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Crestwood Equity Partners LP (NYSE:CEQP)
Q3 2020 Earnings Call
Oct 27, 2020, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good morning, and welcome to today's conference call as Crestwood Equity Partners provides third-quarter 2020 financial and operating results. Before we begin the call, listeners are reminded that the company may make certain forward-looking statements as defined in the Securities and Exchange Act of 1934 that are based on assumptions and information currently available at the time of today's call. Please refer to the company's latest filings with the SEC for a list of risk factors that may cause actual results to differ. Additionally, certain non-GAAP financial measures, such as EBITDA, adjusted EBITDA and distributable cash flow will be discussed.

Reconciliations to the most comparable GAAP measures are included in the news release issued this morning. Joining us today with prepared remarks are Chairman, President and Chief Executive Officer Bob Phillips; and Executive Vice President and Chief Financial Officer Robert Halpin. Additional members of the senior management team will be available for the question-and-answer session with Crestwood's current analysts following the prepared remarks. [Operator instructions] At this time, I would like to turn the call over to Bob Phillips.

Bob Phillips -- Chairman, President, and Chief Executive Officer

Thanks, operator. Good morning to everybody, and thanks again to all of you for joining us. I want to start every meeting, as we typically do, hoping that everybody on the call, your loved ones, your family are healthy and safe as we continue to navigate the pandemic and all of the issues that the country is facing right now. I want to, most importantly, complement all the Crestwood employees that have continued to show dedication and resolve during the third quarter and during the pandemic.

This has not been easy on anybody, whether you work in the offices in Houston, Kansas City or out in the field, across the 38 states where we operate, our folks are doing a tremendous job for Crestwood and for our investors, and I really appreciate that. Health and safety is always our top priority at Crestwood. We want to protect our employees, our contractors, our business partners, the people in our local communities. That's always been our No.

1 priority, and we'll continue to be even during the pandemic. Now let's turn to the quarter. Another really strong quarter for Crestwood. We continue to knock them out quarter after quarter, notwithstanding the challenges we face in the market.

Most important milestone that we achieved in the third quarter is generating positive free cash flow after capital investments and distributions to both our preferred and our common unitholders. I think the portfolio performed very well during the quarter exactly as it should. Robert is going to give you more color around it, but we built this portfolio to be diversified. And to not only mitigate against the risk of commodity volatility, which we can't control, but also, in many cases, to take advantage of the opportunities that commodity volatility creates in our market.

So Robert is going to give you more color around that. We delivered adjusted EBITDA of $136 million; distributable cash flow of $87 million; a leverage ratio, I'm really proud of, 4.1 times, and a coverage ratio, I'm also proud of, 1.9 times. We kept the distribution flat because of that. These results were up 5% over last year.

Again, we beat consensus, and we're well positioned to exceed the midpoint of our revised 2020 guidance range of $520 million to $570 million, and that midpoint implies 3% to 6% annual growth over 2019. When I think about that, I'm really pleased with where the company is that we could actually grow the business during the pandemic. We're all going to look back on this in the future and be proud of that. All in all, we think that's very good results from the Crestwood portfolio despite some obviously very large obstacles this year for the industry and the country.

Our year-to-date results, I think, also, again, demonstrate the diversity and the resilience of our asset base. In the third quarter, we had significantly lower shut-ins than we originally thought. Most importantly, we had new well activity in the Bakken and the Delaware, and that speaks to the quality of the acreage and the quality of the producers that are dedicated to the Crestwood portfolio. We had record gas volumes on the Arrow system, Gathering and Processing volumes for natural gas hit a record level, very, very important.

It gives us a really strong outlook for the future up there on the Arrow system. And with strip pricing for natural gas at $3 an Mcf and above, we're beginning to actually see active drilling in the Barnett. We've got a very positive outlook for the Powder River Basin as Chesapeake starts to bring production back on in the fourth quarter as they are now receiving higher gas prices, and you know that they have been continuing through a bankruptcy process. So we're very pleased to see that positive step in 4Q and for 2021.

And we also experienced record transportation volumes across our Stagecoach pipelines located up in the Marcellus, that's the dry gas region in Northeast Pennsylvania. Really pleased with the job that the guys have done there. Producers continue to view the Marcellus as very economic at higher gas prices, and so we're seeing record volumes up there. And I guess, finally, our MSL team continues to capture margins in their business well in excess of our underwriting forecast for the newly acquired NGL assets that we bought from plains back in April of this year.

Importantly, we're also beginning to see a trend, which I've been waiting for, for years, seeing more demand around our 76 Bcf of gas storage and our 10 million barrels of NGL storage and we think that's leading to a long-awaited margin improvement for storage as a business. All these things taken together shows tremendous balance and stable cash flows for the Crestwood portfolio. Now let's look forward. When I look at the portfolio, I see that 60% of our volumes are natural gas with about 20% NGLs and 20% crude.

So we're obviously very well leveraged to higher gas prices in 2021 and beyond. Our commercial teams are very active in all three downstream markets, gas, NGLs and crude. They use our integrated system flows, a very efficient plant recoveries because our plants are all brand new. Our market areas storage, they combine it with our truck, our rail and our pipe transportation and our extensive terminal business.

And they optimize and market around all of our assets benefiting from demand pull. We know that's become a hot button topic with analysts and investors. We're seeing improving overall margins and higher throughput because of the job that our marketing teams in Storage and Transportation and marketing, storage and logistics are doing around our assets. We are not just relying on producer drilling plans in our four fee G&P services to drive our cash flow.

And that's another point that I think Robert is going to provide some color on. On that front, as you remember, we spent a lot of expansion capital in 2017 through 2019 to build out excess capacity for our growth G&P assets, to ensure that we could handle full inventory develop by our main producers at the price levels that we saw over '17, '18 and '19. Obviously, the market has changed a little bit. But in our analysis at $40 a barrel and above, we feel very comfortable with our current volume profile.

Over the next couple of years, we think that will continue to support Crestwood's free cash flow, our strong distribution coverage and our continued debt reduction. And at $50 a barrel, it's just math, really, we can accelerate debt paydown and strengthen our balance sheet further, create more financial flexibility that Robert and Will and the finance and corp debt team could use to take advantage of opportunities in the market. Now speaking to G&P. While the pandemic has clearly pushed back the timing of some of that expected G&P growth, I actually see a silver lining in that.

The good news is it extends our inventory runway pretty extensively. And obviously, we don't have to spend much additional capital to generate the cash flow that we originally underwrote when we built those gathering systems and processing plants, and that's allowing our investors to benefit from stable distributions and lower debt and again, more financial flexibility. We think that our portfolio right now gives Crestwood a lot of financial flexibility going into 2021. Clearly, there's been a consolidation phase in the upstream sector.

We think that's coming in the midstream sector. We think our unit price will reflect over time the ability to generate more free cash flow, pay down debt, have financial flexibility to invest in other opportunities as we see them. So now in our press release, we did provide a preliminary view to 2021. Robert is going to lay out a little bit more detail before I hand over the call to him.

I want to importantly address the current operating environment for our sector and where I think we see the industry headed. Energy is clearly in a transition, notwithstanding how the election goes. The industry could probably will continue to see continued pressure on social sentiment, regulations, permitting and cost. And while those may have long-term effects on our industry, it won't change the way we do business today, the businesses that we're in, the value of our assets or the domestic oil and gas industry's importance in bridging the United States to a low-cost energy supply to meet the needs of our consumers.

I don't care what politicians say or how much the regulatory environment changes. This is still a vital, essential, critical industry, and we're proud to be a part of it. Now undoubtedly, investment in renewables will increase over time. But the EIA still forecast that natural gas and crude oil will comprise over 50% of domestic energy demand through 2040.

That gives us a long runway of about 20 years to continue to make money for our investors. None of those changes are going to take place overnight. And Crestwood does not shy away from the business we're in or the value of services that we provide to our customers or the importance of the industry to the country. Instead, as the industry transitions to cleaner energy and a lower growth model for fossil fuels, we believe natural gas will play a prominent role and the midstream sector will continue to improve our sustainability initiatives and be an important part of the energy supply chain.

Since we became the first MLP and one of the first midstream companies to publish a sustainability report back in 2018, we've made a lot of progress. And I'm pleased to say that we're working closely with the Energy Infrastructure Council, and industry leaders like Williams and other EIC member companies, to create a standardized reporting template for ESG for the midstream sector. We're not following ESG trends, we're actually setting them. Crestwood is right at the forefront of that move.

So in 2021, let me just close by saying we'll be starting our second decade as a company. In the first 10 years, we built an impressive portfolio of midstream assets, we built a strong operating platform. We've got some of the best people in the business, some of the best young people in the business. I'm the only old guy still left in the company.

And we built — importantly, we built essential credibility with our customers and our investors. We're going to benefit from all that in our second decade. But more importantly, we want to be a leader in the industry in ESG. We want to lead the midstream and reduce the emissions in the field.

We want to be a leader in environmental stewardship and safety. We want to lead in promoting diversity and inclusion in the oil and gas industry. And of course, we want to be a leader in financial and capital discipline. All those things are our goals and objectives for the second decade of Crestwood Equity Partners.

We're committed to being a leading MLP and a best-in-class midstream company, and we're going to do that through prudent management and a strong balance sheet, which will position us. We hope to be a leader in sector consolidation. Give us a chance to enhance our corporate governance model, allow our investors a greater voice and create more value for our unitholders. And hopefully, if we do that successfully through an industry leadership position, we'll help attract much needed capital back to the sector, to the midstream sector.

So I know that's a lot, but we've got a lot going on in the industry and in the country right now. And I hope our employees and our customers and our investors benefit from a little bit of forward-thinking about the way we think about things here at Crestwood. And with that, I'm happy to turn it over to Robert to discuss the third-quarter results.

Robert Halpin -- Executive Vice President and Chief Financial Officer

Thank you, Bob. During the third quarter, our diversified assets continued to perform in line with expectations, generating adjusted EBITDA of $136 million and distributable cash flow of $87 million, up 5% year over year. As market conditions stabilized during the third quarter, lower shut-ins drove volumes higher and producers in the Bakken and Delaware Basin resumed new well completion activity. Our financial and operational results for the quarter drove a leverage ratio of 4.1 times and a coverage ratio of approximately 1.9 times.

Based on these third-quarter results, we announced a flat distribution quarter over quarter of $0.625 per unit or $2.50 on an annualized basis, which is payable on November 13 to all unitholders of record as of Friday, November 6. Now moving to our operating segment. In our Gathering and Processing segment, EBITDA totaled $108 million in the third quarter of 2020, an increase of 9% year over year. In the Bakken, we had one rig and one completion crew operating on Crestwood's footprint throughout the quarter.

And with that level of activity, we connected 15 new wells to the Arrow system and drove new natural gas Gathering and Processing records across our assets. We expect an additional 20 new wells to be completed to the Arrow system during the fourth quarter, which when paired with the approximately 35 to 40 three-product and 20 to 25 water-only drilled but uncompleted wells or DUCs expected on the acreage at the end of the year, we will see incremental volumes heading into 2021. In the Permian, there are currently five rigs running on acreage dedicated to Crestwood, and we expect an additional 15 to 20 wells to be connected in the fourth quarter, and we are now forecasting new well activity in the Barnett shale, in early 2021, driving a year-over-year cash flow growth on that asset. Our Storage and Transportation segment EBITDA totaled $15 million for the third quarter of 2020 on average volumes of 2.2 billion cubic feet per day.

As natural gas prices have remained strong throughout 2020, we have seen producers shift capital investment back to the Northeast, resulting in increased demand for Storage and Transportation assets in the area from the Marcellus producers as well as the Northeast utilities. Along the Gulf Coast, Crestwood's 32 Bcf of natural gas storage capacity is optimally located to support Gulf Coast LNG markets, power generation and the Mexican export markets. In the Bakken, the COLT Hub saw increased volumes over the second quarter of this year as a result of producers bringing shut-in production back online, completion activity resuming in the basin and producers increasing utilization of crude-by-rail assets, given the regulatory uncertainty around the Dakota access pipeline. As we monitor the DAPL leg process, the COLT Hub is a natural hedge and offers our Arrow customers flow assurance and our commercial team continues to identify new pipeline connections for alternative takeaway capacity.

Finally, in the Marketing, Supply and Logistics segment, EBITDA totaled $12 million in the third quarter of 2020, benefiting from the successful integration and continued optimization of the recently acquired NGL assets. The new assets increased Crestwood's market share by expanding its geographical footprint and providing incremental access to the Conway and Mont Belvieu markets, further diversifying the NGL marketing and logistics platform. As we move into the fourth quarter, Crestwood expects the MS&L segment to benefit from strong seasonal spreads, increased downstream market opportunities and further integration of these recently acquired assets. Now moving to the balance sheet.

As of September 30, Crestwood had approximately $2.6 billion of long-term debt outstanding, including just under $1.8 billion of fixed rate senior notes and $780 million of outstanding borrowings on our revolving credit facility. At the end of the quarter, we had approximately $450 million of liquidity on our revolving credit facility, and we have no debt maturities until 2023. Based on current forecasts, we now expect our year-end 2020 leverage to be below 4.25 times, which was the lower end of our revised guidance range that we provided back in May of this year. During the third quarter, we invested $11 million in growth capital.

And as a result of the significantly reduced capital investment during the quarter, Crestwood generated meaningful free cash flow after distributions. And including the proceeds from the sale of our Fayetteville gathering system in Arkansas, Crestwood generated an excess of $50 million of available cash to continue accelerating our debt reduction initiatives. The divestiture of our Fayetteville asset furthered our strategy of divesting noncore assets to strengthen our balance sheet and to enhance our liquidity. During the quarter, Crestwood used the portion of its free cash flow to opportunistically repurchase a portion of our outstanding 2023 senior notes at a discount to par.

Our No. 1 priority will continue to be on strengthening our balance sheet, and driving leverage at or below our 4.0x target over the next 12 to 18 months. We remain focused on liquidity and continuously evaluate opportunities to optimize our capital structure. Before moving on to the Q&A section, I wanted to provide some preliminary color on what we expect heading into 2021.

Based on current conversations with customers, we expect our 2021 guidance range to be similar to 2020 as a result of ongoing activity in the Bakken and Delaware basins, incremental well connects and year-over-year cash flow growth in the Barnett shale and strong demand for our natural gas, crude oil and NGL storage asset. Benefiting from our previous three years of capital investments and based on current customer activity forecast, we expect growth capital will be less than $40 million and maintenance capital to be $20 million or less in 2021. With the resiliency in our portfolio, driving relatively flat year-over-year cash flow and the significant reduction in year-over-year capital expenditures, we expect to generate meaningful free cash flow after distributions in 2021, which we will continue to allocate toward accelerating debt reduction to achieve our long-term target. We will continue to work closely with our producers in the coming months to finalize our 2021 plan, and we'll provide our full outlook and guidance for 2021 during our fourth quarter call in February.

I am very pleased with the work that Crestwood has done so far through the challenges presented in 2020. The resiliency of our portfolio has allowed us to achieve a key milestone of generating positive free cash flow after distributions this quarter, and we expect full-year 2020 results to exceed the midpoint of the revised guidance that we provided earlier this year. Crestwood's diversified portfolio has been an advantage during this year of volatility, and we continue to take steps to strengthen the balance sheet. While our sector is in the midst of a transition, we continue to see signs of improving fundamentals across the industry, and in our business specifically, which will position us to continue executing on our strategies to build further strength across the company heading into 2021.

At this time, operator, we're ready to open the line up for questions.

Questions & Answers:


Operator

Thank you. [Operator instructions] Our first questions come from the line of Shneur Gershuni with UBS. Please proceed with your questions. 

Shneur Gershuni -- UBS -- Analyst

Good morning, everyone. Good to see that everyone is well. Maybe we can start off on the production side a little bit here. I was wondering if you can expand on the strong Bakken volumes.

What's driving it? Is it higher GORs? Or is it really just a return of shut-ins, and if COVID hadn't happened, this would be kind of the result that you would be seeing? And then maybe as part of that question, if you can talk about the recent mergers that have been announced and will that impact Crestwood? Is there a risk to less activity on your acreage as a result or potentially more?

Bob Phillips -- Chairman, President, and Chief Executive Officer

That's a double-barrel question there. But I got an expert on producer relations who handles all of our Gathering and Processing business and and knows a lot of people and a lot of these companies. So he gets the benefit of knowing how producers are improving their drilling and completion techniques, how producers have worked their way through shut-ins, bringing wells back on, the challenges based with downhole pumps, with the cost of reworking wells and how producers from the Bakken to the Delaware are looking at the world going forward with the inventory position they have and how they are moving toward economical development of these plays. And as I mentioned, Shneur, in my opening comments, we're very lucky and always have been that the acreage dedicated to our core assets, Bakken, Powder and Delaware is El Primo acreage, right in the heart or the core of the play and is acreage that works at low breakeven points, but we've kind of always misused that breakeven economics term in our industry.

That's the point at which you could drill if you wanted to. We're well above that in the areas that we operate. So Diaco Aviki is our senior vice president of Gathering and Processing, and he runs a really good program. He's got great teams in all these basins.

We're well connected with our producers. We talk to them on a daily, weekly basis. We've come a long way from the old days where you didn't get good visibility into the producers' drilling programs until the end of the year and they have to govern their Board and they change their mind five times and then the price changes at the end of the year. And then you got to recalculate all your volumes.

We have an impressive team that manages all of our type curve analysis. We understand GOR and WOR in every basin that we operate in. So Diaco, why don't you just give them a sense for the Bakken and the Delaware primarily. What our producers are thinking? Obviously, we've had two big combinations in both basins with WPX going to Devon.

That's really important to us. We love that deal because we have strong relationships with both of the senior management teams. We know them well, and so that's a great combination. It makes our best producer even stronger financially.

And then in the Delaware, Concho and Conoco, again, two companies we have great relationships with. We've got big dedications from both of them. And so we see that as a win-win as well. Why don't you talk about the Bakken and the Delaware from an economic standpoint, from a producibility, and how we're seeing impressive improvements in productivity downhole, not just in drilling and completion but in production performance as well?

Diaco Aviki -- Senior Vice President of Gathering and Processing

Thank you, Bob. I appreciate the handoff. First in the Bakken, one of the things we didn't highlight despite not setting a daily record water, our water volumes quarter over all quarters that we've had in the past have increased by over 20%. So we broke quarterly records on water by 20%.

And that, along with the gas records that we broke are attributable to our capital program that we put in place years ago, working with our customers extremely closely. ESG is a big-ticket item for our customers as it is a big-ticket item for ourselves. So we work hand-in-hand to ensure that we capture as much of the product as we can into the pipeline. And some of the things that they're doing is absolutely impressive.

The cluster spacing is right on the money, enhancing the ore, enhance productivity with ESP utilization and just keeping amazing amounts of production coming out of these wells. From IP perspective, they are just absolute top, first quartile wells across the basin. And that's extremely impressive and they are getting the cost down, too. The completions from a frac stage perspective, they are doing five more stages than what they did prior to COVID, prior to the pandemic and that sort of incremental improvement from a learning curve perspective we don't see very often.

So their costs are going down. They are doing things such as 3-mile laterals. We're seeing that in the Bakken. We're seeing that become a standard in the Permian.

Again, that drives their costs down even further and increasing the productivity of their wells. So we're quite impressed what our producers are doing. Coming down to the Permian. The combination of Concho and Conoco is outstanding, both of them are very good customers of ours.

We've got great relationships with both of those companies. Conoco, as you know, is also in the Bakken. So there's things that we're trying to do with those guys to extend our relationship. So that's a combination that we're excited to see.

It just makes a stronger customer portfolio for us moving forward. And again, the productivity in the Permian, the well results are outstanding. They are able to better understand delineation of the acreage. We've got over 50 DUCs in the Permian.

I know we didn't mention that in our earnings script, but the Permian, we've got a lot of inventory that it's cheap and will come online in 2021 and beyond in addition to the activity that's ongoing out there. So we look at both those basins very positively, not just now but also in 2021.

Bob Phillips -- Chairman, President, and Chief Executive Officer

Bottom line is, it doesn't take as many wells to hold volumes flat up.

Diaco Aviki -- Senior Vice President of Gathering and Processing

That's right.

Bob Phillips -- Chairman, President, and Chief Executive Officer

That's just math.

Shneur Gershuni -- UBS -- Analyst

Yes. No. That definitely, definitely worked, especially the last comments as well. Since you enjoyed double-barreled questions, another one for you.

Your costs are down circa 8%, 9% when I sort of look at Q3 this year versus Q3 last year. Are there any opportunities to take them down a little bit further? I don't want to take away from the fact that they have been very strong so far. But is there anything else that you are looking at? And then secondly, just a housekeeping question. If you could walk us through the add-backs in calculating your leverage ratio?

Robert Halpin -- Executive Vice President and Chief Financial Officer

Yes. I'll hit the cost side and then let Steven Dougherty, our Chief Accounting Officer, help with some of the cost commentary as well as the leverage profile. So I think when you look at our cost year over year, Shneur, as we've talked about, I mean, we've executed on a number of initiatives to reduce costs across the company. And I think the primary focus was obviously centered around driving a fixed cost base that was appropriate and sustainable in the revised outlook that we had for our business going forward.

And I think we're proud to say we've captured the vast majority of that and don't see any material opportunities going forward nor do we see any need for escalation going forward as our business continues to rebound in an improving commodity price environment. So I think we feel good about what we've executed on the fixed cost side. Obviously, variable operating expense will fluctuate with volumetric output across our assets. But we think what we've achieved quarter over quarter and year over year from the cost perspective is kind of the baseline of where we see the business heading going forward.

Steven, do you want to talk through kind of some of the leverage add-backs from the accounting standpoint?

Steven Dougherty -- Chief Accounting Officer

Yes. So the leverage ratio is relatively simple. You take the adjusted EBITDA that we report, you actually have to take it down at the CMLP level, which is actually — which we show in the earnings release and then you add back some adjustments associated with the Jackalope acquisition in second quarter 2019 along with the acquisition of our NGL assets from Plains here in early 2020. You also need to add back the deferred revenue adjustment that we have and the distributable cash flow associated with it as well.

If you add those back, that should get you pretty close to the 4.1 times ratio that we disclosed.

Shneur Gershuni -- UBS -- Analyst

And so the improved leverage this year versus next year, is that a function just of free cash flow generation? It's good, like, you're kind of in a flattish EBITDA range year-on-year?

Steven Dougherty -- Chief Accounting Officer

That's right. I think it's simple, clear as cash flow stays relatively flat from an EBITDA basis year over year and capital steps down by over $100 million year over year. That all goes straight to free cash flow and 100% of that allocated to debt reduction.

Shneur Gershuni -- UBS -- Analyst

Perfect. All right. Thank you very much, guys.

Operator

Thank you. Our next question has come from the line of Elvira Scotto with RBC Capital Markets. Please proceed with your question. 

Elvira Scotto -- RBC Capital Markets -- Analyst

Hey. Good morning, everyone. Can you provide a little more detail around your Fayeteville asset sales? What was the genesis? Did the buyer approach you? And then as a follow-on there, you mentioned potential for additional noncore asset sales. Where are you in that process? And then given what's happening with natural gas prices, do you consider Barnett core or noncore?

Bob Phillips -- Chairman, President, and Chief Executive Officer

Good morning, Elvira. Two great questions. It makes me remember the beginning of the company. I bought Barnett first in October of 2010, so we're celebrating our 10-year anniversary this month.

And I bought Fayeteville second in early spring of 2011, when the price of natural gas was $5.50 an McF. So it's a totally different market. Those were both gas plays. The Barnett has been incredibly resilient.

It was drilled largely in '07, '08, '09. So it had hit its hyperbolic curve earlier, Fayetteville came a little bit later. The Barnett, we still consider to be a core asset because it was the beginning of the company. It's a large asset.

It's a critical asset to the producers up there. We think we do a great job of operating. Our people do a great job of operating efficiently at very low cost. And as we mentioned in the call, due to higher gas prices, $3-plus on the forward strip, we're starting to see some new well activity.

And I'll let Diaco Aviki talk about that in a second. On the Fayetteville, that was an easy decision. That was the second asset that I bought back in '11. It had continued to decline year over year, no new drilling.

Frankly, the producers had not invested as much to keep the production up when gas prices got hit earlier in the year due to the pandemic. We had a lot of shut-ins. Maybe the wells didn't come back quite as much as we thought they would. And then on top of that, there was a change in the downstream markets that was going to require us as the gas gatherer to build a pretty expensive additional interconnect to a new downstream pipeline market, and we just did not feel like spending that capital on that asset, given the decline profile in a PDP-type environment.

We sold it back to the producer. He made us a fair offer. It was a very, very friendly deal. And I think in any situation, we didn't really consider it to be noncore.

It's just we didn't want to spend the capital to tie it into a new market. So that was a fairly easy one. It didn't have any real growth potential left to it. It was on maybe a decline that surprised us a little bit after the shut-ins.

So we felt like that was a good economic deal for the company. Diaco, let's talk about the Barnett and why that's an important asset to us.

Diaco Aviki -- Senior Vice President of Gathering and Processing

Yes. Thanks, Bob. In the Barnett, there's been recent publications that were just recently published that show like our Lake Arlington area breakevens in the low twos. So that's a part of our asset that has significant spare capacity due to historical production levels and easy runway at low capital cost setting up a meter run to bring on additional volumes and production.

And one of our private equity producers has great inventory over there, and they have already contracted for spudder rigs. Spudder rigs should be there within the first, and we should see wells come online early in 2021. That's a great asset for us, and we're really excited. There's a lot of activity actually going on right now with all our producers on workovers for the old holder wells that's just in a low price environment, didn't see that was.

We're going to see it, right now, moving forward into 2021 so they can capture higher prices moving forward.

Bob Phillips -- Chairman, President, and Chief Executive Officer

Higher gas prices, driving a lot of activity. Mark Mitchell, you manage the Northeast PA for us and the dry gas play and you saw record volumes across Stagecoach assets, give us a sense for what the producers are doing out there?

Mark Mitchell -- Senior Vice President, Commercial Operations and Business Development

Yes. Well, as we've continually commented, Northeast Pennsylvania is the premier dry gas basin in North America. And just given the current environment we've seen with commodity prices, associated gas, in Q3, we saw record volumes come into our system out of Northeast PA as volumes have increased year-on-year in Northeast PA. So we get a fair share of those volumes.

Our system runs north, south, right across the core, the Northeast Marcellus, and so we've been benefiting from that. And we're seeing our producers now come in and reaffirm their commitments and actually increase their commitments to the system, which bodes well for that asset continuing to be just a steady, consistent contributor to Crestwood.

Bob Phillips -- Chairman, President, and Chief Executive Officer

Yes. Great. OK, Elvira.

Elvira Scotto -- RBC Capital Markets -- Analyst

Great. Just as a follow-up on that Marcellus region and Stagecoach, I mean at one point, I think Crestwood had talked about the Northeast being a growth area for Crestwood. I mean, do you see that potentially returning as a growth area?

Bob Phillips -- Chairman, President, and Chief Executive Officer

The environment up in the Northeast for infrastructure development has been challenged, but we do see the business continuing to be stable, and there are prospects for growth in the tighter gas market, which we do see coming here, for the upcoming winter and in 2021. So we think there's some good potential for growth of that business going forward.Elvira ScottoAnd then just my last question. You mentioned the flexibility that a strong balance sheet can provide and that it can help you take advantage of potential opportunities. How do you see midstream M&A playing out in the next couple of years and where will Crestwood fit in that trend?

Robert Halpin -- Executive Vice President and Chief Financial Officer

Yes. I think, Elvira, I think we, as a company and management team, believe that what we're seeing in the upstream side now from a consolidation standpoint, it does make sense in the midstream sector over time going forward. As you look at the asset bases that are out there, the companies and positions that are out there, we do think the industry gets healthier through consolidation and through rightsizing capital structures and cost structures over a longer — prolonged period of consolidation. I think from Crestwood's perspective, our focus is on building the strongest balance sheet we can, the most flexible company,from a financial positioning standpoint, and we believe that plays well into a consolidating market really on both sides of the trade.

And I think that our general objective through our free cash flow generation and prioritization of debt paydown is to build in that incremental flexibility to take advantage of that market set of opportunities that may or may not materialize over the coming years.

Elvira Scotto -- RBC Capital Markets -- Analyst

Thank you very much. 

Operator

Thank you. Our next question has come from the line of Tristan Richardson with Truist Securities. Please proceed with your questions. 

Tristan Richardson -- Truist Securities -- Analyst

Good morning. Thank you for all the commentary, especially on 2021. We appreciate the look in spite of all the uncertainty. Bob, you mentioned in prepared comments Crestwood plans to enhance your governance model to remain a leader in ESG and in the midstream space and allow investors a greater voice.

Can you talk about what sort of actions you're contemplating to achieve this?

Bob Phillips -- Chairman, President, and Chief Executive Officer

I can. And I knew when I put that comment in there, that would probably draw a question. I actually expected Shneur to give me that question as opposed to you, but I'm happy that that at least one of you did. We are a traditional MLP, and we're proud of it.

You guys have heard me say this over the years at Crestwood ran an MLP at enterprise, ran an MLP at El Paso. I'm very comfortable in the MLP model. It's not for everybody and not every business fits the MLP model very well. We all know that we're in a transition period in energy, in general, and in the life of corporations and publicly traded partnerships, and we're all going to be held to a higher standard going forward, and that standard is going to be based on transparency and trust.

We hired a young lady three years ago to come in and build our ESG program from scratch. Joanne Howard is considered to be a leader in the industry, in ESG, and she has built an impressive ESG platform for us. And one of the essential components of that is good governance and good governance requires transparency. I would say that we are one of, if not, the most transparent management teams out there in the midstream business.

We give more information probably than we should, more than we have to, but we're happy to do it because our investors appreciate it. We still have a traditional GP ownership structure. My partner is first reserve. They have been since the beginning, and they have been a great partner for the last 10 years.

Everybody knows how the traditional MLP structure works. We continue to look for opportunities as both a management team and as a controlling sponsor to continue to build value in Crestwood, the MLP. We know that one of our long-term objectives is more transparency, and we know that the way to do that is to continue to transition ownership, control and sponsorship to a more public, more transparent model. And so we continue to work on that.

I don't have anything in mind. I'm not working on anything with my partner, and he would tell you if he was sitting here, that he's been 100% supportive of Crestwood, the company, for 10 years and will be for the next 10 years. But we both recognize the transition that's going on in the industry, the importance of ESG and the importance of transparent governance, which ultimately continue to be an MLP and have totally transparent governance, you need a publicly elected Board of Directors. And so there's no mystery about that.

There's no other way to do it. We've had a couple of good precedents for that in the industry. We continue to look at those precedents and how they work and whether or not investors benefit from that and have a greater voice in the way the companies run and the strategies the company is employing. And so we'll continue to work in that direction.

And Tristan, you're smart enough to know that if we can, over time, continue to transition to a more open, transparent ownership model, then we're going to do that because that's what creates value for our investors.

Tristan Richardson -- Truist Securities -- Analyst

That's all I had. Thank you. 

Operator

Thank you. Our next question has come from the line of Jeremy Tonet with JP Morgan. Please proceed with your questions. 

Vinay Chitteti -- J.P. Morgan -- Analyst

Hi. Good morning. This is Vinay on for Jeremy. Just wanted to quickly follow-up on the 2021 EBITDA guidance.

First, thanks for all the details on the well connects you guys mentioned in the press release and prior to the call. Just want to confirm if what oil price do you guys assume? Or did you? In your discussions with the producer, what oil price are these well connects at? And also, if you could give any commentary on the revised guidance of 2020? I mean, when you say the 2021 guidance, do you mean $520 million to $570 million range? Or is it the upper half of the guide? Thanks. 

Robert Halpin -- Executive Vice President and Chief Financial Officer

Yes. I appreciate the question. Maybe your first point on kind of the oil price assumptions or commodity price assumptions that we have baked into our plan, I would say that our internal forecast that factor into our commentary around our 2021 outlook are not all that inconsistent with kind of where the forward script is positioned right now across gas, gas liquids and crude. On the crude oil side, specifically, I think we've got kind of $40 to $42.5 per barrel for the first half of '21 and then increasing to roughly $45 per barrel for the back half of '21.

That's generally consistent with the way our producer operators think about it in the '21 time frame. And when we commented in our press release, the primary driver of the completion activity year over year is driven by the drill but uncompleted inventory that we have remaining at the end of this year plus the incremental rigs that are running, the rigs that are actively running today in the current commodity price environment. So we don't have any expectation for an increase in price, driving an acceleration of activity. It's really based upon what we're currently seeing in the basin.

As it relates to the specifics of the range, obviously, as we mentioned, once we have greater and full clarity into all the contributors to the '21 plan, we will provide that in February of this year. I think our commentary today is based on our initial budgeting process and all the conversations we have had with our customers, we would expect it to be generally in line with the current 2020 range, which is $520 million to $570 million.

Vinay Chitteti -- J.P. Morgan -- Analyst

Got it. Thanks. And then just quickly checking up on your Bakken volumes for September, could you guys mention any color on how the September volumes fared versus 3Q or anything related to how the current volumes are versus 3Q average?

Diaco Aviki -- Senior Vice President of Gathering and Processing

This is Diaco Aviki. In the Bakken, we're in near-record levels on all three commodities at this current point in time. And we've had a massive continued completion program of additional wells in the early part of the fourth quarter. So we should see a very strong fourth quarter for the Bakken asset.

We should be records on every commodity.

Robert Halpin -- Executive Vice President and Chief Financial Officer

Yes. And maybe to expand on that a little bit because it kind of dovetails on a comment or a question that Shneur asked earlier on what drove the 3Q production and 4Q production, but as we disclosed in the press release, we had 15 wells completed on the Bakken system in the third quarter. The production we saw from those wells drove a large amount of the uptick, both quarter over quarter and relative to first quarter of 2020, and certainly, third quarter of 2019. We expect to have an additional 20 wells completed on the Bakken system through the first 1.5 months of the fourth quarter.

So I think that all plays into what Diaco just mentioned as we see current record volumes across the system on all three products and expect that to continue through the fourth quarter and heading into '21.

Vinay Chitteti -- J.P. Morgan -- Analyst

Got it. Thanks. Just one last one, if I could squeeze in here. I mean, you guys did mention SAF positive, great details on it there.

And then if thinking about the deleveraging path, I mean, it seems like as if we aren't really moving the needle much, even in the next 12 months or 18 months there. I just want to understand how the Board and the management thinks about accelerating the deleveraging path versus cutting distributions there.

Robert Halpin -- Executive Vice President and Chief Financial Officer

Yes. I think that — if I understood all that question, it's really focused on kind of our leverage profile. And I think as we stated, we've had a long-term objective of having leverage below 4.0 times. Prior to the downturn, driven by the pandemic, we expected to achieve that in 2020.

Obviously, as development plans have been pushed out a little bit and we've navigated through this year, that's been — the deleveraging profile has also been pushed out a bit. We still are 100% committed toward capital allocation strategies that drive a realization of our leverage targets over the next 12 to 18 months. What factors into that in terms of achieving that objective? Obviously, first is getting to a point of positive free cash flow after distribution in a sizable way. We now have turned that corner beginning in the third quarter of this year.

And as we commented, with 2021 cash flow relatively flat and our capital down tremendously, we will see a significant amount of incremental free cash flow generation next year, which will go toward deleveraging. In addition to that, we executed on a small noncore asset divestiture in the Fayetteville this quarter. We continue to evaluate other assets in our portfolio for similar strategies. And if we were able to get something done there, if something interesting popped up, we would certainly execute on that as a means to accelerate.

And then the last one, you mentioned on distribution. We feel pretty good about where we're positioned right now financially. But obviously, as the market continues to evolve, we evaluate that every single quarter and we'll continue to evaluate it every single quarter. And what alternative uses of that cash, there may be that could prove to be a better use if the business outlook changed.

So those are the levers we have. We remain 100% committed toward our balance sheet objectives over the next 12 to 18-month time frame, and we feel pretty good about how we're positioned now to execute on that.

Vinay Chitteti -- J.P. Morgan -- Analyst

Got it. Thanks guys. That was something. 

Operator

Thank you. [Operator instructions] Our next questions come from the line of Ned Baramov of Wells Fargo. Please proceed with your questions. 

Ned Baramov -- Wells Fargo Securities -- Analyst

Good morning. Thanks for taking the questions. This is a two-part question relating to Chesapeake. Number one, is the company current on all these payables to Crestwood? And secondly, I think Crestwood recently filed objections with respect to the level of disclosures provided by Chesapeake in the bankruptcy process and also with respect to its ability to dispute contracts beyond the 365-day period, which typically is allowed in bankruptcy proceedings.

To the extent you can comment, could you provide additional details as to what triggered the filing of this objection?

Robert Halpin -- Executive Vice President and Chief Financial Officer

Yes. Ned, I'll speak to it. First of all, your first question, yes, we are current on all payments and continue to be closely working with Chesapeake on everything. They've paid us timely in accordance with the contract on all services provided across the company.

The second point is, I would say, it was more of an administrative point as we work with other operators and with Chesapeake closely around navigation through their bankruptcy process, I don't think there's really anything to read into that. We continue to have good active dialogue in our two contractual relationships with them, both in the Northeast as well as the Powder River Basin, have no significant modifications contemplated around the contracts. I believe those contracts are not rejectable and very well positioned. And would expect that as Chesapeake ultimately works their way out of bankruptcy over the balance of the next couple of months that we would continue business as usual and provide service for them going forward.

Ned Baramov -- Wells Fargo Securities -- Analyst

That's great. And then another question. Could you maybe talk about the volume sensitivity around the Stagecoach assets? Specifically, how meaningful is the impact to cash flows from the record pipeline volumes, given that these assets are pretty much contracted close to capacity.

Robert Halpin -- Executive Vice President and Chief Financial Officer

Yes. I think it's really — it's less of a driver of significant cash flow change because, as you mentioned, the bulk of our capacity is under firm contracts up there. And so very, very stable revenue streams as it relates to that. I think what it speaks more to is just the industry and kind of the macro outlook for the basin and what our producers are seeing from an economic standpoint.

And as Mark Mitchell alluded to, that increase in production, driving tightness to the market up there, creates incremental opportunity for us to continue servicing our customers on the Storage and Transportation side, and then continues to highlight the need for incremental outlet points from the basin going forward. I think that all of that bodes well for the value of pipeline in the ground today, and we'll continue to position our Stagecoach assets as irreplaceable premier infrastructure assets out there servicing that growing production.

Bob Phillips -- Chairman, President, and Chief Executive Officer

Ned, let me just add a little bit more color to that. I've been in the storage business for a long time, going all the way back to the late '80s with Rotherwood. Storage has always been a cyclical business, and sometimes the cycles are short when you have cold winters, which we haven't had in a while and sometimes they are long. And this has been a long downcycle for storage as a business that we've experienced over the last five to seven years.

And the reason for that is the big increase in production, and markets just typically trade-off production for paying up for big storage contracts. There are certain utilities that have to have operational storage, and so they have been very consistent customers of ours. But most market players that use storage view it as an alternative to just buying gas in the open market or gas liquids in the open market. We're going through a tightening of both markets, gas and gas liquids from a supply standpoint, which is inevitable due to the pandemic.

And as a result, we're beginning to see, and I commented on this in my notes, we're beginning to see a little bit tighter storage market which we think over time will play out in slightly higher margins for the storage service. And Mark Mitchell and his team, which run Tres Palacios here on the Gulf Coast, which is an absolutely critical storage facility for the LNG business; and Stagecoach up in the Northeast, which is an absolutely critical storage facility for the Northeast utility and power generation market; we're beginning to see a slight tightening, a little bit more increased demand, customers coming to us a little quicker, customers willing to talk about blending extends on term. And as you know, even though these are largely FERC-regulated assets and under long-term contracts, long term doesn't mean 20 years in that business anymore like it used to in the old days. And so we have about 20% to 30% of our contracts that come up or our capacity that come up for renewal from year-to-year.

And so as we look into '21, I see that as a positive that we see firming demand for storage as a service. Mark, you want to comment on the ground, what are you seeing in the Northeast and around Tres Palacios, which serves the LNG business?

Mark Mitchell -- Senior Vice President, Commercial Operations and Business Development

Yes. Well, a couple of comments, that's vague, kind of, broad brush. Across the U.S., we've seen over the last six to eight years, 45% growth in production across the U.S., similar increase in demand. And as Bob commented, we're getting into a tighter market.

Storage during that time period, we have roughly the same amount of capacity. So you have a smaller quantum of capacity to balance a larger market. I mean, generally, we think that bodes well kind of across the group for storage, specifically as it relates to Tres Palacios. And Stagecoach, location is key.

And for example, Tres Palacios is in the South Texas on the Gulf Coast and a great location to serve the LNG markets; power generation in Mexico; and with LNG feed gas becoming a larger part of the equation for demand and the circumstances we've seen over the last few months with cargo cancellations and hurricanes and now we're getting back up to full utilization, we've just had a stronger call on storage from the operators in South Texas and those are customers at Tres Palacios. And up in the Northeast around Stagecoach with production starting to increase, and as Bob mentioned, we are in a tighter market and we haven't had a good winter in a while, but we're very well positioned up at Stagecoach, and we're seeing commitment from customers to step up and reaffirm, and we have more demand for that capacity, and we have capacity to serve customers.

Bob Phillips -- Chairman, President, and Chief Executive Officer

And I think the bottom line, Ned, is our assets have always stayed full at both locations. We're starting to see spreads widen out a little bit and that's good for us. Whether it's a firm service, interruptible service, parking loan service, any kind of up service. As spreads widen, that's a good thing for our assets because they are well located and they are irreplaceable in the market.

You could not get those permitted and replaced today. So they are both sitting on top of big market demands, LNG along the Gulf Coast and Northeast gas fired generation and utility service in the wintertime. So we're pretty pumped for the first time in a few years that Stagecoach actually has a little bit of negotiating leverage with its customers. We don't have a lot, but we're not asking for a lot, but it's definitely a trend that has turned in the last year or so, and it has exactly to do with the fact that supplies are going to be lower.

Does that help?

Ned Baramov -- Wells Fargo Securities -- Analyst

Yes. This is great color. Thanks for this. That's all I have today. 

Bob Phillips -- Chairman, President, and Chief Executive Officer

Thanks, Ned. Appreciate you waiting so long. I know we're about — operator, I think we're about out of time. Yes.

Let me just close real quick, thanking everyone again for hanging on the call. Again, hope that everyone stays safe and healthy through the pandemic. We have a lot of things going on in the U.S. Here at Crestwood, we're keeping our eye on the ball, and we're staying focused on what we do, which is help producers in the field and help markets get their supplies get delivered on time and efficiently.

We're doing it safely. And we're making tremendous progress on the ESG side of the business, really looking forward to what we're going to be able to do in 2021 on that front. So with that, thank you all for joining the call. Look forward to talking to you in February with our fourth-quarter 2020 results, and hopefully, a much better look at what 2021 is going to look like for Crestwood.

Thank you.

Operator

[Operator signoff]

Duration: 62 minutes

Call participants:

Bob Phillips -- Chairman, President, and Chief Executive Officer

Robert Halpin -- Executive Vice President and Chief Financial Officer

Shneur Gershuni -- UBS -- Analyst

Diaco Aviki -- Senior Vice President of Gathering and Processing

Steven Dougherty -- Chief Accounting Officer

Elvira Scotto -- RBC Capital Markets -- Analyst

Mark Mitchell -- Senior Vice President, Commercial Operations and Business Development

Tristan Richardson -- Truist Securities -- Analyst

Vinay Chitteti -- J.P. Morgan -- Analyst

Ned Baramov -- Wells Fargo Securities -- Analyst

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