Crestwood Equity Partners LP (NYSE:CEQP) Q3 2020 Earnings Conference Call October 27, 2020 9:00 AM ET

Company Participants

Bob Phillips – Chairman, President and Chief Executive Officer

Robert Halpin – Executive Vice President and Chief Financial Officer

Diaco Aviki – Senior Vice President-Business Development and Commercial

Steven Dougherty – Executive Vice President and Chief Accounting Officer

Mark Mitchell – Senior Vice President-Eastern U.S. Commercial Operations

Conference Call Participants

Shneur Gershuni – UBS

Elvira Scotto – RBC Capital Markets

Tristan Richardson – Truist Securities

Vinay Kumar – JPMorgan

Ned Baramov – Wells Fargo

Operator

Good morning and welcome to today’s conference call as Crestwood Equity Partners provides Third Quarter 2020 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 a list of risk factors that may cause actual results to differ.

Additionally, certain non-GAAP financial measures 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 on 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. As a reminder, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions]

At this time, I would like to turn the call over to Bob Phillips.

Bob Phillips

Thanks, operator. Good morning to everybody and thanks again, to all of you for joining us. I want to start every meeting as we typically do, hoping that everybody on the call, your loved ones, your family are healthy and safe as we continue to navigate the pandemic and all of the issues that the country is facing right now.

I want to most importantly compliment all the Crestwood employees that have continued to show dedication and resolved during the third quarter and during the pandemic visit, not been easy on anybody. Whether you work in the offices in Houston, Kansas City or out in the field across the 38 states, where we operate. our folks are doing a tremendous job for Crestwood and for our investors, and I really appreciate that. health and safety is always our top priority at Crestwood, we want to protect our employees or contractors, our business partners, the people in our local communities has always been our number one priority and will continue to be even during the pandemic.

Now, let’s turn to the quarter, another really strong quarter for Crestwood. We continue to knock them out quarter-after-quarter notwithstanding the challenges we face in the market. Most important milestone that we achieved in the third quarter is generating positive free cash flow after capital investments and distributions to both our preferred and our common unitholders.

I think the portfolio performed very well during the quarter exactly as it should. Robert is going to give you more color around it, but we built this portfolio to be diversified and to not only mitigate against the risk of commodity volatility, which we can’t control, but also in many cases to take advantage of the opportunities that commodity volatility creates in our market. So, Robert is going to give you more color around that.

We delivered adjusted EBITDA of $136 million, distributable cash flow of $87 million, a leverage ratio, I’m really proud of 4.1 times and a coverage ratio, I’m also proud of 1.9 times. We kept the distribution flat, because of that, these results were up 5% over last year, again, we beat consensus. And we’re well positioned to exceed the midpoint of our revised 2020 guidance range of $520 million to $570 million and that midpoint implies 3% to 6% annual growth over 2019.

When I think about that, I’m really pleased with where the company is that we could actually grow the business during the pandemic. We’re all going to look back on this in the future and be proud of that. All in all, we think that’s very good results from the Crestwood portfolio, despite some obviously very large obstacles this year for the industry and the country.

Our year-to-date results, I think, also again, demonstrate the diversity and the resilience of our asset base. In the third quarter, we had significantly lower shut-ins than we originally thought. Most importantly, we had new well activity in the Bakken and in the Delaware, and that speaks to the quality of the acreage and the quality of the producers that are dedicated to the Crestwood portfolio. We had record gas volumes on the Arrow system gathering and processing volumes of natural gas at a record level very, very important, gives us a really strong outlook for the future up there on the Arrow system.

And with strict pricing for natural gas at $3 in Mcf and above, we’re beginning to actually see active drilling in the Barnett. We’ve got a very positive outlook for the Powder River Basin, as Chesapeake starts to bring production back on in the fourth quarter as they’re now receiving higher gas prices and you know that they have been continuing through a bankruptcy process.

So, we’re very pleased to see that positive step in 4Q and for 2021. And we also experienced record transportation volumes across our Stagecoach pipelines located up in the Marcellus, that’s the dry gas region in Northeast Pennsylvania, really pleased with the job that the guys have done their producers continue to view the Marcellus is very economic at higher gas prices and so we’re seeing record volumes up there.

And I guess finally, our MSL team continues to capture margins in their business well in excess of our underwriting forecast for the newly acquired NGL assets that we bought from Plains back in April of this year. Importantly, we’re also beginning to see a trend, which I’ve been waiting for, for years, seeing more demand around our 76 Bcf of gas storage in our 10 million barrels of NGL storage and we think that’s leading to a long awaited margin improvement for storage as a business, all these things taken together shows tremendous balance and stable cash flows for the Crestwood portfolio.

Now, let’s look forward. When I look at the portfolio, I’d see that 60% of our volumes are natural gas with about 20% NGLs and 20% crude. So, we’re obviously very well leveraged to higher gas prices in 2021 and beyond. Our commercial teams are very active in all three downstream markets; gas, NGLs and crude. They use our integrated system flows are very efficient plant recoveries, because our plants are all brand-new, a market area storage, they combine it with our truck or rail and our pipe transportation in our extensive terminal business and they optimize and market around all of our assets benefiting from demand-pull. we know that’s become a hot button topic with analysts and investors.

We’re seeing improving overall margins and higher throughput, because of the job that our marketing teams in storage and transportation and marketing storage and logistics are doing around our assets. We’re not just relying on producer drilling plans in our for 4P G&P services to drive our cash flow and that’s another point that I think Robert is going to provide some color on.

On that front, as you remember, we spent a lot of expansion capital in 2017 through 2019 to build out excess capacity for our growth G&P assets. To ensure that we could handle full inventory developed by our main producers at the price levels that we saw over 2017, 2018 and 2019, obviously, the market has changed a little bit. But in our analysis, at $40 a barrel and above, we feel very comfortable with our current volume profile. Over the next couple of years, we think that we’ll continue to support Crestwood’s free cash flow, our strong distribution coverage, and our continued debt reduction. And at $50 a barrel, it’s just math, really we can accelerate debt pay down and strengthen our balance sheet further, create more financial flexibility that Robert and Will and their Finance and Corp Dev team could use to take advantage of opportunities in the market.

Now, speaking the G&P while the pandemic has clearly pushed back the timing of some of that expected G&P growth, I actually see a silver lining in that. The good news is it extends our inventory runway pretty extensively and obviously, we don’t have to spend much additional capital to generate the cash flow that we originally underwrote when we built those gathering systems and processing plants, and that’s allowing our investors to benefit from stable distributions and lower debt and again, more financial flexibility.

We think that our portfolio right now gives Crestwood a lot of financial flexibility going into 2021. Clearly, there’s been a consolidation phase in the upstream sector. We think that’s coming in the midstream sector. We think our unit price will reflect over time, the ability to generate more free cash flow, pay down debt, have financial flexibility to invest in other opportunities as we seem.

So, now in our press release, we did provide a preliminary view to 2021. Robert’s going to lay out a little bit more detail before I hand over the call to him. I want to importantly address the current operating environment for our sector and where I think we see the industry headed.

Energy is clearly in a transition, notwithstanding how the election goes. The industry could, probably, will continue to see continued pressure on social sentiment regulations permitting in cost and while those might have long-term effects on our industry, it won’t change the way we do business today, the businesses that we’re in, the value of our assets, or the domestic oil and gas industries importance in bridging the United States to a low-cost energy supply to meet the needs of our consumers. I don’t care what politicians say or how much the regulatory environment changes. This is still like vital, essential, critical industry, and we’re proud to be a part of it.

Now, undoubtedly, investment in renewables will increase overtime. But the EIA still forecasts that natural gas and crude oil will comprise over 50% of domestic energy demand through 2040. That gives us a long runway of about 20 years to continue to make money for our investors. None of those changes are going to take place overnight. And Crestwood does not shy away from the business we’re in or the value of services that we provide to our customers or the importance of the industry to the country.

Instead, as the industry transitions to cleaner energy and a lower growth model for fossil fuels, we believe natural gas will play a prominent role, and the midstream sector will continue to improve our sustainability initiatives and be an important part of the energy supply chain.

Since we became the first MLP in one of the first midstream companies to publish a sustainability report back in 2018, we’ve made a lot of progress. And I’m pleased to say that we’re working closely with the Energy Infrastructural Council and industry leaders like Williams and other EIC member companies to create a standardized reporting template for ESG for the midstream sector. We’re not following ESG trends. we’re actually setting them. Crestwood is right at the forefront of that mode.

So in 2021, let me just close by saying, we’ll be starting our second decade as a company. In the first 10 years, we built an impressive portfolio of midstream assets. we built a strong operating platform. we’ve got some of the best people in the business, some of the best young people in the business. I’m the only guy – old guy still left in the company. And we built – importantly, we built essential credibility with our customers and our investors. We’re going to benefit from all that in our second decade. But more importantly, we want to be a leader in the industry in ESG. We want to lead the midstream in reduced emissions in the field. We want to be a leader in environmental stewardship and safety. We want to lead and promoting diversity, and inclusion in the oil and gas industry. And of course, we want to be a leader in financial and capital discipline.

All those things are our goals objectives for the second decade of Crestwood Equity Partners. We’re committed to be – being a leading MLP and a best-in-class midstream company, and we’re going to do that through a prudent management and a strong balance sheet, which will position us we hope to be a leader in sector consolidation, give us a chance to enhance our corporate governance model, allow our investors a greater voice and create more value for our unitholders. And hopefully, if we do that successfully through an industry leadership position, will help attract much needed capital back to the sector to the midstream sector.

So, I know that’s a lot. But we got a lot going on in the industry in the country right now. And I hope our employees and our customers and our investors benefit from a little bit of forward thinking about the way we think about things here at Crestwood.

And with that, I’m happy to turn it over to Robert to discuss the third quarter results.

Robert Halpin

Thank you, Bob. During the third quarter, our diversified assets continued to perform in line with expectations, generating adjusted EBITDA of $136 million and distributable cash flow of $87 million, a 5% year-over-year. as market conditions stabilized during the third quarter, lower shut-ins drove volumes higher and producers in the Bakken and Delaware basin resumed new well completion activity.

Our financial and operational results for the quarter drove a leverage ratio of 4.1 times and a coverage ratio of approximately 1.9 times. Based on these third quarter results, we announced a flat distribution quarter-over-quarter of $0.625 per unit, or $2.50 on an annualized basis, which is payable on November 13th to all unitholders of record as of Friday, November 6th.

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Now, moving to our operating segments, in our Gathering and Processing segment, EBITDA totaled $108 million in the third quarter of 2020, an increase of 9% year-over-year. In the Bakken, we had one rig and one completion crew operating on Crestwood’s footprint throughout the quarter. And with that level of activity, we connected 15 new wells to the Arrow system and drove new natural gas gathering and processing records across our asset.

We expect an additional 20 new wells to be completed to the Arrow system during the fourth quarter, which when paired with the approximately 35 to 43 products, and 20 to 25 water only drilled-but-uncompleted wells or DUCs expected on the acreage at the end of the year, we will see incremental volumes heading into 2021.

In the Permian, there are currently five rigs running on acreage dedicated to Crestwood. And we expect an additional 15 wells to 20 wells to be connected in the fourth quarter and we are now forecasting new well activity in the Barnett shale in early 2021, driving a year-over-year cash flow growth on that asset.

Our Storage and Transportation segment EBITDA totaled $15 million for the third quarter of 2020 on average volumes of 2.2 billion cubic feet per day. as natural gas prices have remained strong throughout 2020, we have seen producers shift capital investment back to the Northeast, resulting in increased demand for Storage and Transportation assets in the area from the Marcellus producers as well as the Northeast utilities.

Along the Gulf Coast, Crestwood’s 32 Bcf of natural gas storage capacity is optimally located to support Gulf Coast LNG market, power generation and the Mexican export markets. in the Bakken, the COLT Hub saw increased volumes over the second quarter of this year as a result of producers bringing shut-in production back online, completion activity resuming in the basin and producers increasing utilization of crude-by-rail assets, given the regulatory uncertainty around the Dakota Access Pipeline. As we monitor the Dapple legal process, the COLT Hub is a natural hedge and offers our arrow customers flow assurance, and our commercial team continues to identify new pipeline connections for alternative takeaway capacity.

Finally, in the marketing supply and logistics segment, EBITDA totaled $12 million in the third quarter of 2020, benefiting from the successful integration and continued optimization of the recently acquired NGL assets. The new assets increased Crestwood’s market share by expanding its geographical footprint and providing incremental access to the Conway and Mont Belvieu market, further diversifying the NGL marketing logistics platform. as we move into the fourth quarter, Crestwood expects the MS&L segment to benefit from strong seasonal spread, increased downstream market opportunities, and further integration of these recently acquired assets.

Now moving to the balance sheet, as of September 30, Crestwood had approximately $2.6 billion of long-term debt outstanding, including just under $1.8 billion of fixed rate senior notes, and $780 million of outstanding borrowings on our revolving credit facility. At the end of the quarter, we had approximately $450 million of liquidity on a revolving credit facility, and we have no debt maturities until 2023.

Based on current forecasts, we now expect our year-end 2020 leverage to be below 4.25 times, which was the lower end of our revised guidance range that we provided back in May of this year. During the third quarter, we invested $11 million in growth capital and as a result of the significantly reduced capital investment during the quarter; Crestwood generated meaningful free cash flow after distributions and including the proceeds from the sale of our Fayetteville gathering system in Arkansas, Crestwood generated in excess of $50 million of available cash to continue accelerating our debt reduction initiative.

The divestiture of our Fayetteville asset furthered our strategy of divesting non-core asset to strengthen our balance sheet and to enhance our liquidity. During the quarter, Crestwood used a portion of its free cash flow to opportunistically repurchase a portion of our outstanding 2023 senior notes at a discount to par. Our number one priority will continue to be on strengthening our balance sheet and driving leverage at or below our 4.0 times target over the next 12 months to 18 months. we remain focused on liquidity and continuously evaluate opportunities to optimize our capital structure.

Before moving on to the Q&A section, I wanted to provide some preliminary color on what we expect heading into 2021. based on current conversations with customers, we expect our 2021 guidance range to be similar to 2020 as a result of ongoing activity in the Bakken and Delaware basin, incremental well connects and year-over-year cash flow growth in the Barnett shale and strong demand for our natural gas crude oil and NGL storage asset.

benefiting from our previous three years of capital investment and based on current customer activity forecast, we expect growth capital to be less than $40 million and maintenance capital to be $20 million or less in 2021. With the resiliency in our portfolio, driving relatively flat year-over-year cash flow and the significant reduction in year-over-year capital expenditures, we expect to generate meaningful free cash flow after distributions in 2021, which we will continue to allocate towards accelerating debt reduction to achieve our long-term target. We will continue to work closely with our producers in the coming months to finalize our 2021 plans, and we’ll provide our full outlook and guidance for 2021 during our fourth quarter call in February.

I am very pleased with the work that Crestwood has done so far through the challenges presented in 2020. The resiliency of our portfolio has allowed us to achieve a key milestone of generating positive free cash flow after distributions this quarter and we expect full-year 2020 results to exceed the midpoint of the revised guidance that we provided earlier this year.

Crestwood’s diversified portfolio has been an advantage during this year of volatility and we continue to take steps to strengthen the balance sheet. While our sector is in the midst of a transition, we continue to see signs of improving fundamentals across the industry and on our business specifically, which will position us to continue executing on our strategy to build further strength across the company heading into 2021.

At this time, operator, we’re ready to open the line up for question.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question is coming from the line of Shneur Gershuni with UBS. Please proceed with your questions.

Shneur Gershuni

Hi, good morning, everyone. Good to see that everyone is well. Maybe, we can start-off on the production side a little bit here. I was wondering if you can expand on the strong Bakken volumes. What’s driving it? Is it higher GORs? Or is it really just a return of shut-ins? And if COVID hadn’t happened, this would be kind of the result that you would be seeing? And then maybe as part of that question, if you can talk about the recent mergers that have been announced and will that impact Crestwood? Is there a risk to less activity on your acreage as a result or potentially more?

Bob Phillips

That’s a double-barreled question there. But I got an expert on producer relations, who handles all of our gathering and processing business and knows a lot of people in a lot of these companies. So, he gets the benefit of knowing how producers are improving their drilling and completion techniques. Now, producers has worked their way through shut-ins, bringing wells back on, the challenges faced with downhole pumps with the cost of reworking wells, and how producers from the Bakken to the Delaware are looking at the world going forward with the inventory position they have and how they’re moving towards economical development of these plays.

And as I mentioned, Shneur in my opening comments, we’re very lucky and always have been that the acreage dedicated to our core assets, Bakken, powder and Delaware is El Primo acreage right in the heart or the core of the play and is acreage that works at low breakeven points. But we’ve kind of always misused that breakeven economics term in our industry, that’s the point; at which, you could drill if you want it to. We’re well above that in the areas that we operate.

So, Diaco Aviki is our Senior Vice President of Gathering and Processing, and he runs a really good program. He’s got great teams and all these basins were well connected with our producers. we talked to them on a daily weekly basis. we’ve come a long way from the old days, where you didn’t get good visibility into the producers drilling programs until the end of the year, and they had to go to the board, and they changed their mind five times. And then the price changed at the end of the year. And then you got to recalculate all your volumes. We have an impressive team that manages all of our type curve analysis. We understand GOR and WOR in every basin that we operate in.

So, the Diaco, why don’t you just give them a sense for the Bakken and the Delaware primarily? what our producers are thinking? obviously, we’ve had two big combinations in both basins with WPX going to Devon that’s really important to us. We love that deal, because we have strong relationships with both of the senior management teams, we know them well. And so that’s a great combination. it makes our best producer even stronger financially. And then in the Delaware, Concho and Conoco; again, two companies we have great relationships with we’ve got big dedications from both of them. And so we see that as a win-win as well, once you talk about the Bakken and the Delaware, from an economic standpoint, from a producibility and how we’re seeing impressive improvements and productivity downhole not just in drilling and completion, but in production performance as well.

Diaco Aviki

Thank you, Bob. I appreciate the handoff. first in Bakken, one of the things we didn’t highlight, despite not setting a daily record for water, or water volumes quarter – over all quarters that we’ve had in the past have increased by over 20%. So, we broke quarterly records on water by 20% and that along with the gas records that we broke, are attributable to our capital program that we put in place years ago working with our customers extremely closely. ESG is a big ticket item for our customers as it is a big ticket item for ourselves. So, we worked hand-in-hand to ensure that we capture as much of the product as we can into the pipeline.

And some of the things that they’re doing is absolutely impressive. Their cluster spacing is right on the money, enhance GOR, enhance productivity with DSP utilization, and just keeping amazing amounts of production coming out of these wells. from IP perspective, they’re just absolute top first quartile well across the basin and that’s extremely impressive. And they’re getting the cost down to the completions from frac stage perspective, they’re doing five more stages than what they did prior to COVID, prior to the pandemic and that sort of incremental improvement from a learning curve perspective, you don’t see very often. So, their costs are going down. They’re doing things such as three mile laterals. we’re seeing that in the Bakken. We’re seeing that become a standard in the Permian. Again, that drives our cost down even further and increases the productivity of their wealth. So, we’re quite impressed with what our producers doing.

coming down to the Permian, the combination of Concho and Conoco that is outstanding, both of them are very good customers of ours. We’ve got great relationships with both of those companies. Conoco, as you know, is also in the Bakken. So, there’s things that we’re trying to do with those guys to extend our relationship. So that’s a combination that we’re excited to see. it just makes a stronger customer portfolio for us moving forward and again, to productivity in the Permian. The well results are outstanding. they’re able to better understand delineation of acreage. We’ve got over 50 DUCs in the Permian. I know, we didn’t mention that in our earnings script; but in the Permian, we’ve got a lot of inventory that is cheap and will come online in 2021 and beyond, in addition to the activities that are ongoing out there. So, we’re looking at both of faces very possibly, not just now, but also in 2021.

Bob Phillips

Bottom line, is it don’t take as many wells to hold volumes flat up?

Diaco Aviki

That’s right.

Bob Phillips

It’s just math. Did that work, Shneur?

Shneur Gershuni

Yes. That definitely worked, especially the last comments as well. Since you enjoyed double-barreled questions, another one for you; your costs are down circa 8%, 9% when I sort of look at q3 this year versus q3 last year. Are there any opportunities to take them down a little bit further? I don’t want to take away from the fact that they’ve been very strong so far. but is there anything else that you’re looking at? And then secondly, just a housekeeping question, if you could walk us through the add-backs and calculating the leverage ratio.

Bob Phillips

Yes. Absolutely, I’ll hit the cost side. And then let’s let Steven Dougherty, our Chief Accounting Officer help with some of the commentary as well as the leverage profile. So, I think when you look at our costs year-over-year, Shneur as we’ve talked about. I mean we’ve executed on a number of initiatives to reduce costs across the company and I think – the primary focus was obviously centered around, driving a fixed cost base that was appropriate and sustainable, in the revised outlook that we had for our business going forward. And I think we’re proud to say we’ve captured the vast majority of that and don’t see any material opportunities going forward, nor do we see any need for escalation going forward as our business continues to rebound in an improving commodity price environment.

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So, I think we feel good about what we’ve executed on the fixed cost side. Obviously, variable operating expense will fluctuate with volumetric output across our asset. But we think what we’ve achieved, quarter-over-quarter and year-over-year from the cost perspective is it’s kind of the baseline of where we see the business heading going forward. Steven, you want to talk through kind of some of the leverage add-backs in the accounting standpoint?

Steven Dougherty

Yes. So, the leverage ratios relatively simple, you take the adjusted EBITDA that we report; you actually have to take it down at the CMLP level, which is excellent, which we show in the earnings release. And then you add back some adjustments associated with the Jackalope acquisition in second quarter of 2019 along with the acquisition of our NGL assets from Plains here in early 2020. You also need to add back the deferred revenue adjustments that we have in the distributable cash flow growth associated with it as well. you add those back and that should get you pretty close to the 4.1 times ratio that we disclosed.

Shneur Gershuni

And so the improved leverage this year versus next year, is that a function just of free cash flow generation, just because like you’re kind of in a flattish EBITDA range year-on-year.

Bob Phillips

That’s right. I think it’s the simple, Shneur as the cash flow stays relatively flat from an EBITDA basis year-over-year and capital steps down by over $100 million year-over-year. That all goes straight to free cash flow and 100% of that allocated to debt reduction.

Shneur Gershuni

Perfect. All right. Thank you very much, guys. Great to hear from you all that everyone is safe.

Bob Phillips

Thanks, Shneur.

Operator

Thank you. Our next question is coming from the line of Elvira Scotto with RBC Capital Markets. Please proceed with your question.

Elvira Scotto

Hey, good morning, everyone. Can you provide a little more detail around your Fayetteville asset sales? What was the genesis that the buyer approached you? And then as a follow-on there, you mentioned potential for additional non-core asset sales. Where are you in that process? And then given what’s happening with natural gas prices? Do you consider Barnett core or non-core?

Bob Phillips

Good morning, Elvira. Two great questions. It makes me remember the beginning of the company. I bought Barnett first in October of 2010. So, we’re celebrating our 10-year anniversary this month. And I bought Fayetteville second in early spring of 2011, when the price of natural gas was $5.50 an Mcf. So, it was a totally different market. Those were both gas plays. The Barnett has been incredibly resilient. It was drilled largely in 2007, 2008, 2009. So, it had hit its hyperbolic curve. Earlier, Fayetteville came a little bit lighter. The Barnett we still consider to be a core asset, because it was the beginning of the company. It’s a large asset. It’s a critical asset to the producers out there. We think we do a great job of operating – our people do a great job of operating efficiently at very low cost.

And as we mentioned in the call, due to higher gas prices, $3 plus on the board’s scrip, we’re starting to see – starting to see some new well activity and I want to let the Diaco Aviki talk about that in a second. On the Fayetteville, that was an easy decision. That was the second asset that I bought back in 2011. It had continued to decline year-over-year. no new drilling; frankly, the producers had not invested as much to keep the production up. When gas prices got here earlier in the year due to the pandemic, we had a lot of shut-ins. Maybe, the wells didn’t come back quite as much as we thought they would. And then on top of that, there was a change in the downstream markets that was going to require us as the gas gatherer to build a pretty expensive additional interconnect through a new downstream pipeline market and we just did not feel like spending that capital on that asset given the decline profile in a PDP type environment, we sold it back to the producer.

We made as a fair offer, it was a very, very friendly deal and I think in any situation, we didn’t really consider it to be non-core, it’s just – we didn’t want to spend the capital to tie it into a new market. So that was a fairly easy one. it didn’t have any real growth potential left to it, was on – maybe, a decline that surprised us a little bit after the shut-ins. So, we felt like that was a good economic deal for the company. Diaco, let’s talk about the Barnett and why that’s an important asset to us.

Diaco Aviki

Yes. thank you, Bob. In the Barnett, there has been recent publications that were just recently published. So, like our Lake Arlington area, breakeven is in the low two. So, that’s a part of our asset that has significant spare capacity due to historical production levels and easy runway at low capital costs, setting up a meter run, to bring on additional volumes in production. And one of our private equity producers has great inventory over there and they have already contracted for us [indiscernible] should be there November 1 and we should see wells come online early in 2021.

That’s a great asset for us and we’re really excited. There’s a lot activity actually going on right now with all our producers on workovers for the older wells, that’s just in a low price environment didn’t see that love. They’re going to see it right now moving forward in 2021. So, they can capture higher prices…

Bob Phillips

higher gas prices…

Diaco Aviki

That’s right.

Bob Phillips

driving a lot of activity, Mark Mitchell, you manage the Northeast PA for the dry gas flight, and you saw record volumes across stagecoach assets. Give us a sense for what the producers are doing out there.

Mark Mitchell

Yes. well, we’ve continually commented, the Northeast Pennsylvania is the premier dry gas basin in North America and just given the current environment, we’ve seen with commodity prices, associated gas. In q3, we saw record volumes come into our system of Northeast PA, as volumes have increased year-on-year in northeast PA. So, we get a fair share of those volumes. Our system runs north-south route across the core, the Northeast Marcellus. And so we’ve been benefiting from that, and we’re seeing our producers now come in and reaffirm their commitments and actually increase their commitments to the system, which bodes well for that asset continuing to be just a steady, consistent contributor to Crestwood.

Bob Phillips

Yes. Great. Okay, Elvira.

Elvira Scotto

Great. And just as a follow-up on that Marcellus region and stagecoach? I mean, at one point, I think Crestwood talked about the Northeast being a growth area for Crestwood. I mean, do you see that potentially returning as a growth area?

Mark Mitchell

The environment up in northeast, where infrastructure development has been challenge, but we do see the business continuing to be stable and there are prospects for growth in a tighter gas market, which we do see coming here for the upcoming winter and in 2021. So, we think there are some – there’s some good potential for growth of that business going forward.

Elvira Scotto

Thanks. And then just my last question, you mentioned the flexibility that as strong balance sheet can provide and that it can help you take advantage of potential opportunities. How do you see midstream, M&A playing out the next couple of years? And where will Crestwood fit in that trend?

Bob Phillips

Yes. I think, Elvira, I think we, as a company and management team, believe that what we’re seeing in the upstream side now, from a consolidation standpoint, it does make sense in the midstream sector over time going forward. As you look at the asset bases that are out there, the companies and positions that are out there. We do think the industry gets healthier through consolidation and through right-sizing capital structures and cost structures over a longer – for a long period of consolidation. I think from Crestwood’s perspective, our focus is on building the strongest balance sheet we can the most flexible company from a financial positioning standpoint, and we believe that plays well into a consolidating market, really on both sides of the trade. And I think that’s our general objective through our free cash flow generation and prioritization of debt pay down is to build in that incremental flexibility to take advantage of that market set of opportunities that may or may not materialize over the coming years.

Elvira Scotto

Thank you very much.

Operator

Thank you. Our next question is coming from the line of Tristan Richardson with Truist Securities. Please proceed with your questions.

Tristan Richardson

Hi, good morning. Thank you for all the commentary, especially on 2021. We appreciate the luck in spite of all the uncertainty. Bob, you mentioned in prepared comments, Crestwood plans to enhance your governance model to remain a leader in ESG and in the midstream space and allow investors a greater voice. Can you talk about what sort of actions you’re contemplating to achieve this?

Bob Phillips

I can. And I knew when I put that comment in there that would probably draw a question. I actually expected Shneur to give me that question, as opposed to you. but I’m happy that at least one of you did. We are a traditional MLP and we’re proud of it. You guys have heard me say this over the years. At Crestwood, we’re an MLP at enterprise. We’re an MLP at El Paso. I’m very comfortable in the MLP model. It’s not for everybody and not every business fits the MLP model very well. We all know that we’re in a transition period in energy in general and in the life of corporations, and publicly traded partnerships, and we’re all going to be held to our higher standard going forward. And that standard is going to be based on transparency, and trust.

We hired a young lady three years ago to come in and build our ESG program from scratch. Joanne Howard is considered to be a leader in the industry in ESG, and she has built an impressive ESG platform for us and one of the essential components of that is good governance, and good governance requires transparency. I would say that we are one of if not the most transparent management teams out there in the midstream business. We give more information probably than we should more than we have to, but we’re happy to do it, because our investors appreciate it.

We still have a traditional GP ownership structure. My partner is First Reserve. They have been since the beginning, and they’ve been a great partner for the last 10 years. Everybody knows how the traditional MLP structure works. We continue to look for opportunities as both a management team and as a controlling sponsor to continue to build value in Crestwood,the MLP. We know that one of our long-term objectives is more transparency and we know that the way to do that is to continue to transition ownership, control and sponsorship to a more public, more transparent model.

And so we continue to work on that. I don’t have anything in mind. I’m not working on anything with my partner. And he would tell you if he was sitting here that he’s been 100% supportive of Crestwood the company for 10 years and will be for the next 10 years. But we both recognize the transition that’s going on in the industry, the importance of ESG, and the importance of transparent governance, which ultimately to continue to be an MLP and have totally transparent governance, you need a publicly elected Board of Directors.

And so there’s no mystery about that. There’s no other way to do it. We’ve had a couple of good presidents for that in the industry. We continue to look at those Presidents and how they work; and whether or not investors benefit from that and have a greater voice in the way the companies run, and the strategies the companies employing. and so we’ll continue to work in that direction. And Tristan, you’re smart enough to know that if we can, over time, continue to transition to a more open transparent ownership model, then we’re going to do that, because that’s what creates value for our investors.

Tristan Richardson

Appreciate it, Bob. That’s all I had. Thank you.

Operator

Thank you. Our next question is coming from the line of Jeremy Tonet with JPMorgan. Please proceed with your question.

Vinay Kumar

Hi, guys. Good morning. This is Vinay on the Jeremy. Just wanted to quickly follow up on the 2021 EBITDA guidance; first, thanks for all the details on the well connects you guys mentioned in the press release and prior to the call. Just wanted to confirm if what oil price do you guys assume? Or did you – in your discussions with the producer of what oil price are these well connects at? And also, if you could give any commentary on the revised guidance of 2020, I mean, when you say the 2021 guidance, do you mean $520 million to $570 million range? Or is it the upper half of the guide? Thanks.

Robert Halpin

Yes. I appreciate the question. And maybe, your first point on kind of the oil price assumptions or commodity prices assumptions that we have baked into our plan. I would say that our internal forecasts that factor into our commentary on our 2021 outlook are not all that inconsistent with kind of where the forward scrip is positioned right now, across gas, gas liquids and crude.

On the crude oil side specifically, I think we’ve got kind of $40 to $42.5 per barrel for the first half of 2021, and then it’s increasing to roughly $45 per barrel for the back half of 2021. That’s generally consistent with the way our producer operators think about it in the 2021 timeframe. And when we commented in our press release, the primary driver of the completion activity year-over-year is driven by the drilled, but uncompleted inventory that we have remaining at the end of this year, plus the incremental rigs that are running – the rigs that are actively running today in the current commodity price environment.

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So, we don’t have any expectation for an increase in price driving an acceleration of activity. It’s really based upon what we’re currently seeing in the basin. As it relates to the specifics of the range, obviously, as we mentioned, once we have greater and full clarity into all the contributors to the 2021 plan, we will provide that in February of this year. I think our commentary today is based on our initial budgeting process and all the conversations we have had with our customers, we would expect it to be generally in line with the current 2020 range, which is $520 million to $570 million.

Vinay Kumar

Got it. Thanks. And then just quickly checking up on your Bakken volumes for September. Could you guys mention any color on how the September volumes fared versus 3Q or anything related to how the current volumes are versus 3Q average?

Diaco Aviki

Thank you. It’s Diaco Aviki. In the Bakken, we’re near record level on all three commodities at this current point in time and we’ve had a massive continued completion program of additional wells in the early part of the fourth quarter. So, we should see a very strong fourth quarter for the Bakken asset. We should keep records on every commodity.

Bob Phillips

Yes. And maybe, to expand on that a little bit because it kind of dovetails on a comment or a question that Shneur asked earlier on what drove the 3Q production and 4Q production. But as we disclosed in the press release, we had 15 wells completed on the Bakken system in the third quarter. The production we saw from those wells drove a large amount of the uptick both quarter-over-quarter and relative to first quarter of 2020 and certainly, third quarter of 2019. We expect to have an additional 20 wells completed on the Bakken system through the first month and a half of the fourth quarter. So, I think that all plays into what the Diaco just mentioned as we see current record volumes across the system on all three products and expect that to continue through the fourth quarter and heading into 2021.

Vinay Kumar

Got it. Thanks. Thanks, guys. Just one last one if I could squeeze in here. I mean, you guys did mention, if they are positive, great details on it there. And then if thinking about the deleveraging path, I mean, it seems like as if we aren’t really moving the needle much, even in the next 12 months or 18 months there. Just wanted to understand how the board and the management thinks about accelerating the deleveraging path versus cutting distributions there?

Robert Halpin

Yes. I think, if I understood all that question, it’s really focused on kind of our leverage profile and I think as we stated, we’ve had a long-term objective of having leveraged below 4.0 times prior to the downturn driven by the pandemic, we expected to achieve that in 2020. Obviously, as development plans have been pushed out a little bit and we’ve navigated through this year, that’s been deleveraging profile has also been pushed out a bit. We still are 100% committed towards capital allocation strategies that drive a realization of our leverage targets over the next 12 months to 18 months.

What factors into that in terms of achieving that objective, obviously, first is getting to a point of positive free cash flow after distribution in the sizable way. We now have turned that corner beginning of the third quarter of this year and as we commented with 2021 cash flow relatively flat and our capital down tremendously, we will see a significant amount of incremental free cash flow generation next year, which will go towards the leveraging.

In addition to that, we executed on a small non-core asset divestiture in the Fayetteville this quarter, we continue to evaluate other assets in our portfolio for similar strategies. And if we were able to get something done there, if something interesting popped up, we would certainly execute on that as a means to accelerate.

And then the last one, you mentioned on distribution, we feel pretty good about where we’re positioned right now financially. But obviously, as the market continues to evolve, we evaluate that every single quarter, and we’ll continue to evaluate it every single quarter and what alternative uses of that cash, there may be that that could prove to be a better use if the business outlook change. So, those are the levers we have we remain 100% committed towards our balance sheet objectives over the next 12 months to 18 months timeframe. And we feel pretty good about how we’re positioned now to execute on that.

Vinay Kumar

Got it. Thanks, guys. That’s all from me.

Operator

Thank you. [Operator Instructions] Our next question is coming from the line of Ned Baramov of Wells Fargo. Please proceed with your questions.

Ned Baramov

Hey, good morning. Thanks for taking the questions. The two-part question relating to Chesapeake. Number one is the company current on all these payables to Crestwood. And secondly, I think Crestwood recently filed objections with respect to the level of disclosures provided by Chesapeake in the bankruptcy process, and also with respect to its ability to dispute contracts beyond the 365-day period, which typically, has allowed in bankruptcy proceedings. To the extent, you can comment, could you provide additional details as to what triggered the filing of this objection?

Robert Halpin

Yes. Ned, I’ll speak to it. First of all, to your first question, yes, we are current on all payments and continue to be, like closely working with Chesapeake on everything. They’ve paid us timely in accordance with the contract on all services provided across the company. The second point is I would say, it was more of an administrative point, as we work with other operators, and with Chesapeake closely around navigation through their bankruptcy process. I don’t think there’s really anything to read into that. We continue to have good active dialogue in our two contractual relationships with them both in the northeast as well as the Powder River Basin, have no significant modifications, contemplate around the contracts, believe those contracts are not rejectable and very well positioned, and would expect that as Chesapeake ultimately works their way out of bankruptcy over the balance in the next couple of months that we would continue business as usual and provide service for them going forward.

Ned Baramov

That’s great. Thanks for this. And then another question. Could you maybe, talk about the volume sensitivity around the Stagecoach assets? Specifically, how meaningful is being packed to cash flows from the record pipeline volumes given that these assets are pretty much contracted close to capacity?

Robert Halpin

Yes. I think, it’s really, it’s less of a driver of significant cash flow change, because as you mentioned, the bulk of our capacity is under firm contracts out there. and so, very, very stable revenue streams as it relates to that, I think what it speaks more to is just the industry and kind of the macro outlook for the basin. And what our producers are seeing from an economic standpoint and as Mark Mitchell alluded to, that increase in production driving tightness to the market up there, creates incremental opportunity for us to continue servicing our customer on this – our customers on the Storage and Transportation side. And then continues to highlight the need for incremental outlet points from the basin going forward. I think that all of that bodes well for the value of pipeline in the ground today and we’ll continue to position our Stagecoach assets as irreplaceable premier infrastructure assets out there servicing that growing production.

Bob Phillips

Ned, let me just add a little bit more color to that. I’ve been in storage business long time going all the way back to the late 1980s with Rotherwood. Storage has always been a cyclical business and sometimes the cycles are short, when you have cold winters, which we haven’t had in a while and sometimes they’re long. And this has been a long down cycle for storage as a business that we’ve experienced over the last five to seven years, and the reason for that is the big increase in production and markets just typically trade off production for paying up for big storage contracts. There are certain utilities that have to have operational storage. And so they’ve been very consistent customers of ours. But most market players that use storage, view it as an alternative to just buying gas in the open market – or gas liquids in the open market. We’re going through a tightening of both markets; gas and gas liquids from a supply standpoint, which is inevitable due to the pandemic.

And as a result, we’re beginning to see and I commented on this in my notes, we’re beginning to see a little bit tighter storage market, which we think overtime, will play out in slightly higher margins for the storage service. And Mark Mitchell and his team, which run Tres Palacios here on the Gulf Coast, which is an absolutely critical storage facility for the LNG business and Stagecoach up in the Northeast, which is an absolutely critical storage facility for the Northeast utility and power generation market. We’re beginning to see a slight tightening, a little bit more increased demand customers coming to us a little quicker, customers willing to talk about blending extends on term.

And as you know, even though these are largely FERC regulated assets in under long-term contracts. Long-term that mean 20 years in that business anymore, like it used to in the old days. And so we have about 20% to 30% of our contracts that come up, or our capacity that come up for renewal from year-to-year. And so as we look into 2021, I see that as a positive that we see firming demand for storage as a service. Mark, you want to comment on the ground, what are you seeing in the Northeast and around Tres Palacios, which serves the LNG business?

Mark Mitchell

Yes. Well, a couple of comments. I think kind of broad brush across the U.S. We’ve seen over the last six years to eight years, 45% growth in production across the U.S., similar increase in demand. And as Bob commented, we’re getting into a tighter market, storage during that time period and we have the roughly the same amount of capacity. So, you have a smaller quantum of capacity to balance a larger market. That I mean, generally we think that bodes well kind of across the group or storage specifically as it relates to Tres Palacios.

In Stagecoach location is key and, for example, Tres Palacios is in the South Texas on the Gulf Coast and a great location to serve the LNG markets, power generation in Mexico and with LNG gas become in the larger part of the equation for demand and the circumstances we’ve seen over the last few months with cargo cancellations and hurricanes, and now, we’re getting back up to full utilization. We’ve just had a stronger call on storage from the operators in South Texas and those are customers at Tres Palacios. And up in the Northeast around Stagecoach with production starting to increase.

And as Bob mentioned, we are in a tighter market and we haven’t had a good winner in a while, but we’re very well positioned up at Stagecoach and we’re seeing commitment from customers to step up and reaffirm, and we have more demand for that capacity, and we have capacity to serve customers.

Bob Phillips

And I think the bottom line, Ned, is our assets have always stayed full at both locations. We’re starting to see spreads widen out a little bit, and that’s good for us. Whether it’s a firm service, interruptible service, park and loan service, any kind of up service, as spreads widen, that’s a good thing for our assets, because they are well located and they’re irreplaceable in the market. You could not get those permitted and replaced today.

So, they’re both sitting on top of big market demands, LNG along the Gulf Coast in Northeast gas fired generation and utility service in the wintertime. So, we’re pretty pumped for the first time in a few years that Stagecoach actually has a little bit of negotiating leverage with its customers. We don’t have a lot. But we’re not asking for a lot. But it’s definitely a trend that has turned in the last year or so and it has exactly to do with the fact that supplies are going to be lower. Does that help?

Ned Baramov

Yes. This is great color. Thanks for this. That’s all I have today.

Bob Phillips

Okay. thanks, Ned. Appreciate you waiting so long. I know we’re about, operator, I think we’re about out of time. Yes. let me just close real quick, thanking everyone again, for hanging on the call. again, hope that everyone stays safe and healthy through the pandemic. We have a lot of things going on in the U.S. Here at Crestwood, we’re keeping our eye on the ball and we’re staying focused on what we do. We just help producers in the field and help markets get their supplies get delivered on time and efficiently. We’re doing it safely and we’re making tremendous progress on the ESG side of the business. We’re really looking forward to what we’re going to be able to do in 2021 on that front.

So with that, thank you all for joining the call. Look forward to talking to you in February, with our fourth quarter 2020 results and hopefully, a much better look at what 2021 is going to look like for Crestwood. Thank you.

Operator

That does conclude today’s call. You may disconnect your lines at this time. Thank you for your participation and have a great day.



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