake Motley -- Vice President of Strategy and Head of Investor Relations

Thanks, operator and good morning everyone. If you don't already have a copy of our earnings release that was issued earlier this morning, please visit our website at summitmidstream.com where you find it on the homepage or in the News section.

With me today to discuss our third quarter of 2019 financial and operating result is Heath Deneke, our President and Chief Executive, Marc Stratton, our Chief Financial Officer along with other members of our senior management team.

Before we start, I'd like to remind you that our discussion today may contain forward-looking statements. These statements may include, but are not limited to, our estimates of future volumes, operating expenses and capital expenditures. They may also include statements concerning anticipated cash flow, liquidity, business strategy and other plans and objectives for future operations. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can provide no assurance that such expectations will prove to be correct.

Please see our 2018 Annual Report on Form 10-K which was filed with the SEC on February 26 2019 as well as our other SEC filings for a listing of factors that could cause actual results to differ materially from expected results. Please also note that on this call, we use the terms EBITDA, adjusted EBITDA and distributable cash flow. These are non-GAAP financial measures and we have provided reconciliations to the most directly comparable GAAP measures in our most recent earnings release.

And with that, I'll turn the call over to Heath

J. Heath Deneke -- President and Chief Executive Officer

Thanks, Blake and good morning everyone. I want to thank everyone for joining us on Summit's Third Quarter 2019 Earnings Call. I'll start by expressing my excitement and enthusiasm and serving Summit's new CEO and since joining the company in mid-September, I've had the opportunity to conduct an in-depth review of the business and I've been thoroughly impressed by the dedication and attitude exhibited by all of our employees.

In addition and in spite of the continued softness in the upstream sector and really overall macro backdrops, I'm optimistic regarding the outlook of the business and I believe that there is tremendous potential to navigate through this current environment and drive significant near-term and long-term value for our stakeholders.

While we can't control producer activity levels, our core focus areas in the Bakken, the DJ. The Permian and the Utica sit at the top of the stack of the most economic oil and gas acreage to drill in North America. We believe that customers behind our systems can deploy capital in these areas. solid returns in the 50 plus OIL and 250 gas environment that we are currently in. Our G&P systems in these core focus areas are also largely built out with ample room to grow without a significant amount of follow-on capital requirements. Our legacy area cash flows in the Marcellus in the Piceance regions are largely supported by NBC's that continue at or near current levels through the end of 2021 with a significant portion that continue through the middle of the next decade. Also our Barnett acreage is underpinned by a nice wedge of relatively low decline PDP production that we estimate has a marginal cost of less than $1 per Mcf to produce and that's inclusive of our gathering fees. We also have a considerable amount of drilling inventory remaining on the system.

Our Barnett assets are also supported by a large anchor tenant that has significant LNG commitments in the Gulf region and we believe drilling results suggest that the half cycle production costs to developed by Barnett acreage which will be inclusive of D&C LOE gathering and transportation cost of the dock is price-advantaged to help meet those commitments versus buying gas at the current Henry Hub strip in transporting it from the hub to their committed LNG facilities.

Furthermore, we have a world-class gas pipeline project in the Permian Basin which is in flight now and is anchored by firm commitments from the largest and among the most active major in the basin, who by the way is also a strategic joint venture partner and equity owner in the Double-E Pipeline system. So the point I wanted to make here is that I believe that our base business stands on very stable ground in the near term. And I think it's very well positioned for highly attractive and accretive growth in the out years and this comes without the need for a large pickup in development activity. Now having said that, we fully recognized that we are not where we need to be from a leverage and overall balance sheet standpoint and then a much more rigorous focus on cost control and capital discipline is warranted going forward.

We also acknowledge that we need to restore confidence with our investor base on two fronts. One, management's ability to deliver on the guidance that we set and two concerns regarding sponsors commitment and alignment post simplification. While we'd like to get the benefit of the doubt on those two topics, my view is that time and actions will speak much louder than words.

We think that today's DPPO transaction which I'll cover a bit more later on in the call is a major step in demonstrating our sponsored continued commitment to SMLP and its alignment with our stakeholders. In addition, I want to take the opportunity now as a new CEO to emphasize that capital discipline, cost control, improving the balance sheet and setting realistic expectations and delivering on them are at the very top of management's priority list going forward as is our commitment to providing safe, responsible and reliable operations for our customers. Now let me hit on a few other highlights of the third quarter results and a few key themes that are currently playing out across the various operating segments. First, our results for the third quarter of 2019 included adjusted EBITDA of 72 million. Distributable cash flow of 41.7 million and a distribution coverage ratio of 1.75. These results included over $2 million of non-reoccurring remediation expense and approximately 1.9 million of last EBITDA in the quarter associated with temporary operating operational disruption both that happened within our Williston Basin segment. Excluding these events, which are now behind us, our adjusted EBITDA would have been approximately 76 million for the quarter which will be in line with our expectations and represents a more than 10% increase over the second quarter of 2019. Customer activity levels have also trended in line with expectations as demonstrated by the quarter-over-quarter volume growth in 6 out of our 8 reportable segments.

In our DJ Basin segment, our third quarter volumes are up 65% from the second quarter. The combination of volume growth, along with 1.8 million a quarterly demand payments related to the start up of the new Hertford plant resulted in a 133% increase and our segment adjusted EBITDA as compared to the second quarter. Our customers are currently operating two drilling rigs in our service area, one of which is operated by High Point Resources, who has recently highlighted better than expected well results in The Hartford field and we are encouraged by their strategy to utilize cash flow generated by their Northeast Wattenberg asset to further support development of their Hertford acreage. Our DJ Basin gathering and processing systems will be the primary beneficiary of this activity and we think it will contribute to continued volume growth as we look forward into 2020.

The Williston Basin continues to be a top line driver for us here at Summit as liquid volumes have trended ahead of our expectations, our customers turn in line 39 new wells in the quarter, many of which are exceeding internal type curve estimates and as a result exit rate volumes for the month of September went excess of 115,000 barrels per day. This is a new record for Summit and it also represents over 20% growth relative to the second quarter volumes of 94.3000 [Phonetic] barrels.

In the Utica. we are excited to report yet again a third consecutive quarter of segment adjusted EBITDA growth which was up over 18% quarter-over-quarter. Looking forward, we are very excited about a 5 well pad site that was recently drilled behind our SMU system and we expect it to yield initial production rates in excess of 150 million a day once completed in the first half of 2020. To put that in perspective, this one pad site is expected to produce approximately 60% of our third quarter pad level volumes once is turned in line and should continue to grow in this segment beginning in the first half of 2020 It's also we are pointing out that we are beginning to see capex levels decrease across the platform in the third quarter which is driven by the recent completion of our new DJ processing plant and Permian G&P system expansions. We expect that our capex spend levels will further decrease in the fourth quarter as we finish up the Angus Compressor Station expansion in the DJ.

As a 2019 major expansions in the Permian and DJ wind down, all of our G&P systems in our core focus areas are largely built out and again are in a great position to capture a lot of volumetric growth without much additional capital going forward.

Looking ahead to the fourth quarter, at this point based on rig and well activity that we monitor in the field on a real-time basis, we continue to expect our quarter-over-quarter volume growth trend to continue through the end of the calendar year across really all of our core focus areas.

Accounting for the nearly 4 million of third quarter non-reoccurring remediation and downtime in the Williston segment that I've referenced earlier, we expect EBITDA for the year to come in at or near $290 million.

So with that, I'll now hand it over to our CFO, Marc Stratton to review our quarterly results in more detail.

Marc Stratton -- Executive Vice President and Chief Financial Officer

Great. Thanks, Heath, and good morning everyone. I'll begin by walking through the segments that comprise our core focus areas. And I'll start with the Utica Shale segment. The SMU system averaged 290 million cubic feet a day in the third quarter and segment adjusted EBITDA totaled 7.9 million which is up 18.4% from the second quarter of 2019.

This growth was due to a full quarter of volumes from four new wells that were turned in line late in the second quarter and provided a more favorable mix of pad level gather gas on the system. More than 85% of SMU's average daily volume in the quarter or a 248 million cubic feet a day we've gathered from pad sites directly connected to the system which represents a 13% increase from the second quarter.

This pad level volume growth represents a continuation of a trend that we've seen over the last three quarters and is an important driver in our top line revenue trajectory, given that these pad level volumes generate a gathering fee that is approximately three times higher than the fee we earn on volumes originating behind our TPL-7 Connector.

Looking forward, our anchor customer connected two new wells in early October and has also resume flows on five older wells that were previously shut down due to simultaneous drilling and completion activities. The volume impact from these wells gives us confidence that we will see continued strength in our Utica Shale segment throughout the balance of the year. In addition, this customer has plans to turn in line in other two wells in the first quarter of 2020 ahead of a separate customer's planned commission of 150 million a day, five well pad that Heath referenced earlier, which is expected in the first half of 2020.

Just to remind you these dry gas Utica wells are large with IP rates in the 15 million to 30 million a day range and have historically shown to hold flat for up to eight months. upon initial commissioning. As such even five wells can move the needle for our business and this five well pad, in particular, represents a significant growth catalyst as we look forward.

Turning to our Ohio Gathering segment. Gross volume throughput in the third quarter of 2019, averaged 777 million cubic feet a day, up 9% from the prior quarter, as 13 wells were turned in line bringing the total to 51 new wells year-to-date. Our customers currently have 16 DUCs in inventory which are expected to be completed in 2020. These customers are also currently operating two rigs in our service area which will increase the DUC backlog as we head into 2020. Beyond that, certain customers are evaluating drilling programs behind the OGC system targeting the condensate and wet gas windows of the Utica, to satisfy commitments that they've made to provide feedstock for a new third-party ethane crackers in the region. We expect drilling activity will pick up behind the Ohio Gathering System over the next several years as a facility is placed in service and as base load commitments are filled.

In the Williston segment, third quarter liquids volumes averaged 105,000 barrels per day, up approximately 11,000 barrels a day or nearly 12% from the second quarter of 2019 behind 30 new well connections. We expect liquids volumes to maintain their upward momentum into the fourth quarter with average throughput in the month of September and in the fourth quarter to-date period in excess of 150,000 barrels per day.

Our customers are currently operating two rigs behind our liquids gathering systems and have 25 DUCs in inventory which supports our expectations for continued growth throughout the balance of the year and into 2020. As Heath referenced, third quarter adjusted EBITDA for our Williston Basin segment was negatively impacted by more than $2 million related to the higher than normal levels of remediation expense and $1.9 million of lost EBITDA associated with an operational disruption on our Bison Midstream system that occurred late in the second quarter and continued for a portion of the third quarter.

The Bison Midstream system was restored to full operating capacity in late August and no lingering expenses are anticipated in the fourth quarter. In addition we have visibility toward eight new wells being turned in line behind our Bison system in the fourth quarter which represents an attractive growth catalyst for us as we exit 2019.

DJ Basin segment adjusted EBITDA totaled $6.6 million for the third quarter of 2019, a 133% increase compared to the second quarter of 2019 driven by a 65% increase in volumes and the $1.8 million of demand payments that we began to recognize in the third quarter in connection with commissioning of our new processing plant.

The volume and EBITDA ramp has trended in line with our expectations and the two rigs currently working in our service area should bode well for increased utilization rates and higher segment adjusted EBITDA in the coming quarters.

Lastly, segment adjusted EBITDA for the Permian Basin in the third quarter increased by $900,000 over the second quarter results, driven by a 17.6% increase in volume throughput and $400,000 decrease in operating expenses. The third quarter was the first full quarter to benefit from our new Blue Quail compressor station which was commissioned in June and facilitated the new source of volume throughput for our gathering and processing system.

Our customers have remained active operating one to two rigs in our service area for much of the third quarter and have increased their DUC inventory to 17 wells. We have good visibility for 11 new wells to turned in line behind our Permian system in the fourth quarter which will facilitate higher throughput and improved operating efficiencies over the coming quarters.

Now, turning back to the partnership. SMLP reported third-quarter financial results that included $72 million of adjusted EBITDA and $41.7 million of distributable cash flow. Relative to the second quarter of 2019, adjusted EBITDA was up 5% and distributable cash flow was up 8.6%, primarily driven by increasing volumes across six of our eight segments.

At this point, we expect this trend of increasing volumes to continue across many of our systems through the end of the year based on rig and well connection levels that we are currently monitoring. Based on our third quarter distribution of $0.2875 per unit, SMLP generated a quarterly distribution coverage ratio of 1.75 times.

SMLP also reported a third-quarter of 2019 net loss of $10.6 million which included a $16.2 million non-cash expense related to the impairment of goodwill on the Mountaineer system. This impairment was primarily due to a more tempered volume outlook for the Marcellus Shale reportable segment. This system did benefit from five new wells that were turned in line in the quarter but our outlook for additional activity on this system in the current environment is unclear.

Capital expenditures for the third quarter of 2019 totaled $46 million including $5.4 million of capital calls associated with our equity investment in the Double-E Pipeline project. These investments were approximately $10 million lower than the second quarter of 2019 and we expect our capex to decrease further in the fourth quarter given the recent commissioning of our new 60 million a day DJ processing plant and the compressor station expansion in the Permian.

Our legacy areas which include the Piceance Basin, Barnett shale and Marcellus Shale segments generated approximately $38.9 million of free cash flow in the quarter. But only $1 million of total capital expenditures. We had $600 million outstanding under our $1.25 billion revolving credit facility as of September 30, 2019 and approximately $641 million of available borrowing capacity, subject to financial covenant limitations Total leverage at quarter end was 4.9 times, compared to a maximum limit of 5.5 times.

And with that, I'll turn the call back over to Heath.

J. Heath Deneke -- President and Chief Executive Officer

Great. Thanks, Mark. So I'd like to touch on a few strategic things before we open the line up for questions. So let me start with a great progress that the team is making on the Double-E project. In September, we received a favorable notice from the FERC with respect to their intent to issue an environmental assessment for the project in March of 2020 which is in line with our expectations.

Having now locked in our pipe cost and the majority of our right away, the project remains on time and on budget to meet third quarter 2021 in service state. As it relates to our financial plans for Double E, we've evaluated the market fairly thoroughly and we are currently advancing asset level financing that would shift a substantial majority of our Double-E capital expenditures from SMLP's revolver to third parties, beginning in the first quarter of 2020.

Our third-party financing plans would alleviate a significant capital obligation for Summit over the next several years and will help position us to utilize the excess free cash flow to accelerate deleveraging and strengthen the balance sheet. The financing strategy also maintains our ability to capture long-term upside and exposure to the highly attractive Double-E project.

Regarding the DPPO transaction that we announced this morning, SMLP will make a prepayment of 51.75 million in cash and issue 10.7 million in SMLP common units. And in exchange we will reduce the remaining balance by 122.75 million or nearly 40% of the prior DPPO balance, that will move to a current balance of $180.75 million.

I'm sure you all have already done the math but the implied price of the common units issued reflecting approximately 43% premium relative to yesterday's closing price. We have also extended the date that SMLP is required to make the final DPPO payment to January 2022 from an otherwise requirement to make a $151.75 million payment in June of 2020 with another 151.75 million payment in December 2020.

We also preserved the company's flexibility to pay the remaining DPPO balance in all cash, all stock or a combination of each. This transaction is a very important step forward for the company and we believe a good and balanced outcome for all of our stakeholders. It not only puts a substantial portion of the DPPO funding uncertainty and the review mirror but the deferral to January 2022 also gives us more time and therefore more flexibility to develop an optimal solution to retire the remaining balance.

I also believe the consideration mix, the implied premium to the unit price for the equity component as well as the deferral of the remaining balance into 2022 all reflect Energy Capital Partner support in alignment with SMLP's, LPs and creditors and also reflects an overall willingness to support the company with the flexibility it needs, particularly in the current market environment.

Now having said that, we fully acknowledge that even with the longer runway, there is still a lot of work left to be done on the remaining DPPO and most importantly, we need to take meaningful steps now that are within our control to reduce leverage and strengthen the balance sheet to improve our financial flexibility going forward.

So let me cover a few of those steps that we are taking and then we'll open up the line for questions. So first, we just completed an organizational wide assessment of our cost structure and we've identified a number of cost savings and efficiency opportunities that we expect will generate at least $10 million of expense savings in 2020 and up to an annual run rate of $20 million per year thereafter. These amounts are in addition to the 5 million of reoccurring cost savings that we previously disclosed in the August Conference Call. The team which was comprised of both employees and outside consultants conducted a top to bottom review leaving no stone left unturned whether that's out in the field or at the C-Suite level.

While there are number of difficult decisions that we made and we'll have to make in the coming months, very confident that the cost saving targets are achievable appropriate that did not conflict with our core values which include our commitment to providing safe, reliable and responsible operations for our customers.

Also, I want to take the opportunity to acknowledge the tremendous amount of time, thought and effort that our employees from across our organization has put into this transformation initiative. The level of objectivity and professionalism that was demonstrated by our employees during this effort has simply been remarkable.

The outcome reflects a strong character and since the stewardship there is embedded in our operating culture, as well as the ability of the organization to rise and meet the challenges we are facing in the current market conditions. Second, we will continue to remain disciplined with respect to future growth activities.

These activities will be concentrated on the Double E Pipeline project as well as accretive expansions of our infrastructure in our core focus areas. Excluding our investment in Double E which again we expect to fund with third party capital, we expect our 2020 capital program will come in less than $75 million and that's relative to the $175 million program expected in 2019.

So as I mentioned earlier on the call with a chunky '18-'19 capital programs behind us, virtually all of our core focus area GMP systems are built out and they have ample capacity to capture meaningful amount of volume growth in the future with very modest capital requirements going forward.

And finally, we are expanding our asset divestiture program to include potential sales and/or JVs of assets in our core focus areas. While we are continuing to pursue legacy asset sales there is no doubt the current market conditions have made it challenging for us to find serious buyers that are willing to transact at a reasonable price. While we're not giving up, we're not willing to compromise on value just for the sake of getting a deal done and we're going to remain patient and disciplined as we continue to evaluate opportunities going forward.

So to wrap up, I just wanted to say thank you again to our unit holders, our lenders and all of our stakeholders for your continued support and patience and what continues to be a challenging market. I think we've announced some very important steps here to help reposition the business to be successful into 2020 and beyond. On reiterate my optimism and what the future has in store for Summit, I certainly look forward to leading the company and its important next chapter of its evolution.

So with that, let's open the call up for questions.

Questions and Answers:

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Tristan Richardson with SunTrust. Please go ahead.

Tristan Richardson -- SunTrust -- Analyst

Good morning guys. Heath, I appreciate your commentary on operating cost initiatives and restoring confidence and sponsor alignment particularly in the changing production growth environment. Can you talk about the extent to which the sponsor might wave the remainder of the DPPO entirely, just thinking about the potential for actions that would be viewed as seismic our unequivocal potential actions out there?

J. Heath Deneke -- President and Chief Executive Officer

Thanks Tris and I hope you're doing well. I think the DPPO transaction today obviously created a lot of flexibility for us going forward. We push it out obviously, the 2022. We certainly don't anticipate the sponsor just basically giving it away but what I think this does show is that when you look at the consideration mix the implied premium to the share price of roughly 43% relative to yesterday's close the extension out to almost two years from now. I think what we are saying is that the sponsor is going to be very flexible. It's going to work with the business to make sure that as we look to retire the remaining obligation that we can do in an optimal way and if we need more flexibility on down the road, I'm sure our sponsor will provide it.

Tristan Richardson -- SunTrust -- Analyst

Appreciate it. And then, Heath or Marc, can you talk about the extent to which equity remains an option for the remainder of the DPPO and as such when you think about the potential split and cost of equity capital either targets for distribution coverage, sort of lower bookings that you'd be willing to accept in terms of further equity issuance.

Marc Stratton -- Executive Vice President and Chief Financial Officer

At this point, we're talking about something that's at least a couple of years away. Right. So I think as we think about it, we did retain the flexibility to use our stock if we felt like that was the most appropriate way to go and we also certainly could use cash or any combination of it. So I think a lot of is going to depend on how well the business performs over the next couple of years and if we achieve our plans to aggressively delever the balance sheet, it will create a lot of financial flexibility and we'll make a determination based on how our units are trading at that point in time and how strong and how much flexibility we built in the balance sheet to resolve it.

Tristan Richardson -- SunTrust -- Analyst

Excellent. And then just last one from me. I'm just trying to triangulate and on a pro forma for the new units the sponsor would own effectively across the different buckets. is it approximately 50% or is it just generally --

Marc Stratton -- Executive Vice President and Chief Financial Officer

Sure, Tristan, this is Marc. Yes, pro forma for the new issuance, units owned directly by ECP or through S&P Holdings approximately 55% to 56%.

Tristan Richardson -- SunTrust -- Analyst

Helpful. Appreciate it. Thank you guys very much.

Marc Stratton -- Executive Vice President and Chief Financial Officer

All right, thanks, Tristan.

Operator

Our next question comes from Christopher Tillett with Barclays. Please go ahead.

Christopher Tillett -- Barclays -- Analyst

Good morning. I guess first for me is on the Double-E Pipeline. You mentioned you expect that to be funded by third-party capital, I guess could you speak to just the types of structures or considerations that you guys are looking at there?

Marc Stratton -- Executive Vice President and Chief Financial Officer

Yes, sure. Chris, this is Marc. So as we mentioned, we're having some I'd say very productive discussions with investors regarding options to finance our 70% interest in Double-E going forward. And I'd say, we're in a fairly good spot. Obviously this is a world-class project and there is a lot of investor interest out there.

So just to give you a little background, we've got about $25 million invested in Double-E-to-date and over the balance of the year really the fourth quarter, we really only have about another $5 million to $10 million of capital spend which we expect to do under the revolver, our Larger and capital investments will begin really in the first quarter of 2020. It really as we begin to make payments on our pipeline and other materials to prepare for construction. But as we think about longer-term financing strategy, we are giving serious consideration to third-party asset level financing which could take a number of forms that we are evaluating and progressing.

But I think the takeaway is that we think this will be a very efficient way for us to shift a substantial majority of our Double-E capital commitment from SMLP's revolver to a third party during the construction period. Obviously, we think this would be a credit positive for SMLP as it would really enables us to remove a substantial amount of future funding from our revolver. And really accelerate deleveraging and strengthening the balance sheet throughout 2020.

And obviously over the long term, we would continue to have the opportunity to capture the longer-term upside by bringing it back into the partnership sometime after commercial operation. So while we don't have any specifics to announce today, I'd just say stay tuned for updates as we continue to make progress throughout the fourth quarter.

Christopher Tillett -- Barclays -- Analyst

Okay, thank you. And then shifting to the DPPO for a second, can you speak at all to the timing of what you guys might be thinking in terms of repaying the remaining portion and I guess the reason that I asked that is given the 8% interest cost on the remaining 180 million or so by my math it just seems like if you wait until 2022 to do that, the all-in amount might still exceed kind of the amount that was renegotiated earlier this year.

So just kind of wondering how we should be thinking about that.

J. Heath Deneke -- President and Chief Executive Officer

Yes. Hi, Chris. This is. Heath, I mean, I'll take a stab at that. Look, we bought ourselves obviously at the time, I think the 8% cash paying interest is, it's something that was part of the consideration mix and we think is a fairly attractive rate relative to other potential structure. So my view on this is that while we've differ, we don't have to pay it off until 2022 we could make payments on down the road, if we have success on the asset sale front. And as we kind of delever and create more financial flexibility.

So I think the good news on our end is that we have a lot of flexibility and if it makes sense to do another prepayment we certainly will be position and take advantage of that but we felt like own balance, I think we've got it to a much more manageable level now And that again we have just a lot of time and options to resolve going forward. I hope that answer your question.

Christopher Tillett -- Barclays -- Analyst

Yes. Got it. Thank you. That is all from me guys, thanks.

Marc Stratton -- Executive Vice President and Chief Financial Officer

Thanks, Chris.

Operator

Thank you. Our next question comes from Terran Miller with Cantor Fitzgerald. Please go ahead.

Terran Miller -- Cantor Fitzgerald -- Analyst

Good morning. Two quick questions. Number one is are you willing to give us an asset sale per target level. And number two is, do you have a target leverage level you'd like to achieve by the end of 2020?

Marc Stratton -- Executive Vice President and Chief Financial Officer

I'm sorry, can you repeat your first question. I don't think I really follow what you're asking.

Terran Miller -- Cantor Fitzgerald -- Analyst

You're talking about potentially doing some asset sales, I am just wondering if you are willing to size that potential program?

Marc Stratton -- Executive Vice President and Chief Financial Officer

Size the potential program?

Terran Miller -- Cantor Fitzgerald -- Analyst

Yes.

Marc Stratton -- Executive Vice President and Chief Financial Officer

I'm not sure that I know exactly what you're looking for there. But I think look what we're going to do obviously as by expanding our A&D program to include some of our core assets and whether that's outright sales or joint ventures. We're looking at it in a manner that will immediately help us delever the balance sheet, depending on how much cash flow we raised that will give us flexibility if we want to prepay the DPPO we can. So I think there is not a specific target in mind. I think we're very value-focused. And if we get a healthy [technical difficulty] on some of our assets in our core focus areas we'll certainly take advantage of that but at this point again, not a extreme target in mind. It's really about just kind of creating some flexibility and doing what we can to delever as quickly as possible.

Terran Miller -- Cantor Fitzgerald -- Analyst

And in terms of the second question which is, do you have a target leverage level you'd like to get to by the end of 2020?

Marc Stratton -- Executive Vice President and Chief Financial Officer

I think long term are really as fast as we can. I think we feel like the business should be at four times or less and so that timing obviously is going to be dictated by how the base business performs, our success on the asset sale side and other things but definitely we were not going to kind of slowdown delevering until we can get in and around that four times or below.

Terran Miller -- Cantor Fitzgerald -- Analyst

Thank you.

Operator

Thank you. Our next question comes from Elvira Scotto with RBC Capital. Please go ahead. Elvira, your line is now open.

Elvira Scotto -- RBC Capital -- Analyst

Hi, sorry. Good morning. I just had a couple of clarification questions. On the DPPO we noticed that it looks like the sponsor actually reduced the remaining portion of the Of the DPPO by 19.25 million and maybe this was asked earlier but is there any potential for further reduction of the DPPO?

J. Heath Deneke -- President and Chief Executive Officer

Yes, what you think of it as a $20 million reduction in the balance or the willingness to take stock back at a premium that we think is more indicative of where we should be trading. I think we'll evaluate that again as we look to kind of settle the balance. So I don't think there is any-- I wouldn't think of this is necessarily being an impairment if you will to the DPP our balance, I don't think it was more when we looked at the consideration mix. We negotiated a price that we felt was directionally reflective of where we should be training as opposed to just what the current market look like.

Elvira Scotto -- RBC Capital -- Analyst

Okay that makes sense. And I wanted to follow up on the Double-E. So just help me understand, when you're talking about the third-party asset level financing, are you in discussions already and I think you mentioned the 75 million of growth capex in 2020 I think was your guidance assumes that you have in place all the financing on Double-E?

Marc Stratton -- Executive Vice President and Chief Financial Officer

Yes, Elvira. Good morning. This is Marc. Yes, so the 75 million that we've outlined in our remarks this morning and in our press release reflects capex that we have visibility in the business today excluding our equity investment in Double E. So Double E as I mentioned earlier, the significant capital expenditures related to that project are really going to ramp up here in the first quarter of 2020. And really continue through at the end of 2021. And so we have begun a formally conducting conversations with prospective investors and that processes is well under way such that we have third-party capital in place by the first quarter of 2020.

Elvira Scotto -- RBC Capital -- Analyst

Right. So, but then you have this investment by the third parties and then how does it work? You would buy that back when the pipeline comes on line and for them, they would just make a certain return over that time period, Is that the right way to think about this?

Marc Stratton -- Executive Vice President and Chief Financial Officer

Yes, that's exactly the right way to think about it, Elvira. It's the way for us to utilize third-party capital during the construction period to finance the development of the projects and following commercial operation of the asset, we would obviously have the We have the ability to bring that back into the partnership subject to a certain return, that's exactly the way I think about it.

Elvira Scotto -- RBC Capital -- Analyst

Okay, great. And then just in terms of of asset sales, would you sell any of the core assets if you got a really attractive bid?

Marc Stratton -- Executive Vice President and Chief Financial Officer

Yes, we would.

Elvira Scotto -- RBC Capital -- Analyst

Okay, great. And then I think you also mentioned potentially JV-ing the assets, Is that something similar, like, do you think you could do a JV with your sponsor on some of these assets?

Marc Stratton -- Executive Vice President and Chief Financial Officer

Yes, I think that that could be the case or third parties. I think particularly in areas we have a tremendous growth around our footprint obviously in the Bakken, the DJ the Permian, if it made sense to consolidate with someone to generate not only proceeds to delever but also put some capital to work to further grow those systems, I think we inclined to do that as well.

Elvira Scotto -- RBC Capital -- Analyst

Got you. Okay, that's all I had for now. Thanks.

Marc Stratton -- Executive Vice President and Chief Financial Officer

All right, thank you very much.

Operator

Thank you. We have a follow-up question from Tristan Richardson with SunTrust. Please go ahead.

Tristan Richardson -- SunTrust -- Analyst

Hey, sorry guys, just one quick follow-up from me. You talk about flexibility and Max flexibility whether it be on project financing or the flexibility that the new DPPO arrangement offers, just thinking about distribution policy, is that a lever to create additional flexibility as you look forward sort of to the extent asset sales are either unsuccessful or it's a prolonged process, etc. etc. Just thinking about that as a potential lever near term.

Marc Stratton -- Executive Vice President and Chief Financial Officer

Yes. Tristan, I think that's a good question. obviously we just made a decision to maintain the distribution at its current level. What I would say right now, we're deepen our planning efforts with our customers for 2020 and we just announced that we cut our opex by 10 million and we're going to realize that this year and should hit an annual run rate savings of $20 million per year by the end of the year. We just work through our market outline kind of our plans around Double-E with asset level financing with the DPPO transaction we just bought ourselves a lot of time and consideration there we just told you we're going to reduce our capital budget which is average close to 200 million a year over the past couple of years. We're going to cut that by roughly 65% at a minimum. And I think that's certainly going to position us to potentially even start generating some positive free cash flow here toward the end of the year. And, look our core systems are largely built out and it doesn't take Amount of activity level to really materially drive the needle from an EBITDA growth standpoint. The combination of that and the A&D program that we have an expanding that to include asset sales or joint ventures in our core focus areas even in this market we believe they will warrant a premium. I think when you look at all these steps in total, we've got a lot of wood to chop between now and the distribution decision next quarter. So as we do every quarter, we're always going to evaluate the distribution. We're going to make sure that make a determination that whether using our distributable cash flow in the best manner possible. But I will say in our balance sheet is our number one priority going forward going into the year but we've got a lot of options in front of us here and we're going to work through those diligently over the course of the next few months and then got a lot of time between now and the quarter to get there.

Tristan Richardson -- SunTrust -- Analyst

Thank you guys very much.

Operator

Thank you. And at this time we have no further questions. Turning the call back to final remarks to Heath Deneke. Please go ahead.

J. Heath Deneke -- President and Chief Executive Officer

Yes, thanks. And thank everyone. I want to thank everyone for joining us today. We hope we left you with a better appreciation for how the management team and I are going to work to reposition the business here for success in the coming years. We look forward to our upcoming investor conferences and look forward to continue to update everyone on our progress going forward. With that, thank you. And we'll talk soon.

Operator

[Operator Closing Remarks].

Duration: 44 minutes

Call participants:

Blake Motley -- Vice President of Strategy and Head of Investor Relations

J. Heath Deneke -- President and Chief Executive Officer

Marc Stratton -- Executive Vice President and Chief Financial Officer

Tristan Richardson -- SunTrust -- Analyst

Christopher Tillett -- Barclays -- Analyst

Terran Miller -- Cantor Fitzgerald -- Analyst

Elvira Scotto -- RBC Capital -- Analyst

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