Earnings Call Transcript - PAA Q3 2020

Operator, Operator

Good day, everyone, and welcome to the Plains All American (PAA) and PAGP Third Quarter 2020 Earnings Call. Today's call is being recorded. At this time, I would like to turn the conference over to Roy Lamoreaux. Please go ahead, sir. Thank you, Christie. Good afternoon, and welcome to Plains All American's Third quarter Earnings Conference Call. Today's slide presentation is posted on the Investor Relations news and Events section of our website at plainsallamerican.com, where audio replay will also be available following our call today. Later this evening, we plan to post our earnings package to the Investor Kit section of our website, which will include today's transcripts and other reference materials. Important disclosures regarding forward-looking statements and non-GAAP financial measures are provided on Slide 2 of today's presentation. A condensed consolidating balance sheet for PAGP and other reference materials are located in the appendix. Today's call will be hosted by Willie 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; Jeremy Goebel, Executive Vice President, Commercial; and Chris Herbold, Senior Vice President and Chief Accounting Officer, along with other members of our senior management team are available for the Q&A portion of today's call. With that, I will now turn the call over to Willie.

Wilfred Chiang, CEO

Thanks, Roy. Hello, everyone, and thank you for joining us. This afternoon, we reported solid third-quarter results in all three of our operating segments, which Al will discuss more in detail during his portion of the call. A summary of highlights from today's call are provided on Slide 3, which reflects our progress in a number of areas, including: raising our 2020 guidance, executing non-core asset sales, providing 2021 preliminary guidance, targeting an additional $600 million or more of asset sales, and progressing our shift to positive free cash flow, which leads to today's buyback announcement. A few of these are replicated in our key messages for today's call, summarized on Slide 4, which highlight positive momentum as we enter 2021. First, we're well on our way in our transition to positive free cash flow after distributions. Second, our year-to-date performance continues to highlight the value of our integrated business model. Third, we continue to successfully execute across each of our key initiatives. And as a result of our progress and our outlook, we have announced a $500 million equity buyback program that we plan to execute in a balanced manner, allowing us to continue to reduce leverage while maximizing value to shareholders. Let me elaborate on each of these points a bit further. Starting with free cash flow. We've reached an inflection point where going forward, we expect to generate meaningful free cash flow after distributions on an annual basis. As illustrated on Slide 5, we expect 2021 free cash flow after distributions to total roughly $300 million or over $900 million when including our $600 million plus of additional asset sales we're targeting in 2021. Our preliminary guidance for 2021 adjusted EBITDA is plus or minus $2.2 billion. This includes the estimated impact of our targeted asset sales and assumes a $50 million contribution from our Supply and Logistics segment. We intend to provide formal guidance for 2021 on our February earnings call. Regarding our 2020 year-to-date results and as shown on Slide 6, our business has performed well despite a very challenging year. This afternoon, we increased our full-year 2020 adjusted EBITDA guidance to $2.585 billion, which is now in line with the initial full-year 2020 guidance that we furnished in February pre-COVID and is $85 million above our most recent August 2020 guidance. These results highlight the value of our integrated business model. And while challenging the forecast, we have demonstrated our ability to capture margin-based opportunities during periods of volatility through our extensive asset base. Our integrated model, meaningful term supply, and committed acreage position also enhances our ability to move additional volumes on our system over a long-time horizon. As a case in point and as illustrated on Slide 7, you can see the significant increase in our term supply and our Permian acreage position, which we believe is highly strategic in the current environment and brings additional value to the table as we work with customers, partners, and peers to optimize and rationalize infrastructure capacity. Additionally, as summarized on Slide 8, we have a strong portfolio of long-haul pipelines, representing a combination of supply push and demand-pull pipelines. These systems are underpinned by long-term third-party MVCs and are further complemented by long-term dedications of lease supply to our lease gathering business and strong integration with our hub terminals. Included on the slide is a summary of third-party contractual support underpinning our key long-haul systems and the average remaining term of these contracts. In addition to our MVCs, our termed-up lease supply provides us an additional level of insurance that our pipelines will continue to be utilized in a variety of market conditions. Throughout the year, we've continued to execute across a number of key initiatives, which are recapped on Slide 9. We continue to operate safely and reliably, embracing COVID protocols in both the field and in the offices, social distancing and working remotely as conditions warrant. I want to acknowledge and thank all of our PAA team members for their hard work and dedication to driving continuous improvement which is evident through our year-to-date safety and environmental performance metrics. As discussed previously and as Al will discuss further, we are squarely focused on maximizing free cash flow, reducing leverage minimizing investment capital and increasing shareholder returns. Regarding portfolio optimization, on October 15, we closed on the sale of our Los Angeles terminals, generating proceeds of approximately $200 million, which brings our year-to-date proceeds from asset sales to approximately $450 million. Additionally, we announced a strategic asset swap with IPL Inter Pipeline that reinforces our NGL asset position at our Empress complex in Canada. We continue to advance additional asset sale opportunities and have established an additional $600 million as our 2021 asset sales target with the potential for upside to this target. We've also made solid progress in our efforts to streamline and drive efficiencies across all aspects of our business, and we've realized meaningful cost savings. We currently expect to realize $125 million a year or more of fixed cost savings that should endure in future years. This exceeds the high end of our previously estimated cost savings range of $50 million to $100 million. At the same time, we've continued to advance our sustainability initiatives. Highlights of our progress are summarized on Slides 18 through 23 of today's slide presentation. Before I turn the call over to Al, I'd like to touch on a couple of other matters that are currently topical. First, regardless of the outcome of tomorrow's election, our long-term outlook is constructive. We recognize that a potential change in the administration could create headwinds for the industry and for Plains; however, it could also bring benefits, particularly for those with pipe in the ground. Slide 34 of the appendix outlines some of our thoughts regarding a potential change in the administration. Additionally, with respect to an energy transition, we believe alternative sources of energy will continue to grow and will be an important addition to meeting global energy needs. But we also firmly believe that hydrocarbons will be needed for decades and will remain an integral part of the global energy supply. As illustrated on Slide 10, we believe global demand recovery is a question of when and not if, which over time should drive a return of constructive oil prices, sustainable North American production, and higher production levels in key onshore shale basins. The location, scope and flexibility of our integrated system, matched with the capabilities of our teams, position Plains favorably in such an environment. In short, we believe we are well positioned to manage through the current environment and benefit as demand recovers over time. In regards to energy markets, current negative investor sentiment has impacted the entire sector, including our equity securities, which continue to trade at levels that ascribe minimal value to the long-term durability of our business. We believe this provides a significant value investment opportunity. For that reason, and considering our progress across multiple key initiatives and our constructive longer-term outlook, today we announced a $500 million common equity repurchase program. As Al will discuss further, we plan to take a very balanced approach and allocate up to $75 million to buybacks in 2020 and up to 25% of free cash flow after distributions to buybacks in 2021, with the balance being used to reduce leverage. With that, I'll turn the call over to Al.

Al Swanson, CFO

Thanks, Willie. During my portion of the call, I'll recap our third-quarter results, review our current capitalization, liquidity and leverage metrics, and provide additional color with respect to our outlook for 2020 and 2021. As shown on Slide 11, third-quarter fee-based adjusted EBITDA of $620 million exceeded expectations in both the Transportation and Facilities segment. On a comparative basis, Transportation segment results increased over second-quarter 2020 results, driven by a $25 million timing benefit related to MVC deficiencies that occurred during the second quarter, in addition to a modest increase in tariff volumes and continuation of cost optimization initiatives. Relative to third quarter 2019, the slightly lower segment results reflect the COVID-related impacts on producer activity levels. Additionally, one accounting-related item I will note is that in the third quarter, we recorded a $91 million non-cash impairment within our investments in unconsolidated entities attributed to a joint venture in the Mid-Continent area. With respect to the Facilities segment, our third-quarter results exceeded expectations, primarily due to operational cost savings and higher-than-expected revenues at our Cushing facility. On a comparative basis, this segment was in line with second-quarter 2020 and third-quarter 2019, effectively absorbing the impact of asset sales. Third-quarter 2020 Supply and Logistics results of $61 million benefited from contango margins as a result of transactions entered into earlier in the year. Moving on to our capitalization and liquidity, a summary of key metrics is provided on Slide 12. Our long-term debt to adjusted EBITDA ratio of 3.3x benefited from trailing 12 months Supply and Logistics results of $437 million. The leverage ratio would be 3.8x if normalized using our initial 2020 Supply and Logistics adjusted EBITDA guidance of $75 million, reflecting leverage slightly above the high-end of our target level. That's underpinning our focus on reducing leverage. This week, we will repay our $600 million February 2021 senior notes via the par call option. We have no other near-term maturities and our total committed liquidity at quarter end was $2.8 billion or approximately $2.2 billion pro forma for retiring the note. We do not expect to access the capital markets for the foreseeable future. Now I will shift to our outlook for 2020 and 2021, which is summarized on Slide 13. As Willie mentioned, we have increased our 2020 adjusted EBITDA guidance by $85 million to plus or minus $2.585 billion, which is primarily attributed to the Transportation segment and is driven by our third-quarter results and our expectations through the balance of the year. With respect to our preliminary guidance for 2021, which is net of the assumed impact of targeted asset sales, underpinning our outlook is an assumption for the crude oil price environment and producer activity levels to remain relatively unchanged throughout the majority of the year. Therefore, an acceleration of demand recovery and corresponding improvement in commodity prices relative to the current levels would be a net positive to our outlook and potentially favorable to our 2021 preliminary guidance. As we have communicated previously, we expect challenging market conditions for our Supply and Logistics segment in 2021. Moving on to Slide 14. Our expectations for 2020 and 2021 investment capital remain unchanged on a combined basis but reflect a $50 million shift from 2020 into 2021 due to project timing. I'll note that roughly 50% of the 2021 amount is comprised of Wink-to-Webster and Diamond/Capline projects, and roughly 20% to 25% is related to high return, wellhead, and CDP connections that we expect to be paced with producer activity levels. The balance is associated with smaller, high-return projects. A status update and high-level overview for the Wink-to-Webster and Diamond/Capline projects is provided on Slides 31 and 32 of the Appendix of today's slide presentation. Beyond 2021, assuming an approximate $50 per barrel oil price environment, we estimate our run rate investment capital to be within a range of $200 million to $300 million annually. Based on this range, high-return wellhead and CDP connections would represent approximately 50%. However, if we remain at current price levels, we would anticipate total investment capital to be at an even lower level. I would also note that we do not have any material capital commitments beyond 2021. Additionally, we estimate annual maintenance capital to be $200 million or less on a run rate basis. We are very focused on disciplined management of our balance sheet, minimizing capital investment and maximizing free cash flow. I'll note that a detailed breakdown of our free cash flow is provided on Slide 25 within the Appendix. As shown, our free cash flow for the last 12 months is a positive $521 million, while free cash flow after distributions was a negative $464 million. With regard to the unit repurchase program, as Willie noted, and as summarized on Slide 15 and illustrated on Slide 16, we will be disciplined in how we allocate capital. We plan to allocate capital to buybacks in a balanced manner, consistent with our priority of reducing leverage over time. As we generate additional free cash flow and lower our leverage, we expect to be able to increase the allocation to buybacks over time. For the balance of 2020, we currently intend to allocate up to $75 million for repurchases, which effectively equates to the increased 2020 guidance. For 2021, we currently intend to allocate up to 25% of free cash flow after distributions for equity repurchases. The allocation within this range may scale up or down depending on asset sales, financial performance, and other factors. For example, in the absence of asset sales, we may allocate up to 25% towards equity repurchases. In event of meaningful asset sales, we may allocate a higher relative percentage towards debt reduction, in recognition of the loss of EBITDA associated with the assets sold. To be clear, and this is important, we will not utilize debt to fund equity repurchases. With that, I'll turn the call back over to Willie.

Wilfred Chiang, CEO

Thanks, Al. Before opening into Q&A, I want to reinforce three critical points which are summarized on Slide 17. First, we believe we are well positioned to manage through the current environment and emerge stronger. We have strong conviction in the durability of our business, and we have a long-term positive outlook for the future. Our asset base is well positioned to move North American production to market, and we have a prominent integrated franchise in the Permian with significant termed-up supply, committed acreage, integrated systems, long-haul MVCs and access to multiple markets. We believe the Permian will lead the recovery and North America will continue to be the short-cycle solution to meeting the world's supply needs. We certainly understand a longer-term transition to lower carbon energy, and we believe that ultimate global population growth and improvement of quality of life standards will drive the need for all energy sources, including conservation and efficiency. Any energy transition will be underpinned by significant allocation to hydrocarbons, including oil, for multiple decades. Second, we're making meaningful progress on enhancing our financial flexibility and lowering leverage, and we remain very focused on further progress as we manage through these near-term challenges. And third, we continue to drive for strong alignment with our investors and external stakeholders. We've had conversations with many of you over the past several months, and we thank you for your feedback, which has been extremely valuable to help us shape enhancements that we've made and those that we're continuing to advance. We're very focused on managing our business to generate sustainable free cash flow after distribution and improving shareholder returns, which has been a significant focus of today's call. I would also highlight that we've made considerable enhancements to our governance and sustainability frameworks in addition to the safety and environmental commitment that I previously mentioned. In addition to the sustainability presentation and additional disclosures available on our website, we've included a summary overview and some additional detail within the appendix of today's presentation that I would encourage you to review. So thank you again for your feedback. We look forward to continuing these discussions, and we appreciate your continued support. With that, I'll turn the call back over to Roy to lead us into Q&A.

Operator, Operator

Thanks, Willie. Additionally, our Investor Relations team will be available this evening and throughout the rest of the week to answer any further questions. Christie, we are now ready to open the call for questions. We'll take our first caller, Shneur Gershuni from UBS.

Shneur Gershuni, Analyst

Maybe to start off today, if we can start with the preliminary guidance for 2021. Willie, you coined a phrase something about going from sport mode to efficiency mode with respect to costs. I was just wondering if you can talk us through how much of the cost optimizations you've achieved? How much is baked into your 2021 guide? Is there any incremental opportunity that's not there? And maybe as part of the guidance question, if you can share with us the EBITDA associated with the planned $600 million of sales that you outlined in your presentation?

Wilfred Chiang, CEO

Thanks, Shneur, for the question. One of the things we've really focused on is not setting a target for cost reductions. I think as I've shared before, I've been burned too many times where you set a target, and that's exactly the number you get, whether it's a good answer or a bad answer. So we've really pushed the organization to be as efficient as we can. So the answer to your question of how much of it is baked into 2021 guidance is yet to be determined because we continue to make progress as we go forward. And that's why we'll give you formal guidance on that in 2021 in February. But I do want Chris Chandler to chat a little bit about the cost savings that we've got and what the configuration of some of those savings are and then maybe, Al, you want to take the EBITDA question? I think is it $40 million that's associated with 2021 guidance? I just stole your thunder, I'm sorry about that.

Chris Chandler, COO

This is Chris Chandler. So I'll provide some additional color on the cost savings without trying to tie to our actual 2021 plan, as Willie mentioned. But we're working very hard to ensure these savings are sustainable. We believe we've reduced our fixed cost by $125 million to $150 million compared to 2019. And that would exclude any benefit from asset sales or reductions in variable costs. We would expect to achieve these savings if we're in an environment similar to the one that we're currently in. They're really from a number of categories. So it can be things like personnel costs, it's efficiency-related improvements, it's organizational streamlining, it's consolidation and closure of field offices, it's supply chain improvements, it's a reduction in the number of generators that we use to operate our assets, it's moving volumes from trucks onto pipelines, it's consolidating information systems and so on. So we expect to sustain cost reductions in all of those categories going forward. And we'll provide additional color on that when we release our formal 2021 guidance.

Wilfred Chiang, CEO

Al, do you want to add anything more to the...?

Al Swanson, CFO

Yes. No, Shneur, we assumed, clearly, not all of the asset sales happening early in the year. So therefore, it's not as big of an impact, Willie mentioned, the $40 million. That's an approximate based off of more of a midyear type of a convention.

Shneur Gershuni, Analyst

Great. And then maybe as a follow-up, just a clarification. With respect to the buybacks, thank you for taking a formulaic approach to the buybacks. I think the transparency will be much appreciated. I was just wondering if you can clarify if you do asset sales, does that count as part of the free cash flow, and therefore, some of that would be available for buybacks as well too as part of your 25% formula? Or is that excluded from that?

Al Swanson, CFO

This is Al. No, it would be included. Clearly, we will use judgment as to the quantity of EBITDA that we're selling. And in my prepared comments, I talked about maybe changing the allocation a little bit based on that consideration. But no, our definition of free cash flow and we lay out the calculation on the slide includes all investing activities, asset sales as well as maintenance capital and investment capital.

Shneur Gershuni, Analyst

Perfect. Really appreciate the color today and stay safe.

Wilfred Chiang, CEO

Willie here. Regarding the consensus of approximately $2.3 billion, I think it's worth noting that we have $50 million included in our Supply and Logistics segment. I'm not sure what others are estimating, but I've seen some consensus figures around $100 million. When you combine that $50 million with the EBITDA, it brings us to a similar range if we normalize the numbers.

Operator, Operator

And next, we'll go to Jeremy Tonet from JPMorgan.

Jeremy Tonet, Analyst

I wanted to follow up on the asset sales. Regarding the $600 million, which you've mentioned in various ways, how much of that is new compared to what you previously discussed about asset sales? It appears some amounts have shifted from 2020 to 2021, so I would like clarification on what is new. How far along are you with these transactions, and how confident are you about their closure? Additionally, I didn't catch how these relate to debt reduction alongside other buybacks and outright debt reduction. Could you provide clarity on these matters?

Wilfred Chiang, CEO

Jeremy, let me start with this. I'm going to ask Jeremy Goebel to fill in the blanks here. We mentioned $600 million as a potential upside, which could be several hundred million for 2021. Regarding the $440 million or $450 million we announced for 2020 compared to the $600 million, we are essentially resetting the slate now. Moving forward, our target is $600 million or more. Jeremy, would you like to elaborate on this?

Jeremy Goebel, Executive Vice President, Commercial

Yes, Jeremy, this is Jeremy Goebel. We are continuously working to streamline our asset base. When we consider cost reductions, we assess the entire organization. Chris' team, along with the rest of the group, is focused on identifying assets that could potentially be sold, determining which ones hold more value for others than for us. This process involves examining external markets to understand what people are interested in. We have received significant interest in certain assets, and those are the ones we plan to sell. They are valuable assets, but they will be better utilized in someone else's hands, allowing us to optimize our available capital for potential debt reduction and stock buybacks. So the $450 million, as Willie stated, that closed against the $600 million this year. Essentially, you could see a potential $150 million carried into next year. We aim to exceed the $600 million target if we successfully seize all the opportunities in front of us. Al mentioned the mid-year convention, which provides some context. You all understand the timing of investment banking processes and their progression. Therefore, you can expect the earliest opportunities to arise in the second quarter, with additional developments possible in the second half of next year. I hope that clarifies the timing aspect.

Al Swanson, CFO

And Jeremy, I think you threw in a question on the repurchase; you probably get your follow-up embedded in there. But we would look at only common equity repurchases and not either of the 2 preferred securities at this time.

Jeremy Tonet, Analyst

Got it. If I can ask one more question, I wanted to clarify with Jeremy regarding the demand recovery he described. How do you think that might affect supply in different basins next year? Could you provide any insights on potential volume increases or decreases by basin across your operations?

Jeremy Goebel, Executive Vice President, Commercial

Jeremy, that’s a good question. When we talk to producers and customers, we estimate that 20% to 30% of our cash flow will be returned to shareholders. We anticipate a recycle ratio of about 70% to 75% or even 80%, though we expect it to be on the lower end for next year. With oil prices below $50, we believe that will be the market condition. Our forecast considers oil prices between $40 and $45 for next year, which will likely result in a flat performance in the Permian Basin compared to the fourth quarter, with an exit rate of 4.1 and potential for some growth, although it may vary throughout the year based on the timing of completions. But largely managing cash flow and that. The recent wave of M&A could yield some disproportionate allocation to the Permian away from other basins. We're seeing that with some of our customers, which could yield incremental cash flow. But right now, we're sticking with roughly flat to the fourth quarter. And for other basins, you could see continued declines. But largely, what you're seeing most producers do is the declines have started in the second quarter. They're stabilizing now using drilled and uncompleted wells, and they'll try to do that throughout next year. And look to see and reevaluate as demand returns and you get back to a more favorable pricing environment for them to get the drill bit back to work.

Operator, Operator

And next, we'll go to Keith Stanley from Wolfe Research.

Keith Stanley, Analyst

Just following up on the asset sales. Can you give a sense of confidence or visibility in being able to execute at prices you think are adequate? I guess we haven't really seen a lot of new asset sale since the pandemic. So any sort of early reads you have or visibility on getting good prices?

Wilfred Chiang, CEO

I'll make a comment, Keith. We have been successful in transacting on a number of asset sales, as you know, I think this will take us above $3.5 billion worth of asset sales, and we've been able to do them at good values. I don't think we're prepared to give you any more detail at this point. And as we go forward into 2021 on our guidance, if we have some additional information, we can give you some. But we wouldn't have announced our intent if we didn't have some confidence that we can move forward with these.

Keith Stanley, Analyst

Okay. Great. And second question is just on the updated guidance for Transportation for the year, it's up $80 million. The volume outlook is pretty similar. So can you just talk a little more to some of the big changes that are causing Q3 and Q4 EBITDA to be higher in transportation than your expectations last call?

Wilfred Chiang, CEO

Al, why don't you take that?

Al Swanson, CFO

Sure. I'll take a shot at it. Yes. No. EBITDA up $80 million, volumes kind of flattish. If you recall back in May, shortly following the pandemic, we lowered our transportation segment quite meaningfully about $300 million. And the only reason I'm mentioning that is that as the business performed a little bit better in the second quarter, we had a little bit of cushion in our model. But following the big change and the uncertainties, we chose to retain some cushion in our guidance when we put it out in August. And then lower costs being a big part of it, some of which aren't volume-related it's just cost management. And then a little bit of it is with some of our Canadian pipe with an average higher margin, just kind of the business mix, are really the three key things. But we did have a little bit of cushion in our model when we updated guidance last time.

Operator, Operator

And next, we'll go to Michael Lapides from Goldman Sachs.

Michael Lapides, Analyst

Congrats on a good quarter, and I appreciate the announcement and the detail on capital allocation. Really, just when you think about the asset portfolio mix, outside of the Permian and maybe inbound into the Cushing and into the Gulf Coast, how do you think about what in the Plains portfolio over time may prove to be non-core? Like obviously, you've got the $600 million, you haven't disclosed what that specifically is. But when you think about kind of the other parts of the business that may not be core to kind of your long-term 5-year plus strategy? How do you think about what might fit into that bucket?

Wilfred Chiang, CEO

Well, Michael, I understand your request for the list, but we are not ready to share that information at this moment. However, I can explain that everything we do is part of our integrated approach. A good example of this is the asset sales we've completed, particularly some transactions in California. When considering the integrated pull-through of certain systems, those with less integration may present greater opportunities and value to other parties rather than to us. So I would tell you, the integrated model is very, very key. And you've seen us sell some other assets that, as we think about where future outlook of capacity may go. Again, if it fits better in someone else's portfolio, we've been willing to do that. So unfortunately, I'm not going to be able to give you much specifics other than as you think about assets, things that aren't tied to integration. But the other point I would tell you is we've done quite a bit on strategic joint ventures in working with other companies in efforts of rationalization and creating more capital efficiency for multiple parties. So hopefully, that helps.

Michael Lapides, Analyst

No, that helps. And then just kind of a nuts and bolts question on cost management. If I look at the nine months of the year-to-date income statement, G&A is down $24 million year-to-date. Field OpEx is down $172 million, so call it almost $200 million year-to-date. Is what you're implying is that some of that will actually come back next year? Because if you're running at almost $200 million year-to-date down, and you're talking about kind of $125 million, $150 million, it almost implies some of that comes back.

Wilfred Chiang, CEO

Yes. I'm going to let Chris Chandler address this, but what I'll tell you is we're very deliberate about how we think about this. Sometimes you can think about costs and it's variable and fixed. And what we've shared with you is what we think are enduring fixed expense cost reduction. So it's truly what you'll see at a minimum versus volume related, but Chris, why don't you share a bit more?

Chris Chandler, COO

Sure. Yes, this is Chris. You've got the right numbers. Our combined operating and G&A costs are down almost $200 million versus the same period in 2019. And while we can't directly compare that to the $125 million to $150 million reduction in fixed cost that I mentioned earlier, it is reasonable to think as some of that difference being related to variable costs and our expectations for what we expect to spend in 2021 and future years. The other thing to think about there is part of our cost reductions in 2020 are deferrals into 2021. These can be things like not wanting to undertake large maintenance or overhaul activities and bring outsiders into our assets in a COVID environment. If we have the flexibility within our inspection programs and the regulatory requirements, we've deferred some of those activities into 2021, primarily due to COVID. So those are just a few examples of why the numbers are different.

Wilfred Chiang, CEO

Michael, this is Willie. You've talked about operating costs and G&A. And Chris touched on it, but it's more than that, right? So if you look at our maintenance capital expenses, not only do we talk about the investment capital, having high returns. But the maintenance capital, we've been successful in being able to bring those numbers down a little bit that will endure over a period of time. So it's really cost across every bit of the organization and how we spend money.

Operator, Operator

And we'll go next to Tristan Richardson from Truist Securities.

Tristan Richardson, Analyst

Thanks for all the commentary on '21 and the detailed commentary on repurchase. It's more insight than we're used to. Just one quick question on the leverage target as a trigger for that sliding scale of the repurchase allocation. Is the desire to get to a certain point within the 3.0x to 3.5x before ramping that relative percentage? Or if we're in that band, it really just opens it up for you?

Wilfred Chiang, CEO

Al, do you want to take that?

Al Swanson, CFO

No, we won't have a specific trigger nor will we necessarily assume you got to hit the exact low end. There's a number of variables. I think we summarized it on one of the slides that we would consider as we think about it. Clearly, the up to 25% of free cash flow after dividends is where we feel like is the right allocation until we see progress on leverage being one, but then the other variables as well. With regard to just industry conditions, market conditions, et cetera. So no, we're not going to provide an exact formula for how we do it.

Tristan Richardson, Analyst

Al, and then just to follow-up, curious on the fee-based 2021 versus 2020. Can you talk a little bit about how much we should think of as the delta there being asset sales versus new project contributions like Wink-to-Webster? And just the strong Q1 2020, making for a difficult comp.

Jeremy Goebel, Executive Vice President, Commercial

This is Jeremy. The way to think about Q1 2020 is you still didn't have all the long-haul pipes in the Permian in service. So Epic and Gray Oak were ramping. So there was on the legacy pipes, there was more there. That makes the tougher comp. I'd say with regard to project contribution, as some of our partners, I think, have said earlier today, Wink-to-Webster ramps up this year. That's reflected in our guidance of next year, essentially think of it as the Midland-to-echo portion will be available. We are still working on some origination and destination projects, which have resulted in a slowdown of capital spending to maximize efficiency with our partners. We expect to ramp up activities later in the year, specifically from the second half to early in the fourth quarter. At that stage, the TSAs will be activated, and the significant contributions from Wink-to-Webster will only begin in the fourth quarter. Additionally, the Diamond/Capline project is anticipated to start in the first quarter of early 2022.

Operator, Operator

And next, we'll go to Ujjwal Pradhan from Bank of America.

Ujjwal Pradhan, Analyst

Thank you for the detailed information on the capital allocation plan. I have a clarification regarding the asset sales. Willie, you mentioned earlier that the expected contribution is about $40 million for next year, assuming a sale occurs in the middle of the year. This would suggest an EBITDA multiple of approximately 7.5 times. Is that correct? Additionally, could the total asset sale proceeds be higher next year if the EBITDA multiple is better than that?

Jeremy Goebel, Executive Vice President, Commercial

Ujjwal, this is Jeremy Goebel. We certainly think it could be substantially better than that. Then we're specifically not providing detail because we're in the process of discussing with buyers. So I find it difficult to do projections on that front for that reason. But there's substantial assets, which will have significant interest, and we're going to absolutely do our best to get the highest number, and we'd look to significantly exceed that number that you referenced. I'd say that we'll give you more color as we have it. But at this point, we don't. I'd echo Willie's comment.

Al Swanson, CFO

And this is Al. My comment earlier about midyear convention was trying to illustrate that we didn't assume January 1, that was an approximate. So don't take a linear exactly linear calculation to that.

Wilfred Chiang, CEO

I'll tell you. This is Willie. Another key point to consider as we focus on cost reductions and simplifying the business is streamlining. The asset sales we've completed over the years, particularly with non-core assets, have significantly improved our ability to streamline operations. This allows us to concentrate on our key assets rather than spreading ourselves thin across numerous different assets.

Ujjwal Pradhan, Analyst

Got it. Very helpful. My second follow-up is regarding the exposure to federal land. I apologize for revisiting this topic, but it has certainly been a significant focus in relation to the election. Last year, you mentioned that approximately 20% or less of your dedicated Permian acres were on federal lands. Can you provide any updates on your current daily volume gathered on those acres and how much of that flows downstream through your long-haul types? Additionally, if the respective producers have adjusted their production, do you anticipate seeing replacement volumes in your system?

Wilfred Chiang, CEO

So Ujjwal, this is Willie. I want to start on that. We talked about 20%, but what I would almost rather do is focus on the 80% that's not on federal lands. So when you think about the 80% of the acreage we've got, there's a deep inventory that the producers have as far as well sites there. And when you go to the federal lands, I think the one thing I want to highlight is that there are volumes that are flowing today as we think about potential restrictions on federal lands. We believe that most of this will unfold in the future, and reclaiming leases on federal lands isn't currently feasible. Additionally, producers have accumulated a significant inventory of drilling permits. It's important to clarify that any risks associated with federal lands won't affect the existing volumes on our system. Jeremy, do you have anything to add?

Jeremy Goebel, Executive Vice President, Commercial

No, Willie, I'd say it's appropriate. We talk to our customers all the time, and they feel comfortable they have a contract with the federal government to develop those assets. They have multiyear inventory with options to extend. They have substantial inventory because they have much higher rig counts now than the activity. So I'd say those are in hand. I think the base case is a view that there'll be a delayed permitting process. But with multiyear inventories of drilling ahead of them, they can plan for that in advance. So I'd say the view of everything stops immediately on day 1, that doesn't make a lot of sense. Could there be delayed in permitting and go back to Obama era? Yes. Could it be if the Trump administration wins? I think there's a lot of permutations, and it's not an on/off switch. The state of New Mexico will have an influence on this matter. There are significant revenues tied to the oil and gas sector, and we are confident that our customers will continue to perform. If they do not, it could increase the value of our other assets. A stricter regulatory environment could affect other operators but might benefit ours. Depending on the extent of these changes, we could gain in various ways. This situation is not straightforward and is not confined to New Mexico; it could also affect the Williston Basin and direct more barrels to our systems elsewhere. Therefore, it is important to consider this within the broader regulatory context, as it is not a simple yes or no scenario.

Ujjwal Pradhan, Analyst

Appreciate the color. Very helpful. And if I may, just to squeeze a quick one. With the buyback language, you indicated you could pre-purchase either PAA or PAGP units. What could drive the decision between buying back those two units?

Al Swanson, CFO

This is Al. I think the primary one will be the value and the price of the securities; our intent would be to focus on PAA initially.

Operator, Operator

And we'll go next to Jean Ann Salisbury from Bernstein.

Jean Ann Salisbury, Analyst

Okay. Great. I just want a market share question. If I divide your long-haul Permian volumes by total Permian, it looks like you are losing some market share from 28% in first quarter to about 22% now. Is that mainly a function of the pipelines ramping that Jeremy referenced in an earlier question? And is the current 22% stable number until Wink-to-Webster starts?

Jeremy Goebel, Executive Vice President, Commercial

Jean Ann, this is Jeremy Goebel. We don't get into specifics on pipes, but what you would say is there are probably some loss in spot volumes, which would be expected, this would be a stable number, I think. I'd reference you to Page 8 in the presentation, we've listened to our investors and providing some more disclosure there. So we're very comfortable with our Permian long-haul position. And one of the unique things that we haven't really ramped up is our lease supply pushing barrels to market. And that's something that we have the opportunity to do and bring barrels at the profitability and margin is there. In some cases, we can make the same amount by selling it in-basin versus shipping on a pipeline. So we have some tools that others don't. And longer term, we'll fill our pipelines while others are looking for supply. The perspective that everything is going to collapse is not accurate; Plains will consistently have volumes on their systems. As illustrated on either Page 4 or 7 of the presentation, we have sufficient volume to completely fill our pipelines whenever opportunities arise. No other company can make that claim. Therefore, the idea that contracts solely dictate where volumes are directed is somewhat misleading. We have the capability to create markets and utilize various tools. I'd say some of the volumes that came off into the Mid-Continent those were looking to figure out ways and as domestic demand pulls more barrels to Cushing, you could see some move more in that direction. So there's a lot of things at play. It's not as simple as saying it's going to be static and linear. It's market-driven. And we'll have a hand to say in that because we control enough supply to kind of push barrels to where the differentials support.

Operator, Operator

And we'll go next to Colton Bean from Tudor Pickering and Holt.

Colton Bean, Analyst

So just to follow-up on all the questions around the 2021 guide. If we were to look at the fee-based portion of $2.15 billion and add back the $40 million that's associated with asset sales, compared to the Q4 fee-based run rate, it actually looks like numbers are up marginally. So I guess, one, is that a fair characterization that from an exit-to-exit perspective, your earnings are actually flat to actually a little bit better for fee-based? And then second, is that primarily a function of Permian drilling and offsetting declines in other basins?

Wilfred Chiang, CEO

Jeremy?

Jeremy Goebel, Executive Vice President, Commercial

Thank you for your question. What specific numbers are you looking for? I want to ensure I align with the trend you are observing.

Unknown Executive, Unknown

It's a little higher in the fourth quarter, it's slightly higher. It's not...

Jeremy Goebel, Executive Vice President, Commercial

Yes. Yes. I'd view this largely as flat to fourth quarter, as we said from the beginning. I think that's the way to look at it is it's going to be noise, but the general trend would be consistent with fourth quarter because you think you're largely at MVC levels on the long-haul pipes and your gathering systems are basically flat production. Our gathering exposure outside the Permian is very minimal at this point, contributing to this. So the Permian gathering trend plus the long-haul trends and the facilities are relatively stable as you see across the assets. That's the way I would look at it.

Al Swanson, CFO

And we would intend to in February provide more detailed guidance.

Jeremy Goebel, Executive Vice President, Commercial

Yes. And another thing to think about is, remember, the basis for this, and I think it's somewhere in the presentation, but it says $40 to $45, we're basically assuming close to 80% refining utilization in that neighborhood for the downstream pipes. So anything better than that, that's going to drive potential outperformance.

Operator, Operator

And next, we'll go to Gabe Moreen from Mizuho.

Gabriel Moreen, Analyst

I have two quick questions. First, regarding the balance sheet and leverage metrics, how does the new capital return framework align with the goal of possibly achieving an investment-grade rating from the agencies? Also, are the agencies that currently rate you as investment-grade comfortable with this plan?

Al Swanson, CFO

Yes. We believe it aligns with investment-grade status, and we are taking a cautious approach to that allocation. Essentially, we are emphasizing being free cash flow positive after distributions, with 75% of that directed towards debt reduction, focusing on actual debt reduction rather than relying on EBITDA growth to achieve a lower debt level. So it's a very disciplined approach. We think it is consistent with IG metrics. And ultimately, if we don't generate free cash flow after dividends, we won't be buying in any equity in 2021 or beyond. So that's a little bit of where we're intensely focused. I think you kind of heard that in Willie's comments on running a very disciplined approach to how we run the company.

Gabriel Moreen, Analyst

Al, and then maybe as a follow-up for me on election eve, I don't want to promise of, read my lips, no new acquisitions. But I'm just curious with all the talk about consolidation within I guess the energy sector at large. How the capital return framework and I guess, the focus on dispositions would fit into, I guess, a general viewpoint of midstream consolidation and whether assets that are attractive and ancillary to your footprint come to market, whether you would not pull the trigger based on your current, I guess, guidance and outlook there?

Wilfred Chiang, CEO

Yes, Gabe, this is Willie. When we think about rationalization, many of the strategies we've outlined in our playbook involve strategic joint ventures that are favorable and beneficial. I believe we will see more of those. Peer asset sales and some of our own assets may encounter hesitation due to valuation differences. I hope that helps.

Jeremy Goebel, Executive Vice President, Commercial

Gabe, this is Jeremy. Just a couple of other thoughts. One, our securities, we're buying them now. We're not issuing any, right? So I think us using our currency to buy something is largely off the table. What we're looking more as cashless transactions, as Willie said. It's a relative value exercise. The seller is less concerned about the absolute value at that point. You can still enter into strategic JVs with others and get to a point where you extract the synergies on a relative basis. And so those are tougher deals to pull off, to be honest with you, but the industry is motivated to get towards getting to the right answers and taking out idle capacity and getting to a point where you can have reasonable return. So I think we'll continue to look for opportunities to do that, but our focus will be doing it in a very disciplined way and getting valuation right and doing it in a cashless manner where you can still extract the synergy.

Wilfred Chiang, CEO

I think the other way to think about this, Gabe, is you've heard us talk a lot about driving free cash flow plus, right? And all the levers that go into that. So for us to do something that would increase debt maybe near-term for a long-term return, that's just not in the playbook right now.

Operator, Operator

And next, we'll go to Sunil Sibal from Seaport Global Securities.

Sunil Sibal, Analyst

So a couple of questions. So first, when we look at the transportation segment, it seems like this quarter, you benefited about $65 million or so from MVC payment. How should we think about that going forward? Obviously, you're guiding to a kind of similar level of activity going forward. And then how should we also think about that in the context of your customer credit quality?

Wilfred Chiang, CEO

Al, you want to take that?

Al Swanson, CFO

Yes. I mean, as far as the fourth quarter, we expect to see shipments roughly in line with the contractual requirements. Clearly, if that doesn't happen, frequently, there's a delay, and you might see the collections actually come in first quarter of next year, et cetera. If that was the nature of the question. Clearly, with regard to the third quarter, we had some of that MVC amount related to second quarter and some of it was self-contained inside of the third quarter itself.

Operator, Operator

And next, we'll go to Jeremy Tonet from JPMorgan.

Sunil Sibal, Analyst

Okay. And then my follow-up was on the industry environment. So we've seen a fair bit of upstream M&A. I was just curious what are your thoughts on how does it impact the midstream and how do you see the environment for midstream M&A? Obviously, you guys have been active in some asset transactions, but do you see the upstream M&A kind of facilitating any corporate M&A in the midstream also?

Jeremy Goebel, Executive Vice President, Commercial

Sunil, this is Jeremy Goebel. The first question was how does it impact us? From a midstream perspective, we typically work with larger customers, which leads to better credit relationships that should generally benefit us. Each transaction is unique, and the buyer usually has existing relationships. We might need to cultivate new connections, but overall, we have a lot to offer and a significant supply position to assist marketers. And on the upstream side, we have systems that are interconnected to anyone and everyone. So we generally play nice in the sandbox with the bigger customers, and I think that's the trend which you would expect. The second part of your question was associated with do you see upstream yielding to midstream. I think the answer is it's inevitable, and it will happen but just like investment cycles, upstream first, midstream next, downstream following. You'll see that it's going to take some time. I think there's the self-help that everybody is doing. Chris mentioned a lot of the efforts we're making on our end. I believe that our customers are facing similar challenges. The distribution model and the nature of MLPs complicate matters a bit, and I see leverage as a barrier to transactions. Everyone will need to strengthen their balance sheets to reach a point where deals can proceed. I think this will take some time, but it's certain that it will happen; it just may require a while to get there.

Operator, Operator

I want to thank everybody for joining our call today. I appreciate your following us and your continued support and look forward to touching base throughout the remainder of this week and in the future. Thank you.

Wilfred Chiang, CEO

Thanks, everyone.

Operator, Operator

And that does conclude our call for today. Thank you for your participation. You may now disconnect.