Western Midstream Partners LP

NYSE:WES

Earnings Call Transcript 2020-Q4

[Operator]

Good day, and welcome to the Western Midstream Partners Fourth Quarter 2020 Earnings Conference Call. [Operator Instructions].

I would now like to turn the conference over to Kristen Shults, Vice President, Investor Relations and Communications. Please go ahead.

[Kristen Shults, VP, IR & Communications]

Thank you. I'm glad you could join us today for Western Midstream's Fourth Quarter 2020 Conference Call. I'd like to remind you that today's call, the accompanying slide deck and last night's earnings release contain important disclosures regarding forward-looking statements and non-GAAP reconciliations. Please reference our public filings for a description of risk factors that could cause actual results to differ materially from what we discuss today. Relevant reference materials are posted on our website.

Additionally, I'm pleased to inform you that the Western Midstream Partners K-1s will be available on our website beginning March 12. Hard copies will be mailed out several days later.

With me today are Michael Ure, our Chief Executive Officer and Chief Financial Officer; and Craig Collins, our Chief Operating Officer. I'll now turn the call over to Michael.

[Michael Ure]

Thank you, Kristen, and good afternoon, everyone. Yesterday, we reported fourth quarter 2020 adjusted EBITDA of $484 million as a meaningful reduction in producer activity throughout the year relative to our plan, culminated with a decrease in fourth quarter throughput across all products. Remarkably, despite this reduced activity, we reported full year 2020 adjusted EBITDA in excess of $2.0 billion, a year-over-year increase of more than $310 million or 18%.

Due to our increased focus on cost and capital discipline, West delivered fourth quarter 2020 free cash flow totaling approximately $465 million, a 37% sequential quarter increase. For the full year 2020, we generated free cash flow totaling $1.2 billion. That's roughly 10% of our year-end enterprise value.

Early in 2020, we pivoted our focus to free cash flow as a financial performance indicator as opposed to the conventional MLP standard metrics of distributable cash flow and distribution coverage. By operating within free cash flow, we better align company and stakeholder interests of building a long-term successful organization and while providing results that offer comparability in and outside our industry to demonstrate our excellent free cash flow and total return profile.

During 2020, we generated $530 million of free cash flow after distributions by reducing cash capital expenditures by approximately 65% from 2019 and reducing the distribution. Although 2020 was the first year our company generated positive free cash flow after distributions, we have made a fundamental shift in our mentality as an organization to ensure this success continues. As we started 2020, we've recognized it would be a historic year for WES as we executed several agreements with Occidental in December 2019 that established WES as a stand-alone midstream company.

The ensuing global pandemic 2 months later confirmed this historic nature of 2020, but not for the reasons we initially believed. While the pandemic created numerous challenges that were not unique to us, our team seize the opportunity to reexamine every aspect of our operations to identify incremental cost-saving opportunities and pursue efficiencies. This deep dive into our business, continued producer outperformance and additional cost efficiency realizations from deconsolidation enabled WES to exceed all expectations in our first year as a stand-alone company.

We're moving more than $175 million of O&M and G&A costs compared to our original 2020 guidance contributed to the highest annual adjusted EBITDA in Western Midstream's history. We compounded these cost savings with the efficient execution of our capital program, landing $590 million below the original 2020 guidance midpoint and $100 million below the revised 2020 midpoint.

We priced a $3.5 billion four-tranche senior notes offering, which was 6.2x oversubscribed with more than $21 billion of demand. At the end of the third quarter, we announced a $250 million common unit buyback program, of which we've repurchased $49 million as of today's call. The careful protection and efficient management of our balance sheet and the significant work by our employees to discover cost savings enabled us to return more than $1.2 billion to stakeholders through debt repurchases, cash distributions, unit buybacks and units acquired through the Anadarko note exchange.

Furthermore, as a result of the unit buyback program and the note exchange, we've increased our free cash flow after distributions by over $22 million. On a year-over-year comparison, we increased throughput in every one of our products with a 1% increase in natural gas throughput, 7% increase in crude oil and NGL throughput and a 28% increase in water throughput. Our teams implemented mutually beneficial commercial solutions with producers to keep volumes on our system and generate incremental capital advantaged EBITDA for WES, while also providing near-term relief to customers adversely affected by lower demand for its products.

Operationally, we benefited from the completion of 3 significant projects in 2020. The second Latham train, which commenced operations in the first quarter added 250 million cubic feet per day of total processing capacity in the DJ Basin and Train III and Train IV at the Loving ROTF in the Delaware Basin, the latter of which was completed nearly 2 months ahead of schedule and required 35% less capital than our previous North Loving trains.

Our staff put forth a tremendous effort to complete these organizational and operational changes in 2020, and we're confident that the foundation we developed will continue to inure to the benefit of our stakeholders in 2021. This provides us with momentum to work toward a further sustainable cost efficiencies, safe and superior customer service and returning value to stakeholders.

Our previously communicated 2021 guidance of adjusted EBITDA between $1.825 billion and $1.925 billion and capital expenditures between $275 million and $375 million, along with maintaining our year-end debt to adjusted EBITDA ratio at or below 4.0x is currently unchanged. While we are still evaluating the full financial impact of the recent winter storm, which will adversely affect our first quarter results, we do expect to make up those impacts throughout the year.

We've already seen increased activity across the DJ and Delaware Basins at the end of 2020 and into 2021. And we expect these increased activity levels to continue throughout 2021, allowing us to exit the year at higher throughput levels than our 2020 exit rate. With the increase in activity, we expect our capital requirements to be slightly front-end loaded to the first half of 2021. We also anticipate that our EBITDA will trend upward throughout the year as increased activity levels yield increased throughput.

Overall, we expect the DJ Basin to account for 37% of our asset level EBITDA, with an additional 40% coming from the Delaware Basin. In a few moments, Craig will provide further detail around activity levels and capital requirements. But I wanted to take a few minutes to discuss the impact of our cost of service rate contracts on 2021 guidance. As a result of declining 2020 volumes, we experienced upward pressure on cost of service rates. Fortunately, the impact of these increases was partially and, in some cases, more than entirely offset by the significant cost and capital savings achieved in 2020, which we believe will be sustainable on a go-forward basis.

Specifically, our Delaware water and oil cost of service rates decreased as a result of these achievements. These cost savings and resulting downward pressure on cost of service rates demonstrate the symbiotic relationship that WES values with its producer counterparts. We will continue to push forward cost reduction initiatives. These savings are proportionally shared with our partners, which we believe will continue to incentivize additional business.

These are all reasons why WES is positioned to be the midstream provider of choice within the areas we operate, a goal we take very seriously. These anticipated rate changes were taken into consideration as we released our initial guidance at the end of third quarter. The impact of the rate changes was deemed immaterial to the total guided amount, and that remains the same after our final calculations.

Our 2021 guidance also includes nearly all of the $175 million of cost savings realized in 2020. Through optimization efforts in our existing assets, the transition to a stand-alone business model and strengthening our relationship with Occidental, we've identified sustainable opportunities that improve operability, more efficiently deploy capital and ultimately drive value for our stakeholders.

To reiterate our third quarter call, our strategic contractual protections minimize the impact of potential decline in throughput has on our EBITDA. Using 2021 guidance, as an example, if DJ and Delaware throughput levels decreased by an additional 10%, it would result in only a 5% to 6% decline in our asset level EBITDA.

With that, I'll turn the call over to Craig to discuss our fourth quarter operations and provide more thoughts on 2021 activity and capital requirements.

[Craig Collins, SVP & COO]

Thank you, Michael. Operationally, gas throughput decreased by approximately 282 million cubic feet per day or 7% on a sequential quarter basis as a result of minimal investment throughout 2020. Full year 2020 natural gas throughput averaged 4.3 billion cubic feet per day, representing a 1% increase from full year 2019. Our water throughput decreased by approximately 16,000 barrels per day, representing a 2% sequential quarter decrease as a result of lower producer activity in the Delaware Basin.

Full year 2020 water throughput averaged 698,000 barrels per day, representing a 28% increase from full year 2019 resulting from additional volumes early in the year, the conversion of trucked water volumes from our existing producers onto our system and incremental new business that we brought online throughout the year.

Our crude oil and natural gas liquids assets experienced a sequential quarter throughput decline of approximately 70,000 barrels per day or 10%. During the fourth quarter, volumes decreased across the portfolio as a result of minimal investment throughout 2020. Full year 2020 crude oil and natural gas liquids throughput averaged 698,000 barrels per day representing a 7% increase from full year 2019. This growth was driven primarily by higher throughput from our DBM oil complex with the start-up of Loving ROTF Trains III and IV and higher throughput from our Cactus II equity investment.

Our gross margin for crude oil and natural gas liquids increased by $0.15 for the quarter to $2.69 per barrel, which is attributed to the cumulative adjustment related to the annual cost of service rate resets. We expect 2021 crude oil and natural gas liquid margins to be slightly below third quarter 2020 margins as a result of lower Delaware Basin cost of service rates and lower gross margin contributions from equity investments.

Before I provide some color around 2021 activity and capital requirements, I want to take a moment to thank our operational, engineering and commercial teams for an outstanding year. Their passion to improving customer service and consistent care and concern for one another through our LiveSAFE culture continues to serve as cornerstones to our continued success in such a challenging time. Our operations team worked effectively to maintain our system availability above 99% for 2020, outperforming our internal targets.

Ensuring system capacity and operability enables us to move as much product as possible to market and further mitigate producers' needs to flare natural gas. Our commercial team's ability to create win-win solutions with producers and during the depths of the pandemic, helped to keep volumes on our system and protect our revenue streams.

Finally, our engineering organization added 150,000 barrels per day of water disposal capacity, 210 million cubic feet per day of compression and 60,000 barrels per day of oil treating capacity. They optimize processes, increased system reliability, reduced project cycle times and identified significant cost savings, all, which enabled our commercial team to build on their recent success and aggressively compete in the marketplace.

Turning to 2021, the return of activity toward the end of 2020 and into 2021 brings us great optimism. We're expecting rig count to remain relatively constant in the DJ and Delaware Basin over the course of the year. With the anticipated activity levels and DUC completions, we expect our producers to bring online approximately 315 wells across the portfolio in 2021, about 60% of which is located in the DJ Basin. We expect to exit 2021 with gas throughput relatively flat to our 2020 exit rate, while oil and water will increase compared to the 2020 exit rates by high single-digit and low double digits, respectively.

As we look at the increased regulatory environment in our related risk profile, our federal land exposure in the DJ and Delaware Basins is incredibly limited. Currently in these areas, less than 5% of our gas throughput originates from New Mexico federal lands. Water and oil exposure is immaterial. In the event, federal land permitting issues jeopardizes new volumes, we believe the impact to our 2021 adjusted EBITDA is immaterial to the guidance ranges provided. Our analysis contains various assumptions concerning permitting, locations and timing, but this projection is another demonstration of the minimal impact federal land regulations would have on our portfolio.

Turning to capital. We expect our capital requirements to be slightly front-end loaded to the first half of 2021 with the projected increase in producer activity. Our capital guidance of $275 million to $375 million supports a steady level of activity growth throughout 2021. Similar to recent years, we expect to deploy the majority of our capital, about 59% in the Delaware Basin. The majority of our capital will be spent on expansion projects, including saltwater disposal facilities, additional pipelines and well connections. With excess capacity in the DJ Basin, we do not expect any sizable projects to materialize in the foreseeable future.

While the Delaware Basin does not have as much excess capacity as the DJ Basin, we expect the intensity of capital spending to continue to decline. Capital will continue to be required for regional projects, including additional saltwater disposal facilities and compression as we alleviate areas of constraint.

Now I'll turn it back over to Michael to discuss our focus areas for 2021.

[Michael Ure]

Thanks, Craig. After executing separation agreements with Occidental in December 2019, much of our internal efforts last year were spent on standing up an organization, transferring more than 1,600 employees and contractors, establishing separate systems and processes and creating an entrepreneurial culture unique to WES. As we move through 2021, we intend to further strengthen and refine our business model and internal processes, enhance our focus on customer service and operational excellence and continue our active work to minimize our environmental footprint.

On the financial front, we believe we have identified most of the available O&M and G&A savings as part of our 2020 transformation. However, it is part of who we are as a company to continually examine our operations and challenge the status quo to identify innovative ways to reduce our cost structure and work more efficiently. We believe this culture of cost management, continuous improvement, responsible operations and the use of technology to enhance safety and efficiency is imperative to provide value to our stakeholders. We regularly monitor costs as a percentage of gross margin and throughput, questioning and challenging the use of capital and actively monitor spending to protect against cost creep when a higher level of activity returns.

We remain committed to responsibly managing leverage and returning value to stakeholders through further debt repurchases, cash distributions and unit buybacks. Our ability to generate free cash flow after distribution last year and into the foreseeable future, enables us to repay all near-term maturities when due, totaling $1.2 billion in payments over the next 4 years. Coupled with expected EBITDA growth, we intend to further reduce leverage to at or below 3.5x at year-end 2022.

In addition to debt repurchases, we want to remain flexible and opportunistic in how we return value to stakeholders. We expect full year 2021 distributions of at least $1.24 per unit and we're committed to evaluating distribution increases on a quarterly basis as a potential avenue to return excess cash to unitholders. The remaining $201 million of the $250 million common unit buyback program provides us with additional options to return value to unitholders.

As you've seen in our inaugural ESG report posted on our website, we're proud of our recent ESG performance and the passion our people have to address ESG issues in a transparent way. We believe the world will continue to require hydrocarbons, in particular, natural gas to power our lives. The recent freezing temperatures in the Southern U.S. is another example of the important role hydrocarbons play in providing fuel and warmth for our communities. We take seriously our responsibility to minimize emissions by thoughtfully designing, constructing and operating our assets. And collaborating with state and federal regulatory agencies and environmental groups, producers and industry to find the best solutions to today's climate-related challenges.

Our ESG philosophy is rooted in 3 pillars: creating sustainable environments, focusing on people and operating responsibly. Our operational philosophy and the design of our facilities dating back more than 12 years ago are a testament to how we view ESG. Specifically, the design of our Colorado COSF and West Texas ROTFs enables us to gather oil directly from producers well sites, eliminating the need for well site storage tanks and associated oil vapor flaring, leading to emission reductions across the upstream sector. As a proactive measure to minimize our facility emissions footprint, WES began installing electric-driven compression as early as 2008. Today, WES operates more than 350,000 horsepower of electric driven compression, returning more than 22 billion cubic feet of gas to the market that would otherwise be combusted in natural gas driven compression.

We have also been progressively designing our facilities to limit our flaring to activities to those required for safety purposes. For example, when feasible, we install closed-loop process vessels and systems to capture and transport gas to market instead of flaring product. We utilize technologies that recycle waste gases back into our process instead of flaring. It's not only the right way to operate our business, but it also ensures that our facilities can easily adhere to future regulatory changes. These forward-looking designs are unique to Western Midstream, and it demonstrates how our creativity, ingenuity and planning can provide solutions to deliver resources to an energy-hungry world while protecting the environment.

In addition, our customer focus drives our level of commitment to ESG as our teams work closely with producers to minimize upstream flaring during the product life cycle. Our commercial team works to have all infrastructure and pipelines in place before production commences as well as the contracted capacity and reliability to receive and transport our customers' products through our natural gas pipeline infrastructure, compressor stations and processing facilities.

Employees stationed at our regional control centers use automated remote sensing equipment to continuously monitor our gathering and processing infrastructure. This helps us to ensure system availability, which reduces producers need to flare natural gas.

To demonstrate that we're part of the solution, we firmly believe our industry must work together to bring greater transparency to our environmental impact and actively communicate our mitigation efforts. Over the last few months, we have worked closely with the Energy Infrastructure Council, EIC member companies, and investors to create a standardized ESG reporting template for the midstream sector. We've also taken an active role in drafting GPA Midstream's climate policy principles, which, in part, supports our technological advances and solutions that minimize GHG emissions. That collaboration expense of local governments and regulatory bodies as well to generate economic solutions to environmental issues.

In 2020, WES supported a proposed rule from the Colorado Department of Public Health and Environment requiring emission reductions from existing natural gas-fired engines over 1,000 horsepower. As part of an effort to ensure real emission reductions occur, we will achieve NOx reductions by at least 800 tons over the next 3 years, starting in 2022. We also plan to permanently retire 3 natural gas-fired compressor engines by mid-2024, eliminating 17,000 metric tons of CO2. This commitment to be good stewards of the environment starts at the Board level and continues down through the organization to each of our employees.

As further evidence of this commitment from the top, WES recently appointed a Board-level ESG committee, whose charter is to steer our efforts on issues and performance regarding environmental protection, social causes and strong corporate governance. We, as a management team, are excited to work with this new committee to drive positive performance in each of these elements for the future. It's in that spirit of working together that I'm excited to announce our recent membership in ONE Future. The ONE Future Coalition is a group of 37 natural gas companies working together to voluntarily reduce methane emissions across the natural gas value chain to 1% or less by 2025. The coalition's approach to reducing emissions aligns with our priorities as we work together to identify policy and technical solutions that yield continuous improvement in the management of methane emissions. We look forward to continuing to demonstrate our commitment to ESG issues through operational changes, enhanced customer service and partnerships like ONE Future.

I'd like to close with my appreciation to the 1,600 employees and contractors at WES. While the global pandemic and the precipitous decline in commodity prices were not unique to WES, our team's resiliency, outstanding determination and long hours to stand up an organization while working remotely provided our stakeholders with a historic performance, one that may be unprecedented for a first year stand-alone midstream company. Thank you for your efforts.

I would like to especially thank those hard-working people who work through these freezing temperatures to deliver valuable fuel to those in desperate need during the recent storms. Today, while we continue to work through the day-to-day challenges that are inherent in our business, we are committed to delivering long-term value to our stakeholders by operating safely, delivering exceptional customer service and returning cash to stakeholders.

Furthermore, if 2020 taught us anything at Western Midstream, it is the importance of remaining nimble and adaptable when change occurs. Excelling in an evolving and fluid environment is a skill we've been perfecting since we undertook our current focused midstream strategy.

With that, I would like to open the line for questions.

[Operator]

[Operator Instructions]. Today's first question comes from Shneur Gershuni with UBS.

[Shneur Gershuni, UBS Investment Bank]

I was wondering if we can start off with operating leverage potential within the Western Midstream assets right now. I was looking at Slide 30 in your updated presentation, where you talk about volume changes and changes in EBITDA and so forth. And I was sort of looking at your 4Q throughput, for example, natural gas being about 8% below kind of like your average for 2020. So clearly, there is -- there has to be some degree of operating leverage. I was wondering, if you can share with us how much operating leverage do you think you had without needing to spend any material CapEx?

[Michael Ure]

Yes. Shneur, thanks for the question. Let me comment a little bit as it relates to that trend and how that might play out going forward in the way that we look at it.

As noted, we did have a decline in volumes going through the back half of 2020 as we had expected. That decline, we would expect will continue through the first half of 2021 is the increased activity levels, have some delay before they find their selves into the volumes into our system. Some of the capital is a little bit preloaded so that we're prepared to take those volumes when it does occur.

However, to give some indication, we would expect that if the activity levels for 2021 were to trend in the same -- at the same level into 2022, given that we are expected to exit 2021 at a higher level than 2020, therefore, on a growth trajectory that, that growth would trend into 2022 and the capital requirements associated with getting that growth, we would deem to be similar to what we have projected or included in our budget for 2021.

[Shneur Gershuni, UBS Investment Bank]

And just to clarify, do you have a sense of what your capacity actually is? So like just sort of following the forecast that you have right now, and you've given us the volume sensitivities, could '22 from a capacity utilization perspective, like entering '22, would you be at 80%, 85% or 90%? Like is there some sort of like utilization level that you can give us, so that we can sort of utilize the sensitivities that you outlined?

[Michael Ure]

Yes. We don't actually provide a specific details as it relates to our projected utilization. But again, I would indicate that even if you play that into forward years, we wouldn't expect that there would be a material increase in the amount of capital requirements for a foreseeable period of time.

Obviously, there's limits to that. But as we project forward over the next several years, we wouldn't expect that there would be a material increase in capital, if the activity levels continued into the future.

[Shneur Gershuni, UBS Investment Bank]

Okay. So you can handle a 20% volume increase without capital, is kind of the takeaway from that slide then?

[Michael Ure]

Well, again, I never gave any specific details as it relates to a 20% increase in volumes, but I appreciate the probing question. But I did indicate that it would be on an upward trend going into 2022, and we would expect, therefore, the cash flow to increase in 2022 over 2021, and that the capital needs for that period would be relatively similar. And if you play that forward for a reasonable period of time, we would expect that, that similar type of operating leverage would continue without the need for significant additional infrastructure.

[Craig Collins, SVP & COO]

I would just add. Shneur, I would just -- this is Craig. I would just add that given the extensive footprints that we have in the Delaware and DJ basins, we continue to find ways to optimize and find new capital-efficient ways to expand our system incrementally that is very capital efficient. So really exacting a -- what that capacity is, it's somewhat of a moving target because we're continuing to find ways to change that number in an upward trajectory.

[Shneur Gershuni, UBS Investment Bank]

Yes. I definitely appreciate it. And obviously, you've given us more information, we always want more than you've provided. But kudos to the team for that presentation.

Maybe just -- I have follow-up question. You've had a lot of success adding third-party volumes this past year. Does it have the potential to get to a 55% or 60% type of level? Or will Oxy grow faster than that rate, mitigating the increase? Just trying to think about how we can -- can you potentially get to a point where you dilute Oxy's exposure enough to change the views of the rating agencies on notching?

[Michael Ure]

Yes, why don't I comment that, again, from our perspective, we want to grow the pie. And we don't have a specific focus on a target level that we'd like anyone of our partners to get to as a whole. As we look into 2021, a lot of that growth is going to be driven by activity levels from existing customers. But as we go forward, we're very optimistic that through the cost-saving initiatives that we've been able to put forward, we can be a lot more competitive going forward as those new third-party opportunities find their way through the system. If that trends us down to a lower level from a customer concentration risk, then that's great. But it's not a specific focus for us. We want to make sure that we're just -- we're growing the pie as a whole. Craig, I don't know if there's anything else you'd like to add there?

[Craig Collins, SVP & COO]

Yes. I think it's also important to note, just the size of the pie that we have, and it's tough for that number to materially move from 1 year to the next. Even given the successes that we've had in attracting new business. But what we love to see is the pie as a whole, continuing to get larger and have each of our producers be as active as they can be in these basins. And so I think it's just tough to see a material change in that move or a material change in that allocation. But it's -- our focus is growing the pie.

[Operator]

And our next question today comes from Kyle May with Capital One Securities.

[Kyle May, Capital One Securities]

Michael, I appreciate that you are still evaluating the impact of the recent winter storm, but just wondering, if you have any preliminary thoughts or estimates about the impact of the business?

[Michael Ure]

Yes. We don't have any. We were going through a thorough review overall. It definitely will impact Q1. We had a period of about 10 days where the volumes were definitely impacted and are still going through the impact from a cost perspective.

What I can say is that, we're working today at what we would deem normalized conditions. And so thankfully, it's a -- the period of time that has been -- there's sort of walls to it, if you will. So kudos to the team for getting back up and running in a quick manner in light of the conditions that we have, but we're still going through the full assessment on the financial impact of it.

We do believe at this stage, that in light of the fact that we're still early in the year that we'll have an opportunity to make up that financial impact but have not yet fully quantified, what it might be.

[Kyle May, Capital One Securities]

Understood. That makes sense. And then although the guidance for this year has not changed since November, can you talk about the recent conversations that you've had with customers? Just curious if any plans or positioning has changed over the last few months?

[Michael Ure]

Yes. We actually haven't seen a ton of change over the past few months as it relates to behavior as a whole. Just generally speaking, some of the private operators have been a little bit quicker to respond to increased activity levels. Our public customers tend to be a little bit -- have been a little bit more disciplined as a whole. And we haven't seen a material shift or change since the time that we put out that guidance.

[Operator]

And our next question today comes from Spiro Dounis with Crédit Suisse.

[Spiro Dounis, Crédit Suisse]

I want to go back to leverage if we could and tying that back to your advancement towards investment-grade. Leverage so far tracking better than initial expectations. You put out that new number now of at or below 3.5x by 2022. And so as you continue to advance towards investment grade, can you just tell us what the factors are, you think that would be needed to get you there? Have the agencies set some targets for you? I guess how close do you think that is?

[Michael Ure]

Yes. I think, Spiro, it's a great question. From our standpoint, take aside what the actual rating might be, we definitely consider ourselves in the investment-grade territory from a true credit standpoint. And thank you for noting the progressive -- progress that we made up to this point.

We had set a target of 4.5x by year-end 2020. We obviously exceeded that target, and then we put out a target for ourselves in 2022, which will come as a result of us repaying our near-term maturities. So we've got a $431 million maturity that we'll pay off in Q1, and then $581 million maturity that will pay off in 2022. That along with, again, the upward trending, the cash volumes as we exit 2021, will put us in a position to be able to get to those levels as we currently project.

And so the conversations with the rating agencies have been very positive. They're -- from what we have heard, very appreciative of our focus on leverage reduction. The timing of which, obviously, is a little out of our control, but the way that we're functioning is under the assumption that we're really operating under a true investment-grade credit profile, regardless of what the rating might say.

The factors there obviously include, how it is that we handled the pandemic projections going forward, what it is that we're using with free cash flow and then customer concentration.

[Spiro Dounis, Crédit Suisse]

Got it. Okay. That's helpful. Second question is a bit of a two-parter on ESG. It sounds like you guys have been busy on that front, since the last time we caught up last quarter. And so great initial steps. Obviously, on the emission reduction, you're joining some of these industry groups, I guess, as I think about next steps and other things you can do, you mentioned challenging the status quo.

I guess, two things come to mind. And so I'm curious, are any resources being deployed now to potentially transition over to C-corp at some point in time? I'm sure you've been asked that in the past.

And then as we think about advancing more commercial opportunities as opposed to just the operational ones you're working on now, I'm thinking, obviously, direct air capture, carbon capture and storage. How far away are those for you?

[Michael Ure]

Yes. So first question, as it relates to -- and thank you for noting the progress that we've made. It's definitely an effort that we feel very strongly about. And that goes from the top with the creation of the new ESG committee. 3-member committee, standing Board committee as well as all the way through the bottom of the organization to make sure that we're being as efficient as we can with the existing assets that we have.

We, at present, don't consider a C-corp conversion as being optimal for us and our unitholders as a whole. So not something that we currently believe is in the best interest of us as a unitholder. And then I apologize -- as a total stakeholder base. And I apologize, Spiro, I didn't get your last question. Was it commercial opportunity?

[Spiro Dounis, Crédit Suisse]

Yes. No worries. Yes.

[Michael Ure]

Yes. So a couple of things that I would note there, and I'll turn it over to Craig for additional commentary. Again, with the creation of the ESG standing committee, obviously, that's going to give significant focus for the organization to make sure that we're being forward leaning around ways in which we can participate in the efforts as a whole. That committee includes great connection back with Occidental, and we're very impressed overall with the efforts that they have made in that regard. And so obviously, it facilitates some partnership in the event that those types of opportunities find their way down there.

We've also even reallocated some internal resources with a senior team that is focused on those types of opportunities. And so together with the Board committee, executive leadership allocation and connectivity back with Occidental, we think that there are definitely ways in which we can try and find ways that will enhance return or certainly be productive from a return perspective. But also, be conscious of the climate situation that we have today.

Craig, anything else that you'd add there?

[Craig Collins, SVP & COO]

Yes. I would just add that the resources that we've pulled together to lead this effort are led by one of our top commercial talents that's been with us for several years. And we think that, that's really going to be an important element of how we advance some of these ESG opportunities is to figure out how to commercialize and get into opportunities in a way that makes economic sense for us, as Michael points out. But also reiterates and underscores the commitment that we have to make in advances on the ESG front. And so we're excited by the team that we have assembled to help lead that for us. And we're looking forward to what those opportunities will deliver in the coming months ahead.

[Operator]

And our next question today comes from Sunil Sibal with Seaport Global Securities.

[Sunil Sibal, Seaport Global Securities]

So just one clarification on previous questions. So you've obviously laid out a kind of a 3-year deleveraging plan. Is that based on your most recent discussions with the rating agencies, if you execute on that and nothing else changes on the macro environment, does that -- is that sufficient for you to get to IG in terms of the -- rating agencies are -- there is some more work to be done with regard to customer concentration, et cetera?

[Michael Ure]

Yes. Sunil, thanks for the question. Again, it's -- there's a lack of specificity, as you might imagine, as it relates to specific targets that you need to be met in order to immediately trigger some sort of upgrade overall from a rating agency perspective. So I wish I could, and each of them, obviously, are individual agencies themselves and have different perspectives on how it is that they assess ratings and credit as a whole.

So I can't specifically point to anything overall that would then trigger an upgrade. But what I can say is that, we're definitely doing everything that we can to put ourselves in the best position. We believe our metrics actually warrant investment grade. And especially as you trend forward, the way that we're handling the payoff of our near-term maturities and the overall leverage as a whole, we believe, put ourselves in that position. But I definitely can't speak to any specific trigger that would ultimately result in an improvement in rating agency ratings.

[Sunil Sibal, Seaport Global Securities]

Got it. And then on the portfolio rationalization side, obviously, you've done a little bit here, started it off. I was kind of curious, how should we be thinking about that, both in terms of divesting efforts or even maybe looking at other assets in other basins, which kind of give you more kind of ratable businesses, et cetera?

[Michael Ure]

Yes. So our position is the same that we've had for some time, and that is that, we'll look at opportunistic -- opportunities, both on the divestiture side as well as the acquisition side. Over the past 12 months, it's been a challenging environment to get anything executed on either side, whether you're selling or buying.

We do definitely have constant dialogues as it relates to some assets that may be deemed non-core for us, where if someone puts a higher value on it than what it is that we deem the value to be, then we'll execute on those things opportunistically. And that activity level, I would argue is in a better fundamental place today than it certainly was previously. But we're on a continuous portfolio optimization mentality and have been for the past 12 to 18 months.

[Operator]

And our next question today comes from Gabe Moreen with Mizuho.

[Gabriel Moreen, Mizuho Securities]

I just had a couple of question around the cost of service arrangements and how cost reductions filter into that and the sharing mechanisms around cost reductions. Can you just speak to, I guess, how those cost reductions, whether they go all to -- how they filter through the cost of service mechanisms? And are you sharing it all with your customer? Are you sharing it within a band? And I guess, how much headroom you have on cost of service savings, where you -- do you need at that point to share everything with your customers? Sorry, that was a round of -- a long question there.

[Michael Ure]

Yes. No, it's a good question, Gabe. Why don't I go ahead and take a shot at that, and then, Craig, you add anything that I may miss here. It's effectively like -- not all of our contracts are cost of service. And so it is a calculation that's based on the asset level cash flows associated with the capital and operating costs as well as volumes specific to that particular area in which that cost of service contract is relevant. And so as you allocate those costs, there's a determination as to what the rate might be based on historical volumes received and then future volumes projected for the area.

What we did see as it relates to the recalculation for 2021 is that, the significant effort that the team had done in order to reduce the overall cost, to gather the projected volumes, actually had downward pressure to the point where we reduced the rates in oil and water in Delaware Basin as a result of those efforts. So that's effectively the way that it's calculated.

The way that we look at it is that each dollar that we spend needs to be really thoughtful and needs to have an associated value with it because regardless of where those savings might be shared, it's either incentivizing additional development on our acreage position or recruiting and accruing to the benefit of our unitholders. So Craig, is there anything else that you'd add?

[Craig Collins, SVP & COO]

Yes. I would just add that a big driver for this year, as we recalculated those rates, in addition to the 2020 volumes being well below what they're originally anticipated to be. Correspondingly, our capital in 2020 was well below what we originally anticipated. But then the other big dynamic in those models is the future expectations for capital on operating expense. And as we've been able to sharpen our pencils and get better costs around those facilities and assumptions around what would be required to deliver those future volumes.

Including our operating costs, the combination of all that is just internal rate of return calculation. And so that's what really drives that rate adjustment. And so it's both a function of 2020 impact, but also what we can extrapolate going out to deliver those future volumes that really drives those rate adjustments.

And we're pleased that we can -- that we've been able to find ways to reduce costs. As Michael pointed out, it's asset-specific for certain customers. And so to the extent that we get better at reducing our facility costs and our operating costs, it doesn't just stop inside those cost of service contracts, but it extends to our benefit and all the other contracts that we have that are at fixed rates.

[Gabriel Moreen, Mizuho Securities]

Got it. And then maybe, Shneur asked about operating leverage. And I think also based on the metrics you're disclosing about leverage to volume increases or decreases. It seems like you have that. But I'm just curious, as you look across the portfolio and your assets that have MVCs with them, are there any assets where you are actually materially below your MVCs and where an increase in volumes may not filter through to the bottom line, at least initially?

[Michael Ure]

Go ahead, Craig.

[Craig Collins, SVP & COO]

Yes. It is asset specific. It's contract specific. So I think it's probably not simple enough to address through a response in the way that you would find helpful. I would say that we have all that baked into our guidance for 2021 and its part of our long-term planning. We are optimistic that as producers continue to get their feet under them with strengthening commodity price deck and increasing activity levels that producers will be outperforming those minimum volume commitments. And we look forward to seeing that upward trajectory on volumes again.

[Michael Ure]

And Gabe, to comment on that, I mean, there is an element of -- within that calculation, an element of -- if the volumes increase. Again, 10%, the EBITDA increases as we projected 5% to 6%. And so there is a little bit of an element where that increase is being eaten up a little bit by the minimum volume commitments. And therefore, it's at 5% to 6% increase as opposed to something more than that.

[Gabriel Moreen, Mizuho Securities]

Same works on the debt side.

[Michael Ure]

Yes.

[Operator]

And our next question today comes from Derek Walker, Bank of America.

[Derek Walker, Bank of America Merrill Lynch]

Mike, I appreciate the color today. Maybe just two quick ones for me. I think you talked about -- just on the ESG side, I think it was 350-horsepower electric compression, I think you've done over the last 2 years. And you talked about some Nat gas compression retirements. Do you see any more opportunity to convert to compression? And do you anticipate those Nat gas compression retirements this year?

[Michael Ure]

Craig, you want to take that one.

[Craig Collins, SVP & COO]

Yes. I think, Derek, the way we think about the compression is, as we're adding new compression, we're looking for opportunities to electrify as much of that is possible. In some areas, in some basins and even within certain locales in those basins, the proximity to reliable power sources sets up better for some of that compression than others. And so, it really becomes a function of how available and the proximity to reliable power -- what that looks like.

For example, in the DJ Basin, given the proximity to urban development, the power availability is very attractive, really -- and so who's it -- or facilitates opportunities for us to do more on the electric compression side, and we utilize quite a bit of electric compression up in the DJ Basin, which is an important part of how we're running our business up there. Given the environmental regulations that continue to change, we try and stay out in front of those changes by being proactive and deploying that electric compression.

And other areas, it becomes a little bit more challenging to find that readily accessible power grid infrastructure. And I think that's, frankly, one of the challenges or opportunities, if you will, that we see moving forward as the power grid continues to grow and expand to facilitate a broader electrification across the U.S. and hopefully, within some of the operating areas that we operate in.

[Derek Walker, Bank of America Merrill Lynch]

I appreciate that. And maybe just one quick clarification question. Mike, I think you said there's 315 wells in your forecast with 60% of the DJ. How do you see the cadence of those wells throughout the year? I think you mentioned that some of that might be front-end loaded, but do you see that cadence, difference between the DJ and the Permian?

[Craig Collins, SVP & COO]

Yes. I think the cadence is going to be pretty ratable through the year, more or less. Our capital spend will be slightly front-end loaded to the first half of the year to get out in front of those volumes that will come online. But our producers, for example, in both basins right now have increased the rig activity relative to -- in 2020 in a way that gives us great confidence in our ability to see those volumes come on to the system throughout the year.

As Michael noted earlier, volumes really in the first half of this year are still going to be lower than where we expect to exit, but we see a continual climb throughout the year as that rig activity stays fairly steady.

[Operator]

Our next question today comes from Jeremy Tonet with JPMorgan.

[James Kirby, JPMorgan Chase & Co.]

This is James on for Jeremy. Just one quick one on clarification. The 3.5x leverage target for year-end '22, there's no asset sales embedded in that, right? And I guess, any incremental asset sales will be applied to deleveraging first and foremost. Is that correct?

[Michael Ure]

Yes. So we do not have any assumption of asset sales that is embedded in our ability to be able to get to that target. That is through the efforts of repaying our near-term maturities and then the expected EBITDA profile through 2022.

[James Kirby, JPMorgan Chase & Co.]

Got it. And then as my follow-up, maybe if you can just speak to the cadence of buybacks going forward for the remainder of the year, particularly with recent performance, if maybe there's a slowdown or if that -- maybe you allocate capital to increasing the distribution, if the stock keeps working at these levels?

[Michael Ure]

Yes. So as mentioned, we'd actually already been a participant in the first quarter as it relates to buybacks, as we gave you an updated figure there that is slightly higher than our year-end number. And so it's obviously, an opportunity that we still have to be able to use. This is something, as we've mentioned, that our primary goal is to get at or below 4x by year-end. And then we have multiple tools available to us to maximize the value to our unitholders, that being either a distribution -- potential distribution increase or a buyback program. That's something that the Board has engaged on and desire to engage on, on a quarterly basis to assess which of those tools to use at their disposal. That's an authorization, by the way, that is outstanding out through the end of 2021 and was set so that we could meet that leverage target.

[Operator]

And ladies and gentlemen, the next question is a follow-up from Shneur Gershuni.

[Shneur Gershuni, UBS Investment Bank]

Just quick follow-up here. And actually, just with respect to the last question that was asked with respect to the buyback plans. Sort of a 2-part question on it. Just the first part, do you expect to be buying in the open market as you execute on it going forward? Or is there potential for you to be buying back from Oxy? I mean or as you've been executing on and technically, your ownership stake goes up mathematically, and they do have an expectation of needing to get below 50% for the consolidation or deconsolidation? Just wondering if you have any thoughts with respect to that.

[Michael Ure]

Yes. Our thought is that, we'd love to buy back units regardless of where they come from. So up to this point, it's been through the open market, but we'll definitely be interested in considering making a repurchase of some of the Oxy units as well. We're pretty agnostic. The way that we're thinking about it is that we've reduced our distribution burden by close to $40 million, net of the interest being received from the note exchange. It's about $18 million -- sorry, $22 million worth of free cash flow after distributions that this effort has prompted. We've bought back a little over $300 million or right around $300 million worth of units, 31.33 million units as a whole. And so we just -- we view that as an opportunity for us to improve the free cash flow after distribution profile. That mentality exists, whether we buy it from the public unitholders or whether we buy it from Oxy. So we would be interested in either of those.

[Shneur Gershuni, UBS Investment Bank]

Okay. And as a follow-up, I kind of was confused a little bit. I'm not sure if the prior question is intimating that the stock had went up so much so you shouldn't. And whether you were saying you would or you wouldn't because of the movement of stock because they sort of look at it at the fact that when Oxy first bought its stake and you were installed as CEO, you were trading in the high $20s versus $17 today. So I'm just trying to understand if you were all trying to intimate that $17 is high enough or whether it's still cheap enough to continue buying?

[Michael Ure]

I will never indicate that the current unit price is high enough, Shneur. Always looking for ways in which we can improve the value of our unit price without a doubt. We -- what the comment was, is that we don't have a specific threshold that we see today or going forward is necessarily an exact number at which we would start or stop the buyback program. It is an indication that the Board would revisit the overall target levels on a quarterly basis and assess whether potential distribution. Other way -- what are the best ways to return cash to unitholders, whether that's through a distribution growth target or whether that's through the continuation of the buyback program. And just, again, indicating that we have up to this point, been very much utilizing the buyback program to the tune of close to $50 million that we bought back since we announced it at the end of the third quarter.

[Shneur Gershuni, UBS Investment Bank]

Right. And if I understood one of your other answers was, at the end of the day, it does improve your FCFaD payout ratio effectively, right? By reducing the unit counts as well to you.

[Michael Ure]

Right. Exactly. So that's how we think about it. Yes. Exactly.

[Operator]

And ladies and gentlemen, this concludes the question-and-answer session. I'd like to turn the conference back over to the management team for any final remarks.

[Michael Ure]

Thank you very much, everyone, for joining our call today. I appreciate your time. Please be safe.

[Operator]

Thank you, sir. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.