Sunoco Logistics Partners LP (SXL) Michael J. Hennigan on Q2 2016 Results - Earnings Call Transcript

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Sunoco Logistics Partners LP (NYSE:SXL)

Q2 2016 Earnings Call

August 04, 2016 8:00 am ET

Executives

Michael J. Hennigan - President, Chief Executive Officer & Director

Peter J. Gvazdauskas - Chief Financial Officer & Treasurer

Analysts

Kristina Kazarian - Deutsche Bank Securities, Inc.

Brandon Blossman - Tudor, Pickering, Holt & Co. Securities, Inc.

Shneur Z. Gershuni - UBS Securities LLC

Gabe Philip Moreen - Bank of America Merrill Lynch

Jeremy B. Tonet - JPMorgan Securities LLC

Jean Ann Salisbury - Sanford C. Bernstein & Co. LLC

Christopher Paul Sighinolfi - Jefferies LLC

Jerren A. Holder - Goldman Sachs & Co.

Michael Blum - Wells Fargo Securities LLC

Noah Lerner - Hartz Capital, Inc.

Danilo Juvane - BMO Capital Markets (United States)

Operator

Welcome to Sunoco Logistics Q2 2016 Earnings Conference Call. All lines have been placed in 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 time.

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

Michael J. Hennigan - President, Chief Executive Officer & Director

Thank you. Good morning, everyone. Welcome to Sunoco Logistics Partners' conference call to discuss our second quarter 2016 results. I'm Mike Hennigan, President and Chief Executive Officer for the general partner. Joining me today is Pete Gvazdauskas, our Chief Financial Officer, and also on the call is 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 Second Quarter 2016 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.

Let me begin by saying the oil markets have been very volatile in 2016 with crude falling into the mid $20s in February and rising to the low $50s in June before falling back to under $40 this week. The question continues to be the inventory overhang and when that overhang will be reduced. We feel that the supply and demand fundamentals are in place for significant oil inventory reduction in the second half of the year that will result in higher prices. In the meantime, the markets have been very challenging for the entire midstream sector.

During this challenging time, we've had the opportunity to continue to show how Sunoco Logistics can differentiate ourselves in this space as we continue to have growth projects, which allow us to continue to grow our year-on-year earnings, which provide investors with top-tier growth and distributable cash flow among our peers, while maintaining a strong balance sheet and maintaining sufficient coverage of our distribution.

With regard to our second quarter 2016 financial results, we're pleased to report EBITDA of $245 million, distributable cash flow of $173 million, both of which include approximately $60 million of negative LIFO accounting timing in our Crude segment. Absent this LIFO accounting, our results will be over $300 million of EBITDA and over $230 million of distributable cash flow.

As we discussed in detail at our first quarter conference call, we're seeing the reversal of the favorable LIFO accounting timing that was in our first quarter results. As a reminder, when the market is in contango and the absolute price of crude declines, there is a favorable LIFO accounting treatment. Those conditions existed in the first quarter, and that is why we highlighted those to you during those favorable earnings in our results.

We also indicated that we expect that these favorable results to reverse in the second quarter if the price of crude continue to rise. This concept is demonstrated in slide five, when the market is in contango and the absolute crude price rises in the quarter, it results in negative or unfavorable LIFO accounting timing. As we expected, we experienced this negative LIFO accounting in the second quarter.

Although the quarter is not over, it doesn't appear there is a material crude LIFO impact coming through the third quarter. We recognized that this accounting timing adds complexity to our understanding of quarterly results, so I did – as I did last quarter, I will put it in simple non-accounting terms. In the first quarter, there was favorable LIFO timing in our Crude segment, which resulted in an overstatement of our earnings and distribution coverage by approximately $60 million. In the second quarter, there was a negative LIFO timing impact of the same magnitude, understating our earnings and distribution coverage.

So, on a first half of the year basis, which essentially eliminates the LIFO accounting timing, we generated $594 million in EBITDA and $456 million in distributable cash flow, resulting in an approximate one time's distribution coverage. This demonstrates that our blue bar and red bar model works with a distribution coverage ratio of approximately one time in the most difficult crude environments since 2003.

On a year-over-year basis for the first half of the year, we increased EBITDA by $47 million and distributable cash flow by $34 million in a very challenging first half of 2016 environment. Again, we are demonstrating that we are growing our year-on-year results despite the loss of red bar opportunities in the market.

Now, let me give some specifics in each of our business segments. Our Crude segment generated $338 million of earnings in the first half of the year. Our Crude results were still up $15 million in a very challenging macro crude environment, as we discussed previously and included a WTI Midland to LLS spread of approximately $1.85 per barrel compared to the first half of last year, when it was $5.74 per barrel. This is a significant difference that has resulted in decreased arbitrage opportunities.

The spread is up slightly from the recent low in the first quarter of approximately $1.47 per barrel, as it averaged $2.21 in the second quarter, which again limited the opportunity for arbitrage to the Gulf Coast. Despite a loss of red bar earnings in the crude market, our emphasis on the Permian Basin has been helpful in this challenging time as crude production cuts are occurring in basins such as the Eagle Ford area and some of the other shale areas.

The takeaway for investors is that from 2015 to 2016, we essentially saw a reduction in red bar earnings, but we're still able to grow earnings due to our blue bar project startups. Simply said, we lost short-term red bar opportunities and gained long-term committed blue bar cash flows.

It is also important for us to point out that our year-on-year crude flow volumes are up 125,000 barrels per day, despite having declines in the Oklahoma and Eagle Ford areas. Overall, we have a strong Permian platform that is proven to be resilient in this market.

We're also pleased to report that we're looking forward to generating additional blue bar earnings with two new crude projects that started flowing in the third quarter of 2016, the Delaware Basin pipeline and the Permian Express Louisiana Access pipeline. Both projects will ramp up, as most projects tend to, over the third quarter, and we expect full operations in the fourth quarter. Another great job by the project team getting this project online and operational as we expected. The Delaware Basin Extension project demonstrates the synergy capabilities within the Energy Transfer family of partnerships as this expansion will benefit from ETP's oil gathering system and meet the needs of the producing community in the Delaware Basin.

The Delaware Basin pipeline will provide initial capacity of approximately 100,000 barrels a day with the ability to increase that level as production grows. Overall, we feel that the Permian Basin and in particular the Delaware Basin are more resilient to the current market conditions than any other crude production area in the United States.

Turning to our NGL segment, we had a challenging first half of the year. Although we generated $152 million, which is similar to the first half in 2015, we expected more from this business segment.

Our Mariner East Phase 1 project introduced ethane into the pipeline for the first time on February 8. The commissioning of the ethane system took longer than we expected but reached its operational date as of May 1, and started accepting and delivering ethane in addition to propane into the Marcus Hook Industrial Complex. The pipeline averaged 35,000 barrels in the first quarter and approximately 55,000 barrels in the second quarter, as we had to battle through some startup challenges in the quarter.

One of those challenges has been a design issue related to the cold box operation for ethane chilling, which limited the throughput of ethane in the quarter. The good news is that our engineering team has determined an appropriate fix and will be implementing that fix in the next several months on a planned basis, working with our shippers to alleviate the issue.

Although we are disappointed in the short-term results, we feel good that the system is being reinforced for better long-term reliability. Operation of the Mariner East project provides shippers with the benefit of having the flexibility to sell ethane and propane to the local and regional markets as well as international markets as economic conditions dictate.

In particular, we have relationships with many Pennsylvania propane retailers such as AmeriGas. We've always had the expectation that local consumers across Pennsylvania and the region will benefit from having access to the substantial natural resources from the western part of the state. We continue to make progress towards making connections to local propane distribution facilities across Pennsylvania to more efficiently and reliably transport Pennsylvania propane to Pennsylvania consumers. We expect to announce definitive agreements very shortly.

Now let's turn to our Mariner South system. We also saw reduced volume on this system as the international arbitrage became challenged and shippers experienced difficulties at discharge ports. In addition, some of our committed shippers have delayed some movements from the first half of the year into the second half of the year.

Switching to our butane blending business. We have a very robust blending business, as we've increased the number of blending locations and volumes, but these volumes were more than offset by weaker margin. As a result, the butane blending business earnings declined year-over-year. We feel that this business will again see strong EBITDA growth as crude prices recover in the coming years.

The bottom line is that we are disappointed with our NGL volumes on Mariner East 1 and Mariner South. We remain bullish, however, for the long-term prospects of the Marcus Hook Industrial Complex as an energy hub on the East Coast processing and distributing Pennsylvania natural gas liquids as well as our Nederland terminal as an export hub in Texas.

On a more positive note, Marcus Hook customers are realizing netbacks significantly above the Gulf Coast alternative, which reinforces our belief that the East Coast is the best destination for Marcellus and Utica production.

Our Mariner East Phase 2 project, announced with a design target of 275,000 barrels per day supported by take-or-pay commitments received during the open season, continues to progress. And our estimate of permit timing suggests a second quarter 2017 startup.

Our main permits with the Pennsylvania DEP achieved meaningful progress by reaching the administratively complete milestone in June. We are currently in the technical review process, which includes a public comment period that is expected to close at the end of August. The permitting process continues and is consistent with the guidance we've given for the startup.

Moving to our Refined Products segment, we had a solid first half of the year with $104 million in earnings compared to $67 million in 2015, with growth in our pipeline business and our marketing terminals business. Our contributions came from primarily our Allegheny Access pipeline, our Eagle Point, Marcus Hook and other product terminal facilities, as well as our pipeline joint ventures.

Now, let me turn to give an update on capital spending. As for 2016 capital guidance, we previously stated that we expect to significantly reduce our 2016 capital requirements from the previous guidance of $2.5 billion. We are pleased to be able to deliver on that commitment and are now able to give some color on what's occurring in this area, as we have several initiatives in progress.

As we've stated previously, our team has been evaluating project financing for the Bakken Pipeline project, evaluating the potential sale of some assets as well as evaluating inbound calls on potential joint venture opportunities. As you've seen from our recent press releases, we've made two major announcements related to our Bakken Pipeline project.

First, we, along with our partners, have closed on project financing on a $2.5 billion facility which is anticipated to essentially eliminate all of the remaining capital requirements to complete the project.

In addition, we have reduced our ownership in the project by half to accommodate two more strategic partners, Enbridge and Marathon, and we will receive approximately $800 million upon closing of the sale. The Bakken project will be the premier takeaway project from the prolific North Dakota shale area, and as such, we're excited about the addition of two additional strategic partners who can bring even more volume to this robust system.

Marathon has committed to making a long-term commitment subject to the terms and conditions in the upcoming open season to be launched in the third quarter. Energy Transfer continues to oversee the construction of the assets, and Sunoco Logistics will be the operator once the pipeline is completed.

By selling a portion of our interest at a premium to our projected capital costs and at the same time adding two additional strategic partners, we've created a win-win for all partners involved in the project. With these two initiatives in place, our resulting capital need for 2016 is significantly less than our original $2.5 billion guidance, and as such, we are revising our 2016 guidance to approximately $1.4 billion which is a reduction in CapEx of over $1 billion.

So far this year, we have raised approximately $750 million in equity and $550 million in 10-year senior notes at a rate of 3.9%. We also do not have a debt maturity until the year 2020. As always, a strong balance sheet and our investment grade – investment grade rating remain a top priority for our partnership.

We're continuing to work on several other strategic initiatives, but we're not at a stage to give additional updates on those. We remain very confident in our plan and are purposely being thoughtful on the appropriate actions to take as these initiatives progress and we assess their long-term value to the partnership.

Turning to our distribution growth. In difficult market conditions, the key for investors is to assess the company's ability to grow distributable cash flow. Companies that are growing distributable cash flow in 2016 over 2015 are showing they can endure and prosper through difficult market conditions. We understand that portions of the market are clearly focusing on balance sheet preservation and distribution coverage overgrowth until commodity prices improve.

With that said, our balance sheet remains strong, and we are committed to stability and coverage for our investors over the long term, we are unique and that we can maintain a strong balance sheet and continue to grow even during the weakest period of the cycles. We see market fundamentals continue to improve as we progress through 2016, and we will assess the partnership continually as we normally do. But even in these challenging market conditions seen to date, with crude price averaging in the $30s in the first half of the year, we continue to expect to grow our distributable cash flow in 2016.

We announced the distribution increase to $0.50 per unit in the quarter or $2 per unit annualized which is a 14% increase compared to this time in 2015.

As a result, our debt-to-EBITDA ratio was 3.7 times as of June 30 on our revolver covenant basis, which does not reflect the cash to be received from the Bakken transactions. As such, we will look to fund our base 2016 organic capital program in a manner that maximizes our distributable cash flow while maintaining our investment grade credit rating.

I'd like to summarize by stating that our targeted emphasis in the shale areas, our concentration of growing in these long-term developing crude and NGL areas while maintaining a diversified portfolio continues to anchor our partnership.

Despite the challenging first half of the year, our disciplined approach of managing our distribution based on blue bar earnings only should provide confidence to our investors as we continue to execute our long-term strategic plan. Our ability to manage through this commodity cycle is becoming evident at a time when others are reducing distributions or keeping them flat or not growing distributable cash flow, we expect to continue to grow distributable cash flow and our distribution while maintaining a strong balance sheet and managing our coverage.

Our blue bar strategy and execution are on target, and we continue to see an outstanding future. We feel very positive about our position in the Permian and the Marcellus Utica shale and believe those shale plays will thrive as the crude price is expected to increase in the second half of the year and continue rising in the coming years.

With that, I'll ask the moderator to open the line for questions.

Question-and-Answer Session

Operator

Thank you. We have a question from Kristina Kazarian of Deutsche Bank. You may ask your question.

Kristina Kazarian - Deutsche Bank Securities, Inc.

Good morning, guys.

Michael J. Hennigan - President, Chief Executive Officer & Director

Good morning, Kristina.

Kristina Kazarian - Deutsche Bank Securities, Inc.

So, can you touch a bit more on the shipper delay – on the Mariner South, first half to second half, thoughts on shipper delays and volume moving around? And also, can you a touch a bit on how I should be thinking about the ramp in volumes on ME 1 from here? And just a bit more color on both of these trends you guys mentioned would be helpful.

Michael J. Hennigan - President, Chief Executive Officer & Director

Sure, Kristina. In the Gulf Coast, which is pretty much different from what we're seeing on the East Coast, but in the Gulf Coast, some of the shippers have experienced situations where they are looking to load ships out of our Nederland facility and send them to other ports where some cancellations have occurred on them.

So, that's one of the things that's been occurring in the Gulf. The second thing is our shippers have some flexibility within their contract to delay from one quarter to the next quarter as an example and as the arbitrage was still very challenged. There was a situation there where they chose to not lift as much in this quarter, so that they can lift in a better environment later. We'll still get that revenue over time, but it's delayed out of this quarter's results.

And on your second question on Mariner East, I tried to address it in our prepared remarks. We're disappointed in the volumes, we would have expected ME 2 – I mean, I'm sorry, ME 1 to be up to full rate to the 70,000. We only achieved 55,000 in the quarter because we were battling a design problem with our cold box which chills the ethane. So, the bad news is it limited volumes for us that was unplanned in our plan, but like I said, the good news is our engineering team has looked at it. We've identified the fix. We now just have to implement that fix in a way where we work with our shippers to alleviate the problem and minimize any issues to them.

So, we're happy that we think we know the solution. We're happy that we're ready to implement it. We'll do that in the next several months at the best opportune time that works for the shippers, and then we'll have this issue behind us.

Kristina Kazarian - Deutsche Bank Securities, Inc.

Perfect. That's helpful. And then, one last one from me. I know you touched a little bit on how – the steps you guys made from project financing and asset sales, could you touch a bit more though on how I should be thinking about that going forward? I think we also saw a project that you were a JV partner in the Explorer project, there was an asset sale there. Can you just help me think about, are there other opportunities? Would that have been one for you? Or just how I should be thinking about that bucket going forward?

Michael J. Hennigan - President, Chief Executive Officer & Director

Yeah. Sure. Let me start off with the Bakken project sale. First, I want to start by saying that Mackie, Lee and the entire ET team did a great job developing a very strong project. I mean it is the premier takeaway solution for the Bakken area. Once that was in place, we looked at an opportunity to make a strong project even stronger. And with Marathon committing more volume, it's a stronger project, and we added two great strategic partners in Enbridge and Marathon, and then project financing improved the returns for all the partners.

So, I mean the bottom line there is, we think it's achieved a win-win for all the parties, can't be more pleased. It started by the great work of Mackie and Lee in developing the project, and it's gotten to a point where I think we have a lot of good strategic partners, long-term focus, and I think we're in a win-win situation for everybody. So, we're really pleased with that outcome.

On your second point, on Explorer, we didn't make a big issue of that, that was a small acquisition for us, where we increased our percentage there. But we are actively trying to be in the M&A market as we always are. As you know, there're some assets that are out there, we continue to look to competitively bid. At the same time, we have not found an asset that fits our profile where we're not going to overbid for it. So, we'll continue to be active. We believe in looking for acquisitions that can add to our asset base. We're going to try and be as aggressive as we can. But at the same time, we haven't had a whole lot of activity there. So, we'll continue to look.

Kristina Kazarian - Deutsche Bank Securities, Inc.

I actually meant more on the asset sale side or JV-ing out other projects. Could you touch on that?

Michael J. Hennigan - President, Chief Executive Officer & Director

Yeah. Most of the incoming calls that we've had have been for our two big projects, the Bakken project and ME 2. Obviously, we know the outcome of the Bakken project now. We are still in conversations with a handful of companies on ME 2, both strategic and financial players, but how that will play out is still unknown. But as I said before, we're happy with our base plan and don't need to do anything here, and we have a different lens now that we've executed the Bakken projects. But let's just see how this plays out.

Kristina Kazarian - Deutsche Bank Securities, Inc.

Perfect.

Michael J. Hennigan - President, Chief Executive Officer & Director

Bottom line, I would like to say though is we're proud to have the premier takeaway solutions in the Bakken, Permian and Marcellus areas. So, we feel really good about our position in our base plan.

Kristina Kazarian - Deutsche Bank Securities, Inc.

Perfect. Nice job to you guys.

Michael J. Hennigan - President, Chief Executive Officer & Director

Thank you, Kristina.

Operator

Our next question comes from Brandon Blossman of Tudor, Pickering, Holt & Company. You may ask your question.

Brandon Blossman - Tudor, Pickering, Holt & Co. Securities, Inc.

Good morning, guys.

Michael J. Hennigan - President, Chief Executive Officer & Director

Good morning, Brandon.

Brandon Blossman - Tudor, Pickering, Holt & Co. Securities, Inc.

I guess conceptual questions first, and this is following on the last one. But as you look forward, and particularly on ME 2 in terms of JVs – potential JVs there, what – strategically what are you trying to accomplish or is it kind of like one, two and three, is it creating value today? Cash flow – cash in the door today for perhaps EBITDA in the outyears or is it pulling in a strategic partner, just realizing value – the highest value or is it the easy answer which is all of the above?

Michael J. Hennigan - President, Chief Executive Officer & Director

Yeah. Not to be a smart aleck, Brandon, but it is the easy answer. Obviously, at the end of the day, we want to end up with a better accretion situation than we did at starting out. The nice thing for us is we like our base plan. We're very comfortable with what we have. We like the opportunity to make it better, so we continue to look. Many people have heard me say this, we're purposely being thoughtful and maybe slow in some people's minds but we want to be really thoughtful and think about the long-term impact to the partnership.

We know we frustrated people by not giving a lot of guidance when we said we're going to significantly reduce our capital. But at the end of the day, like today, we are able to show you now that our $2.5 billion's down to $1.4 billion. Same situation we have on ME 2. I mentioned in my prepared remarks that we do have a handful of companies that have approached us and they're showing interest. We're examining all those opportunities, and we're not at a point to disclose anything there, but our criteria is everything that you talked about there. We look at all the different facets. And at the end of the day, we want to have a better accretion than we have from our base plan.

Brandon Blossman - Tudor, Pickering, Holt & Co. Securities, Inc.

Okay. Fair enough. And appreciate that color. And then other end of the spectrum, just detail questions, in terms of EBITDA trajectory over the next two quarters or three quarters. So in quarter, can you provide any color on the contribution from Bayou Bridge Q2 and kind of the expectation going forward there?

Peter J. Gvazdauskas - Chief Financial Officer & Treasurer

Yeah. This is Pete. And so, what we've started up on Bayou Bridge is the Lake Charles portion. We're still going forward with the piece that goes all the way out to St. James but that won't be operational till the second half. So, we've got the shorter haul leg to Lake Charles. But the longer haul pipe that gets to further markets out to St. James is not till the second half of this year.

And as you know, we're only a 30% owner in that. So, while it's a nice pickup in the second quarter for us, it's not a material driver of our earnings at this point. We're going to be excited about second half of 2017 when we get that full project online.

Brandon Blossman - Tudor, Pickering, Holt & Co. Securities, Inc.

Okay. Thanks for that. And then, the two new projects this quarter, I think it was pretty clear that it's a Q3 ramp and then full contribution in the fourth quarter.

Michael J. Hennigan - President, Chief Executive Officer & Director

That's correct.

Brandon Blossman - Tudor, Pickering, Holt & Co. Securities, Inc.

That's for the Longview and the Delaware Basin Extension.

Michael J. Hennigan - President, Chief Executive Officer & Director

That's correct.

Brandon Blossman - Tudor, Pickering, Holt & Co. Securities, Inc.

Okay. That's all from me. Thank you, guys.

Michael J. Hennigan - President, Chief Executive Officer & Director

Thanks, Brandon.

Operator

Our next question comes from Shneur Gershuni of UBS. You may ask your question.

Shneur Z. Gershuni - UBS Securities LLC

Hi, good morning, guys.

Michael J. Hennigan - President, Chief Executive Officer & Director

Good morning, Shneur.

Shneur Z. Gershuni - UBS Securities LLC

Just a couple of progress questions, I guess. First of all, court case done with respect to eminent domain, just wondering if you can talk about the ME 2 construction phase now, is it something that you're able to potentially accelerate? I realize you probably prefer to negotiate with landowners than use it. But I was wondering if you can sort of walk us through the timeline as a result of this court case? And then secondly, I was wondering if you can talk about, have any new shippers signed up, any new volumes been committed to it and so forth? Thank you.

Michael J. Hennigan - President, Chief Executive Officer & Director

Sure. So, first off, obviously we're pleased that the court decisively affirmed the lower court decision that we are a public utility corporation in Pennsylvania and that we do have the right of the power of eminent domain. But I will tell you, though, you said it very well, it's not our preferred route. We do want to negotiate mutually acceptable agreements with parties, but some have chosen to pursue the legal route. So, unfortunately that's one of the ways that we had to go about this. So, hopefully at the end of the day, the court decision will show people that we have the rights that we thought from the beginning.

As far as the project timeline, we basically have stayed with where we were before, which is second quarter of 2017. We still think that that's our best estimate. But the critical path on the project right now is the permitting. I did say in my prepared remarks that we are pleased that the permitting has moved along. For a long time there it was in a status quo position, but we achieved what's called administratively complete which is the technical term that says our application is now in a different phase with the DEP. They've been very cooperative as far as working with us to analyze our application.

And I always like to say this, we want to be a company that's environmentally responsible, that's one of our goals. So, the process is taking a little longer than we anticipated early on when we first gave an indication of when we thought the project would start up. But we think we're on track. The permitting is the critical path, so we'll have to wait for that to occur. And with our estimates right now of when that would occur, we think a Q2 2017 startup is the place.

I won't comment on your last point. We have not given any color as far as how many commitments we have. What we've told people is, we have enough commitments to proceed, can't disclose the details but we've always said it's a good project. And in fact, we've been very open about we've been so pleased with where we are that we upsized some of the equipment sizing, so that we have the most upside potential into the future.

So, we're excited about it. It is one of our premier projects. We are evaluating some incoming calls relative to it. But overall, the base plan is still as good as we thought. And as soon as we get these permits behind us, hopefully we'll meet the timeline that we've suggested at this point.

Shneur Z. Gershuni - UBS Securities LLC

When you say evaluating incoming calls, so in other words, I realize you were never going to tell us what the contracted position was, how much and so forth. But I was just more curious, like, are people still interested and still – in terms of potentially adding more and so forth? Because I know that you had a bunch of options on upsizing it or even going with the ME 2X. Is that a fair way to characterize the conditions right now?

Michael J. Hennigan - President, Chief Executive Officer & Director

Yeah, Shneur, I think that's fair. Like I said, we've gotten a handful of calls, both strategic and financial, and you guys obviously understand the difference between the two. We're in a lot of discussion with several parties. At the end of the day, our goal will be, if we can make it a better outcome, then we will move into a different environment. Right today, our base plan is where we are, we're happy with it. We continue to evaluate. But unfortunately, we can't give you much more color than that at this point.

Shneur Z. Gershuni - UBS Securities LLC

No problem. And one final question, I know you love to talk about the blue bar, but I was wondering if we can talk about kind of your red bar type earnings. As of right now, in this current marketplace, it's kind of nowhere to be seen, I guess it's the right way to characterize that. But I wonder if you can talk about what market conditions we should be looking for, for when the earnings start to come back.

And I'm not talking about your peak earnings but something materially improved from where you are right now. What are the conditions that would create spreads between the hubs? Is it a recovery in crude oil production? Is it – should we be watching crude inventory levels or do you think that there's just been so much pipeline put in place that the opportunity to generate spreads both materialized for a very long time?

Michael J. Hennigan - President, Chief Executive Officer & Director

Yeah. That's a good question, Shneur. So, basically, our red bar, the two main buckets that we have in red bar are the WTI-LLS spread that arbitrage from Midland to the Gulf Coast. And you guys know where it stands, that spread has essentially collapsed from some pretty high levels a couple years ago down to less than $2 in the early part of this year. So, that's one main area. The second main area is our butane business, and that correlates pretty well with the absolute price of crude oil. So, if I had to give you one – if you're asking where is that the recovery and I had to pick one thing, I would say it's the price of crude oil, as crude oil recovers over the next couple years, then we should see some of those spreads start to move out. Butane is probably more correlated to absolute price, crude is more of a regional basis like you said. But if crude oil goes up and production goes up, you'll start to again see some regional dislocations in which case you can start to have that arbitrage develop.

So, if you ask me to pick one thing, I would tell you crude price, as that's a very simplified way to look at it. Over time, we do think there'll be recovery, because we are bullish, in crude price over the next several years. In the meantime, you said it very well, we essentially have minimal to no red bar at the moment. Our butane margins have gone down in the last couple years. But like I said in my remarks, we're pretty pleased that our model has held up with crude in the $30s, butane margins pretty collapsed, and not looking robust for next year as we hedge in this summer for next year. We're pretty pleased as to where our model is, which we're calling the bottom of the cycle and we see things getting better over the next couple years.

Shneur Z. Gershuni - UBS Securities LLC

Great. Thank you very much, guys.

Michael J. Hennigan - President, Chief Executive Officer & Director

You're welcome. Shneur.

Operator

Our next question comes from Gabe Moreen of Bank of America Merrill Lynch. You may ask your question.

Gabe Philip Moreen - Bank of America Merrill Lynch

Hey, good morning, guys.

Michael J. Hennigan - President, Chief Executive Officer & Director

Good morning, Gabe.

Gabe Philip Moreen - Bank of America Merrill Lynch

Couple of questions. One on the Bakken project, just bringing Marathon on is an additional shipper, can you talk about how that may change the return profile for that project? And then also, does that imply that – I know you talked about potentially upsizing the capacity, it sounds like that is going to happen with Marathon, bringing additional commitments?

Michael J. Hennigan - President, Chief Executive Officer & Director

Yeah. First off, Gabe, let me say that I'll let you get more details from the Energy Transfer guys on the next call. I mean, they really deserve the credit, Mackie, Lee and that team developing such a great project.

The obvious answer to your question, obviously Marathon coming and bringing more volumes makes it a much better project. As you know, we're not going to give you specifics as to what that means. But I mean, think about, if you step back, we have a partnership now with partners including P66, ETP, SXL, Enbridge and Marathon. And not to be too bold, but it is the takeaway project out of the Bakken area. So, very bullish to its long-term prospects. We're very happy to have two new strategic partners that will bring some value to it. So, it's a much better outcome than where we were. We approached this very similar to where we were before. We like the base project. And if we can improve upon it, we would act. And we were able to improve upon it in two ways, one was the sale in bringing on strategic partners and the second was the financing that just improved the returns for all the partners in the project.

Gabe Philip Moreen - Bank of America Merrill Lynch

Thanks, Mike. Then as a follow-up on that, just in terms of how you're viewing, I guess, the gain relative to your cost in terms of bringing on the partners. Should we just view that as additional equity you're sort of bringing in-house? And then, on the project financing, is there any difference in terms of how we should view that from a debt-to-EBITDA ratio either how you view it in terms of how your banks view it given that it's project financing?

Peter J. Gvazdauskas - Chief Financial Officer & Treasurer

Yeah. Gabe, on the project financing, so that will not be on our balance sheet. So, that will not be reflected as cash. We'll just have our equity investment from a ongoing leverage measurement perspective when we do our debt-to-EBITDA because the debt will not be in that calculation, we won't be picking up our percentage which will now be 15.3% of the EBITDA from the project, we'll pick up our percentage of the distributions, which is comparable to how we treat our other joint ventures and as we roll them into our metrics.

Gabe Philip Moreen - Bank of America Merrill Lynch

Got it. Thanks, Pete. And then last question from me, following up on Shneur's red bar-blue bar question, just in terms of NGL segment, I realize with the butane blending, the Mariner, various Mariner issues for the quarter. Was there anything else going on there because on the press release it also sounds like maybe there are some other marketing or lack of marketing opportunities, can you speak to that?

Michael J. Hennigan - President, Chief Executive Officer & Director

Yeah. I mean there is not a whole lot going on there other than, like you said, the red bar environment as there is not much marketing opportunities in general. But the main miss, if you want to say that, in this area is we're just disappointed that we didn't average the number that we would have liked to average on our Mariner system as far as volumes, and I kind of talked about why that occurred. So, that that's the main reason there. And then, as we mentioned earlier, butane is part of that business and the margins just year-on-year have been lower.

Gabe Philip Moreen - Bank of America Merrill Lynch

Got it. Thanks, Mike. Thanks, everyone.

Michael J. Hennigan - President, Chief Executive Officer & Director

You're welcome.

Operator

Our next question comes from Jeremy Tonet of JPMorgan. You may ask your question.

Jeremy B. Tonet - JPMorgan Securities LLC

Good morning.

Michael J. Hennigan - President, Chief Executive Officer & Director

Good morning.

Jeremy B. Tonet - JPMorgan Securities LLC

Can you hear me?

Michael J. Hennigan - President, Chief Executive Officer & Director

Yes. Good morning, Jeremy. Good morning.

Jeremy B. Tonet - JPMorgan Securities LLC

I was just wondering with the Mariner South movements as you're talking about between quarters and with the delay in Mariner East 2. One, is Mariner East 2 kind of that full run rate right now? And is there any way that you could help us kind of quantify the EBITDA impact for the quarter, if we're kind of thinking about normalized blue bar for that segment? Or just any help there would be great.

Michael J. Hennigan - President, Chief Executive Officer & Director

Yeah. I think, you meant Mariner East 1. So Mariner East 1 is up at full rate, right at the moment. But as I mentioned previously, we are going to have to make that fix to attack the cold box design issue. So, we're assuming that will occur in the next couple of months, but like I say, we want to do it in a way that minimizes our customers' impact. I can't give you a specific numbers on the EBITDA, that, you're going to have to do your own estimate about. But in general, we're feeling that once we get that fix behind us, the ME 1's where we want it to be. We wish it was there sooner during this year. As I said, we're disappointed in the volumes, but we're still very bullish of the project. I think some of our customers have even commented, we're happy with the commercial results. The propane netbacks out of the East Coast are significantly better than what's happening in the Gulf Coast. So, I think things are looking good overall. We just need to get through this little bump in the road.

Jeremy B. Tonet - JPMorgan Securities LLC

Great. Thanks for that. And then, turning to ME 2, and you touched on a bit here, but there has been some concern in the marketplace with regards to how contracted the pipeline is and what the economics look like, and I know you guys would never disclose individual shipper commitments. But I was wondering if you could talk maybe a little bit more about – anything you could share with us as far as improving comfort that you're hitting the economics that you want to on this project.

Michael J. Hennigan - President, Chief Executive Officer & Director

Yeah. Sure, Jeremy. I think that's a misnomer out in the market. So, the way we approached it is, we would not move forward until we had enough commitments to meet our criteria to go forward. If you remember, that open season stayed open for a very long time. We ended up doing 19 extensions to that open season until we reached the level of commitments that we were comfortable that we had the right economics. At the end of the day, we got the commitments and then some, such that we decided to upsize the project. Our original estimates were going to be a little smaller project, but the amount of commitments that we did get put us in a situation which we're very pleased with which gave us the opportunity to upsize the pipe, upsize equipment. So, we could have gone with the smaller project with little better economics, but not as much future growth. We decided to upsize it a little bit and have that growth potential which we're very glad about. Again, same thing, we're bullish of the Marcellus, Utica area. It's great rock, there is premier production occurring in that area. We think it's going to be a terrific place, very, very low breakevens.

And again, we have the premier takeaway from that shale area. So, we're pretty excited about it. We're pretty excited that we got the opportunity to upsize it. But we would have never been able to do that if we didn't have enough commitments in order to make that happen.

Jeremy B. Tonet - JPMorgan Securities LLC

That's encouraging, that's great. Thanks. Just one last one from me. Actually, Pete, just wondering with regards to the balance sheet and funding right now, I mean given your leverage being at 3.7 times, given all the equity that you've raised at $750 million so far this year, just wondering if you could share any thoughts with us and how you think about funding going forward as far as what you need – with the reduced CapEx needs at this point and the strong leverage, could you share any thoughts as far as the need for marketed deals or ATMs at this point?

Peter J. Gvazdauskas - Chief Financial Officer & Treasurer

Great question, Jeremy, and we're happy to be able to give some color on this, this morning. You started it but let me just recap what we've done so far year-to-date. We issued $550 million of 3.9% 10-year bonds and that was back in July, we're pleased about that. And as you indicated, we've also issued approximately $750 million of equity in the ATM program and that is through July. So, when you look at the 10-Q, I think the earnings release that just has the numbers through June, so what Mike and I want to update on this call is, we did do a little more through July and that's – we're at the $750 million, now we're happy to get that past us. So, as we think about funding our approximate now $1.4 billion 2016 capital needs, we are close to balance on our base plan. In regard to equity at this point, we could be done to maybe needing a little more based upon some of the initiatives that we're working on, that we're currently working on. One other point, and we'll have a moment that I'd like to note, we've almost used up all the ATM capacity under our existing program. As you know, we do these $1 billion programs at a time, and as such, we'll need to file another shelf for the next program. As we've done in the past, this will be the standard $1 billion program and it's good for three years. But please, please do not read into this filing that we need a significant amount of equity in the near term because that is not true. We just like having an ATM program available in case future opportunities or needs arise, and therefore, we're going to complete the administrative path of filing the new shelf after the 10-Q is filed in order to maintain that future flexibility and that's over the next three years, these programs are good for three years. So, I just want to point that out, so if you see that come across, please don't read into that, that we need a significant amount of equity, it's just an administrative path that we need to keep that future flexibility as opportunities arise in the future.

Jeremy B. Tonet - JPMorgan Securities LLC

That's all. Very helpful. Thank you.

Michael J. Hennigan - President, Chief Executive Officer & Director

Thank you, Jeremy.

Operator

Our next question comes from Jean Ann Salisbury of Bernstein. You may ask your question.

Jean Ann Salisbury - Sanford C. Bernstein & Co. LLC

Hi, just a couple of quick ones. For the committed Mariner South shippers, do you get the same payment whether or not they lift?

Michael J. Hennigan - President, Chief Executive Officer & Director

Yeah, we have T&D commitments, so we are protected as far as that situation, but as I mentioned, they have a little bit of flexibility, and they can underlift a little bit and lift later. And with the challenges in the arbitrage and in the market, they have chosen to underlift a little bit short term, but ultimately we get that cash, but we can't recognize the earnings, and so the T&D situation plays itself out.

Jean Ann Salisbury - Sanford C. Bernstein & Co. LLC

Okay. And if the – if things kind of look worse and they choose not to lift, you guys would prefer for them to lift but financially you're indifferent?

Michael J. Hennigan - President, Chief Executive Officer & Director

Yeah, like I said, Jean Ann, the way it works is we get the cash in right away, but we can't recognize the earnings or the distributable cash flow until the timing is such that they don't have the makeup time on their contract as far as T&Ds. Once they don't have the makeup time, then we can recognize the earnings but we can't do that until that time plays itself out.

Jean Ann Salisbury - Sanford C. Bernstein & Co. LLC

Okay. Thank you. And secondly, if you sell more capacity to local propane shippers on Mariner East 2, can you have different tariffs than those that are exporting, a range of tariff?

Michael J. Hennigan - President, Chief Executive Officer & Director

I'm not sure I understand your question. Try that again.

Jean Ann Salisbury - Sanford C. Bernstein & Co. LLC

So, you've had a set tariff basically to – that you've arranged with your existing shippers to export propane from Mariner East 2, as now you want to have more local shippers of propane, are you forced to use the same tariff for everyone or can you have a range of tariff?

Michael J. Hennigan - President, Chief Executive Officer & Director

Oh, I understand what you're saying now. No, we have the same tariff for everybody. We are regulated by the PUC in Pennsylvania. So, those local connections will come under those regulations, and we have tariffs for that. So, that is the same for everybody. So, I didn't understand you at first, but...

Jean Ann Salisbury - Sanford C. Bernstein & Co. LLC

Yeah.

Michael J. Hennigan - President, Chief Executive Officer & Director

...yes, common carrier pipeline, PUC regulated, same tariff for everybody.

Jean Ann Salisbury - Sanford C. Bernstein & Co. LLC

Okay. Great. Thank you. That's all for me.

Michael J. Hennigan - President, Chief Executive Officer & Director

You're welcome.

Operator

Our next question comes from Chris Sighinolfi of Jefferies. You may ask your question.

Christopher Paul Sighinolfi - Jefferies LLC

Hey, good morning, Mike.

Michael J. Hennigan - President, Chief Executive Officer & Director

Good morning, Chris.

Christopher Paul Sighinolfi - Jefferies LLC

Just want to follow-up on DAPL, first, congratulations on project financing and the sale, quite attractive there. I was interested in, I think, a question Gabe asked, and I'm not sure if I understood the answer. With the involvement of the two partners, are we to think about the pipe capacity being expanded or is MPC seeking to take capacity that was sort of part of the previously advertised size? Just wondering how to interpret the open season.

Michael J. Hennigan - President, Chief Executive Officer & Director

Yeah, Chris. We haven't commented on where the volume is going to be. We have to launch the open season, and let that play itself out and see where it comes out. Obviously, we have indications from our partners as to where they want to be in the open season, but we actually need to run the open season and then see the actual results. And then we'll be in a position to know where that played out.

Christopher Paul Sighinolfi - Jefferies LLC

Okay. Okay. Understood. And then if I could, just following, I know you got a number of questions so far about the DAPL project, the deal, the interest sale may be providing a template for other things in place. You mentioned ME 2. I was just curious, Mike, as we think about ME 2 and then we think about potentially ME 2X, you had mentioned that you've received interest. I was just wondering if those are discrete projects or if in the context of the conversations you might have had, if we might see ME 2X sort of hinge on whatever partner or no partner we see on ME 2. Is there any interplay there or should we think about them as discretely separate projects?

Michael J. Hennigan - President, Chief Executive Officer & Director

Yeah. I would think of them as separate. I mean at the end of the day, each of these initiatives are different, but and they're also similar in some regards. Obviously, we want to make those projects, if we do something we want to make it better than the base case, so that's kind of goes without saying, and there are different ways to make that happen. You saw the outcome on Bakken, which I think is just great for everybody. Obviously, when you can end up in a situation where everybody wins, that's the best of all worlds. And for us getting a better project and a better return and the financing, it just couldn't have come out any better.

On ME 2, it's similar in that, like I said a couple of times is, we like our base project, we're happy with that. We're entertaining ways to make it a better project. And if we come up with a way to do that, then we'll pursue it.

On ME 2X, I think you got to think of it as somewhat separate. We're in the same situation as we were on ME 2. We continue to extend the open season, it's still out there. So, we continue to extend it week-on-week, continue to have those conversations. Long term, believe it's the right thing to do. Short term, as you know, the market conditions have been tough through the first half of the year. And as people start to see recovery, and they start to believe that over the next couple of years, prices will be different, then obviously the momentum to do something different changes.

So, on that one, again, I wish we could give you more color. We're not at a point where we can do that. Stay tuned. We are telling you that we have several more strategic initiatives that we are working on. We're happy that we could announce the two that we have been working on, but the others we're just not able to give any color yet.

Christopher Paul Sighinolfi - Jefferies LLC

Okay. On that point, I think patience in the past with you guys has been rewarded. Obviously, you mentioned the ME 2X process has sort of been continually rolled. But you had mentioned, with regard to that project, that constructing it concurrently with ME 2 would make a lot of financial sense, probably make that project viable at a lower volume threshold than would otherwise be warranted. With that as our understanding, is there a point realizing that the in-service timetable you told us for ME 2 – is there a point where we can sort of think about a go, no-go decision on ME 2X?

Michael J. Hennigan - President, Chief Executive Officer & Director

Yeah. Absolutely. Obviously, the best case scenario for us is to have a go on that at the time we start construction. And I've said it previously, one of the silver linings of the delay is to give us a little more time to develop ME 2X. It's not a must have, it's a nice to have. We would like to do it at the same time if it works out that way, that's the best scenario for us. If it doesn't work out that way, then we would have to just work on them from a separation standpoint, but we'd lose that synergy of having them together.

We have talked to the potential shippers and we've said we're happy to share the synergy if it can occur. If it doesn't occur, then obviously there's nothing to share there. So, they're linked in one regard, but they don't have to be done at the same time. Having a little more time has given us the ability to potentially get that across the finish line, but we're not there yet.

Christopher Paul Sighinolfi - Jefferies LLC

Okay. And then, thanks for all that color, Mike. And then final question from me and I don't know if this is maybe one for Pete. But as you think about just the cadence of distribution growth, I mean, it's interesting right now that you obviously on a leverage front, particularly affecting for the recent DAPL transaction has been a really enviable position, one of the few companies with meaningful growth coming in 2017 and into 2018.

But looking at just the coverage number right now, obviously, it's a little deficient relative to what you guys would have liked and have advertised as a target. So, how do we think about the confluence of those factors as it pertains to the cadence of growth and the board discussions on that? Any help there would be really appreciated.

Michael J. Hennigan - President, Chief Executive Officer & Director

Yeah. I'll comment first and then I'll let Pete jump in if he chooses. So, overall, I would say, we're exactly where we expected to be on our plan with the exception of the Mariner timing, et cetera. And as you pointed out, we believe we're right around one, we're slightly under in that, and I have explained why that's the case. But overall, we're happy with our model, I mean we've seen red bar go to essentially nothing. We've seen butane margins disappear. We've seen arbitrage on crude disappear and, at the same time, we're where we expected to be.

So, we're still confident in our model. I'm glad you made the point about growth matters. We've been a company that still believes in that. We have not wanted to back away from our growth plans. Earlier this year, we were getting questions of do you want to delay, do you want to not to do this? Our position has been, no, growth matters, and we want to continue to be a company that grows. And I'm hopeful that a by the end of 2016, you see us as a company that we've grown distributable cash flow over 2015, that's our goal. And we want to do that as time continues.

I'll let Pete comment if there's any financing that you want to add?

Peter J. Gvazdauskas - Chief Financial Officer & Treasurer

That's good, Mike, I concur.

Christopher Paul Sighinolfi - Jefferies LLC

Okay. Thanks a lot, guys. I appreciate the time this morning.

Michael J. Hennigan - President, Chief Executive Officer & Director

You're welcome, Chris. Thanks.

Operator

Our next question comes from Jerren Holder from Goldman Sachs. You may ask your question.

Jerren A. Holder - Goldman Sachs & Co.

Okay. Good morning. Just wanted to clarify on the CapEx reduction from $2.5 billion to $1.4 billion. Was there anything else beyond the project financing that impacted that? Because I guess how I'm thinking about it, if you had 30% of this $2.5 billion that's now going to be project finance, that's $750 million, so where is the rest of the reduction come from?

Michael J. Hennigan - President, Chief Executive Officer & Director

Yeah, Jerren. So, let me try and give you a little more there. There is a lot of puts and takes to go into that. As you know, our model is we give guidance for the following year in November and that's when we gave the $2.5 billion. Throughout the year, we look for opportunities to add to that bucket other projects that can create value. So, sometimes that's occurring, at the same time, some things that we thought were going to occur, maybe we'd push back because the – if you remember, the cost of capital in the early part of the year was a lot different than it is today. So, there is a lot of puts and takes that occur throughout the year. Probably without these big projects, we would have given a little better guidance maybe last quarter, but we knew that we had a big event occurring, ultimately $800 million for the sale of our interest is a big change in this whole process.

So without that big play, we probably would have given some update last quarter, but we didn't think it would be good for the market for us to update one way, and then very quickly after it's updated, different way. So, that's why we chose to just wait. And at the end of the day, we ended up in a situation where we now could give color, but it's not as simple as you're thinking just to do, hey this event, this event, how, why is the math. There's a lot of puts and takes that occur throughout the year.

Jerren A. Holder - Goldman Sachs & Co.

Okay. And then – thanks for that. And moving to Mariner South, is there an ability to move maybe other products out in the interim just given some of these deferments, I mean obviously some competitors are moving out propylene and different things like that?

Michael J. Hennigan - President, Chief Executive Officer & Director

Yeah, we would love for that to happen, we haven't seen that, short term, that international arbitrage has been tight. So, ultimately what's happened there is, the economics behind moving it came in as the price of oil collapsed and everything that was going on in the world market.

So, there was a couple cancellations out of the Gulf, at the same time, there was some deferrals, but that was part of what's occurring in the market. So, at the end of day, we just have to see how that plays out. We know we're going to get some of those earnings back as we stated earlier. We can't book those earnings until the T&D's play out. But at the end of the day, we're hopeful that that arbitrage drives the flow of volumes, and that's really what came in that caused some consternation there.

Jerren A. Holder - Goldman Sachs & Co.

Okay. Great. That's it from me. Thanks.

Michael J. Hennigan - President, Chief Executive Officer & Director

Thanks, John.

Operator

Our next question comes from Michael Blum of Wells Fargo. You may ask your questions.

Michael Blum - Wells Fargo Securities LLC

Thanks. If I think about Mariner East, just in total, 1 and 2 together, and that's the 345,000 barrels a day, is there a way to think about how much of that supply or propane will really – will end up basically in the local market versus end up getting to Marcus Hook and then getting exported? And I guess the other way I'm trying to think about that is like, what is the physical capabilities of Marcus Hook to export, like, could you actually export 345,000 barrels a day off of the dock?

Michael J. Hennigan - President, Chief Executive Officer & Director

Yeah. So the two-part question is, first of all, one of the advantages we see about the Northeast market compared to the Gulf Coast is the demand of propane seasonally. Obviously, there is a lot of weather driven there, but there is local demand for heating, et cetera, et cetera, there is also local demand for other uses for the NGLs, there is a regional demand as it moves up outside of Pennsylvania. So you kind of have the immediate Pennsylvania market which is really important. You got the regional market which is around the other states around the area. So, you get some nice demand that's local and different than what's occurring in the Gulf Coast.

As far as exporting, that's driven by the international arbitrage, et cetera. Our goal is to provide a service. We want to provide a service such that those shippers can choose to stay local, go regional, go international, it's their choice. Our choice, our ability is to provide the servicing, let them have the economics to go in different ways. And we've seen that flexibility being used, which is terrific. Sometimes all the barrels stay very local and that's where the need is, and sometimes the barrels are exported.

To your second question, yeah, we use the term unlimited in regards to market those capabilities, and I know that's a crazy word. But we have four ship docks that are able to handle NGLs. As you know, it was a former refinery site, so we would love to get to a point where we needed to build another dock, but we don't see that for a long time. But that would be great if we got to that point, that would be a really great day for us.

Michael Blum - Wells Fargo Securities LLC

Okay. And then last question, do you – can you tell us how much you spent on Dakota Access, so far?

Michael J. Hennigan - President, Chief Executive Officer & Director

That's not something that we disclose, Michael. So, that one, we're not going to be able to give you.

Michael Blum - Wells Fargo Securities LLC

Okay. Thanks a lot.

Michael J. Hennigan - President, Chief Executive Officer & Director

You're welcome.

Operator

Our next question comes from Noah Lerner of Hartz Capital. You may ask your question.

Noah Lerner - Hartz Capital, Inc.

Hopefully...

Michael J. Hennigan - President, Chief Executive Officer & Director

Hello.

Operator

I'm just sorry, sir, we may have lost Noah, but let me just put him back in the queue.

Michael J. Hennigan - President, Chief Executive Officer & Director

Okay. Thank you.

Noah Lerner - Hartz Capital, Inc.

Hello.

Michael J. Hennigan - President, Chief Executive Officer & Director

We're hearing, Noah, go ahead.

Noah Lerner - Hartz Capital, Inc.

Okay. Great. Sorry, there was a problem there. Real quick hopefully, early in your comments, you were pretty firm in that – you think prices will be higher for crude in the second half than the first half. And then also in response to Gabe, you kind of mentioned that you think price has bottomed out. Are you hearing or seeing anything in where you sit within the industry that's different than what the common perception is that energy companies can't make a living at these prices? I'm just curious what is driving that forceful statement that you made.

Michael J. Hennigan - President, Chief Executive Officer & Director

Noah, first of all, everybody knows I don't have the crystal ball to know exactly what's going to happen in the future. What I do do is I have certain beliefs that I try and watch. I'm a believer in the demand is the most important factor because the world has supply capabilities to meet demand, but at the same time, obviously it's motivated by price and the ability to do that. So, my – I'm a believer in supply and demand economics 101, and right today, I still feel very bullish about the numbers that I'm seeing on the demand side. So, you may have heard me saying that in the past in a very simplified models, the oil market's 100 million barrel market, and I believe it's growing at 1% to 1.5% and when you have low prices like we see today, it' s closer to that 1.5%.

So, I think there's 1.5 million of demand, could be a little bit higher than that, some people are saying 1.6 million, 1.8 million, et cetera, et cetera. But if we have a 1.5 million of demand and at the same time, we know production is coming down, I mean, it's pretty factual that non-OPEC production has come off pretty strongly, everybody can see obviously the U.S. data.

So, I see a correction occurring, I think it's going to occur more in the second half of the year. Obviously, the inventories are still high though, I mean they've been stubbornly high. And in my view, the supply-demand fundamentals are showing that they should be dropping globally.

So, we'll have to see if that plays out, I think it will in the second half of 2016 into 2017. There is other players who aren't as bullish as I am. But at the end of the day, I am a believer in supply and demand fundamentals. So, what I see is that it should correct; and if it does, then price will have to come back up to incent production to come back on.

Noah Lerner - Hartz Capital, Inc.

Great. Thanks, Mike.

Michael J. Hennigan - President, Chief Executive Officer & Director

You're welcome, Noah.

Operator

Our next question in queue, it's from John Edwards of Credit Suisse. Your line is open.

Michael J. Hennigan - President, Chief Executive Officer & Director

Hey, John.

Operator

John, you might be on mute. Kindly check your mute button, please?

Michael J. Hennigan - President, Chief Executive Officer & Director

I think we lost him, operator.

Operator

Sir, I believe his line is open right now. He might be on mute. Mr. Edwards, are you on the line? Would you like to proceed to the next question, sir?

Michael J. Hennigan - President, Chief Executive Officer & Director

Yes. Thank you.

Operator

We have Danilo Juvane from BMO Capitals. Your line is open.

Danilo Juvane - BMO Capital Markets (United States)

Good morning and thank you for taking the question here. Just a quick question on ME 2. As you guys sort of evaluate additional alternatives there, what is your preference for either having a strategic player versus a financial player? Which one gives you more project accretion opportunities?

Michael J. Hennigan - President, Chief Executive Officer & Director

Yeah. It's too early to say at this point because all of these conversations can go a lot of different ways, so we don't start into this saying, it's got to be A or B. We get in to see what's the win for the other party, what's the win for us, and we try and evaluate it as it's something that we want to execute on. So, I think it's just a little premature to give you any color in that area. Obviously in the Bakken project, you saw where we ended up, but it's too premature on ME 2 discussions.

Danilo Juvane - BMO Capital Markets (United States)

So, can you achieve sort of similar accretion by choosing sort of either/or do you need both sort of players to participate in the project to make it sort of more attractive than what you have in your base plan today?

Michael J. Hennigan - President, Chief Executive Officer & Director

No. I think you said it well. You can achieve better accretion with that – either path you go. They're just different paths, and obviously we'd have to have that occur, but what I'm saying to you is, it's little premature to say to you which way is looking better at this point on that project.

Danilo Juvane - BMO Capital Markets (United States)

Okay. Thank you. That's it from me.

Michael J. Hennigan - President, Chief Executive Officer & Director

You're welcome. Thank you.

Operator

We show no question in queue at this time, sir.

Michael J. Hennigan - President, Chief Executive Officer & Director

Okay, great. Everybody, I just want to – again, thank you for your interest in Sunoco Logistics. As always, Pete's available for follow-up questions, and I look forward to talking to you next quarter.

Operator

That concludes today's conference. And thank you so much for your participation. You may now disconnect.

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