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Sunoco Logistics Partners L.P. (NYSE:SXL)

Q3 2013 Results Earnings Call

November 6, 2013 8:30 AM ET

Executives

Mike Hennigan - President and CEO

Pete Gvazdauskas - Vice President, Finance

Martin Salinas - Chief Financial Officer

Mackie McCrea - Chairman

Analysts

Stephen Maresca - Morgan Stanley

Shneur Gershuni - UBS

Steve Sherowski - Goldman Sachs

Ethan Bellamy - Baird

Brian Zarahn - Barclays

Brad Olsen - TPH

Mathew Phillips - Clarkson

John Edwards - Credit Suisse

Operator

Welcome to Sunoco Logistics Q3 2013 Earnings Conference Call. All lines have been placed in a listen-only mode until the question-and-answer session. Today’s call is being recorded. If anyone has any objections you may disconnect at this point.

I would now like to turn the call over to Mr. Mike Hennigan, President and CEO. You may begin.

Mike Hennigan

Thank you, [Rita]. Good morning, everyone. Welcome to Sunoco Logistics Partners conference call to discuss our third quarter 2013 results. I’m Mike Hennigan, President and Chief Executive Officer for the General Partner. Joining me today is Pete Gvazdauskas, Vice President of Finance and also on the call are Martin Salinas and Mackie McCrea.

In the course of our remarks and in the subsequent Q&A, we’ll be referring to slides that have been posted on our website entitled Third Quarter 2013 Earnings Conference Call and we may be making some forward-looking statements. In that regard for the purpose of facilitating the discussion, I refer you to slide two.

With regard to our results, we are pleased to report quarterly EBITDA of $181 million and distributable cash flow of $121 million for our Partnership. Through the first nine months of 2013, we have generated $661 million of EBITDA and $500 million of distributable cash flow driven by the strength of our crude oil pipeline business.

Our crude oil pipeline business led our results in the third quarter as we are seeing the further development of our expansion projects in West Texas with Longview Access coming on line and the initial start-up of our Permian Express I.

Our crude oil acquisition and marketing business earnings declined significantly in the quarter as market conditions made a dramatic shift as the WTI to LLS differential collapsed in the quarter.

Looking back at the year-to-date, the WTI Midland to LLS spread was in excess of $25 per barrel in the first quarter dropping to $15 a barrel in the second quarter and then further dropping to approximately $5 per barrel in the third quarter.

The pipeline logistics to the Gulf Coast that came into service in the first half of the year have changed the market dynamic, but we still expect volatility to occur in these differentials at various times going forward. As we stated many times in the past, we haven’t counted on these wide differentials in our strategic plan or in our distribution philosophy.

Our terminals business continue to generate strong earnings in the quarter with our Nederland Terminal gain seeing increase volume as a result of oil flow to the Gulf Coast. We did see an expected drop in terminal earnings in this quarter related to the seasonality of our butane blending business but we expected to pick back up in the fourth quarter.

Overall, although it’s not a record quarter for us, we are still very pleased with our results. The third quarter was an excellent quarter financially for our base ratable business. As we continue to execute our growth plan, new projects are generating increasing ratable long-term cash flow to help offset the recent market decline in our crude margin business.

Now let me give you an update on some of our major organic growth projects. We are pleased to announce that we concluded another successful open season for our Granite Wash extension crude pipeline project, which connects the Granite Wash production area in Northern Texas and Oklahoma to our existing pipeline system. This pipeline will have the capacity to deliver approximately 70,000 barrels of crude oil per day to the Gulf Coast and mid-continent markets.

We continue to develop Permian Express 2, which will increase the takeaway capacity out of the Permian Basin by approximately 200,000 barrels per day and will be available to our Nederland Terminal and provide further access to the Gulf Coast and mid-continent markets. This project is currently in open season as we pursue binding commitments.

We remained bullish on Permian production as console estimates approach 200,000 barrels per day of annual crude production growth from both the shale and other areas in this robust West Texas region. This anticipated production growth support the development of our Permian Express 2 project.

In the NGL area, Mariner West continues in startup mode and is expected to be operational at approximately 20,000 barrels per day in November, and ramp up to approximately 50,000 barrels per day by the end of the first quarter 2014. This project startup was delayed a few months as we made a decision to replace the 9 mile section of pipe as we wanted to make sure we had eliminated that integrity concern.

Mariner East with a capacity of approximately 70,000 barrels per day is expected to be able deliver propone by the second half 2014 and both ethane and propane by mid 2015. As you are aware, propane is already exported from the Marcus Hook terminal today, as the Northeast is long NGLs and will continue to go longer NGLs as the Marcellus and Utica develop further.

We believe that a Northeast NGL hub at Marcus Hook which is capable of handling a broad array of NGL products and is located less than 300 miles from the Marcellus will be a very attractive proportion for producers and local and oversea -- overseas consumers alike.

Mariner East II is in development as the production in Marcellus and Utica continues to grow necessitating additional NGL takeaway capacity needed in the basin. We continue to be bullish this project as the production curves for the Marcellus, Utica NGL production continue to move upward with time.

The latest estimates of 800,000 barrels per day or more of NGL production by 2016 time frame is approximately a doubling from the current levels. We expect to launch an open season soon based on increasing market interest.

Our Gulf Coast NGL project, Mariner South, which is a joint projection with Lone Star shows the synergy within our family of partnerships to export propane and butane from our Nederland Terminal on the Gulf Coast. This project will be operational by Q1 of 2015.

Since 2011, we have announced 10 successful open seasons and we’re excited about our sequel projects that are in development. Permian Express 2 and Mariner East 2, all of these projects are blue bar-based projects providing fee-based earnings and are the basis for our future distribution growth. The cash flow from these projects will allow us to continue to grow ratable EBITDA and reward our unit holders.

From a capital standpoint, we've previously stated that we intended to spend approximately $700 million of organic capital in 2013. With the success of the Mariner South project, the Eaglebine Express project and the Granite Wash Extension along with continued growth in our butane business in our Nederland Terminal, we are revising our guidance to approximately $900 million of organic capital for 2013.

With continued success in our growth strategy and following our normal pattern of giving capital guidance at this call, we are pleased to announce that we expect to spend approximately $1.3 billion of organic capital in 2014 as we implement our broad array of projects.

As we have done in the past, we will give our 2014 guidance for distribution growth at the February call. In the meantime, we have announced increase to $2.52 per common unit on an annualized basis which represents our fourth consecutive 5% increase quarter-over-quarter and our 34th consecutive increase overall.

This also represents a 22% year-over-year increase compared to the third quarter of 2012. We also expect to continue our 5% quarter-over-quarter increase in the fourth quarter, which would give our investors over 20% growth for the full-year 2013 distribution compared to 2012 as we continue to implement our growth strategy. We continue to grow our blue bar earnings and remain committed to distributing these earnings as our projects are implemented and generate cash flow.

As we discussed in the past, our long-term business model of 80% blue bar and 20% red bar would generate an approximate 1.25 times coverage ratio. We also continued our tremendous balance sheet capacity to fund our expansion capital program.

Our debt-to-EBITDA ratio was 2.5 times as of September 30th. As we continue to implement our plan, we remain committed to sustainable competitive distribution growth. We’re confident our strategy is on track and we are committed to growing our cash flows over the near and long term.

With that, I’ll ask the moderator to open the lines for any questions that you may have.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question will be coming from Mr. Stephen Maresca of Morgan Stanley. Sir, your line is open.

Stephen Maresca - Morgan Stanley

Hey, thanks. Good morning, Mike.

Mike Hennigan

Good morning, Stephen.

Stephen Maresca - Morgan Stanley

Thanks for all the detail on the -- CapEx. I wanted to discuss a couple of things. One on the Mariner East Part 2, can you talk a little bit about what form that would take, what would need to be gone in year-end and how much you think that could be ethane versus propane and what timeframe you would potentially go to an open season on that?

Mike Hennigan

Yes, it’s a great question, Stephen. What we’re seeing right now is a lot of interest in the market but it kind of grows across the NGL complex. There is considerable interest in ethane still, as you know there is a tone of ethane up in the Marcellus area that’s working its way into gas that needs to get out and get a higher value product.

Propane continues to be a source of concentration for producers and even we’re seeing interest as we expected along the heavier molecules, butane and possibly the natural gasoline.

So where we stand today is we are expecting to go to open season soon. We are in what I would call the final stages of discussions trying to determine exactly what everybody's interested in. So our hope is to go there real soon. I don't really know exactly what the commitments would be obviously, that's why we go to open season. But our expectation is the market interest is high, we are getting close to going out and at the end of the day we are pretty bullish.

As far as what is the project is, Mariner East 1 is existing pipeline across Pennsylvania and then as you know, we acquired the Marcus Hook terminal to be the foundation for the mariner projects up on the East Coast. So with this project would be a new lay, so we would be looping the line and then adding additional inventory to support the additional volumes at Marcus Hook. So it will be a little bit more additional refrigerated storage at Marcus Hook in addition to more pipeline capacity.

Stephen Maresca - Morgan Stanley

Okay. Thanks for that. And then moving to Permian Express 2, when does that open season end and are you looking for, what type of commitment in terms of, does it need to be full commitment on that line to move forward? Yeah, that’s it.

Michael Hennigan

Yeah, that’s another good question, Steven. PE2 open season concludes midmonth. So we’re pretty close to it, we are bullish. We believe the Permian really needs it. I mean, you’ve seen in the marketplace where the differentials have gone and Midland continues the feel discounted times. So our view new long-term is PE2 is really needed in the basin as production continues to grow pretty robustly. So we are in the middle of it right now. Hopefully, within the next couple weeks, we will close out the season and then be able to communicate where we think we ended up.

Stephen Maresca - Morgan Stanley

Okay. And then final one from me, big increase next year on growth capital, again on to $1.3 billion, I hadn’t gone all the way through the slide decks, so I apologize. Do you breakdown how that’s coming, at what projects that comes from and I guess my question is really, is that that $1.3 billion all projects that are really, you would call 80% to 90% probability to happen that are committed, is that the view on that $1.3 billion that’s not like potential projects? It is stuff that you feel is definitely happening in 2014. And then my second small question on top of that is just, do you expect you can handle that with all debt given your balance sheet?

Michael Hennigan

Yeah. Steven, first of all, it's not 90%, that is 100%, that is our plan for 2014 at this point. And we usually choose at this time of the year to give the market guidance for next year. So those are all approved projects that we plan to implement. We don’t -- as you know, we don't give individual projects mainly because of the competitive reason and the nature of the sequels. But we have said in the past and I'll reiterate that we believe on an overall basis using a fixed multiple is a good number for us to communicate to the market. So our expectation is 100% completed. It is in the approximate region of around $1.3 billion. So we feel really, really good about that.

I would also point out just for clarity that that $1.3 million does not include Permian Express 2 or Mariner East 2, as those projects are still in development. Back to your question on financing, as you know we have considerable debt capacity, restored 2.5 and our target has been in the 3.5 to 4 range. We've enjoyed additional cash flow, so we still have quite a bit of debt capacity to put to bed on our plan going forward.

Stephen Maresca - Morgan Stanley

Okay. Great. Thanks a lot, guys.

Michael Hennigan

You’re welcome, Steven.

Operator

Thank you. And our next question will be coming from Shneur Gershuni from UBS. Your line is open.

Shneur Gershuni - UBS

Hi. Good morning, guys.

Michael Hennigan

Good morning.

Shneur Gershuni - UBS

Just a follow-up on Steve's last question, with $1.3 billion of CapEx being spent next year I assume it’s fair to assume that you don't achieve the full EBITDA impact on day one. How should we think about sort of the flow through of the EBITDA benefit from the spend, is it -- what percentage should show up in ‘13 versus ’14 and so forth?

Michael Hennigan

Yeah. We don’t really disclose the EBITDA going forward. But what I would tell you, looking at our deck, we’ve tried to give a good summary of all the open seasons and when the projected startups of those projects are.

So you can see from the slide, that several of them are already online, the ones on the left hand side of the page, have started online and then as you move further to the right hand side of the page in time, you will see that, some projects are going to come on in mid 2014s, some projects are going to come on in the early part of 2015. So you are going to have an array of privates coming online overtime. But what it shows you at this point is, timeline is such that all the projects will be on by about mid 2015.

Shneur Gershuni - UBS

Okay. Great. And a couple of quick thoughts, starting with the marketing segment, definitely a challenging quarter, compared to how robust it has been for the last couple of quarters? Can you talk about whether we’ve kind of tip donator if things have improved, you are kind of five weeks into the quarter at this point right now. Have things sort of changed a little bit? Is there some seasonality for us to think about us well to with respect to volumes?

Mike Hennigan

Yeah. It’s a great question. The guidance that I can give you in this area is very difficult because there are so many pricing points that impact would happens in that segment of our business.

In the past, we have always talked about the WTI LLS spread as the good indicator. And as I mentioned in my prepared remarks, we have gone from $25 at the start of the year down to $5.

But as I have often said, there are many other pricing points that impact that business. You have the spreads that occurs between LLS and Brent. You have the differential Midland to Cushing. You have the differential of Bakken crude and what’s happened and all those come into play. So, as I have said many times in the past, it is very difficult even on our end to speculate as to where that’s going to play out.

Our focus has been -- we can’t control the market. Our commercial goal is to gather up whatever earnings the market offers, don’t count on them in our distribution philosophy and focus on developing projects that provide long-term ratable earnings and I think that’s what you are going to continue to see out of us.

Shneur Gershuni - UBS

Okay. Great. And one last final question, just, with the terminal facilities segment, when you sort of adjust out the $5 million from last year and so forth, kind of seems flattish yet, you had comments about how some of the terminals that need to have done well? Can you sort of give us a little bit of color as to where we should see that going and sort of and why the performance potentially wasn’t higher this quarter and so forth given your optimism about some of the facilities?

Mike Hennigan

Okay. Great. It is another good question. Little bit of noise in this quarter in that area. So Pete will comment about the prior comparison which you just mentioned, but before I let Pete comment on that is, we have a couple of things going on in that segment in this quarter.

First off, I will remind everybody that we have the butane seasonality. So Q3 is always the lowest quarter from a butane seasonality standpoint because you are just starting back up into the butane season mid September.

The other thing that’s occurring in that segment of, from a downside is we have Mariner West, so that project has been implemented as we talk about. So the terminal situation in Ohio is changing as we are speaking so that’s in transition.

We have also taken the line out of service on Mariner East in the Pennsylvania area. So we’ll be going through some transition as well there as we gear Mariner East up to start backup. So there is some transitioning occurring on the refined product side of the business that has little bit of downside.

On the upside, our Nederland Terminal continues to be robust and we are seeing increasing volumes and as I am sure, as you have seen in the press, TransCanada is getting ready to bring their pipes to the Gulf Coast.

So Nederland continues to see additional volumes whereas the northeast terminals are going through a transition as we bring our Mariner projects on line. And then I will let Pete comment on the comparison.

Pete Gvazdauskas

Yeah. Taking of, Shneur, taking a look at the third quarter of 2012 to the third quarter of 2013 one thing to point out for the third quarter of 2012, we had a $7 million LIFO or call it a gain that was from a prior period. So there was some noise in the third quarter where if you take that out to make it more comparable year-over-year, it’s about flat to slightly up $2 million.

Now let me explain that further in that for Mike’s point, Nederland, Eagle point, we now have Marcus Hook, they contributed approximately an additional $10 million year-over-year. But counter that as Mike also pointed out because of the construction of Mariner West in Marine East, during this period we saw some erosion of earnings and you are seeing the erosion of volumes on those refined product terminals and that was the tune of approximately $5 million. It was also some inventory from our butane blending business that we blended the butane but we didn’t generate the profit until we sell it into the fourth quarter.

So year-over-year we still feel very good, Nederland, Eagle Point markets far growing, there is some timing noise with the refined products acquisitions of marketing business which includes butane blending and as we pointed out the refined product terminals with Mariner East and Marine West.

Shneur Gershuni - UBS

So that $5 million is something that we should see return once everything sort of gets back to operations basically?

Pete Gvazdauskas

We are going to do our best to reconnect those terminals to the systems in the area to bring those earnings back up as best we can, yes.

Shneur Gershuni - UBS

Great. Thank you very much guys.

Pete Gvazdauskas

You are welcome.

Operator

Thank you. Our next question will be coming from Steve Sherowski of Goldman Sachs. Your line is open.

Steve Sherowski - Goldman Sachs

Hi. Good morning. Just a follow-up on the last question for the terminals, is the third quarter or second quarter seasonality, is that the type of a range good number going forward or was this quarter a little bit more extreme?

Pete Gvazdauskas

This is Pete again. It was only a little more, I’ll say extreme to the extent that we had some LIFO noise that I mentioned that there was an additional $7 million of call LIFO positive impact in 2012 versus 2013, but overall you can expect to see the third quarter having a material drop off and then picking up again in the fourth quarter.

Steve Sherowski - Goldman Sachs

Okay. And has there been any update on Pegasus and assuming there hasn’t, do you have any sense of who and there may be an update?

Pete Gvazdauskas

You know Steve we don't have a new update on that. Exxon continues to do their analysis. We continue to check with them periodically, but we really don't have any new information there.

Steve Sherowski - Goldman Sachs

Okay. And apologies if I missed this, but the increase in 2013 CapEx, what does that incorporate, which projects?

Pete Gvazdauskas

So it's the 10 open seasons that we’ve talked about in the past and they are outlined on one of the slides. It shows, what the timing of them is. In addition to that, we have growth in our Nederland terminal that we have talked about. We have growth in our butane business that we talked about. So those are the major areas that encompass most of it. As I mentioned on the previous call, it does not include projects that have not done deals. So PE2 and ME2 are not included in that number.

Steve Sherowski - Goldman Sachs

I mean just the difference in the $900 million, I think before it was $700 million, what's the majority of that Delta Incorporate?

Pete Gvazdauskas

Yes Steve what that was is during the year we ran three separate open seasons that were successful; Mariner South, Granite Wash Extension, and the Eaglebine Express project. So all of those projects that will be coming online, some of them are coming online in '14 and Mariner South coming online in '15. As they became successful open seasons in '13, we started to spend money in those, so they were the major change that increased those from our 700 plan up to the 900 and…

Steve Sherowski - Goldman Sachs

Okay.

Pete Gvazdauskas

…we will continue to spend money on those obviously in 2014 until they start up.

Steve Sherowski - Goldman Sachs

Got you. Okay, that’s it from me. Thank you.

Pete Gvazdauskas

You are welcome, Steve.

Operator

Thank you. And the next question will be coming from Ethan Bellamy of Baird, your line is open.

Ethan Bellamy - Baird

Good morning everybody. Mike, my algorithm for your crude marketing margins only works probably three and four quarters. I want to beat that dead horse just a little bit more. Can you quantify for us how much is linked to WTI LLS or at least for the quarter how much was that. And in the past, that margins moved around on the timing of trades, was trade timing an issue at all this quarter?

Pete Gvazdauskas

Yes Ethan as you can imagine, for competitive reasons we don’t breakout exactly how much is related to LLS or Bakken or any other trade points. No, I wouldn’t say that it was timing driving it. I would say that the market -- each of those individuals markets went through quite a bit of volatility.

I mean you saw, we used the one marker we went from about $15 on LLS down to about $5 on the LLS to WTI. So I think that's the main one and I said in the past that its usually the best one to give you from the correlation standpoint. But there is also the other parameters that I mentioned earlier. I mean if you look at the LLS to Brent, that will give you an indication of how competitive the domestic versus the foreign barrel is on the Gulf coast. And if you look at where the differentials are, say up in the Bakken region, that will give you some indications is to where that -- where that barrel is going to go et cetera.

So we don’t detail out the details for competitive reasons but overall the market was down. Like I said our focus is, we are going to capture whatever market is available to us and we do have a full group that is working on the commerciality of what we can capture in the market. But I like your takeaway to be, we will capture whatever red bar there is out there in the market and then, we are going to concentrate on developing blue bar projects and that’s part of our emphasis is capture whatever red bar we can and continue develop blue bar projects for long-term cash flow.

Ethan Bellamy - Baird

Okay. With respect to Mariner East 2, we have -- I mean we’re watching mega projects to move NGL out of the Marcellus, are there any of those big projects or competitive projects with ongoing open seasons that if those get done, you would back off from that?

Pete Gvazdauskas

No, we wouldn’t back off. I mean, they are obviously competitive projects. There is a difference in philosophy on those projects. Those ones believe you should take the wide range of materials down to the Gulf Coast. Our belief from the very beginning of starting the Mariner concept up in the Northeast was that the Gulf Coast is going to remain long NGLs and there really isn’t a good commercial reasons to bring barrels down to the Gulf Coast if you are only going to have to export them there.

So I would say, I don’t think there is a lot of debate that propanes and butanes and NGLs are along the Gulf Coast. The debate has been around, is ethane going to be long in the Gulf Coast. Our view is it’s going to be longer than most people expect. I know a lot of people are thinking now in 2017, ‘18, ‘19 timeframe, you will get back in balance. Our belief has been that the ethane production will continue to grow and that number will continue to move out, so that we even believe that ethane is going to be long, for much longer than people think.

So it’s a difference in philosophy, but yes, they are competitive. We remain bullish that the best value for producers is to get those barrels to an export market. That’s what we’ve decided to do from the very beginning and that was the basis for Mariner West, that was the basis for Mariner East I and it continues to be the basis for Mariner East 2.

I think the market is starting to recognize it more and more, as they see these developments occur and just the robust numbers that we have in our head is we think by 2016 you are going to be 800,000 plus. Some people quoted a number even higher than that, so the basin definitely needs some more takeaway capacity and we believe the highest value for that business segment is to export.

Ethan Bellamy - Baird

And is Mariner East II, is that born out of reverse enquiry from customers who potentially want more and see cheap suppliers, or is that you’ve been proactive and just trying to win future market share?

Michael Hennigan

Well, it’s obviously both. I mean, we believe in the project, so we’re bringing it to the market. At the same time, the market is pressing us to, when are you going to come out with this open season. What I said is we believe we’re coming out soon. At this point, our job is to find, when is the market ready for project, so that we can go out and implement them and meet the market needs.

For a while there, I think you hit in on the head. Different people were trying to figure out what do they want to do with their barrels. So, I think it’s both. We are being impressed from the market in some regards, and we’re also presenting to the market what we think is the best opportunity.

Ethan Bellamy - Baird

Thanks a lot, Mike. Good luck.

Michael Hennigan

You’re welcome, Steven.

Operator

Thank you. And the next question will be coming from Brian Zarahn of Barclays. Your line is opened.

Brian Zarahn - Barclays

Good morning.

Michael Hennigan

Good morning, Brian.

Brian Zarahn - Barclays

Just turning to the quarter, the marketing and marketing business, quick purchases declined from the second quarter, was that more mix sort of fewer bulk purchases?

Peter Gvazdauskas

Yes, Brian. This is Pete. Yeah, there were fewer bulk purchases and exchanges. The barrels that we actually pick up from the actual wellhead, those lease purchases were actually up marginally quarter-over-quarter, so those lines are not eroding.

Brian Zarahn - Barclays

Okay. And then looking at crude pipeline volumes, looking ahead, how should we think about the Permian Express contribution from a volume perspective?

Michael Hennigan

Well, on PE1, we said that we would start up in '13 at 19,000 barrels a day. And we’re currently running at around those levels. We will kick that project up to the 150ish kind of level in early 2014.

For PE2, we’re waiting to see what happens as this fining open season comes to conclusion, so PE1 is going to just progress. As we talked about in the past and then PE2, we’re going to find out if the market is there to support it by about a mid-month or so.

Brian Zarahn - Barclays

On PE1, you expect fairly high utilization.

Michael Hennigan

Yeah, we do, Brian. I mean, obviously, referenced to the earlier comments we can’t predict what the market is going to do as far as what the spreads are. But yeah, we are a believer that the spreads will still support volumes to be moving on that segment, and that’s been our belief from the beginning and we still believe that despite the volatility that’s occurred over the last couple months.

Brian Zarahn - Barclays

And I guess looking at PE2 and then Mariner East 2, if those -- in the scenario those project, those open seasons are successful, what range do you think would be reasonable for expansion of CapEx given your current guidance?

Michael Hennigan

Yeah, little too early to talk about that, Brian. I think at this point, we just want to get through PE2 and see what that tells us. And then, we’ll be able to give a little bit more color going forward and like I said with ME2, our emphasis is to get out into the market into an open season soon.

Brian Zarahn - Barclays

Thanks, Mike.

Michael Hennigan

You’re welcome, Brian.

Operator

Thank you. And the next question will be coming from Brad Olsen of TPH. Your line is open.

Brad Olsen - TPH

Hey, good morning guys. Most of my questions have already been answered but I did want to ask a couple on marketing some of these NGL export projects. You are in a pretty unique situation as your marketing projects that are both on the East Coast and on the Gulf Coast. And I just was curious, we’ve heard some folks who are marketing pipeline projects out of the Northeast talk about some of the producers dragging their feet, or walking at some of these fixed fee arrangements just because I think a lot of these guys have already spent a lot of money getting their gas and processing arrangements in place.

So could you speak to, whether or not you’re seeing that same trend where you’re starting to see some fatigue in terms of what upstream guys are willing to pay for and have you seen more downstream interest on, have you kind of started marketing Mariner East 2, or on the Mariner South project, have you seen things move from more of an upstream customer base to a downstream customer base?

Michael Hennigan

Yeah. Sure, Brad. First of all, no, we’re not seeing the fatigue that you were describing. So that one we’re not running into. As far as, who is interested in the projects, we knew all long that obviously the producers have a need and we’re trying to fill that need at the both competitive prices that we can to make our projects successful.

On the demand side, we knew that once Mariner East 1 got out there and people saw that companies like INEOS and the European community, we’re seeing U.S. ethane as a support possibility. We knew the interest would increase, so we have definitely seen increase in the demand side. People are bullish that U.S. NGL market will stay as an attractive market for the overseas.

We seen it expand. So there is talk about ethane, there is talk about propane, there is talk about butane. As we go forward, our expectation is the markets will continue to look to the U.S. So I mean, what everybody is seeing now is the fruition of what we believe the couple years ago when we started the Mariner franchise which was the U.S. is going to need to export.

West is exporting to Canada, East is exporting and as you mentioned Mariner South is also an export project. So all of those are pointed toward these other markets. I think you're right on that the demand side has increased their interest and at the end of the day, one of the biggest challenges that we found in this is producers and consumers are interested in the project. It’s getting those two on the same page. This ultimately needed in order for us to provide the transportation service.

Brad Olsen - TPH

Great. That’s interesting color. One other question, I’ll just follow-up with is in terms of demand for ethane versus propane export on Mariner East 2, obviously Ethane is a lot longer in the Northeast but you also do have more or less a disposal option through ATEX and the disposal option through just blending into the gas stream, well propane.

You can’t really get rid of quite as easily and globally there’s been a lot of talk about ethane exports but the fact is to this day, we’ve only really seen INEOS at a very limited number of their facilities, talk about being willing to take ethane. Are you constructive or bullish on the prospects for increased amounts of ethane export or do you think Mariner East 2 is more likely to be dominated by propane volume?

Mike Hennigan

No, I think, I’m very constructive on ethane. I mean at the end of the day what you did say, is there is an alternative to go to the Gulf Coast but as everybody is very aware, the ethane pricing in the Gulf Coast is trading around gas values, so you are not creating value by going to the Gulf Coast.

So, yes, to the question, Stephen asked earlier in the call is what’s out there right today in Mariner East 2 is really trying to figure out, what is the priorities for the market. I think there is interest across the board, there is interest in propane, there is interest in butane as you stated and then there is renewed interest in Ethane.

Early on between our project Mariner West and East, and ATEX, there was some early ethane solutions. But I think, the biggest change the people become more and more aware is the amount of production that’s occurring.

And we continue to be really bullish. The liquids production that are being shown by the consultant and the producers, show that there’s a real need to get barrels out and it kind of goes across the spectrum of NGL products. So I think the challenge has been finding out which of those particular priorities fit both the producer community and the consuming community.

And that’s what we’ve been trying to figure out so that we can set our project out to meet the need. And like I said, I think we’re really close in understanding where they are, and as our expectation that we’ll want soon.

Brad Olsen - TPH

Okay. And so you do continue to see demand from the downstream or the global downstream community on ethane side?

Mike Hennigan

Yes. We should do. I mean, what’s happening is once that door got cracked open, I think a lot of those consuming regions have asked themselves is this something that can work. So there’s been much more interest and then those inquiries have gone directly to the producers and the producers are trying to create the most value for their project -- for their products. So I mean that’s what’s been ongoing for some time now as we’ve been developing it.

Our goal is to try and show a transportation solution that provide value so that the producer and consumer can walk away with the win-win. And at the end of the day, we’ve stated many times, we are believer that the best value in the Marcellus Utica is to fractionate up in the Northeast.

That’s what we think creates the most value and gives you the most optionality to get your ethane to the right market, get your propane to the right market, get your butane to the right market. So we’ve been a believer and fractionation in the Northeast creates value and we’ve been trying to set up our project to have that flexibility.

To the question that was asked earlier, we’re building out propane storage, butane storage, ethane storage and we’re building a pipeline system that can connect to them. And we want to have a world-class terminal and markets. So they can load at amazing rates and that will maximize the value for our customers.

Brad Olsen - TPH

Great. Thanks a lot for the time guys.

Mike Hennigan

You are welcome.

Operator

Thank you. And the next question will be coming from Matthew Phillips of Clarkson. Your line is open.

Mathew Phillips - Clarkson

Morning, everybody.

Mike Hennigan

Good morning Matt.

Mathew Phillips - Clarkson

The follow-up on Brad’s questions on Mariner East, I mean, we saw the hope whether INEOS Grangemouth Saga played out over the past month or so. And it seems like they’re going to be lifting more ethane barrels than they said from the U.S. That they had additionally signed to lift ethane barrels for the Rafnes cracker, Norway. I mean, do you feel the Grangemouth imports represent fresh barrels and given the ongoing express in European refining in petchem, you feel there is a room for more of these type of transactions going forward.

Mike Hennigan

Yes. I do. It is fresh barrels as you know. Its public information at this point that INEOS’ original expectation was for the raptness crack as you talked about. So, yeah, they represent one of the companies that are very interested in pursuing a deal for Grangemouth now and they are one of many companies that are now starting to see that interest in, can they do a deal.

From the producer side, I think they now have another vehicle that they can try and create value and find the INEOSs of the world and the other people that are willing to engage in a commercial arrangement for U.S. ethane. So, I think it's being good. I think there’s all types of great conversations that are occurring that are creating value for the producers and consumers.

Like I stated a couple of times, our goal is to provide that transportation. We’re not involved in the commodity discussion, that’s not what we are looking for. We’re looking to provide the transportation to get ourselves a blue bar project and hopefully connect producer and the consumer in a way that works for everybody.

Mathew Phillips - Clarkson

But on Grangemouth that seems like the U.K. government stepped in and provided some update there. I mean, to get more of this project under the new government report and comment on Europe or do you think that the economics are compiling up on them?

Michael Hennigan

Yeah, I don’t know enough about the government situation over there. But my view is I don't believe in lease spreads. The spreads are pretty obvious as to what the value proposition is between Northeast and now both U.S. and versus the international markets. So, I’m a believer.

There is enough commercial opportunity for deals to get done. I think in the past, the challenges being getting everybody, align to that is some that can occur. And like I said I think the doors cracked open and I think we are going to see more and more of that occur.

Mathew Phillips - Clarkson

Okay. Great. Thank you.

Michael Hennigan

You’re welcome.

Operator

Thank you. And the next question will be coming from John Edwards of Credit Suisse.

John Edwards - Credit Suisse

Yeah. Good morning. Mike, just a follow-up, some of these questions on ethane just in terms of volumes that you think for export ultimately what do you think that ultimately gets to?

Michael Hennigan

It’s little too early to speculate there. Like I said, our hope is we think there is considerable amount of interests and our hope is trying get out with an open season soon, see what the market really wants. We’ve had many, many discussions with both the producers and the consumers. We think we presented a compelling project for people to take advantage of and what I keep saying over and over is we think we are at a point now where we will be able to launch that open season soon.

I do think it’s just a little too early to speculate on what the buying is. I think it’s a little too early to speculate the different types of grades, whether it’s more ethane, propane or butane. I know that there is interest across the NGL spectrum and it’s now our job to get out and find out those interests that would make the project go.

John Edwards - Credit Suisse

All right. Fair enough. And then what’s -- a lot of the -- this different LPG export projects are getting announced, but you know, particular on the Gulf Coast, do you think perhaps there's too many?

Mike Hennigan

No. I don't think there's too many. I mean the million dollar question is how much production is going to occur in the NGL space. I think all of these shale plays have continue to surprise to the upside. Our major believe as a company has been that the supply push without strip the demand pull and I think we’ve seen that over the last couple of years in both crude and NGLs.

So the reason we remain bullish and focus as a company on the crude and NGL segments is we think the production sides are going to continue to surprise to the upside. I mean it wasn't too long ago that, Marcellus, Utica NGL volumes were not thought anywhere near this 800 plus kind of range.

So if you wind the clock back, I think the same thing occurs in some of these other areas, wasn't too long ago the people were saying, do you think Bakken will approach 500,000 to 600,000 barrels. Now we are well passed that and the projections are much higher. So, our belief continues to be, it’s a supply push environment and so, no, I don't think we’ve seen the tipping point on any of these shale areas.

John Edwards - Credit Suisse

Okay. Fair enough. Thanks. My other question had been asked. Thank you.

Mike Hennigan

You’re welcome, John.

Operator

Thank you. And at this point we do not have any further questions in queue.

Mike Hennigan

Okay. Thank you everybody for joining us this morning, people will be available for follow-up questions and I look forward to talking to you next quarter.

Operator

Thank you. That concludes today's conference call. Thank you all for participating. You may now disconnect.

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