Earnings Call Transcript - PAA Q1 2020

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

Good day, ladies and gentlemen. And welcome to the Plains All American’s first quarter earnings conference call. Today’s conference is being recorded. At this time, I’d like to turn the conference over to Roy Lamoreaux, Vice President of Investor Relations Communications and Government Relations. Please go ahead, sir. Thank you, Keith. Good afternoon, and welcome to the Plains All American’s first quarter earnings conference call. Today’s slide presentation is posted on the Investor Relations’ News & Events section of our website at plainsallamerican.com, where audio replay will also be available following our call today. As a reminder, later this evening, we plan to post our standard earnings package to the investor kits 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. Condensed consolidating balance sheet for PAGP and other reference materials are located in the appendix. Today’s call will be hosted by Willie Chiang, 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; and Jeremy Goebel, Executive Vice President, Commercial; along with other members of our senior management team, are available for the Q&A portion of today’s call. With that, I will now turn the call over to Willie.

Willie Chiang, Chairman and Chief Executive Officer

Thanks, Roy. Hello, everyone. Thank you for joining us and we hope that you and your families are safe and well through these very challenging times. This afternoon, we reported solid first quarter adjusted EBITDA of $795 million, which exceeded our expectations. These results include the benefit of additional margin-based opportunities in our S&L segment, and a $20 million benefit from a contract efficiency payment previously expected to be recognized in the second quarter. On a GAAP basis, we reported a net loss due to approximately $3.2 billion in aggregate non-cash impairments, reflecting the impact of the global market downturn that emerged following our February earnings call. As we all know, the world has changed significantly as a result of the coronavirus, and it remains a very uncertain and dynamic time. Let me first acknowledge the commitment of our PAA team and our colleagues, who have responded quickly to the challenges of operating in a socially distant world, including minimizing large group exposure and executing on amended procedures for our field staff and control rooms, and more than 95% of our office staff working remotely. Our team has adapted and maintained our operations, while responding to evolving market dynamics and working closely with our producer and refining customers during this unprecedented disruption. Acknowledging the dynamic and uncertain market conditions, this afternoon we furnish updated 2020 financial and operating guidance. Our 2020 adjusted EBITDA guidance of plus or minus $2.425 billion is approximately 6% below previous guidance and reflects fee-based earnings of $2.2 billion, a 12% reduction from our pre-coronavirus February guidance and stronger S&L earnings of $225 million, offsetting a portion of a lower fee-based estimate. This guidance highlights the benefits of our integrated business model, where we can generate additional S&L earnings in certain volatile market conditions. That said, the combination of the current impact on our transportation segment, limited visibility regarding the pace of demand recovery, and our desire to be proactive really drove our actions that we announced in early April to further strengthen our balance sheet, our liquidity, and our long-term financial flexibility. As shown on slide three collectively, we expect these changes to result in approximately $1 billion of benefit to our cash positioning in 2020. As outlined on slide four, our specific actions include making significant reductions to both our capital program as well as our common equity distributions. We also continue to pursue and capture capital and cost reductions throughout the organization and our supply chain, as well as additional non-core asset sales. Regarding asset sales transactions, representing approximately $440 million of our $600 million target have either closed or are pending closing under definitive agreement. We continue to target a total of $600 million in non-core asset sales in 2020, but we do acknowledge that this number could be more difficult to achieve in the current environment and could slip into 2021. Now let me share a few observations that underpin our outlook. Shortly after our February 4, 2020 earnings call, the world changed significantly. We've included a few charts on slide five that illustrate the fundamental changes experienced today. As the coronavirus escalated into a global pandemic, the associated societal mitigation actions, including shelter-in-place orders, and the resulting energy demand destruction accelerated at an unprecedented pace and magnitude. This demand decrease is a significant near-term challenge facing our industry. Specifically, there is uncertainty around not only the scale and duration of the impact, but also the timing and the extent of recovery. For context, the majority of reputable estimates of year-over-year global demand destruction for the second quarter range from 20% to 25% and plus or minus 10% for the full year. The OPEC plus-plus efforts to curtail production have since followed and although these cuts alone are not enough to offset near-term demand destruction, they certainly will help a longer-term process of rebalancing the market, which will depend heavily on the ultimate level of demand recovery, as well as the duration and extent of the near-term global surplus. In North American markets, the widespread shelter-in-place requirements for most metropolitan areas resulted in an immediate response by the U.S. refining sector to quickly reduce runs. Demand destruction is impacting the entire value chain, causing crude oil and gasoline inventories to approach their peaks, driving wellhead prices to historic lows, and reducing producer drilling and completion activity, facilitating significant levels of voluntary shut-ins, which we expect will cause production levels to decline in the very near future in most, if not all, key basins. The overhang of inventory for both crude oil and refined products, coupled with the potential for a more gradual recovery, suggests that a price recovery may be extended into 2021. However, we depend on the duration of the impact of demand and the willingness of producers to continue to curtail production. With this backdrop, we're now forecasting that year-over-year exit-to-exit basis at the Permian crude oil production in 2020 could be down 15% to 20%, reaching trough levels in June and flattening out the second half of this year. It remains too early to call the Permian growth trajectory for 2021, but we expect it to be lower than what we internally forecasted at the beginning of the year pre-coronavirus. As a result of these dynamics, we have reduced our 2020 and 2021 capital program by $750 million or approximately $1.35 billion, or 50% from factoring in previously anticipated JV project financing to a total of approximately $1.55 billion over the two-year period. Our first quarter investment was approximately $350 million and we currently expect an estimated $1.1 billion of total investments in 2020 and $450 million in 2021 with the potential for some timing shifts between the two years. We expect the vast majority of this investment to proceed, considering the highly contracted nature of these projects. That said, we continue to challenge all investments in the current environment and are working to capture additional cost savings. Beyond 2021, we expect annual expansion CapEx to be below the $500 million level. With that, let me 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 first quarter results, discuss our 2020 guidance, and review our current capitalization liquidity and leverage metrics. I will also review the non-cash impairments we reported in the quarter. In the first quarter, we generated solid results in each of our segments reporting key base adjusted EBITDA of $652 million and adjusted EBITDA of $141 million in our supply and logistics segment. As shown on slide seven, transportation segment results slightly exceeded expectations coming in 11% ahead of the first quarter of 2019 and slightly below the fourth quarter 2019. First quarter facility segment results also exceeded expectations, including the $20 million benefit of an early deficiency payment that Willie referenced. S&L results exceeded expectations due to favorable crude oil differentials, partially offset by less favorable NGL margins. Now let me shift gears to our 2020 guidance, which is reflected on slide eight. As Willie discussed previously, clearly this is a very challenging market to assess right now. The largest headwind for our business is the shift to near-term declines in production, both from reduced drilling and completion activities, as well as from producer shut-ins. Our revised 2020 adjusted EBITDA guidance of plus or minus $2.425 billion is $150 million or 6% below our original guidance provided in February. As is normal practice, we are providing a plus or minus number versus a range, but we would caution that with the dynamic market conditions and lack of visibility associated with it, the COVID-19 demand destruction, there is a range of outcomes depending on market developments either to the plus or minus side of these guidance amounts. Additionally, there may be some interplay for the balance of the year between our transportation and supply and logistics segments depending on shifting market signals associated with storage availability and regional pricing differentials. Our revised guidance reflects a $300 million downward revision for the transportation segments, a $150 million upward revision to our S&L segment, and no change to our facility segments. For the transportation segment, our February guidance had assumed 10% volume growth from 2019 with 2020 tariff volumes averaging 7.6 million barrels per day driven by continued Permian production growth and in the aggregate flat to slightly lower production in the remaining U.S. Shale Basin. We now expect 2020 shale production to decline in all basins both in terms of the year-to-year average and exit rate including the Permian, and now forecast 2020 transportation segment volumes of 6.6 million barrels per day. For a perspective, forecasting transportation volumes for the second quarter alone has proven challenging due to the extreme volatility in recent commodity prices and assessing the corresponding response from producers, which is why we've provided the reminder about the range of outcomes to the plus or minus of our guidance. With respect to the S&L segment in the near term, we expect to capture additional margin opportunities, resulting primarily from continuing market structure, as well as overall dynamic market conditions. Additionally, in 2020, we expect a portion of the benefit from near-term continuing opportunities to be offset by lower margins in our Canadian NGL business. In addition to our expansion capital reduction that Willie outlined, our updated guidance reflects a $35 million reduction in our expected maintenance capital for 2020, which is the result of our emphasis on reducing capital expenditures, while continuing our focus on safe, reliable, and responsible operations. Moving on to our capitalization and liquidity, a summary of key metrics is provided on slide nine, and all metrics are strong and remain in line with or favorable to our target. Following the actions we announced in early April, our investment grade credit ratings were reaffirmed by S&P and Fitch, both with stable outlooks. Our committed liquidity as of quarter end was $2.5 billion. Additionally, we have no senior notes maturing in 2020 and one $600 million senior note maturing in February of 2021. Accordingly, we do not expect a need to access the capital markets certainly through the end of this year and we have adequate flexibility to refinance the February 2021 senior note maturity on our revolver if capital markets do not present attractive opportunities over the next year or so. Before turning the call back over to Willie, let me share a few additional comments related to the $3.2 billion of non-cash impairments we took in the quarter. The recent events and related uncertainty impacting global economies triggered a requirement for an interim assessment of our goodwill balances. Accordingly, we performed a quantitative impairment test as of March 31, and recorded a full impairment of the $2.5 billion goodwill balance. We also recorded additional non-cash impairments totaling approximately $655 million. These include a $150 million loss on the classification of our LA terminal assets to held-for-sale that we communicated last quarter, as well as various non-cash asset impairments totaling $505 million. With that, I'll turn the call back over to Willie.

Willie Chiang, Chairman and Chief Executive Officer

Thank you, Al. So, as discussed throughout the call, and as we've all experienced, 2020 clearly remains a very dynamic and challenging environment. We've taken a number of proactive actions to further strengthen our liquidity, our balance sheet, and financial positioning, and we continue to actively manage our costs and capital expenditures. We remain constructive long-term as we believe that demand will return to meet the needs of a growing global population, although full recovery may occur beyond the next 12 months. Additionally, it's worth pointing out that we have a very integrated crude oil infrastructure system throughout much of the U.S. and Canada with a significant pipeline and storage network in the Permian Basin underpinned by significant volume commitments in over 2 million dedicated acres. We believe the Permian will lead North America in the eventual recovery. The significant retrenchment of industry investment should provide opportunities over time and we expect that the actions we've taken position PAA well for the future. Finally, we remain very focused on what we can control, which is prioritizing the health and safety of our employees, operating in a reliable and responsible manner, and continuing to manage our business for the long term. I’d like to publicly acknowledge and thank our employees for their hard work and dedication as we continue to navigate through these unprecedented times. A summary of the takeaways from today’s call is outlined on slide 10, and we look forward to sharing additional updates on our second quarter earnings call in August. With that, I’ll turn the call back over to Roy.

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

Thanks, Willie. As we enter the Q&A session, please limit yourself to one question and one follow-up question, and then return to the queue if you have additional follow-up. This will allow us to address the top questions from as many participants as practical in our available time this afternoon. Additionally, Brett Magill and I plan to be available this evening and through the balance of the week to address additional questions. Keith, we’re now ready to open the call for questions.

Operator, Operator

Thank you. We will take our first question from Shneur Gershuni with UBS. Please go ahead.

Shneur Gershuni, Analyst

Hi. Good afternoon, everyone. Hopefully everyone is safe. Just wanted to start off on guidance – on the guidance, with all the talk of shut-ins, I guess, the transportation guidance makes sense. It sounds like you're not expecting a reversal of shut-ins before the end of 2020. So, I was wondering, if we can talk about the S&L side for a minute, if I subtract out the 1Q performance from the guidance, it certainly looks like you're saying the back half – or the next three quarters are going to equal less than half of what you did in the first quarter. So I’m kind of wondering, if you don't think you'll be able to capture some of the surging storage rates and spreads, that are currently occurring right now, or is it more that you're being conservative similar to how you guided S&L throughout 2019?

Willie Chiang, Chairman and Chief Executive Officer

Yes. Shneur, hi. This is Willie. I'll start and then I'll let either Jeremy or Harry jump in. One thing I wanted to remind you of is our typical S&L earnings profile is a saddle, right? Normally the first and fourth quarters are the stronger quarters with the second and third less strong. Jeremy or Harry?

Jeremy Goebel, Executive Vice President, Commercial

I think our assets are well-positioned to take advantage of disruptions and volatility. I think the current opportunities in front of us we're capturing contango going forward market differentials. So any volatility and choppiness in between, we'll be able to capture, I think this reflects something we're – a number we're very comfortable in.

Harry Pefanis, President and Chief Commercial Officer

Yes, I think Al pointed in his prepared comments that the guidance reflects positive benefits from contango margin opportunities, a little bit offset by some weakness in the NGL is expected to bounce there.

Shneur Gershuni, Analyst

Okay. I appreciate that color. And maybe as a follow-up, I was wondering if we can talk about G&A and OpEx expenses. I'm just wondering if you've put any targets out or have any expectations about being able to take down G&A and OpEx expense. A lot of your peers are taking that down as well?

Willie Chiang, Chairman and Chief Executive Officer

Sure, Shneur. This is Willie, again. I'll start and I'll ask Chris Chandler to comment on this. Let me start with the easy one first. And the CapEx expectations for 21 plus is under $500 million, so I confirm that. On G&A and operating expenses, we are absolutely pursuing a cost reduction. We have in 2019, we’re building on that. We've got a lot of initiatives and this year to try to capture some and we've already captured a number of savings. The one nuance I want to give you is, when we are doing this, I've been in many different situations where you chase cost savings. And rather than put a specific target out, we are focused heavily on how do we streamline our organization. We've got different segments within the company that we're trying to make sure we are consistent. We get the best practices between it. So, we're really setting a goal to streamline and be as efficient as we possibly can. And that’s kind of the overarching thing. But, I will tell you, the numbers are substantial and we baked a lot of that into our current outlook. Chris, you want to talk a little bit more?

Chris Chandler, Executive Vice President and Chief Operating Officer

Yes, thanks. This is Chris Chandler. I'll just build on what Willie said. We're really continuing what we started in 2019 and the focus there was identifying best practices and really driving organizational consistency across North America. We're also looking closely at our business processes and our business systems for cost and efficiency improvements. So here we are in 2020 and we're really accelerating all those initiatives we started in 2019. We are seeing some cost deflation across the industry and our supply chain organization is working tirelessly to rebid services, materials, and chemicals and capture that savings. We have reduced hiring. We're absorbing vacancies. We're reducing energy and utility costs across our system as we optimize our operations with flows moving in different directions and at different volumes. We're doing things like optimizing our drag-reducing agent injection rates, even optimizing the number of pumps we're operating and pump stations that we operate. Travel expenses are down as you might expect, we're operating maintenance spend not impacting safety or integrity. We have not implemented a specific target for our cost savings, but we do expect them to be significant. They could be in the order of the range of $50 million to $100 million for 2020. And that is as Willie said, incorporated into our guidance. So I hope that's helpful.

Shneur Gershuni, Analyst

That's super helpful, guys. Really appreciate the color, though I have a lot more questions. I'll step back into the queue for now. Thank you and stay safe.

Willie Chiang, Chairman and Chief Executive Officer

Thanks, Shneur.

Keith Stanley, Analyst

Hi. Thank you. First just wanted to confirm Willie said, I guess - the volume and EBITDA guidance for the year, you're assuming volumes trough in June, and then kind of flattened out over the second half of the year. I guess one is that true and wouldn't that also mean based obviously you saw a moving target, but based on what you know today, you are thinking 2021 volumes could be kind of consistent with an exit rate for this year?

Willie Chiang, Chairman and Chief Executive Officer

Yes, Keith. I'm going to ask Jeremy to address those.

Jeremy Goebel, Executive Vice President, Commercial

Keith, this is Jeremy Goebel. Just as Willie said, what we're looking at is lower activity, shut-ins, in May we estimate for instance in the Permian Basin close to a million barrels a day of shut-ins. June and forward ultimately by pricing signals. So contango spreads, regional basis differentials, flat prices, all of those will come in and help producers' decisions. What we've assumed is that the most severe impact is in May, June, and into July. Then you have some level of activity coming back in an August time period. And so, the pace of demand destruction and coming back into the market will dictate what that signal is and how much activity comes back. So, the inflection point at the end of the year will be heavily dependent on prices. It could be an upward trajectory or it could be flat is largely what we've assumed in this forward guidance that we've given.

Keith Stanley, Analyst

Okay. But for 2020 you're assuming - it sounds like you're assuming a little bit of a recovery in Q3, Q4 relative to May and June than April?

Jeremy Goebel, Executive Vice President, Commercial

It's just more of a flattening. So the pace of the underlying decline will naturally mitigate itself as well as the decline happens. But there are some activities that will come in just to offset additional decline, so it’s a very low level of activity, but that’s consistent with our forecast.

Willie Chiang, Chairman and Chief Executive Officer

Yes, Keith. I’m going to ask Jeremy to address those.

Al Swanson, Executive Vice President and Chief Financial Officer

Sure. As far as the determination, there was a number of things that we considered as we reflected on that; one, industry conditions, visibility for those conditions, but also leverage and our liquidity were a couple of them. Our investment program. There was no single kind of driver to reach it. And so, management did a lot of work, ran multiple scenarios that worked with our Board of Directors. We came up with the size of it, but there was no one single kind of driver with regard to it. Clearly, as we've been talking for a period of time, we have wanted and continue to focus on ensuring that our leverage continues to migrate down over time, and our focus on retaining and improving our investment-grade credit ratings over time factored into our decision as well.

Willie Chiang, Chairman and Chief Executive Officer

Yes, Keith, I’ll just reinforce balance sheet and financial flexibility are really the keys.

Jeremy Tonet, Analyst

Hi, good afternoon. I just want to start off with the Permian volume trajectory as you outlined it there just wondering how you think this applies to the entire Permian itself. Do you see your volumes being better or worse or kind of in step with the rest of the basin there? And then how does this impact your system across kind of like the gathering and the intra-basin pipe to take away, if you could just help us dive into your thoughts there that'd be helpful.

Jeremy Goebel, Executive Vice President, Commercial

This is Jeremy Goebel. For planning purposes, we have assumed that our system, including gathering and intra-basin operations, will be impacted similarly to the general market. Regarding outbound pipes, we have adjusted flows based on where we anticipate the barrels will be directed over time. It's a mix for specific gathering systems. We have relied on the guidance provided by producers for intra-basin expectations, which aligns closely with the rest of the basin. For outbound pipes, we balanced the entire system according to our commitments and the connections between the systems.

Al Swanson, Executive Vice President and Chief Financial Officer

So the takeaway, a lot of its contracted under T&D, so physical flows and revenue will be different. On the intra-basin system it's a mix of T&Ds and acreage dedications. So, the physical flows and the revenue impact will be different. But where we have the T&Ds on a lot of our long-haul pipelines, that's going to have a more muted impact. On the gathering side, it's going to be based on forecasted productions and overall basin flows will impact the intra-basin business.

Jeremy Tonet, Analyst

That’s helpful. Thank you. Just wanted to see, supply and logistics moving up, transportation moving down in the guidance, is there any interplay there between one bucket moving to the other bucket, or is S&L really just kind of contango, or other drivers to that opportunity set?

Willie Chiang, Chairman and Chief Executive Officer

Yes. Go ahead, Harry.

Harry Pefanis, President and Chief Commercial Officer

The S&L is largely driven by contango, but as the year develops, we very well could see some fluctuations between transportation and supply. I think Al touched on that a little bit in his prepared comments.

Jeremy Tonet, Analyst

Okay. Thanks for taking my question.

Michael Lapides, Analyst

Hi, guys. Thank you for taking my question. Can you talk a little bit about what your customers are seeing in terms of storage these days? Meaning, are your customers concerned about storage going up? If so, where do you think – are there other mechanisms you can do to alleviate storage concerns faced by the producers? Meaning, are there opportunities to use other facilities, whether it's unutilized pipeline capacity or whether it's other assets to help increase the short-term amount of storage available to customers?

Willie Chiang, Chairman and Chief Executive Officer

Hey, Michael, this is Willie. I'll start and let Jeremy add on to it. Clearly, there's been a lot of work to try to find additional storage within our system. We've been successful in getting some of those barrels. But it is a very dynamic situation and I'll let Jeremy explain a little bit more.

Jeremy Goebel, Executive Vice President, Commercial

Thank you for the question. When we consider our facilities, they are primarily leased for long-term operational purposes, and the storage capacity is mostly allocated within the basins. Many of our customers, particularly Plains Marketing, are seeking flow assurance, which our system can effectively provide. We are fully capitalizing on any opportunities for extra storage for both ourselves and our customers. In April, we did see an increase, but pricing signals might influence future developments. Currently, prices are rising, which may indicate shifts ahead. In April, we faced challenges with flow assurance and transportation. Now, with shut-ins potentially affecting the market, we will have to monitor how things progress.

Michael Lapides, Analyst

Got it. And one follow-on, real quickly, can just give us a high-level view of how much of your Permian long-haul and intra-basin pipeline capacity is contracted under a take-or-pay basis versus kind of more volumetrically exposed?

Al Swanson, Executive Vice President and Chief Financial Officer

This is Al. A large majority of our Permian takeaway is under MBC's, whether it's on our pro rata piece of BridgeTex, Tex Cactus I, Cactus II, the basin pipeline system probably has the lower percentage that's more the line that runs up to Cushing, inter-basin as Jeremy mentioned is a mech.

Michael Lapides, Analyst

Got it. Thanks, guys. Much appreciated.

Willie Chiang, Chairman and Chief Executive Officer

And just to add on to Al's answer, a lot of our Mid-Continent pipelines and pipelines long haul from the DJ those are all fully contracted. We announced transactions on Saddlehorn and Red River to fully contract those pipelines. So, it's not just Permian takeaway, we have P&D throughout our pipeline system. That's clearly been one of our strategies as how do we lock in longer-term value as we work with different producers and sometimes we end up doing a strategic joint venture on a supply push or a demand pull project where, in exchange for additional volume, there's ownership in the pipe.

Michael Blum, Analyst

Hi, guys. Thank you for taking my question. Can you talk a little bit about the tenure of the contracts you have there on the crude storage side? And as contracts roll off, how much uplift do you think you'll see in terms of pricing?

Willie Chiang, Chairman and Chief Executive Officer

We thought we priced most of our storage on a long-term basis. We don't really think about it in the context of a short-term opportunity here that's a few months of contain - or like Jeremy pointed out earlier, most of our customers are operational customers and they use those tanks for their daily requirements. So, minimal contract loss this year. So, I think that's probably the best way to think of it.

Michael Blum, Analyst

Okay, great. And then I had a question on the Canadian business. So, you sold, I guess, some new U.S. NGL storage assets here. I just want to understand is there a shift in the business model in Canada related to that? And the second part of that is the asset sale is being portrayed about a four times EBITDA multiple, so I wonder if you could provide your perspective on that multiple? Thanks.

Jeremy Goebel, Executive Vice President, Commercial

Sure, Michael, this is Jeremy Goebel. First, on the business model, ultimately, what we're moving to is larger bulk transactions and focusing on our lowest cost supply NGLs. We're greatly simplifying the business; we're maintaining profitability and margin with much fewer transactions. We view it as a much more sustainable business model going forward. With that, the assets that we've sold became less core to our business. With regard to the specific Crestwood comments, I can just tell you we're very happy with the outcome.

Tristan Richardson, Analyst

Hey. Good evening, guys. Appreciate all the comments and for quantifying where you can, particularly in this environment. Just a quick follow-up on the transportation side, your outlook there seeing a sort of a 4% impact on the volume side versus higher expectation, but higher percentage impact on the EBITDA side, can talk about the extent this is - to which this is a higher tariff sales being disproportionately impacted or is this just basic operating leverage, just kind of curious there.

Jeremy Goebel, Executive Vice President, Commercial

Yes. I mean, this is Jeremy. I think the way to think about it is some of the spots capacity could have come off of pipelines and that's obviously higher tariffs. But some of its full through, if it's a gathering barrel, that doesn't go through the intervention, that doesn't go through the long haul. It's those that have somewhat of a multiplier impact. So, I'd say it's a combination of spot and pull through from the lease all the way through the pipeline system. Hey, Chris you made a comment about a 4% reduction; was that the question?

Tristan Richardson, Analyst

Just on the volume outlook.

Jeremy Goebel, Executive Vice President, Commercial

Okay.

Tristan Richardson, Analyst

Because the outlook I got is that the right number, 4%?

Jeremy Goebel, Executive Vice President, Commercial

I think you are comparatively right there.

Gabe Moreen, Analyst

Hey. Good afternoon, everyone. I just have a question on CapEx and the scrutiny on growth CapEx and reduction. Would the ability to lower CapEx further be a function more of projects dropping out of the queue or ability to maybe slow walk some projects with your contractors? So I'm just curious how that's going. What you're focused on and also, the discussions with your partners in those projects.

Willie Chiang, Chairman and Chief Executive Officer

Yes, Gab. This is Willie. Thanks for the question. I want to ask Chris to give you kind of an overview of that.

Chris Chandler, Executive Vice President and Chief Operating Officer

So our CapEx reductions come from a number of sources. Certainly, our discussions with producers and our customers have guided some of that. It's really a combination of project deferrals and spending delays to match the required project completion dates. Obviously, there's not an incentive to finish anything early. And then capturing cost deflation that we're seeing across the industry. So, could that continue to change? We do continue to talk to our JV partners and our customers, and to the extent that their plans change, we'll adjust our plans as well. But I would not expect it to be significant.

Gabe Moreen, Analyst

Okay. So in other words, some of these big profits that you've got just they're going ahead, they're contractual backing, understood. And look, I've got a question I know it's not a big business for you but on the natural gas storage side of the business you break out anymore I don't think itself sizable, but are you seeing any interest in additional contracting there, given that that's also a futures curve, which at this point seems to be in contango?

Willie Chiang, Chairman and Chief Executive Officer

That business is done well, it's fully contracted, we continue to see rates creep up. So, it's positive.

Colton Bean, Analyst

Good afternoon. So just a follow-up on the commentary around shut-ins and particularly the expectation of production may trough in June. And I guess, how do you reconcile that with producer comments in the last few days signaling a willingness to bring production back online in the $20 to $25 barrel range or effectively where we sit today?

Jeremy Goebel, Executive Vice President, Commercial

Hey, Colton. This is Jeremy Goebel. I think pricing signals dictated what happened in May shut-ins. Like Willie mentioned, that somewhere between 3.5 million and 4.5 million barrels a day, U.S. and Canada. Pricing signals in June will help inform what nominations we receive in the coming weeks and what flows on the pipelines. Just to carry on with what Willie said, May and June potentially July will see troughs while we assumed June and July time period as trough, and then some activity resumption in the August time period. So, if it happens sooner that’s a positive to our business and this is some of the interplay that Al mentioned with S&L. If the market flattens and there's more pipeline transportation, that's one of the other ways there could be interplay in this. But we're planning for a dearth of activity in April, May, June, and then we expect some resumption starting maybe in August. That’s our planning case.

Colton Bean, Analyst

Got it. And then maybe to ask the question around alternative storage a little bit more explicitly. It was a soft down cap line, was not expected until the middle of next year is there any potential to utilize that capacity for continual opportunities here in the interim?

Chris Chandler, Executive Vice President and Chief Operating Officer

This is Chris Chandler. I'll take that. It's a discussion we've had, but the answer is no. The activities required to reverse the pipeline make it unsuitable for storage.

Willie Chiang, Chairman and Chief Executive Officer

But one thing to remember is there's terminals on both ends and we're actively using those for contango purposes, so at the same time. So we're utilizing all available storage in a safe manner and that we can get barrels in and out, but unfortunately while the conduit doesn't work. We've worked with our partners to commercialize both ends.

Ujjwal Pradhan, Analyst

Good afternoon.

Willie Chiang, Chairman and Chief Executive Officer

Hi, Ujjwal.

Ujjwal Pradhan, Analyst

Thanks for taking my question. This is Ujjwal. Hi. First question on following on your comment on daggers earlier to Keith’s question so given the editor headwinds and further uncertainty, can you update us on your conversation with the rating agency and how much headroom you have in beverage?

Al Swanson, Executive Vice President and Chief Financial Officer

This is Al. What I would point to is just the actions that they came out with here in the last 30 days. Standard and Poor's and Fitch, clearly, our leverage today is in good position relative to our ratings at all three agencies clearly the environment is challenging, as we've talked. So part of the actions we've taken is to make sure we stay ahead of that. But I’d normally try not to put words in their mouth, but I would point to the S&P and the Fitch press releases that they added in the last 30 days.

Ujjwal Pradhan, Analyst

Yes. Thanks. And a quick follow-up. Can you provide more details on the impairment charges, particularly around what assets and regions were under question here?

Willie Chiang, Chairman and Chief Executive Officer

Al, impairment charges.

Al Swanson, Executive Vice President and Chief Financial Officer

Yes, I would put them into three kind of high-level buckets. One is the $2.5 billion from goodwill. That's basically we accelerated the test; our normal annual cycle is June 30 for doing that test. Based on all the events in the industry, we viewed that we had a trigger event, did the test, and basically took the $2.5 billion impairment. As you've probably noticed, there's been a significant number of goodwill impairments in the industry over the last week or two. And so that's how that one trigger. The LA terminal that we put under contract for sale, and we expect to close later in the year, as we transfer that asset held for sale, we took a $150 million impairment on that. If you recall, we actually flagged that on our February earnings call, we put it under contract this year. We knew it was coming. It hadn't plugged through our year-end results yet. The balance of them are basically where we go in and do analysis on individual assets and based on conditions and cash flow forecasts, you do impairment tests and that was on multiple assets several of them and aggregated to about $500 million.

Jean Ann Salisbury, Analyst

Hi, everyone. The exit-to-exit decline of 15% to 20% for the Permian is a helpful estimate. Can you share how this compares to your view of U.S. or North America decline overall in 2020 is about the same or more?

Willie Chiang, Chairman and Chief Executive Officer

Jean Ann, I think you'd look at activity across and it's going to differ by basin. I think there's been some quality challenges in the Eagle Ford which has pulled a lot of activity out of there. So you could see steeper declines in Eagle Ford. I think the Williston shut-ins have probably been the most aggressive of anywhere, it's farther from market. Canadian productions, we would expect that to normalize once the step can be largely driven by shut-ins. So it's going to differ by basin. The DJ, you can see the activity declines. So I think the Permian is going to be lower, shallower than in some of the other basins is the way I look at it.

Jean Ann Salisbury, Analyst

Okay. And then on your risk volume guidance by one million barrels a day, can you break out how much of that reduction was gathering versus inter-basin versus long-haul barrel?

Willie Chiang, Chairman and Chief Executive Officer

We don't have that detail now, but we can look to follow-up with Roy or Brad.

Ganesh Jois, Analyst

Hi. Thanks for taking my question. Just a couple of questions. Firstly, on your CapEx outlook for 2021 and beyond, assuming a flat to declining U.S. production environment, I'm wondering what it is exactly that you might be thinking of spending on? And second question I have is, we've now seen three distribution cuts from you all at what point is a unit point going to be prioritized when it comes to capital allocation as opposed to bondholders and in general, assets build out I guess?

Willie Chiang, Chairman and Chief Executive Officer

Hey, Ganesh. This is Willie. I'll respond, and then Al can add. Regarding the CapEx of $500 million or less, we are not signaling anything specific for the future beyond that it will be below 500. As you assess our expectations for projects, you'll notice a lot of equipment has already been constructed, and our strategy is shifting towards operating with existing assets more efficiently. This approach is why I wanted to highlight the reduced CapEx spending for the future. Regarding distributions, our primary focus has been on improving our debt metrics. The steps we've taken regarding CapEx and additional cost savings are already in progress, and once they are on track, we can concentrate on enhancing shareholder returns.

Jeremy Goebel, Executive Vice President, Commercial

Ganesh, this is Jeremy. Just one thing to add on to that, a lot of the projects we're working on now are largely driven by demand. It's refiners committing to long-haul transportation on the Red River pipeline, linked to Webster is largely driven by the buyers of crude that we're buying in Houston who are now buying from the Permian basin. So a lot of the projects we're working on are pinned by 7 to 10-year long-term emits from high-quality credit quality counterparties. They will be core assets to U.S. crude oil transportation going forward. So we've really narrowed down including Diamond Cap lines, largely driven by St. Dream's refining demand. So I think demand pull pipes is where a lot of our focus is for incremental capital.

Becca Followill, Analyst

Good afternoon, guys. I'm realizing that this is an incredibly unusual time with lots of uncertainty. Perhaps this is an unfair question, but can you tell us the degree of confidence you have in this guidance that you put out?

Willie Chiang, Chairman and Chief Executive Officer

Well, Becca, I'll respond to your question. We're evaluating everything we see right now and feel very confident. The challenge, as you can imagine, is anticipating any unusual factors that could be hard for us to predict. The trajectory of demand recovery could change significantly due to additional outbreaks or hotspots, which is a significant variable. Another major variable is what occurs on the production side. The producers have been very proactive with production cuts, but if we find ourselves in a situation where that isn't the case—though we don't expect this—it could definitely alter the trajectory. I'm not sure if that's helpful, but it reflects my perspective.

Becca Followill, Analyst

That is. I just wanted to see where the places may be that would change it. And then the second question is, every curve that you look at it, there's not another pipe that's needed for the Permian. So can you give us assurance that when Wink to Webster is built, that you're not sitting there on a timeframe where it's built, you don’t have the volumes flowing and that you're not getting the full EBITDA that you're expected, is that absolutely there's a guarantee that you're going to get those – that EBITDA from the pipe and once it gets filled and not sitting there waiting on it, on volumes to come?

Jeremy Goebel, Executive Vice President, Commercial

This is Jeremy. So you're talking specifically about when the Wink to Webster pipeline. If that's the case, yes, it's very high credit quality. The summer integrated producers. Others have large, I mean we're tying into the largest refining – two of the largest refineries in the Gulf Coast that will be buying the barrels off that system. Highly contracted, it's very long contracts.

Willie Chiang, Chairman and Chief Executive Officer

Contract in the terms – contract in the terms of NBCs or volumetric?

Jeremy Goebel, Executive Vice President, Commercial

NBCs.

Becca Followill, Analyst

Okay.

Jeremy Goebel, Executive Vice President, Commercial

Becca, you're aware of this but I'll repeat it anyway. On Wink to Webster that was a very, very it was a large pipeline that started off with two partners that ultimately back to capital efficiency, we were able to work, win, win with ultimately seven total parties, which really filled the lineup. So, I think that’s actually a good example of capital efficiency on the pipe, all anchored by NBC so we would expect that to be probably the most resilient pipe out there.

Pearce Hammond, Analyst

Yes. Thank you for taking my question. I just want to follow up on Michael's question earlier, given your unique vantage point and your extensive oil storage assets. Do you think it is a certainty that U.S. onshore oil storage will fill, and if so, when do you think that occurs, or have the production curtailments really changed that calculus?

Jeremy Goebel, Executive Vice President, Commercial

So, Pearce, if April filters everyone expected, but the pricing signals have changed and so I think pricing for May is largely set by a lot of the impacts in April with regard to ton spreads, with regard to location differentials, and quality differential. So that was absolutely caused the really large 3 million to 4 million barrels a day of shut-ins that we're seeing now across North America. What happens in June is being set by pricing as it goes now, so I think storage is a function of an imbalance in supply and demand. So, you're just going to have to watch supply and demand through the figures going forward. We don’t want to forecast what the future is in that. But we watch the same thing and honestly, it’s going to depend on what happens in June. The closer you get to full the more the incentive it is for producers today production offline. So I think it's just a dynamic situation and we'll continue to watch.

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

Thank you, everybody for joining us today. We appreciate your time and look forward to updating you on our next call in August. Keith I think that will end our call for today.

Jeremy Goebel, Executive Vice President, Commercial

Thanks, everyone. Be safe.

Operator, Operator

Thank you. Ladies and gentlemen, this concludes today's conference. We appreciate your participation. You may now disconnect.