Andeavor Logistics LP (NYSE:ANDX) Q2 2017 Earnings Conference Call August 9, 2017 12:00 PM ET
Andrew Woodward - Senior Director of Finance and Investor Relations
Gregory Goff - Chairman and Chief Executive Officer
Steven Sterin - President Chief Financial Officer
Theresa Chen - Barclays Capital Inc
Justin Jenkins - Raymond James
Corey Goldman - Jefferies
Brian Zarahn - Mizuho Securities
Jeremy Tonet - JP Morgan Securities
Sunil Sibal - Seaport Global Securities
Good day, ladies and gentlemen. And welcome to the Second Quarter 2017 Andeavor Logistics LP’s Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions]. As a reminder, today’s conference call is being recorded.
I would now like to turn the conference over to Andrew Woodward, Senior Director of Finance and Investor Relations. Please go ahead.
Thank you. Good morning and welcome to today’s conference call to discuss our second quarter 2017 earnings. Joining me are Greg Goff, Chairman and CEO; and Steven Sterin, President and CFO. The earnings release which can be found on our website at andeavorlogistics.com includes financial disclosures and reconciliation for non-GAAP financial measure that should help analyze our results.
Our comments and answers to questions during this call will include forward-looking statements that refer to management's expectations or future predictions. They are subject to risks and uncertainties that could cause actual results to differ from our expectations. Please refer to the earnings release for additional information on forward-looking statements.
Now, I will turn the call over to Greg.
Thanks, Andy. Good morning and thank you for joining us today. We are pleased with this quarter’s result and have made significant progress on many of our strategic objectives. The results for the quarter were led by record volumes in our terminalling and transportation segment driven by strong plan product demand and high refinery utilization, especially in Southern California.
We also successfully executed the sale of the Alaska terminal, which generated $25 million net gain for the quarter. The decision to sell was a result of a consent decree related to the Alaska terminals we acquired in 2016 and the sale does not materially impact our revenue.
Gathering of processing was negatively impacted by slower than expected completion activity during the quarter and the planned but extended maintenance at Andeavor’s Mandan Refinery which not only lowered our volumes, but also lowered the average fee per barrel on our high pipeline systems due to shorter haul movements and drove higher maintenance expense. This had a negative impact of $9 million versus our expectations for the quarter.
Despite this, late in the quarter and into the third quarter we are beginning to see higher volumes driven by more drilling and completion activity especially in an around our Robinson Lake processing facility in North Dakota. There is also no further plant maintenance at Andeavor’s refinery and coupled with strong refined product demand, we expect improved volumes for this quarter.
Shifting to organic investments, we made significant progress on several organic expansion projects during the quarter including the Los Angeles Refinery interconnect pipeline and the Vermillion Compression project.
The South Coast Air Quality Management District certified the environmental impact report on May12, 2017 for the Los Angeles Refinery interconnect pipeline system and we started to break ground this quarter. We expect the interconnect pipeline to be completed in July of 2018.
We also remain on-track to complete the Vermillion Compression project during the third quarter, which will lead to additional volume in our Rockies business beginning in the fourth quarter.
And finally, we were awarded in advance several new projects in the Bakken region over the quarter representing about $150 to $200 million of potential investments over the next two years. These project are a direct result of our extensive asset portfolio and customer focus in North Dakota and our ability to offer crude and gas gathering and processing as well as water handling services in the region.
Turning to strategic investments. During the quarter the Andeavor Board authorized its management to work with the Board and management of Andeavor Logistics to consider and begin to negotiates a merger of Andeavor Logistics and Western Logistics and change it to the capital structure of Andeavor Logistics with respect to the incentive distribution rights.
After evaluating many options related to the incentive distribution rights, both Andeavor and Andeavor Logistics preferred approach is to pursue a by-in transaction in exchange for common units. The transactions require approval of the Board of Directors of all three companies as well as the Conflicts Committees of both MLPs.
We believe we will be able to complete negotiations and announce the transaction during this quarter, we view these transactions as incredibly important to enable Andeavor Logistics continued growth plans and further strengthen Andeavor Logistics as a premier customer focus, logistics Company with an enhanced capital structure to better support long-term sustainable growth.
With more stable market conditions and the possibilities to improve Andeavor Logistics’ competitive position, we are excited about our future and ability to grow value for our unit holders.
With that, I will turn the call over to Steven to provide more details about the quarter.
Thanks Greg. Yesterday we reported second quarter net earnings of a $110 million an increase of 45% from a year ago and EBITDA of $229 million up 37% from the same quarter last year. Net earnings in EBITDA for the second quarter of 2017 included $25 million net gain related to the sale of the Alaska Terminal, a $5 million negative impact from the settlement of the customer claim from the legacy Rockies business, $9 million of lower margin and additional maintenance costs due to an extended Andeavor turnaround and $2 million of integration costs.
As we have mentioned in yesterday’s press release, our decision to sell the Alaska Terminal, which has 200,000 barrels of refined product storage capacity was due to consent decree in the divestitures of raw materials, or past present or future earnings or operations.
The plan with extended turnaround of Andeavor’s Mandan Refinery impacted our crude oil and water gathering volume but also reduced our revenue per barrel due to shorter crude oil pipeline movements. The impact of this extended turnaround and maintenance in Mandan which returned to full operations by the end of the quarter had a $9 million negative impact on earnings in the quarter.
Moving to more detail on our business segments. Gathering and processing operating income was $51 million in the second quarter, compared $55 million a year ago and segment EBITDA was $91 million versus $84 million last year. included in that number was the previously mentioned settlement of the customer claim integration costs and the impact related sort of maintenance of Mandan.
Crude oil and water gathering throughput for the second quarter increased 15% year-over-year and gas gathering process throughput increased 11%. This growth was primarily driven by contributions from the North Dakota gathering and processing assets we acquired earlier this year as well as contributions from organic projects and interconnects that we completed on our High Plains Pipeline System.
Production of NGLs is lower year-over-year as Rockies volumes slowed due to production declines, which was partially offset by volumes from our North Dakota gathering and processing assets.
Going into the third quarter, we are currently seeing more are drilling and completion activity
in North Dakota. The current active drilling rig count is 57 rigs as of August 3, up from 34 a year ago and 46 on average during the first half of 2017. And we are seeing improvement in and round Robinson Lake processing facility.
In that area drilling activity is increased to seven rigs currently from two to three rigs in the first half of 2017. In the Rockies, volumes are expect remained challenged that revenue stable due to minimum volume increments.
We are also encouraged by the recent QEP Pinedale sale which we believe based on our experience was similar asset trades should have a positive impact on volumes as the new owners begin to revise that investment.
Turning to the terminalling and transport segment. Segment operating income grew 78% to $121 million from $68 million a year-ago and segment EBITDA grew 64% to $144 million from an $88 million last year, we saw record volumes for both terminalling and pipeline transportation with each increasing approximately 4% and 6% year-over-year respectively for the second quarter.
Performance was primarily driven by new commercial terminalling and storage agreements XQ with Andeavor in connection with northern California and Alaska Terminal acquisitions in the second half of 2016. Also contributing to the segment was the gain associated with the Alaska terminal divestiture.
Terminalling throughput increased 44,000 barrels a day since last year to approximately 1.1 million barrels per day in the second quarter with Pad five gasoline demand a record high as saw higher throughput at California marine terminals.
Volumes in our transportation business increased approximately 51,000 barrels a day since last year to 918,000 barrels per day in the second quarter. This increase was largely driven by higher activity to our Southern California pipeline system.
Now let me take a momentum to discuss our balance sheet, cash flow and our strategic priorities for creating long-term unit holder value. Our balance sheet and financial flexibility remain strong. We ended the quarter with consolidated cash down for $20 million total debt net of an amortized issuance cost was $3.8 billion.
We have approximately $1.6 billion availability under our revolving credit facilities. For the second quarter net cash from operating activities grew 36% year-over-year to $117 million and distributable cash flow grew 40% year-over-year to $177 million. DCF included $28 million of proceeds related to the Alaska Terminal divestiture mentioned earlier.
During the quarter we invested $24 million in high return growth capital projects and had $10 million of net maintenance capital expenditures bringing our total net capital expenditures to $34 million for the quarter. For 2017 we continue to expect total net capital expenditures up $295 million including $230 million of growth standing and $65 million of net maintenance capital.
On July 19, this year we announced our second quarter distribution of $0.97 preliminary partner unit were $3.88 per unit on an annualized basis, which represents our 25th consecutive quarterly distribution increase. The declared distribution also represents a 15% year-over-year increase. Our distribution coverage was 1.3 times for the second quarter and 1.15 times year-to-date 2017.
As Greg mentioned we have made considerable progress on a potential merger between Andeavor Logistics and WNRL and an IDR buy-in with Andeavor. Our object is to have one MLP best positioned to feasibly and sustainably grow business over the long-term. We see tremendous growth opportunity across the business and in particular organic growth and targeted acquisitions in the Permian Basin.
In addition, Andevor’s continued growth provides additional opportunities for the acquisition of terminalling and transportation assets. Not only it captures the significant value from the road, the potential merger and idea restructuring will enable maximum value accretion and unit holder returns.
Our financial discipline and principles remain unchanged and help guide us as we evaluated options for the merger and the IDR buy-in. These principles include the following. First, achieve an attractive cost of capital by removing the IVR burden and merge the MLPs to achieve near-term cash flow accretion which will allow ANDX to aggressively grow the business.
Second, immediately increase and sustain a coverage ratio of around 1.1 times. Third, maintain debt-to-EBITDA below four times and achieve an investment grade rating in the near-term. Fourth, sustain an attractive and competitive long-term distribution growth rate and finally significantly reduce new public equity issuances needed to achieve growth resulting in more value creation and less dilution for unit holders.
As we progress through this process, we will share more details at an appropriate time and we feel this is a very important part of the future growth of Andeavor Logistics. And has the potential to unlock significant value for our unit holders.
Looking at the remainder of 2017, we now expect a North Dakota gathering and processing assets to contribute $60 million to $70 million of the annual net earnings and $95 to $105 million of annual EBITDA this year.
The revise guidance lower by $5 million is primarily due to slower than expected completion activity in the first half of this year. As previously mentioned, we already see improved rate counts and see opportunities that further grow this business in 2018 and beyond.
For organic investments, we still expect to see a $100 million of capital expenditures related to the Los Angeles refinery interconnect pipeline system this year. However, because this project is expected to be constructed and funded by Andeavor on a turnkey basis. Actual cash payments might occur until the projects is fully complete in 2018.
The expected cost of the logistics portion of the project is approximately $150 million and is expected to deliver $15 to $18 million of annual net earnings and $22 to $25 million of annual EBITDA beginning in the latter part of next year.
As for drop downs this year, we expect the opportunity to acquire assets offered by Andeavor in the fourth quarter 2017 which could have an initial $30 to $40 million of annual net earnings and $45 to $55 million of annual EBITDA.
Given the timings of this expected drop-down is now later in the year been originally planned due to the merger and IDR buy-in, we expect post drop we will achieve a run rate of $525 million of annual net earnings and $1 billion of annual EBITDA for 27 versus our prior guidance of actual in-year earnings for these amounts in 2017.
Looking ahead, you can find details of our volume expectations and other elements related to our third quarter 2017 outlook in our earnings release issued yesterday. This concludes our prepared remarks and we will now take your questions. Operator
[Operator Instructions] Our first question comes from Theresa Chen of Barclays. Your line is now open.
Hello, I wanted to follow-up on the comments related to the quantitative and qualitative financial targets and ANDX and what that really mean for the growth strategy going forward. So in the context of maintaining coverage of 1.1 times four time leverage or less achieving investment grade status and producing public equity issuance needs, is your intention to grow primarily through organic projects going forward and possibly supplemented by acquisitions and fund that growth internally with the [indiscernible] cash flows in debt and secondly given that this is the kind of entity you envision Andeavor Logistics to be post all the transactions, what kind of long-term growth rate do you think this strategy and capital structure can generate.
Thanks Theresa, excellent series of questions and some of those we can answer now and some of them will get answered when we complete our transaction. The way you characterize our financial targets as allowing us to have flexibility to invest in the business by maintaining a strong coverage of around 1.1 times, achieving investment grade, which will significantly lower our cost of debt.
And as you said, as we think about and is consistent with how we have run the business since the IPO. Our primary focus because most accretive the most valuable to investors this organic growth. And so that capital structure is really built around allowing us to go after the organic growth that we see, principally in the Permian but we have a number of projects in each of basins.
Second to that I would say is targeted and highly accretive acquisitions, principally likely smaller than some of the large transactions that you have seen out there, we have been very disciplined as we watch those come through, we do think that there are potential acquisitions particularly in the Permian that are attractive multiples that with this capital structure will be very accretive to investors.
And then finally we do have a very strong and growing portfolio of drop down opportunities that are available and so we think about it in that order and certainly with the elimination of the IDR burden, it allows us a significant amount of additional accretion from each one of those, but I would still say we think about the opportunities in that sequence.
Got it and related to the IDR buy-in, just in terms of the steps of getting there, the sequencing and economics of the transaction clearly matter, if you roll up the remaining units of WNRL first that would create a larger IDR cash flow resulting more IDRs to buy-in versus [indiscernible] of IDRs first. But I understand that the quantity of IDR cash flow is just one variable and equation and if you change the valuation of them that transaction could very well be the same from one scenario to another. Can you just help us how do we think about this?
So we mentioned earlier on the Andeavor call that ideally we would like to complete a merger and all the other financial restructurings at the same time and although order is important what is most important is the outcome. And as we said you can approach it different ways, but at the end of the day what we are trying to achieve are the financial principles that I outlined and so that’s really what is guiding us and so regardless of order that’s how we think about achieving that outcome.
Got it and lastly just in light of your comments about improvement in drilling activity and such North Dakota, but taking into account [indiscernible] recent news about using their CapEx and slight downward revision in 2017. Can you just talk about the outlook for this business beyond this year. How do see volumes in such trending to 2018.
We will certainly as we always do, towards the end of the year at investor day, it’s one of our planning process now, I’m sure lot more with you on that. In addition, upon successful completion of the merger, we would be able to talk lot more as well about potential opportunities in the Permian.
But maybe I will highlight a couple of things, first in the short-term as you mentioned we do see rig counts improving, even in spite of [indiscernible] has announced, the capital cut back that they announced could have some modest impact to projects that would have potentially been in 2018.
As we look across the entire portfolio of opportunities that we see, we don’t see that having material impact this year and next year we think that the growth portfolio that we have is quite substantial and we will be able to grow through that.
Thank you very much.
Thank you. Our next question comes from Justin Jenkins of Raymond James. Your line is now open.
Great, thanks, good morning again everybody. I guess may be just starting off at the top here, I’m thinking about the projects that the sponsors and Anacortes Refinery, we have seen your peers may be more directly involve the MLP in projects like that. Is that a consideration here, are we planning on keeping strictly logistic assets inside ANDX.
Our approach if you are referring to the [indiscernible] project, or Isomerization is to really focus on traditional terminalling and transportation assets, and so when we talk about our drop down portfolio, we focus on that, there could be some ancillary T&T assets around those projects, but they will go into our drop down portfolio but the large processing investments and processing units we would not consider at this time.
Perfect that’s helpful and then I guess maybe following up with a couple of procedural questions related to [indiscernible] with the proposed merger here between two MLPs, does that require a unit holder vote at the [indiscernible].
Yes it does.
And then the IDR buy-in would not [indiscernible].
Perfect. Thanks guys, I will leave it there.
Thank you, and our next question comes from Corey Goldman of Jefferies. Your line is now open.
Just a quick question on gathering and processing, we have better half year now of the North Dakota required assets contributing. Understanding there is some noise in there with some one-time items, but it looks as though EBITDA year-over-year is up call it $10 million-ish, just wondering given that the expectations weren’t all that much same to the North Dakota side, if you can you give us some colors as to what is happening kind of in other Rockies [indiscernible].
Yes. I think if you look across the business gathering and processing is where you see the impact on the man down turn around as well as the other charges that were mentioned earlier in terms of the customer dispute and so if you isolate those we are up closer to $20 million year-over-year within a segment. The Rockies business is relatively flat, we have seen a bit of decline earlier this year in particular due to weather and then in other parts of the business due to the outage of the pipeline that moved down into the Salt Lake city area. So as we look at those and we look at the impact of what we would expect from the acquired Whiting assets, we are seeing really kind of the net impact drop down from that acquisition and the rest of the business was relatively flat.
Got you, okay. And can you comment now for 2018 EBITDA expectations, financial expectations have changed at all on the North Dakota acquisition.
We haven’t updated anything for 2018 at this time. I think you know it’s something as I mentioned earlier that the best be done after we complete the financial and merger transactions in the third quarter upon approval then we will give you a full outlook for 2018. That takes into account the full portfolio of opportunities which would including potential Permian growth what is going on with our Los Angeles Refinery projects and drop downs, so we will do that all one-time.
Perfect, okay. That’s all I have, thanks guys.
Thank you. And our next question comes from Brian Zarahn of Mizuho. Your line is now open.
Well good to hear the formal announcement of the [indiscernible] buy-in and just a follow-up question on the how you are looking at it. Will the IDR base include or exclude the current $50 million annual reduction?
So we can’t comment at that level of specific detail and so what I will highlight again is the outcomes and if you kind of put all those into considerations, gives a bit of sense of what we are trying to do. And in particular as I mentioned earlier we want to make this transaction as accretive and as fast as possible to our unit holder. And so we will look at all the different options that are available to do that with those outcomes in mind.
Understanding those goals and the constraints given the negotiations. I guess maybe from a higher level give the weakness in the MLP Capital markets and where the unit price is and how does that potentially impact the buy-in?
You know I really don’t think it does. It’s because the basis of our approach is to achieve the objectives that I laid out. The math kind of works you now mechanically and you know as we have stated we believe that because of the IDR burden we believe our cost to capital is higher. Right now our yields and then what we would expect overtime if we were to eliminate that.
And so ultimately that’s what we are trying to deliver is the sustainable capital structure and unlocking the value that we think is not there in the units today. And so we think about it more as trying to sell and unlock the value and deliver it versus there being any constraint on our ability to do the transaction given the current price level of the units.
And then given the Western merger will be taking place this year. curious why a drop down is anticipated as the merger will be significantly larger than the anticipated drop down.
We had committed to doing the drop down this year and as we look at the drop down portfolio we look at what it does in terms of accretion, waiting to after we complete the transaction is more accretive to our unit holders and it’s also difficult to try to do something like that in the midst of the transaction and so I view them as two separate decisions but the timing is impacted . So, we are committed to pursuing that drop down even though we are doing a larger transaction as well.
Okay and then lastly, any update on your drop down EBITDA, inventory including the midstream assets that mid stream assets that you are parting from western at the panel level?
Yes, last quarter we talked about it being north of 500, 550 million and Western had talked about - you got to remember they included their wholesale business as well. If you just look at traditional logistics assets it would take that number up a bit higher and that’s something that we will provide more of an update on to as we get closer to completing the transactions. And also keep in mind that in addition to drop down portfolio there is a number of projects that aren’t in that number that are going to be ANDX projects that are being funded turnkey at Andeavor. The Los Angeles Refinery unit interconnect is one example and then pending what happens with potential merger, we have a new gathering system in the Permian that’s being funded at the parent company level. That will be potentially another source of growth for the combined MLP be.
I appreciate the color.
[Operator Instructions]. And our next question comes from Jeremy Tonet of JP Morgan. Your line is now open.
Good morning. Just wanted to follow-up on the line of questions with regards to the drop down inventory, the $500 million to $550 million of EBITDA that you referenced there, how much of that is currently online versus will be online at this future point.
Majority of it is assets that already exists, the assets under development the largest part of it is I would say is Los Angeles Refinery project, potential asset under development that we have talked about before is the Vancouver Energy project, but the majority of those are traditional ,existing terminalling and transportation assets across that now combined Andeavor portfolio.
Great thanks and just wondering if you could talk about the [indiscernible] pipeline now that’s online are you seeing any impacts on your system here specifically high plains or anyway that influences your business?
Yes I can share with you what we saw in the second quarter and kind of how we see it at least now and that will evolve overtime given how significant this is to the region. In the second quarter with the line fill we did see - you can see it on our numbers substantially higher volumes moving across our system just given our interconnects and ability of our producers to get to dapple.
We offer a quite a few strategic interconnect locations that we think are going to remain attractive long-term for those producers. they tend to be obviously shorter haul movements than they were before and so you see lower revenue per barrel. As we move forward, there is a lot of announced as you know additional interconnects, which is going isn’t a surprise and we will to see how that develops overtime.
but I think in general I would think of dapple is being very healthy for Bakken because it makes the economics for marginal production that much more attractive and as we continue to move pass line fill and we see which interconnects get built or not and we look at our projects. We think we are positioned well and we will just kind of keep updating you as that progresses. That’s how we see it today.
Great thanks for that and then if you look at Wyoming, I think there has been some kind of acreage changing hands recently and just wondering around that area others in the Rockies that new owner is stepping in could create either new opportunities or improve kind of utilization on exiting assets, anything you can share with us there.
Yes, we certainly appreciate our [indiscernible] customer relationship and we look forward to working with new owners, ones that closes. [indiscernible] has talked about wanting to shift their production investments down into the Permian and typically when you see a new investors come in to market like this, they are going to want to produce obviously for cash and so they may see it as an attractive investment. And so we are excited about the change and look forward to working with them, it’s too early to put any type of numbers around it, but we still see attractive economics particularly in Pinedale and we look forward to work with them and if you look at similar types of transactions where somebody comes in and like this as I mentioned in my comments, you tend to see more opportunities be presented and we are well positioned to do it and we will work hard for that business.
That’s it for me. Thanks for taking my question.
Thank you, and our next question comes from [indiscernible] of Citi. Your line is now open.
Good morning. I just want to clarify to issues related to the potential transaction. Do you envision that to be immediately accretive to Q4 2017 DCF and an 2018 DCR or is it the intention that just [indiscernible] over a longer period time.
So it’s something that will share, when we announce the transaction specifically, however, I did mention one of our principles is that we do want transaction accretive quickly, I know that that’s not a quantitative number but you can judge it once we announce the transaction of debt. that principle of one in that occur was part of our larger, because we want to do the entire process so, as we rule out the entire transaction in the third quarter that will be one key thing that we will share with you're thinking when that will occur.
Okay. And then regarding your thinking is the expectation that you will be able to communicate long-term distribution growth rate or is the thought to achieve [indiscernible] communicate as projects are developed and growth becomes more visible.
So as I said one of the principles we have is that we do want to have an attractive and competitive long-term distribution growth rates. So that would typically be something we would talk about when every you are doing any types of restructuring. Just given how important that is and the reason why we feel confident in being able to do that is because we feel very confident in the amount of growth potential that we see for the business.
Particularly if the merger is successful and we are able to execute on the projects we are already aware of in working as well as the significant backlog at potential projects in the Permian another area. So, no we wouldn’t hold back on kind of that view because we feel confident in the growth, but can’t share more than that at this time.
Okay. And then moving back to the Bakken, with dapple coming online and some indications of strengthening Q3 volumes. Where do you is the largest opportunity from an organic growth perspective. Is it more on doing [indiscernible] existing infrastructure and building like gathering or are there is more meaningful projects that you envision as the as the basin continues to deliver.
So in the Bakken it would be more gathering type projects but when we look across the portfolio we have got a host of terminalling and transportation projects we are working on across the West Coast, as well as some compression projects on the gas side. And so I would say it’s a balanced overall and you know one of the things that we possess is a capability is to be able to expand a array of services we offer producers.
We have got very strong capabilities as you know in crude, we are also now getting gas gathering and processing, also in the water in the Bakken and so when we look at working closely with key producers we see opportunities to broaden the portfolio of services we offer them as well.
Thank you. And our next question comes from Sunil Sibal of Seaport Global Securities. Your line is now open.
Hi good morning guys and thanks for all the color on the call. A couple of questions from me, you know when you take into account all the puts and takes is impacted the Q2 results. Where do you think the normalized EBITDA run rate was for Q2 and leverage levels?
Yes, I think the items that we talked about in the prepared remarks as Greg mentioned that we are effecting the second quarter obviously we had a gain, we had a customer settlement and transactional cost, but also Mandan went through it once every seven years to full turnaround and unfortunately that turnaround started sooner than planned due to a third-party power interruption.
And so if you take those into account, I think that gives you I think a very clear view of what our performance was in the second quarter. And just mathematically you can just add those and I think that gives you pretty clear picture. And it’s also a good number to build off of as you go into the third quarter as you look our volume guidance in a couple of key areas you will sequentially a bit higher volume and also in a couple of areas we would expect to see higher [indiscernible] based on the mix. Now that Mandan is back online and dapple both nearing completion.
Okay, got it. And then when you think about leverage longer term I think you laid out for [4x] (Ph) goal of getting below 4x. Do you kind of see yourself going further below that like three to 4x kind of a number or how should we kind of think about your target range.
Yes I think right now I would say that it would be below four, maybe better said at or below four and I don’t see us going materially below that because we have so much growth potential and we really want to - we think that’s a good level, because once as I mentioned one of our key principles of our capital structure restructuring that we are evaluating and getting close on is to minimize the amount of new equity we have got to go out in the market with.
And so when we balance that out although we could potentially raise more equity and delever more than that we don’t think that that creates as much value and importantly we want to get to investment - we believe we had plenty of conversations with the rating agencies about that level of leverage and feel that that gets us to investment grade. But getting to investment grade and having lower cost to capital as a result of that gives us even more [indiscernible] to play with for investments.
Okay got it. And then one last question from me in terms of I think you previously also talked about looking at opportunities in Permian. I was wondering if you could kind of talk a little bit about what kind of assets would be really kind of more attractive to you guys that in the gas or crude or water space.
So I will talk in a very high level, because I think it’s important that we complete the merger process because many of the key assets that we can build off of exist in the former Western portfolio and some within the WNRL portfolio. So that’s why we believe a combination allows the strength of our balance sheet and the assets that exist that in WNRL and the former Western current company now Andeavor is where we think we are well positioned.
And in general more in the Delaware Basin than in Midland just given the infrastructure that exist around that and we are always focused first on crude, but we do want to be a full service provider and in Delaware there is plenty of gas there as well so we will look at the full suite of opportunities and we have quite a backlog of opportunities that overtime as we get through the proposed merger we can come back and share more information with you.
Okay got it. thanks guys for all the color.
Thank you and that concludes our question-and-answer session for today. Ladies and gentlemen thank you for participating in today’s conference. This does conclude the program and you may now disconnect. Everyone have a great day.