Aug 6, 2015
Executives
Michael Mears – Chief Executive Officer Aaron Milford – Chief Financial Officer Michael Osborne – Senior Vice President of Finance & Accounting
Analysts
Brian Zarahn – Barclays Shneur Gershuni – UBS John Edwards – Credit Suisse Yves Siegel – Neuberger Berman James Jampel – HITE Steve Sherowski – Goldman Sachs
Operator
Please stand by. We are about to begin.
Good day everyone and welcome to the Magellan Midstream Partners Second Quarter 2015 Earnings Results Conference Call. Today's conference is being recorded.
At this time, I'd like to turn the conference over to Mr. Mike Mears, CEO.
Please go ahead, sir
Michael Mears
Good afternoon and thank you for joining us today. Before we get started, I'll remind you that management will be making forward-looking statements as defined by the SEC.
Such statements are based on our current judgments regarding some of the factors that could impact the future performance of Magellan. You should review the Risk Factors and other information discussed in our filings with the SEC and form your own opinions about Magellan's future performance.
We announced our second quarter financial results this morning that exceeded the EPU guidance we provided back in May by $0.07 per unit. The big primarily related to higher shipments on our BridgeTex pipeline to the favorable market conditions in the quarter and higher than expected commodity prices which favorably impacted our butane blending margins and the value of our pipeline overages.
I'll turn the call over to our CFO Aaron Milford to review Magellan second quarter financial results versus the year ago period. Then I'll back to discuss our outlook for the rest of the year and review the latest status of our larger expansion projects before opening the call for your questions.
Aaron Milford
Thanks Mike. My remarks today will include references to certain non-GAAP financial metrics, including operating margin and distributable cash flow.
We've included an exhibit to our earnings release that reconcile these metrics to their closest GAAP measure of net income. Earlier today, we reported higher second quarter net income of $177.4 million, or $0.78 per unit, compared to $146.3 million or $0.64 per unit for the same quarter in 2014.
Excluding, future period mark-to-market impacts of $9.6 million. Earnings per unit for the quarter were $0.82 per unit, $0.07 higher than our $0.75 per unit guidance.
Our distributable cash flow in the second quarter was also higher at $222.8 million or $0.98 per unit and represents a $27 million increase compared to the same quarter last year. I will now move into a more detailed discussion of the performance of each of our business segments.
Our refined product segment generated $148 million of operating margin in the second quarter, which is $14.5 million lower in the second quarter 2014. For the quarter, transportation and terminals revenue of $234 million was $1.2 million higher than the second quarter of 2014.
During the quarter, our terminals revenue increased due to terminal acquisitions, higher volumes from our independent terminals and increased lease storage revenue related to new contracts along our pipeline system. However, most of these increases were offset by lower tariff rates on relatively flat pipeline transportation volumes.
Our gasoline volumes were up more than 5% from 2014 levels, but our distillate volumes decreased approximately 10% compared to the second quarter of 2014. Lower distillate volumes were mostly the result of lower diesel demand due to wet agricultural conditions in the mid-west and lower drilling activity in West Texas and Dakotas Dakota's.
The lower tariff rates realized for the quarter with a result of shorter haul movements. Operating expenses were $3.2 million higher for the quarter.
These increased expenses were the result of the timing of asset integrity spending, which we expect to even out over the balance of the year. Higher environmental cost primarily associated with the pipeline release in May, and higher personnel and property tax expenses.
These increases were partially offset by favorable pipeline product overages compared to last year, which offset operating expenses. Our reported product margin for the quarter was $12.5 million lower in the second quarter of 2014, and was the largest contributor to this segment's lower operating margin performance compared to last year.
If we ignore the non-cash mark-to-market and lower of cost market impacts on reported product margins and look at cash margins, the second quarter cash product margin was higher in the second quarter of 2014, primarily due to higher butane blending volumes in the quarter. Considering the price volatility in the product markets, we've been able to deliver a fairly predictable cash flow stream through our hedging activities and have exceeded our expectations thus far in 2015.
I will now move on to discuss our Crude oil segment performance for the quarter. Operating margin for the crude oil segment increased by $33.4 million to $106.9 million for the quarter.
Crude oil segment revenues of $98.9 million for the quarter were $14.5 million higher than the $84.5 million dollars reported for the second quarter of 2014. The increased revenue for this period is primarily attributable to higher capacity lease payments received by Magellan from BridgeTex related to its lease capacity on our Houston area crude distribution system.
Also increased storage utilization and a one-time benefit of $6.7 million from an early termination payment received from one of our customers related to the crude storage contract. These positive variances were partially offset by reduced affiliate management fees received in the current quarter, due to reduced construction activities related to BridgeTex, and slightly lower tariffs realized on Longhorn due to fewer spot shipments which typically earn higher tariffs.
Of note, Longhorn volumes for the quarter were over 255,000 barrels per day, which was consistent with our expectations and volumes from the second quarter of 2014. Operating expenses for the crude oil segment were $4.1 million higher, compared to the second quarter of 2014.
The increase resulted from less favorable product overages compared to last year and higher pipeline capacity lease power and personnel costs. We also report in our crude oil segment the earnings related to our crude oil related joint ventures, including BridgeTex.
Earnings from our crude oil joint ventures increased $23 million in the second quarter of 2014. Earnings from our BridgeTex pipeline joint venture accounts for almost all of this increase.
The volumes on the BridgeTex pipeline averaged 260,000 barrels per day in the second quarter and approximately 215,000 barrels per day for the first half of this year. Volume in the second quarter benefited from favorable market conditions, including Midland to Houston price differentials being more supportive of spot movements on the system.
We do not expect the BridgeTex volumes will continue at the levels attained in the second quarter and believe that around 200,000 barrels per day on average for the year is still a reasonable expectation for BridgeTex volumes. As we have discussed previously our commitments on BridgeTex equaled to 80% total capacity to the extent that actual volumes average less than these commitments, we would be entitled to charge deficiencies for any shortfalls.
Moving now to our Marine segment. Operating margin was $30.2 million for the quarter, representing a $2.8 million increase compared to 2014.
For the quarter, Marine segment revenues of $45 million was $3 million higher than the second quarter of 2014. The increase in revenues can be attributed to new storage contracts, increased customer activity and higher storage utilization at our Wilmington Delaware and Galena Park, Texas Terminals.
Operating expenses were $0.7 million favorable in the current quarter, but this was offset by slightly lower margin from product gains of $0.6 million due to a fewer barrels being sold and also lower realized prices. Now moving to general and administrative interest and other income expense variances.
G&A for the quarter was $37.9 million, which was $1.3 million favorable. Net interest expense of $36.5 million increased $6.5 million from the second quarter of 2014.
The change in interest expense is primarily due to lower capitalized interest since most of our construction activities for our BridgeTex pipeline came to an end in 2014. Depreciation & amortization expense decreased $6.5 million in the second quarter of 2014 to $40.4 million.
The reduction in depreciation and amortization is the result of the 2014 period being elevated due to $9.4 million of accelerated pipeline depreciation related assets that were later sold. This change was partially offset by higher depreciation expense in the current period from expansion capital projects.
Finally a $6.5 million non-cash gain was recognized as other income related to the change and the differential between the spot price and forward price on fair value hedges associated with our crude oil tank bottoms in line fill. I will now move to a brief discussion regarding our balance sheet and liquidity.
Our average outstanding debt increased to $3.3 billion in the second quarter due to the issuance of $250 million of 3.2% senior notes and $250 million of 4.2% senior notes in March of this year. Our weighted average interest rate fell to 4.8% in the second quarter, this decrease in interest rate is due to the impacts of our commercial paper program and the March 2015 debt issuances, which are both at lower rate from in the debt we retired in mid 2014.
As of June 30, 2015 our trailing 12 month debt to EBITDA ratio was 2.9 times and we remain committed to a maximum ratio of four times. We had approximately $145 million of commercial paper outstanding at June 30, which for reference is included in the $3.3 billion of debt mentioned a moment ago.
We also had no outstanding borrowings on our $1 billion credit facility, which is also used to back our commercial paper program. I will now turn the call over to Mike to discuss guidance for the balance of the year and the status of our growth projects.
Michael Osborne
Thanks Aaron. Based on our solid financial results to-date and outlook for the remainder of the year.
We are increasing our full-year DCF guidance to $880 million. The commodity market has been volatile throughout the second quarter.
However, during this period of volatility there were attractive blending margins available in the forward gasoline markets, and as a result we are now approximately 85% hedge for the fall 2015 and margins that are slightly better than the guidance we gave last quarter. In addition, we're also now hedged for approximately 60% of our projected spring 2016 blending volumes and 40% of our 2016 full year projected blending volumes.
All of these hedges were put in place before the recent drop in gasoline prices. We expect our refined products pipeline volumes to be relatively flat during the second half of the year.
Similar to what we saw in the second quarter, we expect higher demand for gasoline driven by the lower commodity environment to be offset by continued lower demand for distillates due to decreased drilling activities in the Dakotas Dakota's and West Texas. Further as Aaron mentioned earlier, we expect BridgeTex volumes to average closer to 200,000 barrels a day during the latter half of 2015 and for the full year based on the current pricing environment.
Consistent with the 2015 FERC index, we increased our terries by the 4.6% index on July 1st as expected. Our second quarter DCF was 1.3 times our second quarter distribution and with the increase of our DCF guidance to $880 million we also expect distribution coverage of 1.3 times for the full year, which result in excess cash in over $200 million for the year.
We remain committed to our goal of increasing cash distributions by 15% for 2015, and at least 10% for 2016. And as usual, we expect to use any excess cash that generate to fund our expansion projects.
Moving to our expansion projects, I like to provide an update on our larger growth projects. During the second quarter, we announced a 50-mile extension of the Saddlehorn pipeline project to include the new origin at Carr, Colorado.
This extension is extremely attractive as it will provide increased access for DJ basin produced crude oil into the system, as well as providing connections to new and existing third-party pipeline systems such that Saddlehorn will be capable of moving crude oil from multiple Rockies crude oil basins to Cushing. A number of opportunities for incremental throughput associated with this extension are currently being developed.
We're making great progress on the original 550-mile system from Platteville, Colorado to Cushing. Permitting work is in the final stages and nearly all rights way have been obtained.
The mainline pipe has been purchased and is being staged to support construction which is expected to commence in October. This project is currently on budget and on time for a mid-2016 startup for the Platteville to Cushing segment.
The new extension at Carr is expected to be operational by the end of 2016. Magellan is also advancing a strategy to grow our refined products and crude oil Marine capabilities along the Gulf Coast.
We recently announced our first step to execute this strategy with our new Seabrook Logistics joint venture to build 700,000 barrels storage and related pipeline infrastructure in the Houston Gulf Coast area. Seabrook Logistics will have deepwater access to provide crude oil from major refinery in the Houston area.
With startup expected in the first quarter of 2017. We expect to return on this project to be in line with the six times to eight times EBITDA multiple we generally target.
Further, we view this as a future investment and are excited about future deepwater dock, storage and pipeline expansion opportunities that this joint venture provides. These opportunities also include possible connectivity to our refined products and crude oil distribution systems in the area.
We also recently executed a purchase agreement for approximately 100 acres of ship channel property in Corpus Christi. This land effectively doubles the footprint of our Corpus Christi terminal and is being acquired with a focus towards expanding our marine capabilities.
This land will allow us to construct up to four private deepwater ship docks and more than 5 million barrels of storage. We view this as a significant opportunity to increase our service offerings in Corpus Christi and we will keep you posted on further development.
Concerning our other large-scale construction projects we continue to make steady progress on our Corpus Christi splitter and Little Rock pipeline. The splitter is still scheduled for start up during the second half of 2016 and the Little Rock pipeline is expected to commence operations in mid 2016.
With regards to expansion capital spending projections, we now expect to spend $850 million during 2015 with additional spending of $550 million in 2016 to complete our construction projects. These spending estimates represent an increase of $200 million over our previous projections.
Due to the addition of our new projects such as our 40% share of the Saddlehorn extension to car, our 50% interest in the Seabrooks, logistics joint venture additional conductivity to the man point and Little Rock for our new pipeline and a number of smaller projects. These estimates also include the initial land purchase in Corpus Christi, but not the opportunities to build dock or storage infrastructure on that land.
Magellan continues to have well in excess of $500 million of future growth projects under development. These projects include multiple potential projects in Houston area to expand our marine capabilities.
For instance, Magellan has initiated engineering, design and permitting to add a new ship dock and additional storage at our Galena Park terminal, as well as enhanced connectivity between Galena Park and our Houston crude oil distribution system. This project would enhance our marine refined product services and further expand our comprehensive crude oil system in the Houston Gulf coast area.
Other projects under development include the potential expansion of BridgeTex, additional refine products in crude oil storage and projects to substantially lower the cost of our butane supply for our blending activities. And as usual with our strong balance sheet, we do not anticipate the need for any equity issuances in the foreseeable future to fund these projects.
We also continue to assess number of acquisition opportunities, looking not only at assets currently being marketed that proactively and others that we think makes strategic sense. We get asked from time-to-time if there are any [ph] bargain is to be found due to distressed sellers with the current uncertainty in the energy industry.
However, with various deals we have seen and the transactions that have been announced in the space, it's clear the prices remain at elevated levels. While we are always looking for additional assets to acquire, we remain committed [indiscernible] for disciplined growth that will benefit our investors in the long-term.
In closing, I would like to comment on the recent discussion and the market regarding a potential overbuilt situation for crude oil infrastructure. First of all, I want to remind our investors the Magellan's four large crude oil pipelines, Longhorn and BridgeTex, Saddlehorn and Double Eagle are all supported by long-term take-or-pay contracts at levels that provide attractive returns on the investments.
And we won't be back in the market to re-contract these systems for quite some time. From a long-term perspective, we also believe that the long-term value of these assets should be evaluated considering all commodity price cycles and not just current price conditions.
We believe our systems and business model are well positioned to generate short-term growth and sustain long-term value. That concludes our prepared remarks and so now we'll open the call for your questions.
Operator
Thank you. [Operator Instructions] And our first question will come from Brian Zarahn with Barclays.
Brian Zarahn
Good afternoon.
Michael Mears
Hi, Brian.
Brian Zarahn
Mike, can you elaborate a bit on your comments on your Gulf Coast storage expansions, now you have got the joint venture and you purchased some more land at Corpus, maybe what you would you expect over the next 12 months or so in terms of building out your storage capabilities?
Michael Mears
I'll tell you what I can. I mean, clearly those are first steps to what we think, could be some significant opportunities, market interest in both Houston and Corpus Christi for additional marine facilities is very high.
And so, as we talked about before, we've had limited capabilities to capitalize on those opportunities. We do have an opportunity to expand Galena Park and we're executing on that.
But outside of the Galena Park, we've had limited opportunities from infrastructure that we currently own to grow our position. These are the first steps with regard to that, we were somewhat in the catch 22 position.
We had a lot of market interest for assets, but we didn't have a location to execute on that interest and now we do and so that's now the next step, we will be diligently trying to contract those opportunities and so we'll keep you posted on that.
Brian Zarahn
And in terms of Corpus, when would you expect to have an update on a potential project there for the new land?
Michael Mears
I hesitate to give a projection on that especially in the current market environment Brian. So I won't.
We will be diligently working as quickly as we can subject to the current state of the market to put something together, but I hate to give you an estimate for that.
Brian Zarahn
Given your expansion of Gulf Coast storage footprint and directionally U.S. becoming more of an energy exporter, how do you – do you view starting a marketing business to help to get more involved in either crude or refined product marketing take advantage of your assets or how do you – how you think about that opportunity?
Michael Mears
We have an asset quite a bit before and to be clear, we have no interest at this point in time to enter a pure marketing business. We think that our business model, which is to stay independent really provide some advantages for us in the marketplace.
And so we don't intend to get into the marketing business. We have evaluated and we will continue to evaluate whether it makes sense for us to get closer to the wellhead from a logistics standpoint to provide a service to get the barrels from the wellhead to our long-haul pipes types, we would be very – we would be most interested in doing that where we have long-haul pipes, we're not particularly interested in getting into the gathering business simply to get into the gathering business, but to the extent it in can support, supply and our long-haul pipes that may have an interest there.
But I view that as distinctly different from getting into the marketing business. So we would view that as really an extension of the logistics business around our pipelines.
Brian Zarahn
And then last one from me, and you answered it partially during your comments on M&A. So prices have not come down, but just given where the MLP capital markets have traded, and everyone's cost to capital has risen dramatically.
So I would – what's your outlook for, not just the value – the change in valuation for mid-stream assets, but also the quantity of assets that will potentially have come to market over the next six months to 12 months.
Michael Mears
Well I think you've got kind of competing items there. I mean, first of all, certainly with the increase in the cost to capital you would expect that prices will come down.
We haven't seen that yet of course this is a new week as everyone knows, so we'll see what the margin looks like going forward. On the other hand, of course lower prices may chill people from putting assets on the market in this environment, so with regards to the quantity of assets, I'm not sure that we'll see more or not but I would expect valuations to come down.
We're in a very strong position to take advantage of that. If that happens with our balance sheet and our position.
So we'll just have to see what happens.
Brian Zarahn
Thanks, Mike.
Operator
And the next question comes from Shneur Gershuni with UBS.
Shneur Gershuni
Hi. Good afternoon guys.
As a follow up to some of Brian's questions. I was wondering if you can sort of talk about your growth outlook and I do appreciate the guidance you have given for both 2015 and 2016 and you've given some more details on some capital spending so forth, but we sort of look at the backdrop of – kind of a mid 600s rig count – if that was to continue into 2016 – mathematically U.S.
crude production would decline kind of negating the need for a lot of logistics investment – how should we be thinking about growth – from a distributable cash flow perspective – beyond 2016, you been reluctant to give color on your "shadow" backlog in the past, but I was wondering given market conditions – whether that opinion has changed and whether you'd like to give a little bit more color so that we can gain some more comfort that it's not going to just cliff in 2017 or 2018?
Michael Mears
Well, that first-of-all, if you look at with regards to cash flow generation for 2017 – many of the projects that we are large capital projects that we're building right now will not come into service until mid 2016 to late 2016 including Saddlehorn or splitter or Little Rock pipeline. We've also I think mentioned we've got a new butane blending facility in with colonial that we're putting together will come into service in 2017.
All of those are going to provide incremental cash flow for 2017. So, we think we've got a strong growth trajectory into 2017.
Beyond that and clearly once you start getting out 3 years or 4 years the visibility on growth becomes cloudier for us and for everybody just – just given how far forward that is. But we have mentioned a few things here today, that are kind of our core strategy particularly with regards to marine infrastructure.
And that the market even in this environment is asking for more marine infrastructure with regards to crude oil and condensates. And so that is a primary growth strategy for us, the potential capital deployment opportunities are pretty significant there, we haven't quantified them, they are substantial portion of the – of our backlog, they're not the only part of our backlog, but we are concerned with our long-term growth prospects.
We believe that we've got solid opportunities and we can continue to grow the trajectory over that three year or four year time period. So I hope that answers your question?
Shneur Gershuni
Yeah. It does, and just a clarification on that.
With all the chatter about potential lifting of the crude oil exports ban and just with condensate moving out as well too. Is condensate splitters dead at this point right now, beyond what's already in motion or do you kind of still see an opportunity for that as something that you would consider as part of your attaching to your marine type of investments?
Michael Mears
Well, I mean first of all, we would, we consider whatever the customers and our shippers are interested in. So someone wants to support a splitter we are more than happy to build another one for them, at Corpus we've got the land to do, we think we can do it as cost effectively as anyone down there.
And we think the addition of the land and the potential private docks at Corpus to facilitate that. That being said, getting a commitment for that right now in this market is pretty tough.
It's not possible, we are still talking to folks about the potential for another splitter. To be honest, I would say it's more likely than not that we won't get commitments for that in the near term that we need to see some improvement in the market before we'd see somebody willing to do that.
But we view that as somewhat of an open option for us in Corpus Christi because we've got the capability to do it and the infrastructure support one.
Shneur Gershuni
Great. A follow up on the M&A question.
Are you looking specifically just to buy individual assets or would you acquire an entire company and should – is it fair to assume that anything that you would look at would be something that would fit lately kind of into your segments as they fit as they are right now or would you be considering getting into other areas of midstream?
Michael Mears
We were not bound to just assets. We've looked at evaluated corporate acquisitions.
So, I mean, we're not having any restrictions with regards to that. We would primarily, I mean, if we looked at the pecking order of what we would be interested in, clearly something that fits nicely into our business units would be a high priority.
But I wouldn't exclude any other fee base business, I mean, I think it's safe to say fee based is what we would want to focus on and it wouldn't necessarily have to be specifically what we do today, but the strong fee based business model. We are less interested in diversifying into more businesses with more commodity exposure for instance G&P.
I say this a lot never say never to anything, but it's very unlikely that we would consider getting into that in any material way.
Shneur Gershuni
But it wouldn't prevent you, so if there was a company that happened to have G&P assets, but it was relatively small, is that tolerable or you would just look to carve that out afterwards. I mean, is that the way to think about it?
Michael Mears
Well everything is case specific obviously. So yeah, I mean, we wouldn't exclude a business that has small commodity sensing business just because it is commodity sensing, if the larger package made sense.
So and whether we divest it afterwards or keep it again is all a case by case evaluation.
Shneur Gershuni
Okay. Fair enough.
And one final question with the FERC tariffs up next year. What's kind of the base case modeling assumption you guys are thinking with respect to how we should be thinking about the increases on a go forward basis as we model out 2017/2018 and 2019?
Michael Mears
Well, I'll tell you it's all very preliminary at this point, I mean, there are proposals that are out there. I think if any of you've seen the FERC notice.
The FERC putout a public notice on the index and they proposed a range of 2% to 2.4%. I think that's probably is good as anything as far as an estimate for what the index will be starting next year.
Shneur Gershuni
Okay. Cool.
Thank you very much and good luck to-date.
Operator
[Operator Instructions] . Our next question comes from John Edwards with Credit Suisse.
John Edwards
Yeah. Good morning, everybody.
Michael Mears
Hi, John.
John Edwards
And congrats on another good quarter. I was just wondering – with some of your comments regarding expanding into marine-related infrastructure, are is one of the businesses you would consider getting into sort of short-hauled shipping using barges on the Intracoastal Waterway that kind of thing is that something that would be potentially contemplated or is that off the table?
Michael Mears
That's not something we're currently looking at. When I talk about marine facilities, I am talking about providing the capabilities to put liquids, refined products or crude oil on barges or ships for other people.
We're not, again never-say-never, but right now we're not actually looking at getting into that, into the actual marine transportation business or sales.
John Edwards
Okay. That's helpful.
And then just I was just curious on some of these newer – I don't know if you're – if you'd be willing to breakout some of the costs on – say the Land Seabrook JV – the car extension or you traditionally haven't given out specific details out, but I thought I'd ask it anyway?
Michael Mears
Well, we haven't usually unless they've been high-dollar projects, and we're not planning to do it at this point. I guess we can reconsider that and let you know if we change our mind, but at this point we haven't.
John Edwards
Okay. All right.
That's it from me today. Thank you very much.
Michael Mears
Thank you.
Operator
And our next question will come from Yves Siegel with Neuberger Berman.
Yves Siegel
Good afternoon, everybody. And Mike just curious on you know your longer term outlook and in terms of where we are in the cycle.
The one comment yesterday about overbuilding potentially your comment this morning about, this afternoon about your pipeline is being well contracted for long-term. Where do you think we are in terms of a longer term cycle as it relates to maybe additional pipeline infrastructure or so I guess, one would be, do you think there is still room for additional large pipeline projects and secondarily, do you feel that spending levels can perhaps, growth opportunities stay elevated, but there is a shift in the type of infrastructure projects i.e., what you have articulated today in terms of around marine assets?
Michael Mears
Well, let me talk first, your first question kind of globally and then I'll talk more to us from the second part of your question. It's, it would be hard press pressed to argue with regards to crude oil specifically, I'm not in position to comment on NGLs or anything else.
But talking about crude oil specifically, its hard press to paint a scenario, where at least for the foreseeable future any additional long-haul pipelines are needed other than the once that are in place and/or being built. And it's hard to answer that part of the question, that again that's not to say things can't change in three years or four years and the market changes, but just based on how it looks today that it appears unlikely that additional infrastructure is needed.
Michael Mears
With regards to what replaces that from a capital deployment growth perspective at least for us specifically, it's well I've just talked about. I mean these marine opportunities are substantial and provide a significant opportunity for us and I think they also work for the industry even though I can't comment on everyone's access to that or ability to execute on that but for us, it's a strategy – it's a core focus and provides quite a bit of opportunity going forward.
So...
Yves Siegel
That's great. Just a quick follow up.
So when you think about those opportunity, do you have a similar ability to contract long term similar to the duration of the contracts that you would be able to have on the pipeline projects?
Michael Mears
That's our desire. I mean clearly it's more difficult in this environment to get long term contracts than it was few years ago.
But on the other hand, as I mentioned earlier, the interest in marine storage is very high and interest in dock capacity is very high. And so we believe we can get contracts to support our initiatives, I mean we don't have them today or we'll be talking about them, but as I mentioned earlier, we were kind of in a Catch-22.
We – people wanted us to provide a proposal to them, but we didn't have a location to do it and we're solving that problem. And so, we're optimistic that we can get those contracts.
Yves Siegel
That's super. Thank you very much.
Michael Mears
Sure.
Operator
And the next question comes from Lin Shen with HITE.
James Jampel
Hi. It's actually James Jampel from HITE.
Thanks for taking the call. The overbuild that we see in the Permian.
What do you think has to happen to sort of bring that situation back into equilibrium and get Midland prices back below cushion and how long do you think that might take?
Michael Mears
Well, the short answer is production needs to increase and production is going to increase when the price recovers of that. I don't know if there is really any other trajectory that would impact that and as far as when that's going to happen, that's the $64 million question isn't it, I mean, clearly the expectations for that recovery happening in the second half of this year appear to be unlikely.
But I also think that the fact that it's going to recover is somewhat of a certainty. So it's just a matter of timing and I don't know that we have any more better data points than the folks who look at this every single day, but I certainly would expect that we would start to see a recovery next year maybe the latter half of next year.
But predictions are predictions, I mean, lots of people make them and most of them are wrong. So ...
James Jampel
But with the existing rig count and the existing curve, the things we see there's no recovery on the horizon under those circumstances?
Michael Mears
I think, that's true. But that horizon, you know those things can change relatively quickly, I say relatively quickly in six months to a year, those things can change.
And I think that, when we just look at what's happened in the last year, I mean, look at the production forecast and the rig count a year ago from today, and I don't think anyone will have predicted that we'll be sitting here today with the current forecast. So, those things can change relatively quickly.
But you're right. I mean, if you look at the current production curves and the current rig count, and you extrapolate that forward and assume it's going to stay that way for some time, that's not a very plus picture, but I think what I'm trying to say is a likely to, so this is going to stay that way, is probably not high that there's going to be a change and it's going to improve, it's just a matter of win.
James Jampel
Do you see other areas, other basins where the current curve holes and the current rig count scores that will soon be in this type of situation other than the Permian?
Michael Mears
Well, I think it's probably every basin. And as far as, I mean, if you look at supply versus the infrastructure take away, if that's what you're addressing, clearly the Bakken is probably not there yet, but I'm fast forwarding to win of all the pipes that are proposed or built, it will be in that situation.
I think the Eagle Ford is probably in that situation, but I think back from to my earlier comments I made, it's hard to say right now, that if the current price persists that you've got the potential for excess capacity. I don't think there's any doubt but that's true.
It's – so the real question is, is when is the recovery going to happen such that you become more balanced and back to us specifically though, I mean, I think again what I wanted to highlight in our comments with regards to us is that we've got long term contracts in all of our pipes they're take-or-pay contracts and we're not going to be in a position of having to re-contract those pipes for quite some time. So we feel like we're in a very strong position to weather the storm so to speak through this period and so we feel pretty good about that.
James Jampel
Okay. Thank you very much.
Operator
And the next question comes from Steve Sherowski with Goldman Sachs.
Steve Sherowski
Hi, good afternoon. I think earlier you mentioned that marine terminal spending could potentially be at a next leg of this CapEx cycle, I was just wondering, is there any way to compare the potential investment opportunity relative to long-haul crude oil pipelines like intuitively, I would imagine that actual spending on the terminal itself is probably a relatively small opportunity, but I'm not sure if that's the case after you factor-in storage and pipeline interconnects and whatnot?
Michael Mears
Well, it's all the matter of scale. So it's hard to address that, I mean, it – I mean, obviously tanks by themselves are not as expensive as long-haul pipes, but there is a lot more that goes into that.
There's is in – the connectivity that's required, there is the docks that need to be built. So at least with regards to us, again not speaking for the whole industry, with regards to us, when we look at a potential capital deployment environment to build out our marine strategy, we feel like, we can keep spending the levels similar to what they have been, if we can fully execute on our strategy.
Steve Sherowski
Got you. Thanks.
That's it from me.
Operator
And Mr. Mears, there are no further questions at this time.
I'd like to turn the conference back over to you for any additional or closing remarks.
Michael Mears
All right, well I want to thank everyone for their time today. We appreciate your continued interest in Magellan, we'll keep you updated on the progress of our projects.
Thank you.
Operator
Thank you. And that does conclude today's conference.
Thank you for your participation.