Western Midstream Partners LP (WES) Q3 2020 Earnings Call Transcript

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Western Midstream Partners LP (NYSE:WES)
Q3 2020 Earnings Call
Nov 10, 2020, 2:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Western Midstream Partners Third Quarter 2020 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, today’s event is being recorded.

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

Kristen S. ShultsVice President, Investor Relations and Communications

Thank you. I’m glad you could join us today for Western Midstream’s third 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 Western Midstream’s Form 10-Q and other 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.

With me today are Michael Ure, our Chief Executive Officer and Chief Financial Officer and Craig Collins our Chief Operating Officer.

I now would like to turn the call over to Michael Ure.

Michael P. UrePresident, Chief Executive Officer and Acting Chief Financial Officer

Thank you Kristen, and good afternoon everyone. Yesterday, we reported $518 million of adjusted EBITDA, the highest adjusted EBITDA on WES’ history and $339 million of free cash flow. We generated $198 million of free cash flow after distributions, almost three times more than last quarter. The team at WES has worked incredibly hard on our strategic positioning and the steadfast commitment to excellence has culminated in this quarter’s success. The outstanding results from our third quarter performance is a testament to what we can achieve with the harmonization of our portfolio.

This quarter represents a pivotal moment in our company’s history as we highlight the strength of our premier asset portfolio, the resiliency of our producers, and the consistent and exceptional performance of our people. This time last year we announced three focus areas for WES, which included optimizing our existing assets, developing and growing our relationship with Occidental, and generating additional third-party business. I’m pleased to say we have made substantial progress toward these goals, all while overcoming the headwinds of the pandemic and challenging market environment.

Our ability to attract additional volumes on to our system and generate sustainable cost savings and operational efficiencies has better positioned WES to emerge from this downturn as a stronger, more resilient company. Our ability to realize readily available economies of scale and self-fund 2020 capital requirements have enabled us to capitalize on unique opportunities and attract additional business onto our system. Those successes continue to this day. As our commercial team secures mutually beneficial commercial solutions with new and existing customers.

We have also further strengthened our relationship and communication with Occidental by identifying opportunities for our two companies to improve operability, deploy capital more efficiently, and ultimately drive value for our stakeholders. Above all, optimizing our existing assets, including the transition to a stand-alone midstream business has proven to be the most transformational work in our company’s history. We expect to realize approximately $175 million of O&M and G&A savings compared to our originally issued guidance. And we believe that substantially all of these cost savings are sustainable.

Through a comprehensive review of our operations and supporting processes, we have identified opportunities to reduce our cost structure and enhance operational efficiencies, thereby generating improved sustainable results with fewer resources. Through these efforts, we have become a cost leader among our peers. The hard work from our teams, coupled with producer outperformance increases confidence in our ability to exceed the high end of our pre-COVID originally guided EBITDA target of $1.975 billion, despite slightly reduced throughput, while reducing our capital expenditures by more than 55%. This EBITDA growth exemplifies the benefits of the contractual protections to support our business during downturns. Our renewed focus on driving cost and operational efficiencies and their responsiveness and scalability of our capital profile.

Year-to-date we have utilized free cash flow after distributions to repurchase $194 million of debt. Furthermore, we have recently repaid the entire second quarter outstanding balance of $75 million under our revolving credit facility enabling us to accelerate leverage reduction. These actions yield the current debt to adjusted EBITDA ratio below 4.0 times, which is below both our targeted year-end 2020 and 2021 leverage ratios. In fact, our leverage ratio has returned to early 2019 pre-simplification levels. We remain committed to maintaining our target of at or below 4.0 times at year-end 2021, continued restoration of our balance sheet, and maintaining investment grade credit metrics.

Before I turn it over to Craig, I’d like to take a minute to extend my thanks to our entire organization. Their long hours and hard work to unlock our company’s full potential and their dedication to realizing substantial cost savings and operational efficiencies, which positions us to be an industry leader for the foreseeable future.

With that, I would like to turn the call over to Craig to discuss our operational performance for the quarter.

Craig W. CollinsSenior Vice President and Chief Operating Officer

Thank you, Michael. Operationally, gas throughput decreased by approximately 160 million cubic feet per day or 4% on a sequential quarter basis. Although throughput did decrease in the Delaware and DJ Basins, this 4% decline was driven primarily by throughput at our Wyoming Granger straddle plant returning to a more normalized level when compared to second quarter 2020. Our water throughput decreased by approximately 86,000 barrels per day, representing an 11% sequential quarter decrease as a result of lower producer throughput in the Delaware Basin.

During the third quarter, we continue to convert trucked water volumes from our existing producers on to our system. And we have reduced these water volumes in excess of 90% year-to-date. By transferring these volumes to our extensive network of permanent underground water pipelines, we have significantly reduced environmental risks and trucking related emissions and improved road safety. Our operated crude oil and natural gas liquids assets experienced sequential quarter throughput decline of approximately 28,000 barrels per day or 4%, primarily due to decreased throughput at our DJ and Delaware basin facilities.

Our crude oil and NGL throughput and produced water throughput increased 11% and 18% respectively from third quarter 2019. And total, our volumes declined approximately 6% on a sequential quarter basis. Despite these volume declines, our adjusted gross margin decreased by approximately 1% or $5 million on a sequential quarter basis. Further demonstrating the benefits of the contractual protections that a superior portfolio provides.

I’m incredibly proud of what our operations, engineering, and commercial teams have achieved thus far in 2020. Earlier this year, we implemented a companywide safety program known as LiveSAFE to enhance and strengthen WES’ already robust safety culture. Year-to-date, our system availability is above 98%, providing needed reliability for our producers and exceeding our internal targets. As Michael highlighted earlier, we have also reevaluated our operational needs and expect to deliver approximately $175 million of O&M and G&A savings for full year 2020.

Our engineering organization continues to optimize designs across our assets, further improving reliability, reducing project cycle times and reducing capital spend. For example, we have redesigned our saltwater disposal facility and compression designs to achieve cost savings of 20% and 30% respectively. This quarter, we successfully commenced operations of Train IV at the Loving ROTF, adding 30,000 barrels per day of treating capacity to the DBM oil system in West Texas. Through improved communication, clear expectations and cost controls, our team completed the project nearly two months ahead of schedule and acquired approximately 35% less capital than our previous North Loving trains.

Subsequent to quarter end, and as noted in the earnings release, the company closed on the sale of WES’ 14.81% equity interest in Fort Union Gas Gathering, LLC and entered into an option agreement to sell WES’ Bison treating facility during the first quarter 2021 for upfront consideration of $27 million, without impacting 2021 cash flow. We will continue to evaluate portfolio optimization in the sale of non-core assets to accelerate our financial goals.

Now, I’ll turn it back over to Michael to discuss our 2021 guidance and financial priorities.

Michael P. UrePresident, Chief Executive Officer and Acting Chief Financial Officer

As with others in the industry, our 2020 financial and operational performance has been ever evolving amid the pandemic. And transitioning WES to a stand-alone midstream enterprise has provide an additional challenge this year. Understandably, the current macroeconomic uncertainty and tempered producer expectations in 2021 has increased scrutiny concerning our 2021 forecasted results. As such, we felt it prudent to issue preliminary guidance today with plans to release our official guidance early next year.

First, we expect 2021 adjusted EBITDA between $1.825 billion and $1.925 billion, based on our customers’ current production forecast information. We expect producers to complete DUC inventories throughout the remainder of 2020 and into 2021. Furthermore, we expect modest activity levels to continue throughout 2020 with increased activity during 2021. Through DUC completions producers brought online 10 wells during the third quarter in the Delaware basin. We expect an additional 68 wells to be brought online in the DJ and Delaware basins by the year-end 2020. Additionally, we expect total 2021 capital between $275 million and $375 million, a decrease of approximately 24% compared to the $425 million midpoint of our previously updated 2020 guidance.

The combination of our Delaware backbone infrastructure and our ability to continue our cost efficient operations should generate significant EBITDA with limited capital. These activities, which are supported by contractual protections and the sustainability of 2020 cost saving initiatives and operational efficiencies are expected to result in meaningful 2021 EBITDA for Western Midstream. Our contractual protections are in place so that a decline in throughput does not lead to an equivalent decline in EBITDA. Using 2021 preliminary guidance as an example, if DJ and Delaware throughput levels decreased by an additional 10%, we would experience an asset level EBITDA decline of only 5% to 6%.

We expect to generate significant free cash flow enabling WES to remain at or below our year-end 2021 target of 4.0 times. We will continue to prioritize returning excess free cash flow to stakeholders by repaying debt, repurchasing units, and paying meaningful cash distributions. Our premier asset portfolio, strong fee-based contracts, and the ability to realize operational efficiencies and cost savings have generated meaningful EBITDA and free cash flow. These results aid in reducing leverage below 4.0 times and increase stakeholder value even during challenging economic conditions.

After our third quarter distribution, we will have returned approximately $1.15 billion to stakeholders this year through debt repurchases, cash distributions, and units acquired through the Anadarko note exchange, that’s roughly 10% of our enterprise value. The September exchange of the note receivable from Occidental for WES common units generated $18.1 million of incremental free cash flow after distributions and required no additional capital outlay.

Year-to-date, we have repurchased $194 million of debt for an aggregate price of $180 million or approximately $14 million discount to par. Furthermore, in October, we optimized our portfolio with the Fort Union equity interest sale and the Bison facility option agreement. Additionally, we recently announced a unit buyback program for the repurchase of up to $250 million of WES’ outstanding common units. These transactions evidence our ability to be flexible and opportunistic in how we generate and return value to stakeholders, an approach we intend to continue in the future.

Before we open it up for Q&A, I would like to preview the upcoming release of our inaugural ESG report. We are excited for you to learn more about who we are, how we safely and responsibly manage our daily operations and our approach to environmental, social and governance issues. Throughout our sponsorship history with Anadarko and Occidental, we have cultivated a culture of strong corporate responsibility. We feel it is imperative to take the next step as a stand-alone midstream company to introduce stakeholders to our independent ESG efforts. This report details our work toward reducing our environmental footprint and positively contributing to the lives of our workforce and local communities. From our field level employees to the Board of Directors, each one of us is responsible and accountable for sustainability. We strongly believe that focusing on people, supporting a sustainable environment, and operating responsibly is the right way to run our business, and our internal standards regularly exceed regulatory requirements.

We are proud of our role in delivering affordable energy and industrial feedstock to improve the quality of life globally. Our direct to wellhead pipeline infrastructure significantly reduces release risks and leads to reduced trucking related emissions, improved road safety and limited road degradation. Furthermore, the design of our Colorado co-sif [Phonetic] and West Texas rodifs [Phonetic] enable us to gather oil directly from producers’ well sites, eliminating the need for wellsite storage tanks and associated oil vapor flaring and reduces emissions across the upstream sector. As the lower emission bridge fuel, natural gas plays a vital role in the global transition to cleaner energy sources. It supports the use of renewables by providing a versatile, quick-to-ramp up fuel source for times when wind, solar and other alternative fuels are not available or cannot meet peak demand.

In closing, this past year has been a time of great significance in WES’ history. Despite the challenges resulting from the global pandemic and the precipitous decline in commodity prices, we have made tremendous progress in establishing WES as a sustainable leader in the midstream space, surpass expectations in our derived financial and operational efficiencies and generated significant incremental value for our stakeholders. Our team has repeatedly proven their ability to overcome adversity with exceptional performance, and I want to personally thank every individual for their agility, innovative spirit and continued commitment to the long-term success of Western Midstream.

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

Questions and Answers:

Operator

Thank you. We will now begin the questions and answers session. [Operator Instructions] Today’s first question comes from Jeremy Tonet with J.P. Morgan. Please go ahead.

JamesJ.P. Morgan — Analyst

Hey good afternoon guys this is James [Phonetic] on for Jeremy, thanks for taking my questions. Just want to start off with third-party activity here. If you can remind us what percentage by basin, or if you don’t disclose that, of your entire portfolio is third-party activity? And then just looking at the 2021 guide, is there any incremental third-party activity baked into that or what are your sensitivities around there?

Michael P. UrePresident, Chief Executive Officer and Acting Chief Financial Officer

Yeah, so currently, about roughly 40% of our production comes from third-party sources, and that’s across the portfolio. As we look at our 2021 guidance, it incorporates both the expectations of activity levels of both our third-parties as well as our largest customer, Occidental. So it includes the feedback that we have received from all of them regarding activity.

JamesJ.P. Morgan — Analyst

Got it. Thanks a lot. And then you mentioned in the past asset sales to kind of accelerate deleveraging in the Fort Union equity interest sale this quarter, looks like the start, but is — you mentioned in your prepared remarks that the non-core part of the portfolio is still on the block, but just looking at the contribution from that part of the portfolio expected for 2021, it looks kind of flat year-over-year. Maybe if you could just talk piece-by-piece the parts of that of the non-core product portfolio and kind of the durability, it seems like maybe for 2021, there would be natural decline there, but it looks pretty flat year-over-year. So any color there would be appreciated?

Michael P. UrePresident, Chief Executive Officer and Acting Chief Financial Officer

Yeah, I don’t think there is — it will take a long time to go through specifics of all of our equity interest, we have a lot of them. In total, the value of those assets actually is highlighted specifically in your question and that they provide a pretty sustainable overall contribution to our enterprise. As it relates to asset sales, as we highlighted on the previous call and certainly has played out in this most recent quarter, we have the opportunity and optionality with regards to the options to any of those sales, because of our financial performance, we have already achieved a leverage target that we had set for the end of 2021 and do expect to exit 2021 at or below those levels, even despite any impact on the asset sales side. And so as we look at potential sales of any assets, including potentially equity investments, it is going to be on a value basis, something that we take a look at. We are going to be very value sensitive related to it because we have that flexibility in light of the great performance that the team has been able to achieve.

JamesJ.P. Morgan — Analyst

Great. That is helpful. And if I could just sneak in one more. Just on the pace of the buyback program, is there any boogies or what factors would affect your pace to buyback here in 2021?

Michael P. UrePresident, Chief Executive Officer and Acting Chief Financial Officer

Yeah, it is a great question. So we intend for it to be a programmatic structure for the buyback. The level that was set was intended to allow us the ability to repurchase units while still staying underneath the four times leverage ratio exiting 2021. And so that is the dollar amount that was set and it will be going forward just on a programmatic basis that we will repurchase those units.

JamesJ.P. Morgan — Analyst

Great. Thanks for the color. I appreciate it.

Operator

And our next question today comes from Spiro Dounis with Credit Suisse. Please go ahead.

Spiro DounisCredit Suisse — Analyst

Hey, thanks. Hi Mike, hi Craig. Just wanted to go back to that first question and maybe map it a little bit tighter to Oxy’s guidance. Just based on the call this morning, it sounds like Oxy is targeting flat 2021 relative to the 4Q ’20 exit rate and seem to imply that maybe capex as it stands, would be a ceiling. And so upside would be maybe limited. So I’m just curious when we are looking at your latest guidance, and we think about the midpoint, does that imply that sort of flat outlook and to think about getting to the either higher or low end, curious where you are seeing growth or where the other variables are outside of Oxy sort of base case flat exit rate?

Michael P. UrePresident, Chief Executive Officer and Acting Chief Financial Officer

Yeah, so a couple of comments I would make there. And the first comment is that when Oxy is discussing those items, it is on a company wide basis, a company that has 1.1 million barrels and the WES assets actually are frankly only covering a fraction overall of Oxy’s very attractive and large asset base. And so you can’t necessarily derive comments as it relates to what they are intending to do on a corporate wide basis as it specifically relates to WES. What our expectations are based on conversations with our customers, including Oxy and third-parties, is that we will exit 2021 at a higher level than we are exiting 2020, if that gives you any assistance there.

Spiro DounisCredit Suisse — Analyst

No, it does. And I appreciate you pointing that out from a corporate perspective. Second question, just sticking with some themes that came out of the call earlier this morning. And Mike, you talked about ESG and your novel report coming soon. Oxy spent a considerable amount of time talking about carbon capture. And it seems like that is an area that they are looking to develop and grow potentially even as large, if not larger than Oxychem. And so I realize that days of drop-downs are over, but still a very tight relationship with Oxy. So just curious if WES can participate in the build-out of that business, which seems to have a lot of service and fee like structures or infrastructure-oriented nature to it?

Michael P. UrePresident, Chief Executive Officer and Acting Chief Financial Officer

Yeah, it is a great question. And yes, we do maintain a very active and great relationship overall with Oxy. And I do believe that there are opportunities that might exist within the incredibly just powerful development on the low carbon ventures side that was discussed on the call this morning. As it relates to our ESG report, we plan on getting that out actually in the coming days and really encourage you to take a look at that report. We are really excited about it. It is the first one that will be published on a stand-alone basis and something that we are really proud of, all of the work that the team has done up to this point, as it specifically relates to so the low carbon ventures front, there likely are some opportunities there and it is certainly something that we are taking a look at.

Spiro DounisCredit Suisse — Analyst

Great. I will leave it there. Thanks everyone.

Michael P. UrePresident, Chief Executive Officer and Acting Chief Financial Officer

Thank you.

Operator

And our next question today comes from Kyle May of Capital One Securities. Please go ahead.

Kyle MayCapital One Securities — Analyst

Hey good afternoon and thanks for taking the question. My first one, I want to start with the margins on a per unit basis were better-than-expected in the third quarter. So Michael, I appreciate you mentioned that it sounded like those were sustainable, but wondering if you could just talk a little bit more about your cost control efforts and how we should be thinking about that going forward?

Michael P. UrePresident, Chief Executive Officer and Acting Chief Financial Officer

Yeah, we do consider them sustainable. We have really taken a ground-up approach on the way that we function on a stand-alone basis, which has involved great efficiencies overall. Frankly, it is a transformation that has been accomplished over the past year that we are really proud of. And anyone who has been a part of WES over the past year should really take some pride in the impact that we have been able to achieve as a whole by frankly, just looking at the way that we do things and making it more efficient as we have been able to now produce those results over a couple of quarters. And the changes that we have made being — just frankly, the way that we do things on a day-to-day basis and the sustainability of that. We do expect that of the $175 million, we have been able to achieve thus far for 2020, the majority, if not, the entirety of that, we will be able to carry forward on a long-term basis. I mean, think about that, $175 million effectively of EBITDA that is been created. If you apply a multiple to that. It is billions of dollars of value that the team as a whole has been able to do through just rethinking the way that we have done things in the past and figure out more efficient ways to do it going forward. So we would expect that and what is embedded in our forecast for 2021 is that those savings are sustainable.

Kyle MayCapital One Securities — Analyst

Got it. That is very helpful. And also as we are thinking about the capital budget, I realize you pointed out that the 2020 spend should be lower than the, I guess, below the low end of your prior guidance range. So just curious if that could be similar to what we saw in the third quarter and then how we should think about that kind of rolling forward into your plans for 2021?

Michael P. UrePresident, Chief Executive Officer and Acting Chief Financial Officer

Yeah, we would expect that the fourth quarter would be at a higher level than operated on for the third quarter. So there will be an uptick as we undertake some maintenance activities, additional maintenance activities that will happen in the fourth quarter, in particular, as well as some of the activities related to an expected ramp-up in activity for 2021. And so I would expect capital to be higher fourth quarter relative to third quarter. Does it answer your question, Kyle, on 2021. Sorry what was the question there? I want to make sure I answered that.

Kyle MayCapital One Securities — Analyst

Well, really thinking about 2021, just kind of how the cadence of spend would look through the course of the year, if there is any outliers or if it is kind of ratable through the course of the year?

Michael P. UrePresident, Chief Executive Officer and Acting Chief Financial Officer

Yeah, it is largely ratable, a little bit likely higher, little front-end focused. Again, as we pick up some of the activity levels that we are expecting to ramp up. I would expect that is a little more front loaded and then slightly declining into the back half of 2021.

Kyle MayCapital One Securities — Analyst

Got it. That is helpful. Thanks Mike, and I appreciate it.

Michael P. UrePresident, Chief Executive Officer and Acting Chief Financial Officer

Thank you.

Operator

And our next question comes from Shneur Gershuni with UBS. Please go ahead.

Shneur GershuniUBS — Analyst

Hi, good afternoon everyone. Maybe to come back to the guidance question a little bit here, not specifically about Oxy or anything of sort. I was wondering if you could give us a little bit of color, kind of like what you said for fourth quarter, you expect 68 DUCs to be completed. What is the variables from the high end and low end for your guidance range in terms of [Indecipherable] adjustments, like what are the assumptions that you are using to come to the bottom end versus the top end, if you can share that with us?

Michael P. UrePresident, Chief Executive Officer and Acting Chief Financial Officer

Yeah, sure. So as with any guidance that we put out and others tend to put out, there tend to be some variables that you bake in a little bit of risking, if you will, around that incorporates expectations on the production side or throughput side, there is a slight delay overall and when that development activity might take place, then that impacts on that throughput might come in. All of those variables, just the risking associated really with timing as much as anything is where you have the high end and the low end of the range.

Shneur GershuniUBS — Analyst

But you can’t share the — like is it 100 DUCs for the year or something like that or –?

Michael P. UrePresident, Chief Executive Officer and Acting Chief Financial Officer

No.

Shneur GershuniUBS — Analyst

Okay. It was worth a shot. The second question is just with respect to the water assets, kind of a two part question here. One, you talked about the conversion from truck onto your system and so forth. How much of a margin uplift do you get as a result of that? And is that a substantial portion of the cost savings that you expect to achieve going forward and how much more is there left to go at this stage right now?

Craig W. CollinsSenior Vice President and Chief Operating Officer

Shneur, this is Craig. And I think I just want to make sure we are not speaking past one another as far as what was intended through that, that explanation earlier in the call. What we are referencing really is that we have producers that are hauling water or paying others to haul water for them. And rather than those producers continuing to ship water on trucks, we are getting more and more of that volume shifted onto our system where we can charge fees. So I’m not sure if you are implying or asking about our direct costs associated with trucking versus piping, but we are not trucking water. We are just moving it by pipe. And so it is really the incremental volumes that we are bringing on to the system that would otherwise be flowing on third-party trucks. Is that addressing your question?

Shneur GershuniUBS — Analyst

Yes, it does. So you are basically saying it is an operating leverage benefit and the ESG uplift that you sort of referenced earlier is really more for your customers that you are part of that solution. Did I characterize it correct?

Craig W. CollinsSenior Vice President and Chief Operating Officer

That is right, Shneur. And then on the cost savings part, it doesn’t play into the cost savings at all. The cost savings are just related to our operating costs and our G&A.

Shneur GershuniUBS — Analyst

Okay. Perfect. And if I can just sneak one last question in. With respect to the water assets, I understand you are in a mode of returning capital to unit holders, but there are some water assets that are on the market that are near your assets. Is that something that you would be interested in for the right price? Or right now, you are just focused on buying back units and paying down debt?

Michael P. UrePresident, Chief Executive Officer and Acting Chief Financial Officer

Yeah, our primary focus, Shneur is again, we have attained the leverage target that we set out, and our focus is to retain that leverage level as we exit 2021. We have opportunities to return capital to unit holders, including through the buyback. And depending on how our units are performing, potentially even reinstituting growth on the distribution side. If there are opportunistic M&A transactions that result in efficiencies that we can build into our system, and the valuation is attractive overall to us, then we will definitely consider that, but it is all in the context of the other levers that we have to return capital to unit holders.

Shneur GershuniUBS — Analyst

Perfect. Thank you very much for the color today and have a safe day.

Michael P. UrePresident, Chief Executive Officer and Acting Chief Financial Officer

Thanks Shneur.

Operator

And our next question comes from Derek Walker of Bank of America. Please go ahead.

Derek WalkerBank of America — Analyst

Hi, good afternoon guys. Just one follow-up on Shneur’s question there. Mike, you mentioned potentially increasing the distribution. What are some of the sort of the avenues there that would actually kind of make that a more likely scenario? Is it just getting to the high end of your guidance? I just wanted to see what some of the items there would be for that to happen? And then second — yeah, maybe I will stop there and then I will ask the call.

Michael P. UrePresident, Chief Executive Officer and Acting Chief Financial Officer

Sorry to cut you off. I didn’t intend to do that. I thought you are done. So first is our distribution is something that the Board revisits on a quarterly basis. And so some of the factors that would play into that would be higher end of the guidance, therefore, additional free cash flow that could be delivered back to our unit holders. The success of the buyback program, where our units might be trading and therefore, kind of the cost of capital nature associated with the buyback or the distribution coupled together is something that we would take a look at again with our Board on a quarterly basis. So those are all factors that we would think about.

Derek WalkerBank of America — Analyst

Got it. And I appreciate the color on the buyback. Maybe just a couple of other quick questions on it. When does that start? Is there anything from your perspective that basically would not allow you to sort of complete up to the $250 million [Phonetic] number. Again, is it just sort of volumes declining in either DJ Permian? I’m just trying to figure out some of the moving parts there as far as how do you think about that utilization next year?

Michael P. UrePresident, Chief Executive Officer and Acting Chief Financial Officer

Sure. So we do have access to be able to repurchase units into the fourth quarter of this year, and it extends through the end of 2021. It is on a programmatic basis. So obviously, volume of our units is a factor, value of the units, obviously, is a factor. I mean these go into those program nature. We are confident in being able to and the reason why we set that level where we did is we are confident that with that repurchase, it will still allow us to exit 2021 at or below the four times. And so really, it is just a matter of whether or not there is sufficient units between now and then to be able to repurchase within the program guidelines that we provided.

Derek WalkerBank of America — Analyst

Got it. And maybe just one last one for me. I appreciate the preliminary 2021 guidance, kind of [Indecipherable] so far, and I know you are coming out with the formal guidance in the next quarter. Is there anything in the formal guidance, any items there that we should expect to be included today outside of sort of is calibrating for updated producer behavior in volumes. Is it just a redetermination on the cost service side or any other items there that you expect to include for the formal guidance piece? Thanks.

Michael P. UrePresident, Chief Executive Officer and Acting Chief Financial Officer

Yeah, no, I think the only real difference between the preliminary and the formal as we look forward to when we would issue that would be an affirmation or any potential changes that might result as it relates to producer activity. Would be I think the really the only real driver there.

Derek WalkerBank of America — Analyst

Got it. I appreciate that. Thanks Mike. Thanks Craig.

Michael P. UrePresident, Chief Executive Officer and Acting Chief Financial Officer

Thank you.

Operator

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

Gabe MoreenMizuho — Analyst

Hey good afternoon everyone. Just two quick ones for me. For the unit repurchases, should we assume that those are going to be done to reduce the public flow or is there a possibility that some of it could be arranged in terms of buying back some units that Oxy owns?

Michael P. UrePresident, Chief Executive Officer and Acting Chief Financial Officer

Yes, so our program is agnostic as to where those units come from, so it could be a combination of public or Oxy units, obviously, up to their discretion on whether or not they would like to participate.

Gabe MoreenMizuho — Analyst

Thanks Michael. And then in terms of getting back to investment grade, can you just talk about how the announcements today potentially fit into that goal and whether that still is a goal given, I guess the weight that being so tethered to Oxy has sort of on your own credit ratings?

Michael P. UrePresident, Chief Executive Officer and Acting Chief Financial Officer

Yeah, so it is definitely a target and the goal for ours. Obviously, us being able to achieve our leverage target much earlier than expected, plays really well in being able to get those investment-grade ratings reinstated. The Fitch, in particular, has actually decoupled our rating relative to Oxy’s and so our hope is that now that we have gotten our ratios back to a level that we believe would put us in the investment-grade territory that we can begin to have active conversations with the agencies to potentially pursue that. Obviously, it is at their discretion, but the fact that we have now been able to achieve those leverage metrics, we think puts us in a position to begin to push for that rating.

Gabe MoreenMizuho — Analyst

And last quick one for me, if I could, just on I know strict commodity exposure isn’t really a big part of the WES story, but can you talk about that margin and your assumptions for 2021? Are you just assuming the forward curve and have you done any hedging?

Michael P. UrePresident, Chief Executive Officer and Acting Chief Financial Officer

Yeah, we don’t hedge. We don’t have material commodity price exposure, and we don’t actually look at our forecast on a commodity basis. We take actually the inputs from our customers and our customers are the ones that kind of lever their activity levels up or down depending on what their expectations are for commodity prices. And so for us, it is not something that we sensitize just related to commodity prices.

Gabe MoreenMizuho — Analyst

Thanks Michael.

Operator

And our next question today comes from Elvira Scotto with RBC Capital Markets. Please go ahead.

Elvira ScottoRBC Capital Markets — Analyst

Hey thanks, good afternoon everyone. I was just wondering, I know you provided a lot of detail, but just a little more around the cost savings. What would you say is the biggest driver of getting up to that $175 million. And then do you see potential to do even more cost reductions, cost efficiencies?

Michael P. UrePresident, Chief Executive Officer and Acting Chief Financial Officer

Yes, so one of the main things really is that we now have a group of employees across the board whose only focus is on efficiencies on the midstream side. And so as a result of that, you are able to drive greater excellence as you narrow down the focus overall from the organization. And frankly, the organization has stepped up in a really big way to expand what they do on a day-to-day basis to make sure that we are all pitching in to accomplish those cost savings and that is happened both at the G&A level as well as at the opex level. And, Elvira, I have asked myself the same question on whether or not there are more opportunities. And on the last call, I think we felt very comfortable in the $115 million estimate. And within a quarter, we have increased another $60 million. And so based on that, I definitely think that there are going to continue to be additional opportunity for us to drive cost savings and efficiencies through the system.

Elvira ScottoRBC Capital Markets — Analyst

Great. And then just one follow-up question on the option to sell Bison. Does that option expire? I mean, what caused the sale not to happen?

Craig W. CollinsSenior Vice President and Chief Operating Officer

Elvira, that option extends through the first quarter of next year. And so at some point, prior to the end of the first quarter next year, we will get an election [Phonetic] from the counterparty. And obviously, if they don’t elect, then we will continue to own and operate the facility, but we felt like it was a transaction that made a lot of sense to us without impacting our 2021 EBITDA. And those assets probably fit better in other hands than they do ours. And so it was an example of us monetizing something on a highly accretive basis, and we will continue to look for other opportunities, although I wouldn’t say we have anything on the block per se. We will be thoughtful around strategic opportunities to monetize non-core assets in the future.

Elvira ScottoRBC Capital Markets — Analyst

Got you. Thanks a lot.

Operator

And our next question today comes from Selman Akyol with Stifel. Please go ahead.

Selman AkyolStifel — Analyst

Thank you. Two quick ones for me, please. First of all, as you think about growing third-party volumes and all of the M&A we see going on at the producer level. How is that impacting your outlook for that?

Craig W. CollinsSenior Vice President and Chief Operating Officer

Yeah, Selman I would say that, as you can imagine, from an upstream perspective, the activity levels in 2020 have slowed down significantly and will continue to be at pretty modest paces in 2021. I think what it does is it really highlights the quality of our assets, the footprint that we have, both in the Delaware Basin as well as the DJ basins and the quality of rock that underlies them. I think when we look at where producers are operating rigs, our acreage is very favorable to what they have in their portfolios. And as we continue to see consolidation on the upstream side, I think that continues to bode well for us, because I think the inclination by those consolidators will be to focus their capital spending in the most attractive areas. And we feel like we are very well-positioned for that with where our assets sit.

And you know, I would say that from my perspective and the perspective that we have taken the value proposition that we are offering, third-party customers. First of all, we are offering best-in-class access to best-in-class assets. And we have worked tirelessly, as Michael has outlined, and lowering our cost profile to be more competitive in the space. But the other side of that is we are making strategic actions down further downstream that will flow through and accrue to the producers benefit to enhance their netback. And so I think between the work that we are doing within our systems as well as what we can offer for producers downstream. We are offering a compelling value proposition to them on a go-forward basis that really differentiates us from where we have been historically.

Selman AkyolStifel — Analyst

Okay, thank you. And looking at your capex budget for next year, clearly weighted toward the Delaware Basin versus the DJ Basin. And I know that in part is being driven by the conversations you are having with your producers, but I was just curious, is there anything you can say in terms of Colorado and some of the language in and around setbacks, etc., that is being discussed up there, if that is a factor as well in terms of the way that is being weighted?

Michael P. UrePresident, Chief Executive Officer and Acting Chief Financial Officer

Yeah, Selman, it is for us really just a weighting of expected activity levels relative to where our asset footprint is and so nothing specific as it relates to the Colorado side. The only comment I would make is that the feedback we have received from producers is that there are sufficient off ramps that have been provided as part of those changes in regulatory means that they will still be able to adequately pursue their development programs. And so it is really the capital program is following where those volumes are.

Selman AkyolStifel — Analyst

Okay. Thank you.

Michael P. UrePresident, Chief Executive Officer and Acting Chief Financial Officer

Thank you.

Operator

[Operator Instructions] Our next question today comes from James Carreker with U.S. Capital Advisors. Please go ahead.

James CarrekerU.S. Capital Advisors — Analyst

Hi guys thanks for the question. I was wondering if I could ask just on the 2020 EBITDA guide. It was quite an increase versus kind of what was you were looking at three months ago. I know you guys talked about some nice cost savings. Just wondering if there is any other factors that kind of went into why we see — saw such a big increase in your 2020 expectations?

Michael P. UrePresident, Chief Executive Officer and Acting Chief Financial Officer

Yeah, so it can be explained in a couple of matters. First, there was producer outperformance from a throughput perspective in the third quarter that we project will continue through the end of the year relative to the way that was sitting about three months ago. And importantly, again, we increased our cost savings targets by another $60 million, which is a very meaningful impact overall on our EBITDA through the end of the year. I mean the third quarter is indicative. We actually had volumes decline and yet our EBITDA went up because of the incredible cost savings that the teams have been able to achieve. So as you roll that through, through the end of the year that is where you get the difference between the guide that we had a quarter ago and what we are expecting through the end of 2020.

James CarrekerU.S. Capital Advisors — Analyst

Okay. That is helpful. And then I wanted to ask about, I guess, the 2020 capex, you talked about coming in below the low end. I believe on your free cash flow statement in your press release, it looked like you are already at about $390 million of capex year-to-date. So I was just wondering if you could square the circle for me on that?

Michael P. UrePresident, Chief Executive Officer and Acting Chief Financial Officer

Total year capital, actually I have is a different number, James. So let’s see, let me do the math, it is about $250-odd million is what I have, give or take. So if it makes sense, James, what I will do is I will ask Kristen and Abby to reach out to you, maybe after the call, to go through and reconcile that.

James CarrekerU.S. Capital Advisors — Analyst

Okay. I’m just looking at your free cash flow calculation in your press release, but that is fine. It is $370 million capex and $19 million in contributions to equity, but we can finalize that offline.

Michael P. UrePresident, Chief Executive Officer and Acting Chief Financial Officer

I understand. I think the difference there was, definitely we can reach out to walk through. I think the difference can be explained through cash versus accrual capital. So why don’t we follow-up and walk through that with you.

James CarrekerU.S. Capital Advisors — Analyst

Okay. And if I could squeeze in one more. And just look on the DJ crude side, there was a very sizable step down. Was that all-natural declines or was there some shut-ins or some maintenance or some other things to kind of explain? And then, I guess, the implications of that on future volumes into Q4 into 2021?

Craig W. CollinsSenior Vice President and Chief Operating Officer

Yeah, part of that was due to some turnaround work that we did in the third quarter, but most of it was just due to natural declines.

James CarrekerU.S. Capital Advisors — Analyst

Okay. That’s all I had. Thank you.

Operator

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

Michael P. UrePresident, Chief Executive Officer and Acting Chief Financial Officer

Thank you. And thank you, everyone. I would like to thank everyone for participating on the call. I wanted to take just a moment and personally thank the exiting directors from our Board, really grateful for the leadership and mentorship that they provided to me. Also like to welcome the new Board of Directors, really look forward to working with them over the coming years and growing and developing under their leadership and mentorship. So thank you all for participating on the call. We will see you until next quarter.

Operator

[Operator Closing Remarks]

Duration: 49 minutes

Call participants:

Kristen S. ShultsVice President, Investor Relations and Communications

Michael P. UrePresident, Chief Executive Officer and Acting Chief Financial Officer

Craig W. CollinsSenior Vice President and Chief Operating Officer

JamesJ.P. Morgan — Analyst

Spiro DounisCredit Suisse — Analyst

Kyle MayCapital One Securities — Analyst

Shneur GershuniUBS — Analyst

Derek WalkerBank of America — Analyst

Gabe MoreenMizuho — Analyst

Elvira ScottoRBC Capital Markets — Analyst

Selman AkyolStifel — Analyst

James CarrekerU.S. Capital Advisors — Analyst

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