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Plains All American Pipeline (NASDAQ:PAA)
Q2 2020 Earnings Call
Aug 04, 2020, 5:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good day, and welcome to the PAA and PAGP second-quarter 2020 earnings call. Today's conference is being recorded. At this time, I would like to turn the conference over to Roy Lamoreaux. Please go ahead, sir.

Roy Lamoreaux -- Vice President, Investor Relations, Communications, and Government Relations

Thank you, Dan. Good afternoon, and welcome to Plains All American's second-quarter earnings conference call. Today's slide presentation is posted on the Investor Relations news and Events section of our website at plainsallamerican.com, where an audio replay will also be available following our call today. Later this evening, we plan to post our earnings package to the investor section of our IR website, which will include today's transcript and other reference materials.

Important disclosures regarding forward-looking statements and non-GAAP financial measures are provided on Slide 2 of today's presentation. A condensed consolidating balance sheet for PAGP and other reference materials are located in the appendix. Today's call will be hosted by Willie Chang, chairman and chief executive officer; and Al Swanson, executive vice president and chief financial officer. Additionally, Harry Pefanis, president and chief commercial officer; Chris Chandler, executive vice president and chief operating officer; Jeremy Goebel, executive vice president, commercial; and Chris Herbold, senior vice president and chief accounting officer; along with other members of our senior management team are available for the Q&A session of today's call.

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

Willie Chiang -- Chairman of the Board and Chief Executive Officer

Thanks, Roy. Good afternoon to everyone, and thank you for joining us. I hope that you and your families are safe in what seems like a new normal environment for all of us. At PAA, our organization has adapted to additional COVID protocols in the field, social distancing and working remotely for those that can.

We continue to operate safely, reliably, and I'm very proud of our team as we are having our best year-to-date safety metrics as measured as total recordable injury rate, and we are achieving levels that are better than half where we were five years ago, both in safety and key environmental metrics. This afternoon, we reported second-quarter adjusted EBITDA of $524 million. These results reflect slightly favorable performance in our fee-based and supply and logistics segments relative to the revised full-year guidance we furnished in May. A summary of our performance and an overview of our call is reflected on Slide 3.

Al will discuss our results in greater detail during his section. I wanted to take a few moments to provide context for today's call and to discuss our updated guidance. I also want to highlight our progress on increasing profitability and free cash flow through reducing costs, executing key projects and further optimizing our capital program. We continue to believe that long-term energy fundamentals are constructive.

That being said, as illustrated on Slide 4, in the near term, this continues to be a dynamic and unprecedented environment for our industry. As anticipated in response to COVID-induced demand destruction in the weeks following our first-quarter earnings call in May, North American producers responded aggressively by shutting in significant levels of production, limiting the amount of storage builds and mitigating the risk of testing storage maximums, while refinery utilization gradually began to increase. The previously steep contango market structure tempered and crude oil prices improved the levels that supported producers' ability to bring previously shut-in production back online in June. However, the U.S.

Lower 48 horizontal rig count continued to decline and currently sits approximately 20% of 2019 peak levels. Our current expectation is that production will continue to slowly recover from the trough in May through year-end as shut-in production comes back online and some completions continue. We forecast the Permian to end the year approximately 4.1 million barrels a day, slightly better than our expectations earlier this year. I would highlight that we expect the market to continue to be dynamic in the near term, influenced by multiple factors of uncertainty, including the pace of demand recovery due to potential COVID resurgence and geopolitical developments.

A return to longer-term sustainable production growth ultimately remains a function of the timing and the pace of demand recovery, as illustrated by the third -- various third-party estimates of demand recovery reflected in Slide 5. Despite the near term uncertainty, we remain constructive in our long-term view of global energy demand. We believe the world needs U.S. energy, the Permian Basin is critical, and our positioning supports a positive and a constructive outlook for our business.

As Al will discuss in further detail, this afternoon, we increased our 2020 adjusted EBITDA guidance by $75 million or 3% to plus or minus $2.5 billion, with all three segments contributing to the increase. We are squarely focused on increasing our free cash flow with the expectation of generating meaningful free cash flow after dividends and enhancing our financial and operating position. You will note a new free cash flow disclosure in this quarter's update, which I will also comment on. In addition to increasing guidance for our adjusted EBITDA, we have further reduced our 2020 and 2021 capex program by an additional $100 million.

I would note that our capital investment is coming down meaningfully in the second half of the year as we complete and put key projects in service. As reflected on Slide 6, we invested approximately $650 million in expansion capital in the first half of 2020, and we expect to invest approximately $350 million in the second half of the year. In 2021, we expect -- we currently estimate approximately $450 million of expansion capital investment as we complete our investments in the Wink to Webster and Diamond Capline projects. We expect to further lower levels of capital investment in 22-plus as we focus on smaller projects to connect production and improve returns across our system.

Project updates are outlined on Slide 18 in the appendix, and I highlight the following: we placed our Martin Hills terminal expansion in Canada into service during the quarter; our Red River, Saddlehorn and St. James expansions are on track to be in service by year-end; the Wink to Webster JV continues to progress. The JV's throughput agreements are expected to become effective when the full JV systems entered service, which is now expected in the second half of 2021 with the potential for partial early service in second quarter of 2021. The Diamond and Capline projects remain on budget, with both projects expected to be in service late 2021.

As summarized on Slide 7, we continue to advance initiatives to optimize our asset portfolio and streamline our business. With respect to portfolio optimization, we have closed or contracted for approximately $440 million in asset sales year-to-date, which includes $190 million expected to close before year-end. We continue to advance $160 million or more of additional divestiture opportunities, some of which could be more challenging to achieve in the current environment and will likely extend into 2021. With respect to optimizing our business, we continue to streamline and drive efficiencies across all aspects of our business.

In May, we estimated the benefit of this process to result in $50 million to $100 million of cost savings for 2020. Based on our progress to date, we're on track to achieve the higher end of our range, which is reflected in our updated guidance. We also expect a significant portion of our savings to endure in future years as we continue to reduce our cost structure. Additionally, our 2020 guidance for maintenance capital remains unchanged at $215 million.

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

Al Swanson -- Executive Vice President and Chief Financial Officer

Thanks, Willie. During my portion of the call, I'll recap our second-quarter results discuss our 2020 guidance and review our current capitalization, liquidity and leverage metrics. As shown on Slide 8, in the second quarter, we generated fee-based adjusted EBITDA of $520 million. Transportation segment results were generally in line with our expectations, but due to the impact of producer shut ins, tight regional basis differentials and the timing of shipper deficiency payments reflects quarterly sequential and year-over-year declines.

We expect to collect the second-quarter shipper deficiency payments in the second half of 2020. Second-quarter facility segment results exceeded expectations, primarily due to operational cost savings and higher-than-expected throughput at certain of our Mid-Continent terminals. On a comparative basis, the segment was in line with second-quarter 2019 despite the impact of asset sales and down sequentially as a result of a multiyear deficiency payment received in the first quarter, as well as the impact of asset sales. Supply and logistics results of $3 million exceeded our expectations as contango-based margin opportunities and more favorable NGL margins offset the impact of shut-in driven volume shortages, timing of inventory costing and the typical NGL seasonal dip that occurs in the second and third quarters.

Now I will shift to a discussion of our 2020 guidance, which is reflected on Slide 9. As Willie mentioned, our revised 2020 adjusted EBITDA guidance of plus or minus $2.5 billion is $75 million or 3% above our guidance provided in May and reflects an increase in all three segments. For the transportation segment, we have revised down our expected average daily volumes by 4%, reflecting second-quarter actual volumes, our current views of anticipated throughput on our system in the second half, as well as shipper MVC deficiencies. Unit margins have improved, reflecting higher expected average tariff rates and our continued focus on reducing operating costs.

I'll note that our updated guidance incorporates the shift between quarters of earnings related to the timing impact of MVC deficiencies relative to billing cycles and the deficiency payments are also contributing to the higher average tariff rate for 2020. With respect to the S&L segment, the guidance increase reflects our second-quarter performance, plus the benefit to the second half of the year from contango opportunities captured to date, as well as the stronger-than-anticipated NGL and crude oil margins. Moving to our capitalization and liquidity, a summary of key metrics is provided on Slide 10. Our reported long-term debt to adjusted EBITDA ratio of 3.2 times benefited from trailing 12-month supply and logistics results of almost $500 million.

As is noted on the slide, the leverage ratio would be 3.7 times if normalized using our initial 2020 S&L adjusted EBITDA guidance, reflecting the leverage slightly above the high end of our target level, thus underpinning our focus on reducing leverage. In June, we completed a $750 million, 10-year debt offering at 3.8%, which will be used to repay our $600 million February 2021 maturity via the par call option during the fourth quarter. We have no other near-term maturities in our current -- our total committed liquidity at quarter end was $2.9 billion. As a result, we did not expect to access the capital markets for the foreseeable future.

As Willie stated earlier in the call, improving our free cash flow is a key objective. And to the extent it exceeds distributions, will be reduced -- will be used to reduce debt in the near term. As shown on Slide 11, our free cash flow through the first six months of the year is a positive $122 million, and free cash flow after distributions was a negative $370 million. Absent short-term changes in working capital associated with hedged inventory storage, we expect our cash generation, combined with lower capital investment, to benefit free cash flow for the balance of the year and into 2021 and beyond.

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

Willie Chiang -- Chairman of the Board and Chief Executive Officer

Thanks, Al. As discussed throughout the call, I want to reinforce, we remain on track with our revised expectations that we articulated in May and we are intently focused on execution during what remains to be a very dynamic challenging environment. We remain constructive on long-term energy demand as population growth and the quest for better living conditions will drive global energy demand in the years to come. Ultimately, the world needs North American energy.

And as the largest and one of the most economic producing regions, we expect that the Permian will ultimately lead in North American recovery. Given the critical nature of our integrated crude infrastructure system in key North American basins and our large Permian position, which is underpinned by significant volume commitments and more than 2.5 million dedicated acreage and facility dedications, we believe we're very well-positioned over time. Additionally, we're taking the right steps to further streamline our business, to lower our costs, improve free cash flow generation, reduce leverage and return cash to our unitholders after reaching our leverage targets. These actions make us a stronger company and positions us well for the future.

Before I open the call up for questions, I do want to acknowledge and thank all of our PAA team members for their hard work, their commitment and dedication. As our workforce continues to operate in a socially distant world, we remain laser-focused on safe, reliable and responsible operations and managing our business for the long term. A summary of our takeaways from today's call is outlined on Slide 12. With that, we'll look forward to sharing additional updates on our third-quarter earnings call in November.

I'll turn the call back over to Roy.

Roy Lamoreaux -- Vice President, Investor Relations, Communications, and Government Relations

Thanks, Willie. [Operator instructions] Dan, we're now ready to open the call for questions.

Questions & Answers:


Operator

Thank you, sir. [Operator instructions]

Roy Lamoreaux -- Vice President, Investor Relations, Communications, and Government Relations

Shneur?

Shneur Gershuni -- UBS -- Analyst

How are you, guys? Interesting points and up to date. Hopefully, all is well. Maybe to start off a little bit here. Just to start off, I guess, a little bit bigger picture.

When you last gave guidance on the last earnings call, I know when rig counts have bottomed and so forth, and you have a fairly ominous view as kind of an exit rate for the Permian for this year. You've sort of moved the goalpost a little bit with this call today. I was wondering if you can share with us, what are the key signposts that you are watching to -- or are you looking at completion crews as a leading indicator? Are you waiting for sustainable increase in rig count, shutting reversals, crude differentials? Just kind of wondering what are the things that you're looking at? Could it be something like efficiencies like we saw in the last call from an E&P breakeven perspective. Just wondering if you could kind of talk about the inputs or to come up with your views?

Willie Chiang -- Chairman of the Board and Chief Executive Officer

Shneur, let me start, and then Jeremy Goebel will give you his insight on this. Generally speaking, the guidance that we thought on the Permian specifically, where we are right now is pretty much -- it's pretty close to expectations when you think about everything else. The difference is the slope of the curve and how quickly it happened in potential recovery curve, which I think Jeremy can cover, as well as some of his observations on the other things that we're looking at. Jeremy?

Jeremy Goebel -- Executive Vice President, Commercial

Shneur, it's Jeremy Goebel. So we basically had modeled a frac holiday, but the shut-ins and curtailments happened very quickly. So into May, yet rebalancing toward the second half of June. So if you think about it, it was steeper, but it recovered quicker.

And if you think about it, there's three components, those barrels either went into storage. Those barrels didn't get produced because of curtailment or those barrels were just lost because of natural declines, lack of completions. So across the system, we see producers now getting into starting to stabilize production. So I think our exit rates, plus or minus 100,000 barrels a day, there's some movements in between.

I'd say volumes now recoveries, curtailments came back quicker than we thought, but you're going to experience declines. So I think people are getting back to work slowly. But you're going to have a significant inventory of DUCS, so we're going to manage -- watch completions. We're going to watch rigs.

But I think in general, you see maintenance capital and articulated by all the upstream producers. Everyone is looking to stabilize production toward the end of the year and maintain production until they see higher prices. So I think everyone's articulated what their plan is going to be, and we see that across our system as volumes stabilizing as opposed to the volatility we saw in May and June.

Harry Pefanis -- President and Chief Commercial Officer

Yeah. So the other thing is, all this is based on kind of a plus or minus $40 crude oil price. It's really stabilized in here. It seems to be point to stay in this range, but all those assumptions are based on the type of pricing.

Jeremy Goebel -- Executive Vice President, Commercial

Yeah. I think a big difference of what we thought may happen is because of the proactive nature of the producers shutting in, we're really -- we were able to avoid this filling up of storage, which would have created a knee-jerk reaction across the system, which would have been more severe than what's happened. So I think the crude oil price is where they are has helped that. And the proactive -- or the proactive nature of what the producers did helped the crude oil price and helped kind of avoid a containment problem.

Shneur Gershuni -- UBS -- Analyst

No, that makes perfect sense. Really appreciate the color on that. Maybe as a follow-up question. Your capex again.

And just wanted to focus specifically on this $100 million reduction. Is this just you're finding ways to do the same things for less, and that you've -- and things are just costing less and nothing is really changing in terms of what you're putting in terms of assets? Or have you scaled back some projects a little bit as well here? I'm just trying to understand if there's kind of an impact in terms of output for '21 and '22 and beyond, or things are just costing $100 million less than what you previously thought?

Willie Chiang -- Chairman of the Board and Chief Executive Officer

Well, Shneur, I'll start again. Clearly, we've said over and over again, we are focused on improving our cash flow and capex spend. Any spend we've got is precious and we've got an intense focus and laser on how do we avoid spending capex. We have an internal term that we use.

It's must do and no regrets capex, right? So to answer your question, it's really a little bit of all the above, but I'll ask Chris Chandler to comment.

Chris Chandler -- Executive Vice President and Chief Operating Officer

Yeah. Thanks, Willie. This is Chris Chandler. We're always looking for ways to optimize scope and improve execution efficiency on our projects.

We have seen some material and labor cost deflation. And of course, with the slowdown in upstream development, we're able to execute projects more efficiently without paying the expedite equipment or material or paying over time to complete work. We've also been successful in optimizing the scope of our larger projects, including Wink to Webster and Diamond Capline. This might be things like number of tanks or size of tanks at origin or destination facilities.

And finally, we have deferred several projects in Canada to beyond the 2021 time frame. So it's really a combination of a number of efforts, like Willie mentioned, to continue to bring down our capital spend.

Willie Chiang -- Chairman of the Board and Chief Executive Officer

And maybe just a little bit about '22 beyond, Shneur. We guided to $450 million of capex in 2021. Just a little bit over a third of that is on Wink to Webster, our Capline and Diamond project. So when you think about that and you think about 2022, it really sets us up to be able to lower our expectations on what we're going to spend on capital in '22 plus.

Shneur Gershuni -- UBS -- Analyst

Perfect. That makes a ton of sense. Really appreciate the color, guys. I have some more questions, but I'll jump back in the queue.

Have a great and safe day.

Willie Chiang -- Chairman of the Board and Chief Executive Officer

Thanks, Shneur.

Operator

[Operator instructions] And we'll take our next questionary in queue.

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

This is Jeremy Tonet from J.P. Morgan. Just wanted to start off, if I could, there was significant contango opportunities in the quarter. And just wanted to see how that translated into your results.

How much of that did you secure kind of in long-term contracting and showed up on the facility side versus maybe shorter-term contracting showed up in the S&L side? And just trying to get a feeling for how that dynamic played out.

Willie Chiang -- Chairman of the Board and Chief Executive Officer

Jeremy, I think Harry can cover that for you.

Harry Pefanis -- President and Chief Commercial Officer

Yeah. So from a contango perspective, we captured all of that on the S&L side, not on the in the facilities. And it probably looks muted, and that's because of a couple of things. First of all, one, we had under deliveries from producers, so we weren't fully able to utilize all the contango storage that we had available.

Secondly, a lot of the positions were put on, on a term basis. So we were looking at longer-term positions rather than just doing short one-month positions. So you'll see some of that come across in future months. And then the third component of it that sort of muted it was, particularly in Canada, the inventories are on a weighted average cost basis.

So just the way that weighted average cost mechanism works, not all the profits that were probably generated within the quarter actually occurred in the quarter. They were at least spread out over the balance of the year. So all that is reflected in the guidance for the balance of -- be offsetting that for the balance of the year, those -- there are tighter differentials. And spreads that we've only been able to capture historically, won't be -- we not anticipate that those will be as robust as we thought they might have been earlier in the year.

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

Got it. That is helpful. And then just wanted to get into the guidance a little bit more, I guess. I think the transportation volume guidance went down a little bit versus what you last said, but the EBITDA went up.

So just wondering what kind of the moving pieces are now versus then to drive that if it's kind of different movements in different basins, long-haul for short haul, if you could just give us a flavor for how the different basins kind of changed in this guide versus the last, that would be helpful.

Jeremy Goebel -- Executive Vice President, Commercial

This is Jeremy. Part of that was in the reduction is you've got lower volumes, but you collect the MVC. So EBITDA will go up correspondingly with lower volumes. We expect that to correct itself over the course of the year.

Because if you think about it, we talked about the issues within May and June. Pricing suggested the barrel should stay in the basin. So it made no sense for the marketers to ship a barrel from Midland to the Gulf Coast. They left it in Midland to take care of shorts and went another directions, or went in the storage or they didn't contain those they were under produced.

So that will reflect itself and EBITDA will show up if the volumes won't show up. On the gathering side, that's more of a natural if it's produced, it shows up. That's the way I would think about that. Lower guidance for transportation on share volume movements, but EBITDA will reflect that we were paid for the movement.

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

OK. Maybe just to complete it then, what type of MVC dollar value do you expect to show up in the next quarter to kind of make it all come together?

Jeremy Goebel -- Executive Vice President, Commercial

It's in the bulk of $25 million. [Inaudible] Q2, Q3.

Operator

[Operator instructions]

Keith Stanley -- Wolfe Research -- Analyst

Keith Stanley at Wolfe Research. So first, I just wanted to confirm, Jeremy, I think you said $40 oil, you'd expect, kind of flatter production year-end '21 versus year-end '20 in the Permian. Is that your best sense right now? And does that require rigs to come back or more leading on DUC inventory?

Jeremy Goebel -- Executive Vice President, Commercial

Keith, this is Jeremy. For a flattish case, that would be largely reliant on DUC inventory. For a case where you see -- the way we look at it is when rigs show up at six to eight months before the volume impact, so any improvement in activity is unlikely to happen in the first part of next year. We view it as more of a mid- next year.

So a lot of the scenarios we're looking at is roughly flattish to slight growth. The way to think about it is you had an inventory of uncompleted wells to -- in the Permian specifically to match 400-plus rigs. You immediately ramp down over two to three months to the 125 to 135 rigs. But you had substantial uncompleted inventory, plus those rigs that were drilling when the wells weren't completed.

So there's some surge capacity in there. We don't necessarily think that's going to drive growth. But that's going to create some noise in forecasting production. But candidly, for an impact of a rig because of pad drilling and the processes they go through now, it's close to six months before you see anticipated impact to production.

So we would think that, in a very likely case, you could hope production flat with the rigs you have today, and you probably need to start bringing rigs on toward the end of next year or late -- early into 2022 for growth.

Keith Stanley -- Wolfe Research -- Analyst

Great. That's very helpful. And then second question, I'm just trying to square. So your volume guidance went down.

But it sounds like your Permian Basinwide volume outlook is now a little better on the margin than the last call. Is that a function of kind of you guys being a little more exposed to the Delaware versus the Midland? Or just any color on your system versus Basinwide for the year?

Jeremy Goebel -- Executive Vice President, Commercial

The way I look at it, though, is impacts to us can be -- it's revenue barrel, right, on our guidance. So that could be touched 3 times. So any movement it amplified, so changes in forecasting. I'd say that we feel strongly about our assets and where they're positioned and where volumes will be.

I think a lot of that is noise on the long-haul side from the MVCs. I think that's predominantly where it is on the gathering. We have a very healthy gathering system connections. We're seeing a lot of activity in the Northern Delaware and the Western Delaware, and our Midland Basin assets are holding in well, too.

I think this is largely driven by long-haul in MVCs.

Keith Stanley -- Wolfe Research -- Analyst

OK. Got it. That makes sense. Thank you.

Willie Chiang -- Chairman of the Board and Chief Executive Officer

So it's not the gathering piece of the business.

Operator

[Operator instructions]

Ujjwal Pradhan -- Bank of America Merrill Lynch -- Analyst

Good afternoon, everyone. This is Ujjwal Pradhan, Bank of America. Firstly, I just wanted to get an update on what you're seeing in your gathering accretion in the Permian? And maybe perhaps if you're in a position to update your outlook and some of the high double-digit, exit-to-exit decline bridge that you had referenced in the past. Some of your Permian crude gathering peers have noted some improvement in volumes in Midland since May and have made some positive revisions to their outlook.

So anything you can provide I would appreciate that.

Willie Chiang -- Chairman of the Board and Chief Executive Officer

So Ujjwal, I think Jeremy covered our kind of our volume outlook and the shape of the curve. I don't know if there's anything else specific that you want to know. Jeremy, you have anything to add or?

Jeremy Goebel -- Executive Vice President, Commercial

Ujjwal, this is Jeremy. We don't give specific gathering asset guidance. But I'd say -- like I said to the previous call, we feel good about the activity and things are holding in throughout the end of the year. I think we -- I think our guidance reflects where we see volume to be.

And we're not disadvantaged relative to any gathering assets, and we put the quality of the acreage under ETRs relative to anyone. As Willie mentioned earlier, between facility and acreage dedications, we've got over 2.5 million acres between Texas and New Mexico, and we feel strongly with it. We just don't give specific asset guidance.

Ujjwal Pradhan -- Bank of America Merrill Lynch -- Analyst

Understood. Appreciate that. That's helpful. And just to clarify some of your comments on the drivers of the transportation segment EBITDA update here.

Maybe if you -- would you be able to provide color on, sort of, the bulk of volume declines -- where the bulk of the volume declines are below MVC? It sounds like it's mostly on the long-haul side. But also, how close the current volumes are to MVCs. So trying to get a sense of under recovery circumstance, how close we are to those levels?

Jeremy Goebel -- Executive Vice President, Commercial

Ujjwal, this is Jeremy. I would say that the changes in the basin reflect change in our long-haul system for the most part. You saw -- when we said on the last call that we were forecasting close to 2.5 million barrels a day of declines from March to May on onshore U.S., the EIA data has come out in support of that. They see a steep percent decline there, and you see volumes ramp up through this quarter.

And in the next quarter, that's going to be the shape of what it looks like on a lot of our assets. I'd say we'd reflect the basin or some proxy for it.

Ujjwal Pradhan -- Bank of America Merrill Lynch -- Analyst

Got it. Got it. And a quick one, if I may. Just on the cost savings initiatives and the number that you have quantified toward the higher end of the range, around $100 million this year.

Are you able to provide some color on what are some of the specific savings that you have made? What type of initiatives they were and how much can we expect to be ratable in 2021 and beyond?

Willie Chiang -- Chairman of the Board and Chief Executive Officer

Yeah. Chris can give you a little more insight. We do expect to have a good portion of that carryover into following years. Our efforts here are really how do we get lower our cost structure across the company through a number of different things, whether it be organizations, systems, efficiencies and things.

Chris, do you want -- do you have something you want to give some insight?

Chris Chandler -- Executive Vice President and Chief Operating Officer

Sure. Yeah. This is Chris Chandler. The organization has really stepped up and delivered cost savings really almost across all of our categories.

I'll give you some examples. We've seen reductions in personnel costs. We've tempered hiring and replacing any vacancies with employees that we've redeployed internally. We've looked at our operations for the next two years and reoptimized all of our maintenance activities around those expected operations.

So for example, tanks that we were going to take out of service earlier in the year, we've been able to delay until next year to utilize in contango storage, yet still within, of course, integrity requirements and regulatory requirements. We've seen a large reduction in travel and entertainment expenses, as you would expect. Our supply chain organization has been very busy, competitively bidding both materials and services, and we've seen significant savings there. And then finally, our technical resources, instead of focusing on expansion projects, have really looked internally to optimize our systems and are finding ways through number of pumps we run and which pump stations we operate and the trade-off between horsepower and drag-reducing agents to lower the operating cost on our pipelines, even at the same through part of the same volume.

So it's really -- it's in every category, and we're seeing some very good success. And like Willie said, we think we're going to be able to carry that into 2021 and beyond, even as volumes recover.

Willie Chiang -- Chairman of the Board and Chief Executive Officer

One of the things we really pressed forward on is not setting a dollar value. We really challenged our organization, how do we become as streamlined as we possibly can? And our team hasn't let us down, and we've got a number of initiatives that Chris articulated in a number of them. But we're going to keep pushing on this because it's a continuous effort.

Operator

[Operator instructions]

Pearce Hammond -- Simmons Energy -- Analyst

This is Pearce Hammond with Simmons Energy. Thanks for taking my question. I appreciate your comments, Willie, on the divestitures and the prepared remarks. And in light of the recent Berkshire hathaway transaction with Dominion, I wanted to get your perspective on, do you think valuations are attractive for divestitures in the current market? And do you see opportunities to further streamline and optimize Plains through additional divestitures?

Willie Chiang -- Chairman of the Board and Chief Executive Officer

So the answer is, we're always looking at our assets to see what makes sense for us and what doesn't, right? If it is worth more to others than it is to us, and we strive for that win-win-win for the buyer, the seller and the employees to get the asset over to a business that can maximize the value. So I made a comment about a number of transactions that we're currently working on. I can't give you any more resolution on that, because we're in the middle of some of those things. But to answer your question, we are absolutely looking at opportunities to not only just asset sales, but we've been -- one of our strategies have been with strategic joint ventures to try to optimize capital efficiency where you can either share cost synergies, commercial synergies, capital synergies.

So those are obviously in play. And then the larger transactions, there's nothing that drives staff to do anything now. We've got a pretty, pretty identified path that we're on. And if we are able to do the things that we want to do, we think it's going to unlock value in our company, which will help us, if there is ever an opportunity, to do something broader.

As far as the Berkshire deal, I really can't comment on that. But all is open, but we're also very, very cognizant of what makes sense, what's transactionable. And we're focusing on things that we can do.

Pearce Hammond -- Simmons Energy -- Analyst

OK. Thank you, Willie.

Jeremy Goebel -- Executive Vice President, Commercial

Pearce, this is Jeremy. I would just think that the Berkshire transaction, that's a unique set of assets and unique fit for a buyer. I still think there needs to be some help in the term loan being the credit market to bring specific buyers back to it. I think a lot of the strategics are on the shelf right now.

So that's not necessarily a proxy for all transactions. As Willie mentioned, we're constantly evaluating our assets and making them generate specific returns, and let's keep it harvested or exit. And so anything in the exit but, we're constantly looking for opportunities to maximize value with third parties. And so we're trying to pair specific assets with specific buyers.

And so the things that we think are candidates for sale, we're waiting to those specific buyers are healthy. We don't want to give anything away.

Pearce Hammond -- Simmons Energy -- Analyst

Thank you, Jeremy. And then a quick follow-up. If DAPL is shut down, would that be a net benefit for Plains because of your rail assets?

Jeremy Goebel -- Executive Vice President, Commercial

Pearce, this is Jeremy. We have the Bakken North asset in was Canada that can connect from trend to Regina. So we can benefit on the pipeline in the rail side and also from an S&L standpoint. So I think there are opportunities there.

We're waiting to see how that plays out, but we would look to maximize value to Plains and its assets if something were it happened. But candidly, from a regulatory standpoint, everybody is watching it to see it as a precedent.

Willie Chiang -- Chairman of the Board and Chief Executive Officer

Yeah. I'll just make a comment, Pearce, on DAPL. We are not close to it because we're not a partner, and we certainly don't operate it. But one thing that we are watching with a lot of care is what precedent does set.

Again, I don't know the details, but to have a line that's been operating for a number of years safely being shut down for different reasons, it's an environment of uncertainty and it's certainly something that we don't see the benefit of. So that's one. And we always hate to see rules and regulations get confusing. And to Jeremy's point, with the assets that we have, it gives us a lot of optimization opportunity to handle not only the DAPL experience.

But if there were interruptions elsewhere, if there's an interruption -- as far as hurricanes and the Houston Ship channel, Corpus Christi, there's -- having the asset base that we have gives us the flexibility to move barrels where they need to go.

Operator

We'll take our next question in queue.

Michael Lapides -- Goldman Sachs -- Analyst

Michael Lapides from Goldman Sachs. Somebody asked the question about asset M&A earlier. And I want to kind of take a step back and really ask the question of, when you look around the portfolio, and obviously, the Permian is core. And obviously, assets like Capline are core and Diamond.

But you have a lot of assets in a lot of other basins where you don't necessarily have a lot of scale, outside of the Permian and the storage at Cushing in Capline and at the Gulf Coast. How do you think about what potentially is noncore or what the, kind of, the optimal portfolio longer term, not necessarily in the next 12 or 24 months, but kind of three to five, five to seven years from now, what that would look like for the company?

Willie Chiang -- Chairman of the Board and Chief Executive Officer

Well, Michael, it's a tough question to answer because I'll give you our fundamental strategy, maybe that will answer it. It may help you understand how we think about it. I mean, clearly, with the base we've got, we do want to build around existing assets we have, build optimization capabilities in flexibility. Those are all projects that you've probably seen us do.

In areas that we don't have an advantage or a significant presence, you've seen us obviously try to -- try to find the right home for the assets if they're available. We're not in a position where we have to sell assets for the wrong values, but we are always talking with people, again, trying to unlock what makes sense for different folks. So I think you'll continue to see us build around our base in the areas that you can look at on the map that we don't have as a core -- a core asset base. If there's an opportunity that makes sense for us to do something with someone else there, we obviously would consider it.

We also factor risk. We factor a lot of things, cash flow into it. So it's kind of a hard answer to give you our blueprint on, but hopefully, that helps.

Operator

Take our next question in queue.

Jean Ann Salisbury -- Sanford C. Bernstein -- Analyst

This is Jean Ann Salisbury from Bernstein. Do you expect U.S. crude exports to fall off in the second half? And would that reduce the share of Permian flows going to Corpus versus other -- versus Houston or Cushing?

Jeremy Goebel -- Executive Vice President, Commercial

Jean Ann, this is Jeremy. Right now, we're seeing strong flows to the Gulf Coast. Obviously, differentials and demand will play into that. But absolute volume of production is down, so you would expect from a March standpoint, if exports to go down, relative share of Corpus and Houston, Corpus has been increasing.

As Wink-to-Webster comes along, that could change balances. So I think there's a few things that will continue to move it. But demand and location of demand is going to have a big impact on that.

Jean Ann Salisbury -- Sanford C. Bernstein -- Analyst

OK. So you wouldn't necessarily say that because Corpus is so export heavy, that it would be negative, I guess, if the U.S. starts to export less.

Jeremy Goebel -- Executive Vice President, Commercial

Not necessarily because the demand is there simply from all the MVCs across the pipes and the dock. They're going to pull as many barrels as they can that are physically available. I don't think from an export standpoint, we're not seeing -- from a quality standpoint, we're seeing normalization between Houston and Corpus. And when that happens, it's just going to be a matter of demand and who has access to barrels.

Jean Ann Salisbury -- Sanford C. Bernstein -- Analyst

OK. That makes a lot of sense. That's helpful. And then is there any appetite from customers today to blend and extend contracts? Or is now not really the time?

Jeremy Goebel -- Executive Vice President, Commercial

Jean Ann, this is Jeremy again. I would say that there's been a bit of shock between March, April, May and June. As we get into this, those discussions will be had across all assets. We're extending contracts in the field and doing things -- doing a lot of different things with our customers, but those discussions will be had to optimize longer-term relationships with customers.

But it's a little bit too early. There's a lot of bankruptcies going on. So those contract discussions are being had with individuals. I think that the next wave of discussions on the long haul, that will be part of it, for sure.

Operator

We'll take our next question in queue.

Tristan Richardson -- Truist Financial -- Analyst

Tristan Richardson with Truist. Hey, really appreciate all the comments you guys gave on the second half. Just one quick question around seasonality in the second half. I think the 3Q directional estimate you share suggest something a bit higher and/or flat with 4Q versus the normal seasonality.

Is part of that dynamic, the expected timing of MVC deficiency payments or the timing of contango capture? Curious some of the factors making that second half a little more ratable than we'd normally see.

Willie Chiang -- Chairman of the Board and Chief Executive Officer

Tristan, I think you covered the two of them. MVC timing impacts in contango, as Harry outlined. I don't know if anyone else has anything to add to that.

Jeremy Goebel -- Executive Vice President, Commercial

This is Jeremy. The one thing the seasonality in NGLs is always in the third quarter versus the fourth quarter. So you definitely will see that.

Al Swanson -- Executive Vice President and Chief Financial Officer

But think some of the contango is mitigating --

Jeremy Goebel -- Executive Vice President, Commercial

A stronger contango margins in the third quarter to the fourth quarter and actually got prospers are a little stronger in the third quarter and in the fourth quarter, too.

Tristan Richardson -- Truist Financial -- Analyst

That's great. And then maybe just one on contango opportunities in general. I think is there a way to frame up the total size opportunity of spread opportunities that were created by all this disruption? Or another way to think about spread opportunities that might be, sort of, nonrecurring just with all the disruption we saw in March, April and May and June.

Willie Chiang -- Chairman of the Board and Chief Executive Officer

I'll make a comment and others can jump in. One of the things we consciously tried to do is increase our fee-based -- our fee-based earnings. So if you went back a number of years, we might have more storage available to capture some of these. Our intention now is the assets that we've got, if we can get fee-based service out of it, it makes more sense for us to do that than try to keep tanks empty for contango or basis spread arbitrage.

Harry or Jeremy, do you want to add anything?

Harry Pefanis -- President and Chief Commercial Officer

No, I think that covered it.

Willie Chiang -- Chairman of the Board and Chief Executive Officer

So I didn't answer your question, but it's less than it's been in the past.

Operator

We'll take our next question in queue.

Gabe Moreen -- Mizuho Securities -- Analyst

Gabe Moreen with Mizuho. Just two quick questions for me. One, if you can just comment on sort of the working capital return you're expecting in the back half of the year. Assuming no other, I guess, contango or other S&L opportunities present themselves?

Willie Chiang -- Chairman of the Board and Chief Executive Officer

Can you ask that again? I'm sorry, you broke up there. Gabe.

Gabe Moreen -- Mizuho Securities -- Analyst

Sorry. Can you hear me better now?

Willie Chiang -- Chairman of the Board and Chief Executive Officer

Yes.

Gabe Moreen -- Mizuho Securities -- Analyst

Just I was going to ask about whether the magnitude of working capital return in the back half of the year, assuming no other contango or S&L opportunities present themselves?

Al Swanson -- Executive Vice President and Chief Financial Officer

This is Al. As you know, working capital and that is difficult to forecast. We clearly built a decent amount of contango storage and NGL into the second quarter -- first quarter to second quarter with seasonal build, prices, margin, all that come into play. So it's one that we will not start forecasting working capital swings.

We won't be doing a true forecast in our guidance for how we're defining free cash flow for that very reason, because prices at the end of a period can impact margin and all that.With that said, clearly, as it relates to the activity, we think, over periods of time, but four quarters, a lot of that seasonality comes out, then it's purely price, and our focus is going to be on generating free cash flow.

Gabe Moreen -- Mizuho Securities -- Analyst

OK. Great. And then maybe, Willie, if I can follow-up on your comment, on a third of the 2021 growth capex being in larger projects. Does that imply that the $300 million that's left is your base level of GNP growth capital that you're spending kind of year in, year out? Just curious if you would characterize it that way.

Willie Chiang -- Chairman of the Board and Chief Executive Officer

I would say in the right neighborhood, but I don't want to quote specific numbers because it's two years out. But it's a fair way to look at it.

Operator

We'll take our next question.

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

Good afternoon, Colton Bean, TPH. So just to follow-up on some of the questions around transportation. Is it possible to speak a bit more explicitly to what type of volumes you all have seen over the course of July?

Jeremy Goebel -- Executive Vice President, Commercial

Colton, this is Jeremy Goebel. I would say that the vast majority of curtailments were -- we've seen gone outside of the Williston Basin in -- by July. So the declines we've seen have been offset by -- some additional completions we've started to see in June and now in July and in August, we expect more. So I'd see activity ramping and curtailments are behind us.

I'm not going to talk about specific assets, but I would say that the production in July exceeded our forecast or estimates.

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

Understood. And then just as you look at capital needs expected to average $500 million or less, sounds like potentially a decent bit less. It does seem like excess free cash flow should continue to grow. So as we think about allocating that capital, is you reaching your leverage target a gating event to allocating more cash to unitholders? Or does equity valuation also factor into that priority ranking?

Harry Pefanis -- President and Chief Commercial Officer

Yeah. In the near term, leverage will take priority, but clearly, do we have to exactly hit our target? That will be a question. We're a bit of ways, as I've mentioned in our or in the prepared comments about where we think our leverage is in a more challenged S&L environment, which is what we're expecting going forward. But we will be focused on using the excess in the near-term for debt reduction, leverage reduction.

And then we'll be looking to allocate to equity holders, whether it's distribution increases and/or share repurchases. And those decisions are far enough out that it would be premature to talk about how we'll approach that.

Willie Chiang -- Chairman of the Board and Chief Executive Officer

The other thing we'll look at carefully is it's all also a fact of kind of what does the future look like, right? So if there's a better certainty of the future, that may change the story a little bit. So it is a bit of a moving target. But clearly, the message is we want to get our -- we want to get our [Inaudible] down to lower levels. I think we have time for one more question.

Can we go ahead and take that, please?

Operator

We'll take our last question in queue.

Ganesh Jois -- Goldman Sachs -- Analyst

This is Ganesh Jois from Goldman Sachs. Quick question. How would you react to the decision that DT announced this morning to reduce its oil production for the long run? And if this becomes a longer-term trend, how do you view the capital intensity of your business and some of the decisions that you have to make?

Willie Chiang -- Chairman of the Board and Chief Executive Officer

Well, Ganesh, on volume -- lower volumes, I think, again, back to what we're focused on is how do we reduce our capital intensity, right? And I think you've seen us take actions to do that. Portfolio optimization played a piece in that. And it's just very difficult to lay out a strategy on what you might do with your portfolio without knowing timing, extent and duration of what people are doing. But directionally speaking, to answer your question, we would obviously adapt.

And again, everything we're doing is to try to put the position, put the company in a position where we flourish in the future. And so we would not be -- we would take that input and then just adjust our capex programs appropriately or look for more opportunities to some strategic JVs. In some cases, maybe there's an opportunity for a line to go into a different service that may help a less carbon-intensive world. So until we have better definition of that, it would be hard to kind of articulate a specific strategy.

Operator

This concludes the Q&A. I will now turn it over to Willie for any closing remarks.

Willie Chiang -- Chairman of the Board and Chief Executive Officer

Well, great. Listen, thanks again for everyone dialing in. We hope you remain safe, and we look forward to talking to you all soon. Thank you very much.

Operator

[Operator signoff]

Duration: 54 minutes

Call participants:

Roy Lamoreaux -- Vice President, Investor Relations, Communications, and Government Relations

Willie Chiang -- Chairman of the Board and Chief Executive Officer

Al Swanson -- Executive Vice President and Chief Financial Officer

Shneur Gershuni -- UBS -- Analyst

Jeremy Goebel -- Executive Vice President, Commercial

Harry Pefanis -- President and Chief Commercial Officer

Chris Chandler -- Executive Vice President and Chief Operating Officer

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

Keith Stanley -- Wolfe Research -- Analyst

Ujjwal Pradhan -- Bank of America Merrill Lynch -- Analyst

Pearce Hammond -- Simmons Energy -- Analyst

Michael Lapides -- Goldman Sachs -- Analyst

Jean Ann Salisbury -- Sanford C. Bernstein -- Analyst

Tristan Richardson -- Truist Financial -- Analyst

Gabe Moreen -- Mizuho Securities -- Analyst

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

Ganesh Jois -- Goldman Sachs -- Analyst

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