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

Q4 2013 Results Earnings Conference Call

February 20, 2014 8:30 AM ET

Executives

Mike Hennigan - President and CEO

Pete Gvazdauskas - Vice President, Finance

Martin Salinas - Chief Financial Officer

Mackie McCrea - Chairman

Analysts

Abhi Rajendran - Credit Suisse

Stephen Maresca - Morgan Stanley

Steve Sherowski - Goldman Sachs

Brian Zarahn - Barclays Capital

Bradley Olsen - TP&H

Noah Lerner - Hartz Capital

Michael Blum - Wells Fargo

Selman Akyol - Stifel Nicolaus

Operator

Welcome to Sunoco Logistics Q4 2013 Earnings Conference Call. All lines have been placed on listen-only mode until the question-and-answer session. Today’s call is being recorded. If you have any objections you may disconnect at this point.

And now, I’d like to turn the call over to Mr. Mike Hennigan, President and CEO. Thank you. You may begin.

Mike Hennigan

Thank you, Jane. Good morning, everyone. Welcome to Sunoco Logistics Partners conference call to discuss our fourth 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 session, we’ll be referring to slides that have been posted on our website entitled Fourth 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.

Overall, we’ve had another record year for our partnership and we are very pleased with our results. We are also pleased to have completed our first full year as part of the energy transfer family. We were able to increase cash flows to both our General Partner and Limited Partners as we continue to implement our growth strategy.

With regard to our results, we are pleased to report quarterly EBITDA of $210 million and distributable cash flow of $155 million. This brings our total 2013 EBITDA to $871 million and distributable cash flow of $655 million, both records for our partnership.

More importantly, as a result of continuing our growth strategy, we increased our blue bar earnings by approximately 20% or roughly $100 million this year. Our crude oil pipeline business led our results this year with $349 million of EBITDA, which was a $74 million increase over last year as we implemented our expansion projects in West Texas with Longview Access coming on line and the initial start-up of our Permian Express 1 project.

As we continue to execute our growth plan, new assets are generating increasing ratable long-term cash flow to help offset the market decline that occurred in our crude margin business.

Now let me give you an update on some of our major organic growth projects. In 2013 we launched two additional crude projects that will come online in 2014, Granite Wash Extension and the Eaglebine Express. These pipelines are expected to be operational in the third quarter of this year.

In addition, we are very pleased to again announce another successful open season for our partnership as our Permian Express 2 project is a go, which will increase the takeaway capacity out of the Permian Basin by approximately 200,000 barrels per day, providing access to multiple markets and expected to be operational in the second quarter of 2015.

This is our 11th successful open season since 2011. We remain bullish on Permian production volume growth, consultant estimates are now over 200,000 barrels per day of annual production growth in this region.

On the refined product pipeline side, our Allegheny Access pipeline will provide refiners with access to new refined product outlets and will provide marketers with access to Midwestern products.

Due to the growth in domestic and Canadian crude production, Midwest refiners are in excellent position to have access to price advantage crude oil. They have had excellent margins as a result and are looking at ways to run more crude oil.

This has created a surplus of refined product and an opportunity to broaden our refined product pipeline network to be able to move Midwest barrels into the Eastern Ohio and Western Pennsylvania markets. This pipeline is designed for 85,000 barrels per day and expected to commence operations in the third quarter of 2014.

In the NGL area, our Mariner West ethane pipeline to Sarnia has started up and is operational at approximately 20,000 barrels per day. We are expecting this pipeline to ramp up to approximately 50,000 barrels per day by the end of the second quarter 2014. For this next step, additional pumps will be added to our system, while the origin and destination facilities bring on their necessary towers to ramp up the full capacity on our system.

We continue to develop our Marcus Hook facility as a Northeast NGL hub which we continue to expand to make it capable of handling the full array of NGL products to meet the needs of the producers and local and overseas consumers alike.

Our Mariner East 1 pipeline with capacity of 70,000 barrels per day is expected to be able to deliver propane by the second half of 2014 and deliver both ethane and propane by mid-2015.

Mariner East 2 is in open season currently and we remain very confident that we are developing a project that will meet the needs of the producers and consumers of the best in our liquids from the Marcellus and Utica Basin.

Building on the strength of the products being fractionated in the Basin, this project is intended to increase the takeaway capability of ethane, propane and butane to provide the flexibility for each product to get to the highest value market.

As an example, if this project were online today, propane would be able to be directed to the Northeast markets during these periods of extreme cold condition, butane could be utilized in the winter blending, while all the NGLs would have the flexibility to be exported to create maximum value capture. In the long-term, we believe the U.S. production of NGLs will exceed demand leaving Marcus Hook port in an advantaged position to reach the European and Asian markets.

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

As our projects in development continued to progress we’ve added four additional open seasons in 2013 has been successful to our list of go forward projects. These crude pipeline projects targeting growing production areas, Eaglebine Express, Granite Wash Extension and Permian Express 2, as well as our Mariner South NGL project.

These major projects are blue bar-based provide fee-based income and are the basis for our distribution philosophy. The cash flow from these projects will allow us to continue to grow ratable EBITDA and distributions for our investors.

From a capital standpoint, we implemented record organic capital of $965 million in 2013. And with continued success in our growth strategy, we will need to update our previous guidance of $1.3 billion in 2014 and we expect to do that at our next call.

As for distribution growth, we increased our quarterly distribution by 5% to $2.65 per common unit on an annualized basis, which represents our fifth consecutive 5% increase quarter-over-quarter and the seventh consecutive -- and the seventh consecutive time we’ve raised our quarterly distribution by at least 5% and our 35th consecutive increase overall. This also represents a 22% year-over-year increase compared to the fourth quarter of 2012.

As for guidance for 2014, we are pleased to announce that we expect to continue approximately 5% quarter-over-quarter increases in 2014, expect to give our investors over 20% growth again this year as we continue to implement our growth strategy. We continue to grow our blue bar earnings and we remain committed to distributing these earnings as our projects materialize.

As we discussed in the past, our long-term business model of 80% blue bar and 20% red bar would generate an approximate 1.25x coverage ratio. To the extent our red bar coverage is higher percentage then we’ll enjoy cash flexibility as a source of equity for funding future growth. We also continued our tremendous balance sheet capacity to fund our ongoing expansion capital program.

Our debt-to-EBITDA ratio was 2.7x as of December 31st. As such, we will look to fund our base 2014 organic capital program in a manner that maximizes our distributable cash flow while maintaining our investment grade credit rating. To the extent we need to issue some equity, we are considering an at-the-market or ATM program.

Since our organic growth capital will be spent over time, we believe the program to issue equity over period of time will be more efficient and help minimize the negative carrier of issuing units without the associated cash flows until our projects come online. 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’re committed to growing our cash flows over the near long-term.

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

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Abhi Rajendran with Credit Suisse. You may ask your question.

Abhi Rajendran - Credit Suisse

Hi. Good morning guys.

Mike Hennigan

Good morning Abhi. How are you doing?

Abhi Rajendran - Credit Suisse

Doing well, doing well. Just a couple of quick questions, maybe just starting with kind of your latest thoughts on ethane exports beyond what’s already been announced. Could you maybe just talk a little bit about some of your conversations, your recent conversations with customers and just how large you think the opportunity could get over the rest of the decade, obviously Mariner East 2 plays into it. Just any color there would be helpful?

Mike Hennigan

Yeah, Abhi, it’s difficult to give you a lot of color since the open season is still in progress but we are very confident that Mariner East 2 provides the best value for the consumers and producers alike. And I mean the best way to describe it in my mind is kind of the current market. I mean, right today the propane market in the U.S. is very robust in the Northeast due to the extreme cold conditions. And what this project provides is incredible flexibility for producers and consumers because domestic prices have really risen in the Northeast market and barrels are really needed in the Northeast market.

So keeping propane that comes out of Marcellus and Utica with the flexibility to hit the Northeast market and then when the winter is over and the market is long again, to be able to export, we still think it provides tremendous value. I also said in my prepared remarks, butane is very similar. The butane [arb] [ph] to the U.S. provides the opportunity, yet at the same time, butane has been used in gasoline in the winter and then in the summer it’s not been used.

So we still think fractionated products up in the basin hitting the best market is still the best value for the marketplace. The open season is still open. We continue to work with the market. It’s a complicated open season because we’re involving both ethane, propane and butane. And as you already know, we have the existing ME1 project in progress as well which is also part of the integration of this.

So the talks are good. We’re very confident. We have the open season still open. And I am hoping that we can give you color very shortly but we’re very confident in the project.

Abhi Rajendran - Credit Suisse

Okay. Got it. And then just a follow-up on that, maybe more specific to ethane. I mean, do you think know that that could be a larger export opportunities and the market is baking in through the rest of the decade? Are the opportunities mainly to Europe, any color there would be helpful?

Mike Hennigan

Yeah. I mean, that’s a great question. It’s actually the foundation for how we started into this Mariner franchise. We continue to believe that ethane will be long in the U.S. for a long time. We understand the consultant estimates that say by 2017, ‘18, we could get back in balance. But that requires multi-multi world scale plants to be built in the Gulf Coast. So it’s our view that the supply side will continue to outstrip the demand side. We believe ethane will need to be exported from the U.S. As you’ve seen from Marcellus and from others, the market over in Europe is starting to fully understand that better. There is a lot of opportunities of very large ethane market similar to the U.S.

And at the end of the day, we believe that INEOS was the first mover with our Mariner East 1 project to get that going. We are in talks with many people just as the producers are to advocate U.S. ethane into the European market. And then longer-term, when the Panama Canal ever gets to the increasing capacity, we think there’s an opportunity for NGLs to make it to the Asia market competitively as well.

So the reason we’re still bullish on Mariner East project is we believe, (NYSE:A) the U.S. NGL market is going be long. (NYSE:B) we believe there is two markets that can absorb these barrels. Europe where we think market is competitively priced and managed from a shipping standpoint. And then Asia, where we don’t believe we are competitively disadvantaged once the canal becomes available for both the Gulf and the east coast.

So talks continue. There’s a lot of good momentum around this area. I think, overall the market is understanding, how long the U.S. is going to be and I think both producers and consumers are engaging in those discussions and we’re trying to facilitate transportation so that they can make a deal between themselves.

Abhi Rajendran - Credit Suisse

Okay. Great. That’s very helpful. And then one last quick one if I may, it sounds like your CapEx outlook for ‘14, maybe be a little bit higher from around $1.3 billion to at least $1.3 billion. Could you just touch on what might be driving this, or is this just kind of cost inflation or something like that?

Mike Hennigan

Yeah. No, it’s not cost inflation, Abhi. We completed our PE2 open season at the very end of the year. So we know, we are going to increase it from $1.3 million -- $1.3 billion, I’m sorry. We just wanted to take a little bit of time and kind of cross the Ts dot the Is a little bit on our engineering and update it once we have a little bit better feel for it. So, I mean that’s why I said, we plan to update that number at our next call. We had previously guided $1.3 billion. But now the PE2 is across the finish line. We know we need to update that guidance and we will do that at the next call.

Abhi Rajendran - Credit Suisse

Okay. Great. Thanks very much for the all the color.

Mike Hennigan

You are welcome, Abhi. Thank you.

Operator

Our next question comes from Stephen Maresca with Morgan Stanley. Your line is open.

Stephen Maresca - Morgan Stanley

Hey, good morning, guys.

Mike Hennigan

Hey, Steve.

Stephen Maresca - Morgan Stanley

Congrats on getting Permian 2 sufficient commitments. So first question there, can you give me more color on how, what that means when you are sufficient? Mike, will you keep some open capacity on the line, how much would you keep?

Mike Hennigan

Yeah, Steve. Steve, that’s a good question. But as you know, we try not to disclose for protecting the shippers. We are not going to give color as to how much of the capacities been subscribed to. At the end of the day though, I know you know our story here is we believe 200,000 barrels a day of growth is a current per year in the Permian. We were excited to get the project out, we targeted right around that 200,000 barrels per day and we were subscribed to the point that we have a go project. But not going to comment on the capacity relative to what the commitments have been.

Stephen Maresca - Morgan Stanley

Okay. Fair enough. On Mariner East, so 70,000 barrels a day from Mariner East 1 middle of this year and so is that, I just want to understand, that just going to be propane and then when we get to mid-2015, will still be that 70,000 barrels a day but that mix will be part ethane and part propane?

Mike Hennigan

Yeah, Steve, you have it correct. So when it’s fully operational, it will be two-thirds ethane and one third propane for 70,000 barrels a day. What we’ve been trying to do is generate what we call an early [oil] [ph] case. And in the second half of ‘14, we will have the propane system starting up. It will be ramping up, a lot of that 25,000 barrels a day of capacity when we start up, we won’t have the full refrigeration in service and we won’t have the facility fully up to where we are going to have full refrigeration and full loading. But we will have the ability to price propane well ahead of the full refrigeration capacity.

And then we are going to be staging in the refrigeration as we come on line and then, so you had it exactly right. By mid-2015 it will be ethane and propane with the critical facilities being completed, which is the refrigerated ethane tank and propane tank and like I said, there will be some staging of the refrigeration.

Stephen Maresca - Morgan Stanley

Okay. In the terminal facilities you saw refine product, terminal throughput down 6% and refinery terminals down. Is that just due to turnarounds, or is there something else going on?

Mike Hennigan

It is mainly our -- transitioning our system from refined products into the Mariner system. We ended up taking our eastern system out of service, little bit early to ensure that we had enough time for the integrity work. If you recall Mariner West, we ended up a little bit late for some integrity stuff from what we’re targeting. We wanted to have some lessons learned from that. We took our eastern system out a little bit early just to make sure we didn’t have that issue. So that’s one of the drivers. There is some other small drivers that impact the system but that’s the main issue.

Stephen Maresca - Morgan Stanley

Okay. And then final one from me on the financing side, growth CapEx is at least $1.3 billion and as you mentioned likely going higher and your available borrowing I think right now is $1.3 billion plus a little more. So, do you think this ATM that you talked about, it will handle, be able to handle all of any equity needs for Sunoco for the year, is that that the plan?

Mike Hennigan

Yeah. Right now, our base plan as you know is we are very comfortable with our balance sheet at 3.5 to 4 basis on a debt-to-EBITDA ratio. So, we will manage to that. As you mentioned, we’re confident that our growth continues. We’re saying at some time when we get to a point where we want to issue equity, we want to have this program in place to try and time our growth with our equity issuance, but I think you’ve got it right, Steven. So we will use our balance sheet first and our debt capacity first. And then when we need move in towards equity, we will have the ATM program as a balance.

Stephen Maresca - Morgan Stanley

Okay, perfect. Thanks for all the color, guys.

Mike Hennigan

You are welcome, Steve. Thank you.

Operator

Our next question comes from Steve Sherowski with Goldman Sachs. You may ask your question.

Steve Sherowski - Goldman Sachs

Hi, good morning. On the Permian Express 2, I know you don’t typically talk about specific project, CapEx, but could you just give us a sense of spending timing?

Mike Hennigan

Yeah, it will be over the next couple years, I mean, our plant startup is around Q2 of 2015, and you are right it’s not almost to give individual projects, but, I mean, what we call people as far as the project, it’s new pipe lay from Colorado City over to our Corsicana area. So there’s a couple 100 miles of new pipe and then we have multiple options from that point with existing pipe and new pipes to continue the project gone from there.

So hopefully that gives you a little bit of sense. But as you can imagine, like I said, we just finished the Open Season, we’re looking at our engineering cases. We know we have a go. We have a couple options and that’s why we chose to -- we will wait till next quarter to give a little better update, but we will definitely be increasing our capital from the ‘13 as a result project.

Steve Sherowski - Goldman Sachs

Now understood. And is that 200,000 barrel a day capacity expandable at all or is that the absolute max?

Mike Hennigan

We always look for opportunities to expand. I mean, in all of our systems whenever we do a project, we want to make sure that we try and leave as much flexibility for growth beyond that, I mean that’s our standard mantra. Whenever we look at sizing pipe, we want to obviously not be too big to burn the shippers’ commitments and have a decent balance between capital expenditures and shippers having a good opportunity. At the same time, we always do like to try and leave a little bit of capacity expansion, so that we have growth capabilities within our projects. And that’s kind of standard in all the projects that we look at.

Steve Sherowski - Goldman Sachs

Got you, okay. And if I could just have one final one. On the marketing business, is this a pretty good run rate going forward in your view? And I guess where do you -- where is the pressure coming from, is it increased competition or is it really crude spread driven, if you could just add a little bit of insight into that, I would appreciate it?

Mike Hennigan

Sure. So, obviously 2013 spreads were all over the place as far as real high in the beginning of the year. I guess the best way to look at our crude marketing is, we made about $50 million in the second half of the year and the first quarter is looking very similar to that. So I think the market has kind of found a little bit of an equilibrium. I mean, we still believe in a more longer term basis the WTI Brent will run in that $9, $10, $11 range. The forward market is kind of showing that kind of level right now. That will put the TI to LSS spreads slightly under that. So we think the markets in about equilibrium for the moment.

Your question on competitive, sure, it’s a very competitive business. A lot of people are out there trying to provide service to the producers. I mean, our goal in that business is to provide service from the least all the way to the best market. We try and get producers to the best possible market and we use our system as best we can to find out where that best value is and translate that back to the producer community. So, a very competitive business, very volatile as far as what’s occurring, little bit last 50 months or so. But like I said, the second half of the year and the first quarter kind of ended up around the same spot if that gives you a little bit of color as to where we think we are.

Steve Sherowski - Goldman Sachs

Thanks. Appreciate it.

Mike Hennigan

You are welcome.

Operator

Our next question comes from Brian Zarahn with Barclays.

Brian Zarahn - Barclays Capital

Good morning.

Mike Hennigan

Hi, Brian.

Brian Zarahn - Barclays Capital

I guess going back to ethane, INEOS recently made announcement that they signed another contract to procure additional U.S. ethane, does that impact Mariner East 1 or is that more Mariner East 2 relationship?

Mike Hennigan

That’s more for Mariner East 1 going back to what Steven had mentioned earlier. The project itself is two-thirds ethane, one-third propane starting public information at INEOS and Range were the large first movers in that area, but INEOS announced some additional ethane supply as part of Mariner East 1.

Brian Zarahn - Barclays Capital

And I guess given that announcement, is it reasonable to assume more than half of the capacity is contracted for Mariner East 1?

Mike Hennigan

Yeah, for Mariner East 1, Brian, we told the market that we are fully subscribed. Obviously we wish that we had more capacity on that line to grow it, but that was with started ME 2 and ME 2 will be new pipe lay. So ME 1 is fully subscribed, ME 2 is new pipe lay, ran Open Season on ME 2. We are trying to offer the full array both ethane, propane, and butane, but as you can see there is kind of some integration with what happens with ME 1 and trying to work through that concept with the market is where we have been. And then that’s what’s occurring right now in the Open Season.

Brian Zarahn - Barclays Capital

So the recent announcement is sold out the contracted capacity or is that more of a delayed announcement?

Mike Hennigan

Yeah, that’s just between INEOS and Consol. They just decided at this point to announce that they had reached their agreement. From our standpoint that was all done deal from the past as far as ME 1 was concerned.

Brian Zarahn - Barclays Capital

Okay.

Mike Hennigan

But that they decided to announce their agreement was now official.

Brian Zarahn - Barclays Capital

And then looking at the fourth quarter, what account for the year-over-year decline in operating and SG&A expenses?

Pete Gvazdauskas

There is a couple some non-cash accrual adjustments, Brian, that we had at year end. We’ve detailed them on the last page of the earnings release. We can walk those through offline, but some of them are one-time and we should see that much in the future.

Brian Zarahn - Barclays Capital

Okay. Thanks Pete. That’s all I have.

Pete Gvazdauskas

Thank you, Brian.

Operator

Our next question comes from Bradley Olsen, TP&H. Your line is open.

Bradley Olsen - TP&H

Hey. Good morning, guys.

Mike Hennigan

Good morning, Brad.

Bradley Olsen - TP&H

Couple of questions on Mariner East 2, Mike, you mentioned in your prepared comments that Mariner East 2 was probably the best positioned out of the competing projects to service local demand, as well as to provide export out of the [NGL] graphically, why delivering into Philly gives you that optionality?

But when you think about kind of recovering capital or earning or return on capital all year around, how do you think about kind of the seasonal demand locally and accommodating that seasonal demand, while still earning a return on capital 365 days out of the year on both the pipe and export portions of the facility?

Mike Hennigan

Yeah. Sure Brad. I mean, overall, we stated many times that we believe the U.S. is long NGLs overall. So our whole thesis for the mariner franchise in the Northeast has been, there is no reason to bring C3s, C4s, natural gasoline down to the Gulf coast, because I say nobody debates the fact that propane, butane and natural gasoline along in the Gulf.

So if you believe the U.S. is long those products, than you need to export and getting them to the closest port in our mind makes the most sense. It’s better to travel 300 mile and be more competitive as far as shipping cost rather than going 1500 miles.

Now what the Northeast does though, is provide a little added advantage that when we have the extreme colds and everybody know this has been a unique winner, but we had extreme cold, the inventories have been low and the Northeast really needs the market to stay domestically.

So right today, exporting is not the right outlet for the producer’s value. So right today the Marcus Hook facility gives you the optionality to keep the barrels in this market, which is where the best value today. So domestic is better than export. But, overall, though, long-term and we think for most of the year to your point on 365 days, most of the time the export market going to provide more than opportunity.

We also believe in the concept of having fractionated products. Having the ability to put propane immediately to the market, it makes a lot of sense to us, if you think to be doing a different thing, the natural gasoline to be doing different.

And then ethane the one that I think is been debated by the marketplace for a couple of years and we still maintain that the balance will stay longer than most people are saying. We don’t necessarily agree with the consultant view that ethane will come in balance and we think ethane needs to continue to export.

At the same time, we do recognize that capital needs to be spent. We know that European market needs to spend some capital. But we think there’s been more and more interest. We think ME 1 was the first way to get people to notice that there’s an opportunity to create value there. Mariner West also did the same thing with Sarnia.

So getting the ethane molecules to a market that’s not long, is obviously makes a lot of sense. And we just think U.S. Gulf is long and will stay long for longer than most people believe. We’re just more bullish to shale production of NGLs and I think most of the consultants have given credit for.

Bradley Olsen - TP&H

Okay. And I guess, just to kind of expand on that a little bit, so the Northeast, for example, where your demand for propanes and heavier probably fluctuates between some of the milder days in the spring and summer, and some of the colder days in the winter by about 200,000 barrels a day? Is there anything about the Mariner East 2 contracting structure that you floated in your open season that you think is better equipped to turn what is a very seasonal demand profile into contracts that are effectively fixed contracts that earn the same amount all year round?

Mike Hennigan

Yeah. Absolutely. I mean, we believe we’re offering exactly what you just stated. Flexibility gives people value creation and that’s what our whole goal is at Marcus Hook. Being at a port, we have the ability to export or having the truck facility, so load on the truck and meet local demand as exactly what we’re trying to accomplish. So, I think, you said it better than we said it probably, but that is the goal of the project.

Bradley Olsen - TP&H

And just one more question on Mariner East, you have talked -- it sounded originally like you were considering it more at the Y-grade project or at least kind of full spectrum of NGLs, now it sounds like you have whittled that down to ethane, propane, butane. I guess when given all the fanfare about ethane exports and as you rightly noted all the capital that needs to be spent across the ocean for ethane consumption and imports to take place over there? Why does it seem like the project has been moved away from heavier natural gasolines, pentanes and heavier, given the fact that there is a lot more existing petrochemical demand for those heavy NGLs on the Atlantic Basin than there is for ethane? Is there something that’s changed or is that just kind of, is that, am I reading too much into the wording?

Mike Hennigan

Yeah, Brad. I don’t think you got that one right here. We’ve never really considered a Y-grade project. So don’t think if it is Y-grade. We are believer in fractionating in the basin creates the most value. So our early belief and that’s when we started this process while back is why we teamed up with MarkWest to start off into the Mariner West and Mariner East 1 project is.

Fractionating in the basin and our belief creates the most value and gives you the most optionality and flexibility for the project. What we are trying to do though is meet the needs and it’s really just the volume consideration. I mean ethane is half the NGL barrel, propane is the third. So I wouldn’t think if it is Y-grade, we’re just trying to say the market is realizing that all of these barrels need to find value creation.

But from the volume standpoint, that’s why you saw the ethane projects come out first, just a pure sense of the volume that needed to be handled. So Mariner West, Mariner East, ATEX, were all targeted ethane projects to start due to the fact that ethane half the volume of the NGLs.

What I think the market really recognizes now is that the rest of the NGL suite also has some value creation to it. Obviously right today propane is topic of mine just because of winter in the Northeast. But longer term, we’re just saying all the NGLs are valued as a separate component so we believe in fractionating them. We believe in providing flexibility and we believe they’re getting them to the best market is where the value really is.

So it’s not Y-grade, it’s just providing the full array of individual product. So we’ll be getting ethane to Marcus Hook. We’ll be getting propane to Marcus Hook. We’ll be getting butane to Marcus Hook. And on any given day, those products could be hitting whatever market makes the most sense. If it’s making sense to export, that will occur. If it’s making sense to put it on our truck and take it to a local market that will occur.

Bradley Olsen - TP&H

Got it. So given that, I was wrong about the Y-grade. It still doesn’t necessarily answer kind of why going lighter with the purity products on ethane versus some of the heavier products like natural gasoline where there might just be some more existing demand on the Atlantic Basin. Is there any reason, I guess, why it sounds as though your project is aiming to only go as heavy as butane?

Mike Hennigan

No, again Brian, it’s -- the project is able to handle the full array. It can go all the way to natural gasoline just, but like I was saying as far as volumes are concerned that’s just such a smaller piece of the full NGL barrel. That right now the focus is on ethane half the barrel, propane is a third of the barrel then you get smaller and smaller as you go down.

So it’s not that there is not emphasis, it’s just there is not as much emphasis due to the quantity of the barrels today. But we believe all along that throughout time, the market will recognize the full value of the whole chain of NGL products. It just a priority basis on making sure the ethane has taken first priority.

I mean it wasn’t too long go as you know that there was a need to get the ethane out of the natural gas. The BTU value was limiting. So having the projects start-up on ethane relieved one of the concerns that was in the natural gas market. And I think you’re going to see that priority work down the volume chain over time.

Bradley Olsen - TP&H

Great. Thanks a lot, Mike.

Mike Hennigan

You’re welcome.

Operator

Our next question comes from Noah Lerner with Hartz Capital. Your line is open.

Noah Lerner - Hartz Capital

Good morning, Mike.

Mike Hennigan

Good morning, Noah.

Noah Lerner - Hartz Capital

Mike, Mike, somewhat of a follow-up to Steve Maresca’s earlier question regarding Permian 2. I am just curious. Is there an average range of multiples that you look for before you greenlight a project?

Mike Hennigan

No, there is a lot of considerations to go in before we greenlight a project. I mean at a very high level, our emphasis doesn’t need our strategic plan. And as you know, we’ve talked in the past that we continue to concentrate the company in crude production and NGL production. So that’s our strategic focus.

When we get into individual projects, we look at a lot of parameters. Obviously we have economic models that we run and kind of compare to what we think our other opportunities are. I mean overall, we’ve guided the market to organic program. We believe overall gets us about a 6 multiple. No project is exactly the same. So I wouldn’t want to you think that every project has just an ex-component to it.

We look at a wider range of factors. And I think every company is doing this. Does it meet your strategic plan? Does it have growth? Does it meet your economic hurdles et cetera, et cetera. Are you meeting customer’s need. Obviously, we’ve targeted the Permian with our West Texas expansion Permian 1 and now Permian 2. We remain bullish in that area. And it’s just an outgrow of what we believe from the very beginning is target crude and NGL production that’s what we’ve been doing as a company.

Noah Lerner - Hartz Capital

Great. And, so I take it then that the Permian 2 when it gets blended in, it’s not going to materially move that overall 6% on the CapEx program materially in one direction or another.

Mike Hennigan

Yeah, not 6%, six times I mean --

Noah Lerner - Hartz Capital

Six times, I’m sorry. Six times.

Mike Hennigan

Sure, sure. I mean, that’s what we’ve guided in the past. We still think that’s a good number for the overall project base that we have. So we’re very happy with that type of return on our organic programs. At the same time, we continue to look for acquisition opportunities.

I mean, we are not opposed. In fact, we are in favor of finding something that makes sense for us. We just have been able to do that at this point. But we continue to look at every opportunity we can find, because we would love to increase our platform. In the meantime, until we find something that makes sense for us, we’re going to continue to play out this organic platform that we’ve laid out.

Noah Lerner - Hartz Capital

Okay. That’s great. Thanks a lot, Mike.

Mike Hennigan

Yeah, you’re welcome, Noah.

Operator

We have a question from Michael Blum with Wells Fargo. Your line is open.

Michael Blum - Wells Fargo

Hi, good morning. My questions were actually addressed already. Thank you.

Mike Hennigan

Hey. Thanks, Michael.

Operator

We have a final question from Selman Akyol with Stifel. You may ask your question.

Selman Akyol - Stifel Nicolaus

Thank you. Good morning.

Mike Hennigan

Good morning, Selman.

Selman Akyol - Stifel Nicolaus

As you guys, you have stated multiple times that U.S. is going to be long NGLs, and I am just thinking more in terms of Mariner South. You’re going to be exporting propane and butane. But longer-term, as you think about it, are you exploring any options for ethane out of there as well?

Mike Hennigan

We obviously continue to look at all of those. Mariner South is a great project for us because it gets our needle in terminal in the mix and NGLs. So our first thing is needle is a crude terminal. It’s the largest crude terminal we believe in the U.S. We’re happy to get it into the NGL mode, but I think you have good point. Once for NGL capable in that area, we are going to look for other opportunities to expand.

What’s really great about our NGL system down there is being part of the energy transfer family. So we’re working hard now with Lone Star to find other opportunities for us and I think this is a great example of value creation within the family of partnerships. We wanted to get needle into the mix on NGLs. For quite sometime, we were able to do when we became part of energy transfer and working with Lone Star and now we continue to work together. So, I think you’re right on. We’re going to look for more opportunities on the Gulf Coast as well as what we’re doing up in the Northeast.

Selman Akyol - Stifel Nicolaus

All right. And then my other question, just following up on your acquisition comment earlier. In terms of look for acquisition is it more -- is it more a thing of finding the right set of assets, or is it just the pricing environment?

Mike Hennigan

It’s a little bit of both. I mean, we start with basic premise that it needs to be the right assets and the right strategic fit. I mean, that’s criteria number one. After that we try and get into this position where we feel that we’re going to create value. We’ve been very active in the processes. I would even say somewhat frustrated that we have not been able to get something that we think could work. We really would like to take advantage of this low-cost capital environment that we’ve been in.

As you are probably aware, our yield has been trading at a pretty good clip for us, and our cost to capital is in a very good position. So, we’d like to put that to work for us. So, we’ve been active looking at different things. We haven’t found anything that really works for us yet. But strategic is our first option and then, we look at the economics of it. And I will tell you that we try and look at every opportunity that’s out there and we are hopeful that we are going to find one that works for us. We are actively looking.

Selman Akyol - Stifel Nicolaus

All right. Thank you very much.

Mike Hennigan

You’re welcome.

Operator

We have no further questions at this time.

Mike Hennigan

Okay. Thank you everybody for joining us. As always, Pete will be available for follow-up questions and I’ll see you next quarter.

Operator

That does conclude today’s conference. Thank you for participating. You may disconnect at this time.

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