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Crestwood Equity Partners LP (CEQP) CEO Robert Phillips on Q2 2019 Results - Earnings Call Transcript

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About: Crestwood Equity Partners LP (CEQP)
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Earning Call Audio

Crestwood Equity Partners LP (NYSE:CEQP) Q2 2019 Results Earnings Conference Call July 30, 2019 9:00 AM ET

Company Participants

Robert Phillips - Chairman, President and CEO

Robert Halpin - EVP & CFO

John Powell - SVP, Chief Commercial Officer

Conference Call Participants

Shneur Gershuni - UBS

Dennis Coleman - Bank of America

Ned Baramov - Wells Fargo

Kyle May - Capital One Securities

J. R. Weston - Raymond James

Tristan Richardson - SunTrust

Operator

Good morning and welcome to today's conference call to discuss Crestwood Equity Partners' Second Quarter 2019 Financial and Operating Results.

Before we begin the call, listeners are reminded that the Company may make certain forward-looking statements as defined in the Securities and Exchange Act of 1934 that are based on assumptions and information currently available at the time of today's call. Please refer to the Company's latest filings with the SEC for the list of risk factors that may cause actual results to differ. Additionally, certain non-GAAP financial results such as EBITDA, adjusted EBITDA and distributable cash flow will be discussed. Reconciliations to the most comparable GAAP measures are included in the news release issued this morning.

Joining us today with prepared remarks are Chairman, President and Chief Executive Officer, Bob Phillips; and Executive Vice President and Chief Financial Officer, Robert Halpin. Additional members of the senior management team will be available for the question-and-answer session with Crestwood's current analysts following the prepared remarks.

At this time, all participants are in a listen-only mode. A question-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference call is being recorded.

At this time, I would turn the call over to Bob Phillips. You may begin.

Robert Phillips

Great. Thanks, operator, and good morning to all of you. Thanks for joining us.

We're pleased to report another great quarter, second quarter results. Really good. And we're excited to update you on our 2019 capital program. I guess it's obvious this is a really exciting time at Crestwood. Another quarter, one step closer to reaching our goals to become free cash flow in 2020 and another step towards delivering on our three-year DCF per unit compounded annual growth rate target of 20% per year.

Our assets, obviously, continue to produce solid results. They continue to exceed our internal projections as well as consensus estimates with second quarter 2019 adjusted EBITDA of $121 million. That's an 18% year-over-year increase.

These results came in with a healthy coverage ratio and leverage ratio of 1.5 times and 4.2 times respectively. And based on those results and year-to-date, we think we're on track to achieve the upper end of our full-year 2019 adjusted EBITDA guidance of $500 million to $530 million.

Strategically, we remain pleased with how the Crestwood portfolio is positioned across the industry. We continue to prudently invest capital and build out needed infrastructure in the Bakken and the Powder River Basin, supporting near-term supply growth there on some of the best rock in the lower 48, with both of those regions benefiting from really good producer netbacks driving activity.

Our assets in the Bakken and the PRB are well positioned on top of top-tier acreage that continues to offer exceptional EURs, very attractive economics for our producer customers, substantial drilling inventory dedicated under long-term fix fee contracts and importantly, we own 100% of these businesses.

The Bakken is a little bit ahead of the PRB in terms of development cycle, but they make a great one-two punch to drive Crestwood's results over the next few years. And over the long term, our Marcellus Stagecoach assets and our Delaware Nautilus joint venture continue to be well positioned to improve their contributions to our bottom line over time through additional infrastructure expansion opportunities.

I think you all know the resource potential in the dry gas Marcellus and in the Delaware Basin, where we have substantial assets, are both regions that have incredible supply growth potential, but are currently challenged by producer economics or downstream infrastructure needs. We continue to believe both areas have a very bright future for Crestwood and our partners.

Additionally, in the second quarter, we saw the value of Crestwood's diversified business model once again, as we focused on completing our capital expansion projects in the G&P segment in the Bakken and in the Powder River Basin. Our storage and transportation and our marketing supply and logistics segments more than pulled their weight in the second quarter by both posting very strong results and they continue to drive nice outperformance in the first half of 2019.

The S&T and MS&L teams have been taking advantage of changing market conditions both in the NGL markets, largely in the Marcellus-Utica region and in the crude oil markets, largely in the Bakken, to serve our East Coast and West Coast refinery customers. And they are doing a great job for us of optimizing our storage, our pipeline, terminal truck and rail assets and providing critical services to Crestwood's broad portfolio of upstream and downstream market customers. So a great job by all teams during the quarter.

While we expect the gathering and processing segment to continue to ramp significantly in the back half of 2019, owing largely to our three-year capital expansion program, and this will largely drive our results in 2020 and beyond, I want to compliment the S&T and MSL segments as they continue to be key contributors to our ability to deliver consistent quarterly results for our investors. So it continues to be a great diversified portfolio, hitting on all eight cylinders.

Now while the midstream landscape continues to shift and certain regions and certain midstream services are challenged from time to time, we think Crestwood is uniquely positioned to excel in the current operating environment. We recognize what investors want. They want us to be increasingly focused on enhanced corporate governance and transparency, capital discipline which drives lower spending, and free cash flow generation that improves leverage.

At the end of the day, investors are demanding that management teams align themselves with the investors' view of the world and focus on strategies and investments that really create true value on a per-unit basis and at the same time be good stewards of capital and good stewards of the environment. These are all attributes that are the core mission of Crestwood. I think we've done a great job in the last few quarters, of really illustrating our ability to do that quarter in, quarter out.

To build on our operating and financial success that we've accomplished since 2017 Crestwood has also been a leader in the industry to develop a robust ESG program across our organization, further integrating sustainability into the Company culture. I'm very proud that during the second quarter we published our inaugural sustainability report. Taking an MLP midstream industry leading step towards enhanced reporting and disclosures.

There's a lot of details in the report and I encourage you all to go and take the time to look at it. But just a few examples of the reported data are scope 1 and scope 2 emissions, executive compensation and performance metrics, and importantly, social and gender performance indicators. The initial response of the inaugural report from our investors has been extremely positive.

We've also received strong feedback from our employees and our other key stakeholders including customers, community members, regulators and key government officials in the areas that we operate. One important community that we highlight specifically in the report is our relationship with the MHA Nation in North Dakota, where we operate the Arrow gathering system on the Fort Berthold Indian Reservation.

As an example, two weeks ago our team was in Mandaree, North Dakota, for the official opening of the Crestwood Maagarishda Head Start Center. Over the past two years, Crestwood has donated almost $2 million to support early childhood education in the MHA Nation and Community. It's our hope that this new state-of-the-art facility will allow more children access to quality education and higher learning opportunities on the reservation.

The MHA Community is an integral part of the Crestwood family and Crestwood operations in North Dakota, and we're extremely proud of the strong relationship that we've developed with them over the years and we'll continue to build on for many years to come. Now the Bakken is clearly Crestwood's leading area of operation. It's our primary cash flow growth driver over the next few years and it's producing our highest project returns across our portfolio.

On the Arrow system, we continue to expand our three-phase gathering system. And I'm very pleased to announce that we're on track for an early September in-service date for the Bear Den II processing plant expansion. Our producers have sequenced their second-half development plans to align with the commissioning of the Bear Den II plant so that we can all work together to maintain compliance with local flaring restrictions. That's a very important role that Crestwood plays in North Dakota.

We connected 36 wells to Arrow in the first half of 2019, and we expect to connect approximately 60 wells to the system in the second half of '19. And the in-service of the Bear Den II plant will result in immediate step change in cash flows from the Arrow system. And I want to take a moment here to congratulate our Arrow team for recently hitting new daily gathering records for crude, gas and water in the month of July at 124,000 barrels a day of crude oil, 92 million cubic feet per day of natural gas and 82,000 barrels a day of produced water. It's breathtaking how much production is coming off of our dedicated acreage on the FBIR.

Now to the Powder River Basin. We recently completed transitioning operations from Williams and we fully integrated Jackalope into the Crestwood portfolio. Our project management teams have assumed full responsibility of the Bucking Horse plant project and the Jackalope gathering and compression expansion projects. We're on track to increase our gathering and processing capacity up to 345 million cubic feet per day.

And I'm pleased to announce here, that we're currently on track for an early first-quarter 2020 in-service date with the new Bucking Horse plant expansion. Now, on the Powder River Basin system, we expect Chesapeake to complete between 40 and 45 wells in the second half of 2019. And we've been very encouraged by recent drilling and delineation results on the eastern most portion of their acreage, which is dedicated to us in Converse County.

Turning to the Delaware Basin, you know it's an important asset for us. But the basin has been challenged with record low natural gas prices and low and volatile NGL pricing during the recent quarter and largely for much of the last several quarters. Some of our producers in the Willow Lake system, which is on the northern part of our Orla Express, had temporarily shut in volumes during the quarter, and this resulted in lighter volumes for the second quarter than we expected.

But those shut-ins were temporary and most of that volume is now back online. We see prices improving for both natural gas and NGLs over the next couple of quarters. Importantly, on July 1st, our natural gas purchase agreement with Chevron Phillips Chemical kicked in, providing our Orla processing plant customers with extremely favorable T&F pricing to the important Gulf Coast markets.

So we should see additional volumes pickup at Orla in the second half of the year, both with drilling results that are starting to kick in, as well as improved pricing for our customers and margins for Crestwood.

I'd also like to highlight Shell's development activity has been very steady during this downturn, if you will, or this cycle. And we think the broader Delaware Basin has a bright outlook going forward as key infrastructural projects approach their in-service dates, which should make room for more gas and gas liquids to get to the Gulf Coast, reduce basis volatility across gas, gas liquids and crude.

Most notably, the near-term project that will impact gas will be Kinder's Gulf Coast Express Pipeline expected to be in service in September or October, which will significantly benefit natural gas prices out of the Basin. And we're already beginning to see that in the forward markets. So while taking a couple of quarters off from our growth expectations, we expect the Delaware assets to kick back in the second half of this year.

Now, as we look across our portfolio, we continue to invest in infrastructure that's needed in the areas that we are operate -- that we operate in. We're very committed optimizing returns for investors and in a free cash flow positive business model, capital is sacred and each project must be evaluated on its individual merits.

We've been really good about that for the last couple of years and we continue to stick closely to the strategy of number one, investing only in projects in our core growth areas that offer a strong return on invested capital; number two, projects that are immediately, if not quickly, accretive to DCF per unit; and number three, projects that are leverage neutral or leverage enhancing over time. In 2019, our capital budget is between $425 million and $475 million. Most of that capital is being spent in the Bakken and the Powder River Basin, as you know.

When those expansion projects are complete, we think Crestwood's full-year 2020 growth capital should drop to about $100 million to $150 million per year. And that's a range that clearly provides a path to generating substantial free cash flow for Crestwood and our investors in 2020.

Now, as I said at the beginning of the call, we think the Company is nearing an inflection point and this quarter marks another great step closer to getting solid execution across the board and meeting our targets.

Fundamentals are very strong in the growth areas that we operate in. And we have two near-term catalysts that should drive a meaningful ramp in cash flow, beginning in the third quarter with the Bear Den II plant and in the first quarter of 2020 with the Bucking Horse II plant.

We remain committed to being a best-in-class midstream operator with a strong balance sheet. We take safety very seriously. We take limiting the environmental impact of our operating footprint very seriously, and we're on the right path to maximizing total return for our unit holders. So I think Crestwood is in a really good spot right now, given everything that's going on in the industry.

So with that, happy to turn it over to Robert for a quick look at the second-quarter financials and some commentary on our strong balance sheet. Robert?

Robert Halpin

Thank you, Bob. I am pleased to report another quarter of very strong results for Crestwood and operational execution.

Our second-quarter 2019 adjusted EBITDA was $121million, up 18% year-over-year compared to $103 million in the second quarter of 2018. Our distributable cash flow was $65 million, up 19% year-over-year, compared to $54 million in the second quarter of '18.

These strong results were driven by solid volume growth across all three products; our Arrow system in the Bakken, the consolidation of the Jackalope acquisition and volume growth in the Powder River Basin and stable contributions from the Storage and Transportation and Marketing, Supply and Logistics segments.

For the second quarter of 2019, we declared a distribution of $0.60 to our common unit holders, resulting in distribution coverage for the quarter of approximately 1.5 times. In our Gathering and Processing segment, EBITDA totaled $88.6 million in the second quarter of 2019, an increase of 12% over $78.8 million the second quarter of 2018.

Second-quarter 2019 segment EBITDA growth was driven by a 17% increase in crude oil gathering volumes and a 47% increase in produced water gathering volumes at the Arrow system in the Bakken. partially offset by declines in our legacy natural gas basins and temporary producer shut-ins in the Delaware Basin.

Our Storage and Transportation segment EBITDA totaled $13.7 million the second quarter of 2019, on average volumes of 2 billion cubic feet per day. Notably, on July 1, Crestwood began receiving a 50% cash distribution from Stagecoach Gas Services, representing the final step-up in the agreement with our joint venture partner, Con Edison.

This will result in cash flow increasing $7 million in 2019 and approximately $14 million on a full-year basis going forward. Furthermore, the cold tub facility had been instrumental in moving crude oil and NGL volumes out of the Bakken. And that facility remains right on track to exceeding our 2019 forecasts.

Rounding out the Marketing, Supply and Logistics segment EBITDA totaled $16.4 million for the second quarter driven by our NGL Marketing team's ability to capture margin from volatile NGL pricing, created as a result of record high NGL production coupled with constrained infrastructure.

In addition, we continue to utilize our NGL Market and Logistics team to support the growing Crestwood processing volumes in our key growth basins. This model has allowed us incremental margin opportunities on the volumes we gather and also provides our producers enhanced netbacks and flow assurance.

Now, turning to the balance sheet. As of June 30th, Crestwood had approximately $2.2 billion of debt outstanding, including $1.8 billion of fixed rate senior notes and $363 million of outstanding borrowings on our $1.25 billion revolving credit facility. As we announced back in April, Crestwood issued $600 million of fixed rate senior notes due 2027 at 5.58% during the second quarter.

Proceeds from the offering were used to repay outstanding borrowings under the revolver, including the cash consideration for the Jackalope acquisition. Leverage, as of June 30th, was 4.2 times, and Crestwood remains committed to our long-term leverage target of 3.5 to 4 times, a target we expect to achieve by midyear 2020.

In the second quarter of 2019, we invested approximately $150 million in consolidated growth capital projects and joint venture contributions, almost 100% of which was spent in the Bakken and Powder River Basins.

As Bob mentioned, we continue to expect a growth capital for the full-year 2019 to be within the previously announced $425 million to $475 million range. Further capital expenditures for the balance of the year will be funded through retained cash flow and available liquidity under our revolving credit facility.

Now, looking towards 2020, we expect a significant reduction in growth capital requirements as the expansions in our Bakken and Powder River Basin assets will be largely completed. And as a result of the significant cash flow growth and lower capital requirements, Crestwood has a clear path to generating substantial free cash flow in 2020, achieving our long-term leverage objective and positioning the company to execute on its commitment to accelerate returns of capital to our unit holders.

Crestwood is committed to its current strategic path and remains confident that with our proven execution, we will continue to generate meaningful value for our unit holders. And with that, operator, we're now ready to open the line up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Shneur Gershuni with UBS. Please proceed with your question.

Shneur Gershuni

Bob, Robert, in both of your comments today you talked about a step down in CapEx for 2020,so as we think about your CapEx twilighting, can you talk about your plans for returning cash to shareholders if there were a preference between distribution versus buyback. I also recognized you are targeting a 1.2 times coverage ratio but are you also going to target an equity self-funded ratio as well to before turning cash to unitholders?

Robert Phillips

Shneur, thanks for the question. It is a topic that we talk about a lot here particularly as we look into five year plan. We’ve got a Board meeting coming up, a very important strategic Board meeting to layout for the Board what the next five years looks like and what we expect out of these great assets that we have been able to accumulate in the competitive position we have in the basin.

I'm not sure I like the word twilight for my capital program going forward, it's evolving. The way we see 2020 right now we think that $100 million to $150 million capital expenditures is the range of what we would expect to spin based upon our current customers’ active drilling programs, we have great line of sight and great visibility through a really good collaboration with our producers in the Bakken and Powder River Basin and the Delaware from that standpoint on what their drilling plans are next year.

We have successfully built backbone capacity in all of these regions. We currently have very little access processing capacity which is been the -- essentially that the challenge for us and for our producers. So in the Bakken and Powder River Basin, we got processing expansions well underway and Gathering System loops and additional compression will be added on an as needed basis.

When we talk about 2020 capital, we think that's largely pipeline and compression and filling up the plants that we’re currently building and we got good line of sight to that. So that’s what’s going to drive the cash flow.

We’re certainly not in any kind twilight period. We don't send our commercial teams home at lunch every day. They’re still actively out there working for additional supplies around all of our assets and I would comment in each of the three areas, the Bakken, the Powder and the Delaware, we are actively working on additional projects that are both on inside our footprint that will both optimize existing capacity and/or take advantage of contracts that we have currently, particularly on the downstream because we've been very aggressive in making sure that our producer customers have takeaway capacity and that it's priced appropriately and it results in good netbacks for them. So we think the 100 to 150 is a good snapshot of where we think we would be today based on our current customers drilling programs.

Having said that, we have shown an incredible amount of financial discipline over the last several years in not getting outside of our circle or making investments that don't meet our three critical criteria, which I highlighted for you in my opening comments.

If we maintain that conservative financial discipline which I expect us to do and stay within our footprint, we’re going to not only have additional investment opportunities but we're going to continue to drive cash flow higher and leverage lower even above and below the forecast that we have for 2020 now.

I am going to let Robert talk about how we're thinking about distributions versus buybacks versus investments versus you know getting some of the preferred bought back in, we’ve got a lot of things in our toolkit that are now key plans to optimize the balance sheet and the capital structure over the next couple of years.

So we’re not done spending on our assets and we’re not done optimizing our balance sheet and our capital structure. What we do have clear line of sight on is growing excess cash flow and we're in a very, very exciting position at Crestwood to be able to start returning that to shareholders. Now I am going to let Robert to talk about how we think about returning that performance to shareholders.

Robert Halpin

Yes, I think just to expand little bit on that Shneur from a financial perspective, our primary focus we’ve been committed to is reaching our leverage objective in the early part of 2020. We’re digesting a sizeable capital program in the Bakken and Powder River Basin this year and have clear line of sight to exceptional returns on those projects beginning in the second half of this year.

And as a result, we’re going to see a substantial improvement in balance sheet strengths and we’re going to see a substantial growth in cash flow over the 2020 timeframe. And we think about what we do with all of that excess cash flow, I think it’s a unique spot to be in our sector.

I mean, when we think about in terms of prioritization of allocation, first get to our balance sheet objective. Second, enhance returns to our unitholders; the benefit of being free cash flow positive is you have all sort of flexibility to determine what’s the best possible path to accelerate those returns and enhance value for unitholders.

At this point, given that we’re going to be pushing closer to two times coverage for full year 2020, we do think some amount of incremental distribution growth fairly make sense and we’ll continue to evaluate alternative uses around optimizing the capital structure as we go and continue to progress that dialogue with our Board.

Shneur Gershuni

When I sort of think about your comments and just to clarify when I think of CapEx twilight is being modestly lower so I am not sort of indicating you're not growing, but there is a step down but it sort of seems to suggest that you are talking about a lumpiness nature sort of you fell up and then you need to recharge Bakken and so forth. I mean does that mean that you sort of favor buybacks relative to distribution increases just sort of match the lumpiness when you're going to need to spend capital and so forth versus the more [indiscernible] distribution increase?

Robert Halpin

I don’t know that I get that formula [indiscernible] Shneur. I think the valuation of buybacks versus distribution is an ongoing evaluation quarter-over-quarter and there’s a lot of variables that play into that. So one thing I think we’re absolutely committed to is getting our balance sheet where we’ve want it by the end of this year and first half of next year in the midst of the sizeable capital program we’re digesting right now.

Once we’ve achieved that and we start generating that substantial free cash flow, then I think we have all source of flexibility to optimize the return profile and return those capitals to our investors going forward.

So I wouldn’t box us in to say we have one [indiscernible] versus the other because there’s too many variables that play into that but I think it was where we are from a coverage and leverage standpoint, optimizing the returns to our investors in 2020 is a key point of our strategy.

Robert Phillips

And to be clear Shneur, it’s not a choice here. We’re not making a choice of one over another over another. It's going to be a fluid evolving landscape both for Crestwood individually the industry and our equity capital markets. So there's a lot of considerations, you know that, we had that conversation with you many times.

It's not a singular choice. We are so excited to be in a position to finally begin to make a return to our investors. We’ve had a lot of investors that have hung with us for a long time and we're excited to be at a point where we can start that process but do it with a degree of certainty, a degree of consistency and also keep that financial flexibility to take advantage of competitive opportunities that are occurring inside the areas that we operate and we’re going to do all those.

It’s not going to be with one choice to do one thing with all the excess cash flow at the risk of not being able to continue to be competitive in the areas that we operate, in all three of those areas including the very important Marcellus Stagecoach area are areas where we want to continue to invest capital.

We think that the returns are going to be exceptional. We’re going to continue to be accretive to our overall portfolio and we’re -- once we get that leverage down, we intend to keep that leverage down and whatever is leftover is going to come back to the shareholders. There’s absolutely no doubt about that. We've been working really hard here at Crestwood for about four years to get in position to be one of the first guys in the business to really start making a return to investors and we're excited to be there and we’re just a couple of quarters away.

Shneur Gershuni

Maybe just two small questions. Can you remind us of the type of OpEx question you just expect from Jackalope and maybe are there any commercial synergies that you hope to achieve as well anything positive with price and you’ve been able to control of everything?

Robert Halpin

Yes at acquisition we announced – we thought there was $6 million to $8 million of synergies there from on the G&A side primarily, but also in OpEx as well. And so, we transition fully away from Williams at this point. And so, we're in the midst of achieving those synergies on the cost saving side. On the commercial side, we’ve already had some small wins out there that I think have been enhanced by us consolidating operatorship with commercial activities.

And so, more to come on that front and I think that we're ready to announce today but I would say it’s off to great start on both cost savings and the commercial activities.

Robert Phillips

Yes, we did add a note in the press release about an extension to the Eastern acreage Chesapeake's Eastern acreage that's an important note. We don't have a lot of color to give you around that, but there well results out there have been strong. And we built some capacity out there and that puts us in a great position for some offset operators that are starting their delineation programs.

And we’re really pleased with where we are in that process. So it is growing asset it's not – we’re not looking at operating savings in a vacuum there because the asset is growing you will actually see real actual operating costs go up as we further expand the system with a lot more compression remember that’s a compression at the business.

So operating expense will go up, but as we expand the system expanded the compression and expand the processing on a relative basis we’re certainly very happy with our operating cost structure right now what maybe we’re four months out of the gate. We finished the TSA in record time in 90 days.

We took over all operations everything is running very smoothly and we’re already well below our run rate expectations when we underwrote the acquisition. So I think our operating savings are real and I think they are going to drop to the bottom line, but it’s going to be hard to see them because the business itself is growing out there.

Shneur Gershuni

Final question you talked about achieving 15% ROI indeed, can you remind us how you calculate the VAC?

Robert Phillips

[indiscernible] VAC.

Robert Halpin

I think when we think about from a VAC perspective I think it’s fairly straightforward. We look at, our target capital structure how we allocate across the credit side of the balance sheet and the equity side. I think when we think about cost of equity long-term, we look at distributable cash flow per unit and targeted growth objectives factor and a growth factor on top of that.

And I think if we were to access kind of what we’re underwriting project returns we’re probably looking at 15% percent plus depending upon risk profile. And we view are all and weighted average cost of capital based on the growth prospects today and cost of debt its somewhere in 10% to 11.5% types of code.

Shneur Gershuni

Perfect thank you very much guys really appreciate all the color.

Robert Phillips

Thank Shneur, good questions. Keep that conversation going about distribution versus buyback we look talking with you about it.

Shneur Gershuni

We’ll do.

Operator

Our next question comes from Dennis Coleman with Bank of America. Please proceed with your question.

Dennis Coleman

Quite a good discussion there about the distribution versus buyback policy and how you think about that maybe just one detailed follow-up and then I have separate questions. But as you think about distribution growth you’ve signaled it very clearly, should we expect sort of once a year type of increases or how will you sort of address that I mean we can look back in history and see that sort of, it was more of once a year type of policy. But how are you thinking about that given the fluidity that you talked about and how you’re thinking about what’s going on.

Bob Phillips

Yes, that’s a good question Dennis and I’m going to let Robert answer it from a financial standpoint. But I come from the old school by the way thanks for the target price upgrade yesterday we appreciate that. You guys really doing your work on the company. Back in the late 90s when we first started out there were about 10 MLPs out there and we all did once a year.

And then as there were more dropdowns out of the big integrated pipeline companies into Williams and Duke and El Paso and others, enterprise got bigger through the merger. We all kind of more to a penny a quarter and I kind of go back to the stability of the mid-to-late thousands as we were growing into the Shale revolution. I thought that a penny quarter gave investors great visibility into the financial health of the company.

It’s easy to calculate that into your capital program, it’s not a burden it doesn’t stretch the balance sheet, it doesn't stretch the cash flow and it typically leaves you with plenty of investment capital to make good choices about reinvesting into the business. At the same time, we've all been through a lot in the last five or six years in this industry and we know that many companies got way out over their skis and we’re still seeing distribution cuts today.

So we're going to stay very guarded around our two primary goals which is very strong coverage and very low leverage and whatever is left over my guess is Crestwood being the industry leader that it has been on so many issues will probably come out with a very slow conservative gradual, but consistent and easy to produce with great visibility, distribution, growth plan that will lay out to the industry and to our investors.

And it's going to be something that we could absolutely unequivocally hit every quarter or years depending upon how we roll it out. So to us consistency and stability of distribution increases will be the hallmark of our policy.

Dennis Coleman

I don't know Robert did you have anything to add there I am sorry it was?

Robert Halpin

No I think Bob covered Dennis.

Dennis Coleman

Okay, very good I do it. My other question any – have you had any conversations with OXY as they close in on – well as they approach the close of the Anadarko transaction are there opportunities there that you might talk about?

Robert Phillips

We have not had any direct conversations with OXY from the standpoint of Crestwood being involved in that transaction. We like everybody else we're all sitting around waiting to see what happens with the current processes that they are running to sell half of all of that business to financial types. We know that process is underway we’re not just trading in that. I think like a lot of guys we’re just sitting on the sideline waiting to see what happens.

I would say that it's not lost on us, how much synergy that would be in the Delaware and how much synergy that would be in the Powder River basin. If we were to somehow find a way to participate in that, but I can tell you unequivocally we made no direct contacts with the company now and don't have anything underway.

Operator

Our next question comes from Ned Baramov with Wells Fargo. Please proceed with your question.

Ned Baramov

I'll start with Arrow it seems the second quarter crude oil volumes were lower relative to the first quarter, but then based on throughput metrics achieved in July it seemed you've already picked back up. Could you maybe provide a little bit more detail behind the volatility and volumes over the last three/four months?

Robert Halpin

Yes I’ll take that one Ned I think it’s you’ve twisted with the commentary we included in the release and in the prepared remarks on the call today. The second quarter really is a reflection of working closely with our customers to sequence their completion schedule with infrastructure availability as we complete our debottlenecking projects. Obviously flaring and the limitations are flaring is the key focal point for everyone in the basin.

Crestwood played an integral part in that and I think that when you look at the 22 well completions we had in the second quarter 17 of those occurred in mid to late June. So you just didn’t see a whole lot of uptick but as we look into the back half of the year, we’ve got roughly 40 well for next year to-date. We’re going to get to 100 by the end of the year and that’s pretty heavily weighted in the third quarter and early fourth quarter.

And so yes what we're seeing in current throughput it’s going to be a solid second half of the year at Arrow and then when we get - Bear Den 2 plant in service in early September all uplift from there. So things are trending really well it’s been good collaboration between us and our customers out there to make sure that the completion or sequence for the infrastructure.

Robert Phillips

This is Bob, let me just add a little color and then [indiscernible] who runs that business for us to comment on - he's on the ground every day working with the producers. Remember, we have three products there and boils the primary economic driver, net backs were good during the quarter. They remain fairly good throughout the entire year and we expect them to remain good for the rest of the year.

We made great strides in water and gas during the quarter and that's lost a little bit, because people tend to look at just oil volumes. Oil volumes now are at record levels, 120,000, I think, 122,000; 123,000 barrels a day last week.

Big IP rates coming in on those wells. But I don't want it to be lost that we're building out three phased infrastructure here; oil, natural gas and water. We have been limited on oil in the past just because it pumps limping in the field, not on downstream, delivery capability because we've had a big interconnect at dappled, which we are also expanding to get more volumes out there into dapple.

But I want Jackalope just to cut it, and of course we've talked openly about the gas problems out there. Our little Bear Den I plant ran it more than max capacity during the quarter. Our offloads have been at max capacity and the volumes are still being layered a little bit.

So we've been working shoulder-to-shoulder with our producers to make sure that they complete wells and we get them connected when we have capacity to actually take the gas and not increase layering but one of the great accomplishments of the quarter was really to get on top of our water business. [Indiscernible], you want to make some comments on that?

Unidentified Speaker

On the water side of business, we started out the quarter a little bit slow. But you can see a substantial amount of growth through the quarter, it's about 64,000 barrels a day. We're targeting towards the end of the year being more than 100,000 barrels a day in water. So that's substantial amount of growth and net excellent water are fairly healthy. It's just a nice complimentary service and also takes trucks off the road, supports our ESG initiatives and put more equipment.

Robert Phillips

Yes, didn't want to lose that because these guys work hard every day to move oil, gas, water and gas liquids. And we have been working extra hard to make sure that our gas liquids move and our MSL team has done a great job of moving the white grade out of that region and getting it to market, and getting fairly decent prices for our producer customers, most that's passed back to our customers.

So really the entire Company has been working hard to make Arrow a success during the second quarter. And now as you can see, as we complete these debottlenecking projects, the volumes are there and the producers are just going into super drive on the completions and a much bigger drilling complete schedule ahead for us in the second half than in the first half.

So we have far exceeded our volume forecast so far and expect to do that by the end of the year as well.

Ned Baramov

And then I had a second question on potential noncore asset sales. Are these assumed in the 2x or 3x leverage by the end of 2020 that Robert mentioned earlier in response to another question?

Robert Halpin

In our plan there are no divestitures included in that analysis. That leverage is purely driven from the cash flow generated from the assets, not divestiture. So we are not an active divestiture program, we always take - we always look at the portfolio and evaluate it, but that is not a part of getting to our leverage target.

Robert Phillips

And just to clear up, Ned, to make sure we wouldn't have misunderstanding; my commentary was I think we're going not be pushing close to 2x on the coverage ratio side. Our leverage target remains at kind of 3.5x to 4x in the first half of next year.

Operator

Our next question is from Kyle May with Capital One Securities. Please proceed with your question.

Kyle May

Wanting to follow-up on some of your commentary there. Previously you mentioned the new Bear Den and Jackalope plants will be highly utilized. Can you give us a sense of how much you're offloading now or any color on how much utilization you're looking for there?

Robert Phillips

Yes, and we try to give enough information in the press release to figure that out. But let me just be clear about it. When we turn Bear Den II on, we expect to be flowing 100 million a day or more in the early part of the third and fourth quarter; late part of the third quarter, early part of the fourth quarter.

At that point in time, we will have shut down all of over offloads of natural gas in the Bakken and we'll be processing 100% of our volumes. If the producers hit their ramp schedule, that could easily be 110, 120 by the end of the year on a run rate basis on Bear Den.

Bucking Horse II, little bit different story. Chesapeake, as you know, I think we commented it slow down a little bit. Again, just because of infrastructure constraints on the Jackalope system. Our project management teams are aggressively developing four different compressor stations on the system right now. Couple of those should be in service before the end of the year. We should be able to pick up additional volumes that either currently are going to third parties or they just have not completed the wells because there's nowhere to go with the gas.

From time to time, we have offloaded to third parties as from a low of 10 million a day to a high of 40 million to 50 million a day. So on any one day, the offloads, they're pretty substantial as well. We like to run our Bucking Horse I plant full and offload as little as possible. We're also working with Chesapeake on marketing agreements they had and we're being very collaborative with them and trying to make sure that we don't have any gas shut in. All the gas gets to market somewhere.

And so until we get that Bucking Horse II plant, up, we're going to continue to effectively offload excess production for their account as well. And we're happy to do that. We know that we're missing processing volumes depending upon how much it is from day-to-day. But our number one goal is to provide good customer service. So if we have to offload the third parties, we're happy to do that.

I would say that by early to mid 2020, we should have Anadarko in the range of 225 to 250 running through Bucking Horse.

Robert Halpin

I think that's reasonable.

Robert Phillips

Yes, something in that order. And we've been processing; I think, in the second quarter we processed 125 million, 130 million a day with some downtime.

Robert Halpin

Yes, we had a peak of 150 million a day.

Robert Phillips

We had a peak of 150 million. So, Kyle, I think that's where we would likely be 100 million to 125 million in total in the Bakken and 200 million to 225 million maybe a little bit more in the Powder.

Kyle May

And one more from me just to maybe continue the conversation about free cash flow. I know it's still early to get in depth about 2020. But can you give us any more color around maybe when you're thinking about that inflection and the magnitude of free cash flow next year?

Robert Phillips

Yes, I think we've given some general parameters around our three year growth outlook for 2021. I think we have a slide in our investor presentation that shows our 2020 statistics that gives the guidance - indication for EBITDA outlook as well as coverage outlook.

Yes, I think that was the genesis of my comments around we'll be pushing close to 2x coverage in 2020 time frame based on the current distribution profile. So we think that's - except that we don't think we need that much. And so I think as we start rolling out our full 2020 detailed plan, at that point in time we'll likely be communicating what our objectives are around return of capital.

Operator

[Operator Instructions] Our next question comes from J. R. Weston with Raymond James. Please proceed with your question.

J.R. Weston

Appreciate all the color and the early exchanges on capital allocation. And wanted to kind of go into it and try to make a finer point here. It just kind of, I guess I appreciate the capital twilight maybe. It has two negative of a connotation, but the other side of the coin is I think broader investor preferences are obviously for free cash flow generation from really across the space.

And I kind of wanted to ask in the context of the potential opportunities maybe in the eastern PRB. If you could kind of describe that as a case study in terms of how Crestwood goes about potentially raising 2020 growth CapEx or beyond? And just kind of describing the thought process mentality, hurdle rates et cetera as you potentially look at these other commercial opportunities out there.

Robert Phillips

Yes, let me take all the commercial side of that and talk a little bit about our vision for the Jackalope system in 2020 and beyond. And then I'll let Robert talk a little bit about actually capitalizing a case study project like that. We’re in a great position to offer gathering and processing services to several producers in the basin not name Chesapeake. And the reason for that is the Chesapeake acreage position is fairly large.

So with 300,000 acres dedicated to us we’ve been in the basin for six years now we started building out the system and 2012 and 2013. We bought in 2013 we’re now in 2019 going to 2020. The system is fairly extensive geographically. It covers almost the entire area and we’re now beginning to see delineation in the areas where we have built backbone infrastructure and have compression capacity. And of course we know that we're doubling the size of our processing capacity at a centralized point.

So all that creates a huge footprint and there's a lot acreage in and around and in between a lot of these laterals that we have built. And there are producers that are starting their own delineation program almost everybody out there is delineating around the Turner first. Because it's largely an oil play it gives great economics today. But they're all very aware of the Niobrara which has a little bit more gas in it actually a lot more gas depending on where you complete and IO.

And then ultimately the Mallory is largely gas and we know from our years of experience here and all the research that we've done that the PRB represents a stack pay concept not any different than the Delaware. So we’re going to be involved in years and years and years of both delineation and development as the producers go up and down the stack. Right now the focus is on Turner because it’s driven.

In the areas around our Jackalope system particularly on the East and we highlighted that because that was a step out for Chesapeake and the well results were good as we expected and hoped. There are other producers and if you look at our maps it’s obviously who they are and let’s just pick Anadarko as an example. They have a huge acreage position. They’re well behind Chesapeake from delineation and development standpoint.

They’re just now getting to the point of beginning to delineate their acreage. And so, we think we’re in a great position for the acreage that is adjacent to an approximate to our existing gathering system to be an incremental service provider. We are not working on and they have not asked us and we don't even contemplate a massive build-out of a grassroots gathering and processing assets for somebody like Anadarko.

We are looking that entirely on an incremental basis. We had incremental gathering capacity we can add additional compressors at existing stations or build new stations. And for the next couple of years we’re actually going to have a little bit excess capacity at Bucking Horse II over and above what we expect Chesapeake to be able to deliver. So we have very cheap capacity that we can offer to these offset producers at very effective rates.

And it simply not going to, take a whole lot of capital to go get that gas as they began to delineate the acreage that's adjacent to us. So I think in the past we might have talk about these big, big projects those were largely the oil gathering system. We did not get the Chesapeake oil business that went to a third-party and that's worked out well for them and well for Chesapeake because it's improved their netbacks and Chesapeake's economics are better.

We're getting the benefit of that in seeing higher gas production. We have a little bit excess capacity that will work off of over the next couple years at Bucking Horse II. And there's just not a whole lot of additional capital it’s really just looping and compression to be able to reach out to some of these other producers like Anadarko, EOG, Panther, Anschutz others around our system. Samson they are beginning their delineation programs as well.

I hope that some color, we do not have any kind of hidden major capital project in the PRB that would come in 2020 or 2021 that would change our outlook for that, it's all going to be incremental capital spending as we work to optimize our existing asset and fill up capacity when we have it available. Robert?

Robert Halpin

Yes, I think just a quick color to you return kind of hurdle comment. I think it’s fairly simple for us. We got a -- Bob identified are kind of three primary criteria for analyzing new investment opportunities. The first it has to be in a core bucket. So fairly the Powder River is one of those. It has to be immediately or very quickly accretive to DCF for unit and it has to be enhanced to do the balance sheet.

We are committed to our free cash flow generation in 2020 and incrementally increasing returns to unitholders but that’s not mutually exclusive to identifying high-quality, high return investments in our core growth areas. And so I think we’ll continue to do that. We’ll capitalize into a right way and into similar model that what we’ve been doing in the past and we’ll keep driving value with those investments as they come.

J.R. Weston

I guess, I wanted to switch gears quite a bit, just ask about the MSL segments in the release and a little bit here in the commentary on the call you had described kind of the infrastructure constraints and the strong margins in the forward markets that has been able to kind of lock in so curious how that compares relative to the guidance that you said at the beginning of the year and how much of that maybe evolved into 2020 and again how it compared to kind of base line expectations for next year?

Robert Phillips

Yes, J.R., let me give you some color first and I’m going to turn it over to John Powell, who runs that business for [indiscernible] give you more details about how we found ourselves in a really good spot this year to be able to do what we've done and continue to do what we’ve done.

I want to remind everybody what MSL role is in this company. Number one, we’ve got a significant number of storage, pipeline, truck and rail assets terminals around the country and our primary job at MSL regarding NGLs is to buy inventory in the summer, use our truck, rail terminal system, use our storage across the country to store volumes and resell those to our traditional customers on the retail, wholesale side of the propane, butane business.

We have continued to do that very effectively and the team's done a great job over the last several years despite some winters having no winter at all and other winters having really strong winters and only lasted for a week or so. The guys have done a great job of optimizing those assets and so that's their core business.

Their second core business is to manage the output from all of our processing plants and that's why great business largely. But the MSL team is given us an additional advantage if you will or an additional service to be able to sell product all the way to the market and get higher netbacks and insurer flow or create flow assurance for our customers and they’ve done that exceptionally well in the Bakken and the Delaware also over the last couple years. So that’s the core reason for the job.

What John and his team do very effectively is take advantage of market dislocations, they usually occur in the Marcellus, Utica because that's the core of our NGL business, because our NGL assets truck, rail, terminal and storage are all in the Northeast and serve the Northeast propane market in the Northeast refinery butane market. So I just want to remind you what the core mission for that business is and then John can describe how he’s been able to optimize it and position the portfolio this year. John?

John Powell

Thank you, J.R. Just really I mean, it’s just a flexibility of being able to move the entire team whether its on the East Coast or the West Coast and so what we’ve done particularly over 2019 is work strategically with our Bakken producers as well as in the Powder and in the Delaware Basin.

So it's really just finding where the solutions need to be and positioning ourselves to be in that situation. So every year it’s kind of a very fluid dynamic in terms of the industry and we are just positioned around flexibility to be able to position those assets and take advantage of any dislocations regardless of where it is and so as we continue to see increased productions across each one of the basins, it’s really our ability to be mobile, flexible and provide that service to our producers as well as the downstream markets.

So I think it’s all about flexibility in terms of service providing services to those producers and consumers and so that’s what we strive for. So as we look towards 2020 is always trying to figure out exactly where we need to be flexible, where we need to move our assets to advantage of the opportunities there but also seeing front of our producers and consumers to make sure that they're getting the value that they need as well.

Operator

Our next question comes from Tristan Richardson with SunTrust. Please proceed with your question.

Tristan Richardson

Just a couple at the end here, a lot of conversation on PRB, appreciate all your commentary there. Just real quick one, the 40 to 45 well connects in the second half, how does that compare with your expectations of quarters ago as you are evaluating the acquisition of the remaining interest?

Robert Halpin

I think we’re right on track but it’s into a little bit ahead of schedule.

Tristan Richardson

And is the Eastern lateral, any significant component to that?

Robert Halpin

It’s not a meaningful component. I think that it’s really a couple of well completion this year or some future infills draw those pads going forward. So I think thus position us well commercially with how the ongoing third party discussion we have in the basin.

Tristan Richardson

And then last one for me. Just thinking about G&A in the quarter, now that you've got sort of a pro forma full run rate for the PRB interest, is this kind of a good number to think about renovating as we go forward?

Robert Halpin

I think we’re pretty clean from the cost perspective.

Tristan Richardson

Okay. Perfect. Thanks. Appreciate all the comments on 2020 and pointing a few flags there. Thanks very much.

Operator

Ladies and gentlemen, we’ve reached the end of the question-and-answer session. At this time I would like to turn the call back to Bob Phillips for closing comments.

Robert Phillips

Yes, thanks operator and thanks to all of you that hang on for the hour. Appreciate the analyst questions. Tristan was the last. He's been involved with us in helping to develop our messaging around ESG sustainability to investors.

I just want to close with a couple of quick notes about how important filing our inaugural sustainability report is, beginning to develop the culture here at Crestwood and across midstream industry around sustainability as we embark on a three-year journey here to build what we think is a leading company in the midstream industry around sustainability as a concept.

It means different things to different people. Let me tell you what is already meant to us. It’s already begun to yield positive results and the way that investors look at the company. We've already had investors take a hard look and do the work and based on research reports, we’ve got investors that typically would not look at Crestwood or would not look at the midstream are beginning to take a look because they see the transparency, they see our commitment to sustainability and they see how we're positioning the company for the future.

I can't say enough about the team and the job that they’ve done from not only laying out the initial three year platform and beginning to build the initiatives and the culture inside the company, identifying the risks, building risk mitigation strategies inside and outside the company, engaging in the communities in the areas that we operate, never more important than our community relations on the reservation in North Dakota and how important that relationship has been to us and will be in the future.

We think that this along with our financial performance in our competitive and strategic position in the four primary basins that we operate in will be a differentiator for Crestwood, as investors take a look at us. If we can optimize that by maintaining a strong balance sheet but also continuing to show growth and competitive growth in the basins that we operate in, which benefits from great acreage, great producers, strong netbacks, solid development activity over the next several years and I think we will be a unique investment opportunity for people in this industry.

If we can supplement that by continuing our financial discipline and how we manage the company continue to make good investments and begin to visibly provide returns to our investors and our unitholders then I think we will again be very unique.

So ESG sustainability is important to us. It's a reflection of who we are as a company and where we intend to take the company and we’re already beginning to see positive results as we go begin to kick off our 2020 plan process, which should start here at the end of the summer. I really think we’re going to see cost savings, we’re going to see optimization and efficiency improvements, all as a result of the new ESG sustainability initiatives that we're driving through the Company.

So we're pretty excited about a lot of this stuff. It doesn't get the headlines that maybe the Williams acquisition did or the Bakken performance, but it's an important part of the future of Crestwood and who we are.

So thanks to everybody for joining us today. We're really pleased with our performance. Thanks to all the employees at Crestwood that do a great job, not only serving our customers but being good neighbors in the communities that we operate in.

And with that, operator, we'll close the call, and thank you for being the good moderator today.

Operator

My pleasure. This concludes today's conference. You may disconnect your lines at this time. And we thank you for your participation.