Feb 5, 2015
Executives
Greg Armstrong - Chairman and CEO Harry Pefanis - President and COO Al Swanson - EVP and CFO Ryan Smith - Director of IR
Analysts
Brian Zarahn - Barclays Capital, Inc. Steve Sherowski - Goldman Sachs & Co.
Jeremy Tonet - JP Morgan Mark Reichman - Simmons and Co. Cory Garcia - Raymond James and Associates Matthew Philips - Clarksons Sunil Sibal - Global Hunter Securities Selman Akyol - Stifel
Operator
Ladies and gentlemen, thank you for standing by and welcome to the PAA and PAGP’s Fourth Quarter and Full year Results Conference Call. During today’s call all participants are in a listen-only mode.
Later, there will be an opportunity for your questions and instructions will be given at that time. [Operator Instructions] And as a reminder, this conference is being recorded.
I would now like to turn the conference over to Director of Investor Relations, Ryan Smith. Please go ahead, sir.
Ryan Smith
Thanks, Gill. Good morning and welcome to Plains All American Pipeline’s Fourth Quarter and Full Year 2014 Results Conference Call.
The slide presentation for today's call is available under the events and presentations tab of the Investor Relations section of our website at www.plainsalllamerican.com. In addition to reviewing the recent results, we will provide forward-looking comments on PAA's outlook for the future.
In order to avail ourselves of Safe Harbor precepts that encourage companies to provide this type of information, we direct you to the risks and warnings included in our latest filings with the Securities and Exchange Commission. Today’s presentation will also include references to non-GAAP financial measures such as adjusted EBITDA.
A reconciliation of these non-GAAP financial measures to the most comparable GAAP financial measures can be found under the guidance and non-GAAP reconciliations tab of the Investor Relations sections of our Web site. There you’ll also find a table of selected items that impact the comparability of PAA's financial information between periods.
Today’s presentation will also include selected financial information of Plain GP Holdings, or PAGP. As the control entity of PAA, PAGP consolidates the results of PAA and PAA’s general partner into its financial statements.
Accordingly, we do not intend to cover PAGP’s GAAP results. Instead, we have included a schedule in the appendix to the slide presentation for today’s call that reconciles PAGP’s distributions received from PAA's general partner, with the distributions paid to PAGP shareholders as well as the condensed consolidated balance sheet.
Today’s call will be chaired by Greg Armstrong, Chairman and CEO. Also participating in the call are Harry Pefanis, President and COO; and Al Swanson, Executive Vice President and CFO.
In addition to these gentlemen and myself, we have several other members of our management team present and available for the question-and-answer session. With that, I’ll turn the call over to Greg.
Greg Armstrong
Thanks Ryan. Good morning and welcome to all.
Anticipating that there is more interest in our comments regarding PAA's report in this past quarter's performance, I intend to keep my opening remarks on 2014 brief and focus mostly on 2015. PAA reported growth in fourth quarter of 2014 results was nearly up at the end of the guidance range published in November 5, 2014.
Adjacently, the gap was on the fourth quarter and the full year of 2014 with 594 million and 2.2 billion respectively. Slide 3 contains comparisons for a variety of metrics to our performance in the same quarter of last year versus our fourth quarter 2014 guidance and slide 4 highlights that this is the 52nd consecutive quarter of the PAA's delivery in results in line with the above guidance.
Given the events occurring in the current market after our last earnings call, we are pleased with how PAA finished out the final quarter of 2014. As noted on slide 5, we are also pleased to report PAA accomplished each of its 4 goals for 2014 and PAGP exceeded this target of distribution growth for the year as well.
For this quarter, PAA recorded a distribution of $0.67.5 cents per common unit or $2.70 per unit on an annualized basis which will be paid next week. This distribution represents an approximate 10% increase over PAA's distribution paid in the same quarter last year and a 2.3% increase over PAA’s distribution paid last quarter.
Distribution coverage for the quarter on a standalone basis was 111% and was also 111% for the year. PAA has now increased its distribution in 41 out of the past 43 quarters and consecutively in each of the last 22 quarters.
Additionally, PAGP scored a distribution of $0.20.3 cents per share, represents a 27% increase over the non-pro-rated quarterly distribution paid for the same quarter of last year and a 6% increase over the distribution paid this last quarter. Turning to 2015, I want to provide some color on PAA's 2015 guidance that we furnished just yesterday and the context for the changes from a preliminary guidance we furnished on November of 2014.
In our third quarter earnings call in early November, we provided preliminary guidance range for 2015 adjusted EBITDA of 2.35 billion to 2.5 billion with a midpoint of 2.43 billion. Prior to the call, we announced an acquisition that had effect of full utilization, we estimate it would raise our run rate adjusted EBITDA by approximately $100 million per year.
With a ramp up in 2015 that would result in incremental adjusted EBITDA of around $90 million and bring the midpoint of our acquisition adjusted guidance to just over to 25 billion. As illustrated by slide 6, our business model and asset base had been purposely structured to generate solid results in almost any commodity price environment and have proven their resiliency over the last 15 years in a variety of markets.
While we had minimal direct commodity exposure to commodity prices, our performance is influenced by certain differentials and overall production levels that in turn are impacted by major price movements and their effects on producers drilling activities. For example, capacity limitations on pipelines or changes in location differentials can impact the volume of Bakken production is required to be moved or preferentially elects to move by rail which in turn affects our facility segment activities.
A material reduction in such volumes at the margin could impact our rail volumes and/or compress margins due to competition. Since our November earnings call, crude oil and natural gas liquids prices have decreased by approximately 40% and bases differentials in a number of locations have compressed meaningly.
Natural gas prices have declined by 30% or more. These combined declines in commodity prices have collectively reduced the level of cash flow producers have available to reinvest by a meaningful amount.
In response, most producers have significantly reduced their capital budgets for 2015 relative to 2014 actual levels as well as relative to their initial 2015 plans. The magnitude of such budget reductions varies among producers but in general it appears the average reduction is roughly in the 30% to 40% range with respect to producers that impact North American crude oil production the most.
Our preliminary 2015 guidance anticipated some probable leaping in crude oil prices from roughly $80 per barrel with the lower end of our guidance range effectively allowing for crude oil prices to fall to approximately $65 a barrel for a relatively short period of time. The WTI price so far has averaged $48 per barrel which is around 25% below the $65 per barrel level.
As I mentioned in our November earnings call, we are not immune to the adverse impact of the major step change in commodity prices that is accompanied by similar change in producers’ activity levels especially during the transition. Accordingly, we have reduced the midpoint of our acquisition adjusted EBITDA guidance for 2015 by 6.5% from just over 2.5 billion to 2.35 billion.
This updated midpoint is based on our updated guidance range of 2.25 billion to 2.45 billion. We have also revised our distribution growth target range for 2015.
We are currently targeting the distribution growth of PAA of 7% for 2015. PAGP's correlative distribution increase would be approximately 21%.
The decision to adjust our distribution growth was not without significant thought and deliberation. In establishing this new target, we considered a number of factors including our revised guidance range for adjustment EBITDA and the developments and related uncertainties with triggered over visions.
Our previous guidance for distribution growth and our sense of current market expectations, our desire to be a top quartile performer within the large cap MLP universe on the sustainable basis, the concept of possible distribution coverage serving as a rainy day reserve, the upside and downside implications of a variety of alterative portions of action regarding the distribution growth in an uncertain environment. The flexibility to adjust during the year should market conditions meaningfully change and finally the incontra variable fact that stuff happens.
We also assessed our convictions that the current low oil prices are not fundamentally sustainable and therefore self correcting. And we contrast that against the John Maynard Keynes axiom that the market can stay irrational longer than you can stay solvent.
We weighed these and many other factors and believe we landed on a situation appropriate conclusion. We retain the option to adjust upwards or downwards the performance demonstrates that this was suboptimal decision.
Given recent industry developments, we believe that achieving our revised distribution objective will reflect positively on resiliency of PAA's business model and diversity of its asset base and the strength of its project portfolio. Importantly, we believe that PAA continues to represent an attractive rest of world proposition that compares very favorably to our large CAP MLP peer group.
Based on the midpoint of our guidance, our projected distribution coverage is essentially one-to-one for 2015, give or take a few millions on the $2.3 billion adjusted EBITDA scenario. As we discussed in previous calls, we generally target minimum distribution coverage of approximately 1.05 to 1.1 based on the concept that relative to baseline performance in a normal market that level of coverage should provide a cushion against any rainy day events.
We believe the recent industry downturn falls into the category of rainy day event. Importantly, as we look forward to the next few years, we’re on 2015 we believe the expected cash flow growth associated with our ongoing expansion capital program will further strengthen PAAs industry leading crude oil franchise and enable PAA to continue to deliver attractive distribution growth while also restoring distribution coverage levels to levels in line with our target minimum distribution coverage levels.
Slide 7 compares PAA’s historical performance with respected distribution coverage with the crude oil price tackles going over the last 11 years as well as a recap of our view regarding forward distribution growth and coverage. Moving on to our CapEx activities for 2015 we believe the investments we have planned for this period will position PAA for solid performance for the next several years.
To set the stage from our comments on our 2015 capital program as well as our outlook towards acquisitions in this environment, I want to share our views on four key industry considerations first the underlying supply and demand and balance yourself correctly for a variety of reasons and for a variety of reasons we think we will see recovering prices and associated pick up in drilling activity within the next 12 to 24 months give or take a few months. An illustration of the potential impacts on production volumes based on recovery periods starting at the each end of this range is provided on slide 8.
Second, the large North American resource base remains intact and will be developed. As reduced activity levels the overall production curve will shift at the right, these production levels will be reduced and the time period required to produce this resource base will be extended.
This concept is illustrated on slide 9. Third, as a result of recent developments various entry for a number of midstream activities have increased.
In a nutshell capital is less likely available and is certainly more expensive. Four, operating and commercial expertise and synergies will be more relevant and fundamentally financially sound business builder should benefit in the resulting environment at least for a while.
In summary, although the challenge in the near term we believe this environment is a healthy one for PAA over the long term. We have a strong balance sheet liquidity position and an integrated business model and asset base.
It is worth noting that we are building pipeline, internal assets its strategic locations that are interconnected with our existing asset base and that has very long useful to us in many cases as much as 70 years or more. Accordingly, as long as our open assessment of the resource base and the commodity price environment required to develop these resources is directionally on point we can afford to be wider the mark regarding production volumes for the first 12, 18 or even 24 months without materially impacting PAA’s long term business or its overall economic returns on such capital investments.
As a result we are well positioned to continue developing our industry platform to develop our business platform the organic growth projects and also to pursue capital energy acquisitions. With that in mind we’ve targeted an expansion capital program for 2015 at 2.85 billion, consistent with prior programs the 2015 capital program is diverse with the single largest project representing less than 10% of the total program thus reducing the impact of a delay caused over or other issue on any given project.
Additionally, we continue to target returns in the low double digits to mid teens for the vast majority of the projects reflecting the benefit of adding onto existing assets in the various resource basins as well as interconnecting with our existing assets in other regions. Aside from the carryover projects to be finished in the first part of 2015, the bulk of the incremental financial contribution will be layered into year beyond 2015 and thus at the stage for a future growth and adjusted EBITDA.
We also continue to develop and advance additional projects that could be introduced into the program throughout the coming year. Finally, we continue to remain very active with respect to acquisitions and believe our synergies, commercial expertise and financial flexibility should prove to be more advantageous in this environment than we’ve experienced over the last two or three years.
With that I will turn the call over to Harry.
Harry Pefanis
Thanks, Greg. During my portion of the call, I’ll review our fourth quarter operating results compared to the midpoint of our guidance, the operational assumptions used to generate our 2015 guidance and provide an update to our 2015 capital program.
As shown on Slide 10, adjusted segment profit for the transportation segment was $270 million, which is approximately $9 million above the midpoint of our guidance. Volumes of 4.3 million barrels per day were in line with our guidance.
Adjusted segment profit per barrel was $0.68 or $0.02 above the midpoint of our guidance. The acquisition of a 50% interest in the BridgeTex pipeline in mid-November was a primary contributable to our financial over performance in the quarter.
Adjusted segment profit for the facilities segment was $151 million, which was approximately $4 million above the midpoint of our guidance. Volumes of 122 million barrels are in line with our midpoint of our guidance.
However, adjusted segment profit per barrel was slightly above guidance of $0.41. Of our volumes adjusted segment profit was higher than anticipated primarily due to higher throughput of a Cushing terminal and lower than expected operating expenses partially offset by a slight delay in startup of our bigger field crude oil and rail terminal.
Adjusted segment profit for the supply and logistics segment was $173 million or approximately $12 million above the midpoint of our guidance. Volumes of 1.3 million barrels per day were in line with the midpoint of our guidance.
Adjusted segment profit per barrel was $1.48 or $0.09 above the midpoint of our guidance. The higher than anticipated adjusted segment profit was primarily due to crude oil differentials with more favorable than forecasted partially offset by lower than forecasted profit of NGI was largely shift in timing into the first quarter of 2015.
Let me now move to slide 11and review the operational assumptions used to generate our full year 2015 guidance. For our transportation segment, we expect 2015 volumes to average over 4.9 million barrels per day an increase of approximately 831,000 per day or 20% over full year 2014 volumes.
We expect adjusted segment profit per barrel of $0.68 or $0.04 higher per barrels than last year. The volume increases in primarily due to forecasted increases of approximately 200,000 barrels per day on our Permian Basin pipelines, 137,000 barrels per day on our Sunrise pipeline, 90,000 barrels per day on our Cactus pipeline, 38,000 barrels per day in our line 63/2000 system, 96,000 barrels per day attributable to our interest in the BridgeTex pipeline and 83,000 barrels per day attributable to our interest in the Eagle Ford joint venture pipeline.
For our facility segment we have taken average capacity of 128 million barrels of oil per month. Adjusted segment profit per barrels is expected to be $0.38 which is an approximate 7% decrease from 2014.
The volume increase is attributable to a combination of minor increase in storage capacity are Cushing, St. James and [Europe] terminals coupled with increased rail volumes primarily attributable to our new Bakersfield facility.
The expansion in our Narborough facility and our new [Carraba] terminal which is affected to be in service in mid year 2015. The decrease in segment profit per barrels due to forecasted decreases in gas profit margin, our gulf coast facilities and in rail fees related to the movement of certain volumes of Bakken crude oil.
For supplying logistic segment, we expect volumes to average 1.19 million barrels per day or approximately 33,000 barrels per day higher than volumes realized in 2014. Adjusted segment profits per barrel is expected to be $1.27 or $0.27 barrel lower than last year.
The volume increased in this segment is primarily due to anticipated increase in the lease gather activities. Segment profit per barrel was estimated to be 18% lower compared to actual 2014 results as we expect to see compressed margins in the current low price environment partially offset by increased margins related to crude to [contangle] storage opportunities.
With that we will now move on to our capital program. During 2014, we invested slightly over $2 billion in organic growth projects, which is in line with the guidance range provided last quarter.
As reflected on slide 12, our expansion capital expenditures for 2015 are expected to total approximately $1.85 billion and is typical with our capital programs this is composed of number of small to medium size projects but across most of the liquid resource place. Consistent with past practice, we will adjust our expected capital investment level quarterly based on our progress on approved projects and potential approval of additional projects within our project portfolio.
The inspected and service timing of larger projects in our capital program is included on slide 13. I’ll take a few minutes to provide a status update for few of the larger investments.
We will start with an update of our Cactus pipeline. We expect the line to be in partial service in April 2015.
Initial operations will be in the 50 to 100,000 barrels per day range ramping up to 150,000 barrels per day by August corresponding with the completion of an expansion of our Eagle Ford joint venture pipeline. The line will be capable of moving approximately 250,000 barrels per day and will be expanded to approximately 330,000 barrels per day by the first quarter of 2016 once our quarter inch pumps are installed.
In the Permian basin we expect to invest approximately $365 million in 2015. We placed Monahans to Crane pipeline and service in January this year that line created about 100,000 barrels per day with additional takeaway capacity of the Delaware basin.
In March we will begin construction of our 24 inch loop at the basin pipeline system from wing to McCamey which will also add approximately 300,000 barrels per day of takeaway capacity for the Delaware basin. The line is expected to be in service in August this year with full utilization expected in 2016.
In addition we have four projects in the Delaware basin, a 16 inch pipeline from dry area to Wink, a 12 inch pipeline extension of our BlackTip pipeline to connect the [indiscernible] county. Our 16 inch state line pipeline extending towards the cot dry area in New Mexico and our 20 inch pipeline loop from BlackTip to Wink.
In the Eagle Ford we expect to invest $120 million in 2015. We remain on pace to complete the expansion of our joint venture pipeline from Gardendale to Three Rivers in April 2015 co-dating with the expected service date of the Cactus pipeline.
The joint venture is also -- the segment from Three Rivers to Corpus Christi in conjunction with the gathering system that joint venture is building from the current and [LIBO] county production area two to the Three Rivers terminals. The joint venture is also developing a rain terminal Corpus Christi.
This facility is expected to be in service in late 2016 and we have the ability to service ocean going vessels. In the Rockies we are expecting to invest approximately $50 million in 2015 to build the pipeline from [indiscernible] to our Colorado railroad terminal facilitating the movement of Narborough crude on rail.
In Canada we have approximately $520 million of extension projects at our Fort Sask facility including two new 350,000 barrels back product [cabins] two new ethane cabins with the combined capacity of 1.6 million barrel. Approximately 5 million barrels of additional volume capacity, a truck rack and a rail loading facility, these projects are all progressing on schedule.
We also have a couple of rail project in progress. The rail loading facility in Carraba and the expansion of our unloading facility at St.
James are the two most significant projects. Our Carraba terminal is expected to be in service in mid 2015 and the St.
James project which will enhance our ability to receive heavy crude oil is expected to be in service by third quarter of 2015. Shifting to maintenance capital, expenditures for the fourth quarter totaled $73 million resulting in total 2014 expenditure of $224 million, about $19 million higher than our guidance as we are able to make more progress in our maintenance project anticipated.
For 2015 we expect our maintenance capital range between $205 million and $225 million. Now before I turn the call over to Al I want to mention a couple of other matters.
First, during the fourth quarter we received confirmation from the BIS to condensate process at our Gardendale facility meets definition of a product that can be exported. Today we have not exported any process condensate however, we believe we are well positioned to segregate the process condensate and to export the product when market conditions warrant.
Second, we had a couple of losses, [indiscernible] the first two relates our pipeline the few challenges are status of the common carrier. We believe we are a common carrier and we will defend our position but it has been advised not to discuss the matter on the call.
Also in California group has filed suit seeking to have the court avoid the air district approval of our oily water sewer system permits at our Bakersfield rail terminal. Again we believe we have valid permits and will defend our position but we have been advised not to discuss the matter on the call.
So with that I will turn the call over to Al.
Al Swanson
Thanks, Harry. During my portion of the call, I will provide comments on a few yearend counting items and a general overview of our financing activities, capitalization and liquidity, as well as our guidance for the first quarter and full year of 2015.
As a result of significant price decreases during the fourth quarter, we had marked to market derivative gains net of operating inventory evaluation adjustments of $166 million which are associated with operating activities in 2015 and beyond. Additionally, we recorded a non-cash impairment totaling $85 million on our long term inventory.
As a reminder our long term inventory is comprised of minimum inventory in third party asset and other working inventory that is needed for our commercial operations and is required for the foreseeable future. From a business perspective, we consider the long term inventory to be similar to line sale and do not hedges as doing so would create price risk not eliminated.
However, under GAAP accounting rule our long term inventory is subject to impairment testing which resulted in non-cash impairment. Line fill is not subject to this type of impairment testing.
As is our standard practice both of these non-cash items were treated as selected items impacting comparability and therefore are not included in our adjusted results. Moving on to finance related items.
In the fourth quarter PAA issued approximately 3.6 million units raising $197 million in equity capital through our continuous equity offering program. As illustrated on slide 14, for the full year 2014, we issued 15.4 million units through this program raising $866 million in equity capitals.
Since first implementing the program in 2012, we have raised approximately $1.9 billion. In the debt capital market, PAA has raised $1.15 billion through the sale of $500 million of five year senior note and $650 million of 30 year senior notes with interest rates of 2.6% and 4.9% respectively.
As illustrated on slide 15, PAA ended 2014 with strong capitalization, credit metric, and liquidity. In January, we entered into a new $1 billion credit 364 days credit facility.
This credit facility increased our committed liquidity from approximately $2.6 billion to $3.6 billion. At December 31, 2014, PAA had long term debt to capitalization ratio of 52% and a long-term debt to adjusted EBITDA ratio of 3.7 times.
Slide 16 summaries information regarding our short term debt hedged inventory line fill at quarter end. Moving on to PAA guidance for the first quarter and full year of 2015, as summarized on slide 17, we are forecasting midpoint adjusted EBITDA for the first quarter $580 million and $2.35 billion for the full year.
This guidance assumes that 2015 oil prices are plus or minus $50 per barrel and that produce our drilling activities are materially reduced relative to 2014. As Greg noted earlier, while we have minimal direct commodity exposure we will be impacted by the anticipated reduction in oil production growth and also impacted by tighter differentials.
Accordingly although we can benefit from potential volatility during the coming year, our 2015 guidance assumes a near base line type of environment for supplying logistics would compress margins in this low-price environment, partially off-set by some contangled storage opportunities. As reflected on slide 18, our guidance for 2015 forecasts strong growth in our transportation segment relative to 2014.
This 27 % growth is primarily the result of our organic capital investments and the BridgeTex acquisition. The facility segment is forecast to be essentially in line with 2014.
Collectively adjusted the EDBDA adjusted from the feed base transportation facility segment are forecasting increase of $253 million or 16 % from 2014 and are expected to represent 77 % of our total adjusted EBITDA. We expect this fee based percentage to migrate to 80 % or more, over the next several years relative to our baseline activity.
As Greg mentioned, our 2015 organic capital investment program is $1.85 billion. The majority of this capital will be invested in our fee based transportation facility segment and we’ll have minimal contribution to 2015 results, but will provide growth for 2016 and beyond.
This level of investment combined with the 3.1 billion of capital investments we made in 2014 provide us with good visibility for continued multi-year growth, given the time lag associated with achieving full run-rate cash flows. I would also like to point out some additional considerations regarding our 2015 guidance.
First, our NGL business within our supply and logistic segment has inherent seasonality. NGL volumes and margins are typically the highest in the first and fourth quarters of each year due to weather driven demand in the winter months.
Slide 19 directionally illustrates our forecasted 2015 quarterly supply and logistics adjusted EBITDA as illustrated in the green portions of the bars. The seasonal impact will likely result in higher distribution coverage in the first and fourth quarters with lower coverage during the second and the third quarters.
Secondly, as illustrated on side 19, we expect our fee base transportation facility segment to generate favorable aggregated quarterly comparisons in 2015, relative to the corresponding quarters of 2014. However, in our supply and logistic segment our guidance assumption for near-base market condition throughout 2015 results in negative quarter-over-quarter supply and logistic segment comparisons for second and third quarters of 2015 relative to corresponding quarters of 2014.
For more detailed information on our 2015 guidance, please refer to the Form 8K that we’ve furnished yesterday. With that I’ll return the call back over to Greg.
Greg Armstrong
Thanks Al, we are pleased with our PAAs overall performance for 2014. With respect, our 2015 guidance, our planning case incorporates all process hovering around the $50 per barrel level for the entire year and producer activity levels calibrated to that outlook.
Based on our understanding of public information put forth so far by number of producers, our approach appears to be on the more conservative side as it appears many are forecasting a pickup in prices during the second half of year, which supports a higher activity level than incorporated into our outlook. As we proceed through the year, actual prices and developments will likely require all of us to re-calibrate to some extent.
We believe our approach of honoring the continuation of current prices for the entire year is a reasonable and prudent force of action that hopefully airs on the conservative side and positions us to benefit from an improvement prices and activity levels, while minimizing our down-side during an uncertain environment. We feel good about the gaps range we provided for 2015 operating financial performance, as well as our distribution growth targets and believe our expansion capital program will further strengthen our business platform for many years to come.
With this outlook in mind, let me now review our 2015 goals, which are highlighted on slide 20. During 2015, we intend to deliver operating financial performance in line with or above guidance, we intend to successfully execute our 2015 capital program and set the stage for continued growth in 2016 and beyond.
Increase our November 2015 annualized distribution by 7% over our November, 2014 distribution levels. And finally, selectively pursue strategic and accretive acquisitions.
PAGP ‘s goals also highlighted at the bottom of this slide, which is to increase PAGP’s November 2015 annualized distribution by 21% over the November 2014 distribution level. We are off to a good start with respect to our distribution goals and we look forward to updating you on our progress throughout the year.
Prior to opening the call to the questions I would like to mention that Ben Figlock was recently appointed by Occidental Petroleum Corporation to serve on his behalf as a member of our Board of directors of PAA and PAGP replacing the Vicky Sutil. Ben currently serves as Vice President and Treasurer at Occidental.
We are pleased to welcome Ben and look forward to working with him over the coming years. We also want to thank Vicky for her dedicated service to PAA and PAGP Boards.
Additionally, I want to mention that we will be holding our PAA and PAGP 2015 Investor Day on June 4, in New York. If you have not received an invitation and would like to attend, please contact our Investor Relations team at 8668901291 that’s 8668901291.
Once again, thank you for participating in today’s call and for your investment in PAA and PAGP. We look forward to updating you on our activities in our first quarter earnings call in May.
Gayle, at this time we would open the call for questions.
Operator
[Operator Instructions] We will go to Brian Zarahn with Barclays. Please go ahead.
Brian Zarahn
Good morning.
Greg Armstrong
Morning Brian.
Brian Zarahn
Greg, during the oil price slide you have been able to get commitment from new projects in today's Permian announcement but given the new oil price assumptions how do you view the organic opportunity going forward?
Greg Armstrong
Brian, I would tell you that we take a fundamental approach and so ours is kind of grassroots ground up assessment of the resource basin and well by well, county by county analysis so we are picking the spots that we choose to build projects and to work on building future projects. I don't think the overall project portfolio has really changed in the aggregate size, certainly I think there is versus maybe a view of what we would have assumed those projects would have been developed on let’s say six months ago, it's probably pushed out into a ride a little bit but for the near term I really don't think we are going to see much different in what we undertake over the next 12 to 24 months than we not have otherwise.
It's really going to affect years there, four and five and you kind of get that - you see that impact Brian in that one slide where we showed the $80 case and the $50 case and the two recovery cases. It's basically just pushing everything out into the ride but it's really not changing from our perspective the projects we were going after.
I think it can affect the marginal projects that other might have been chasing to try knock the top off the peak production curve but that hopefully means there are probably less competition as we go forward but our project portfolio really hasn’t changed materially when you say, I would agree.
Brian Zarahn
Some more of a timing issue. I guess, I am looking at one of your projects can you give a little update on cap line, has the timing of that potentially changed.
I know it's little further out and then how should we think that project does move ahead, what’s the opportunity potentially to bring West Texas barrels over to St. James potentially increasing diamonds capacity, how should we think about just overall asset footprint to get more barrels to the Louisiana gulf coast?
Al Swanson
I will let Harry comment on some of the details, but I will just say if you stand back and look at it from 15,000 or 20,000 fee and you look at the interconnectivity, the extension of the Diamond pipeline from Cushing to Memphis where we will cross over and be able to touch the cap line system and as you mentioned the inter connectivity then we already have barrels coming from West Texas, barrels coming from the Rockies into Cushing and then more Canadian crude coming in really puts PAA in the [indiscernible] with respect to be able to service many, many markets. Really can't add much in the way of information regarding the status of cap line then what’s been put in the press so far which is that we - the owners are conducting the study I think in a call earlier this week, Marathon which was the operator acknowledge that they thought they would be bringing the study to conclusion with respect to finishing the analysis in the first quarter and then obviously there is a lot of discussion has to happen with the operator but when you think about it I mean Diamond really adds a lot of additional optionality to the potential to optimize cap line.
It's a longer term project Diamond will be in service until 2017 any potential reversal of cap line would have to be after Diamond in service. It's going to largely supported by Canadian crude, supplemented by the ability to source crude and diamond as well.
So it's hard to sell out more than Greg already mentioned other than probably when you think of it as a longer term project.
Harry Pefanis
And I would view this as a upside option because it really does and contributed significantly to cash flow today, I think the current cash flow that we receive offer cap line is probably in the $10 million a day or less, excuse me, $10 million a year or less so limited downside very significant upside if you start running any kind of meaningful volumes on a reset there.
Brian Zarahn
I will stay tuned on that last one from me, on potential M&A, oil prices are expected to recover over the next 12 months. Does that imply a rather small window to do acquisitions and also just what’s your view of the competitive environment to do accretive deals given there is so many potential acquires?
Unidentified Company Representative
Yes, this is John, let me kind of back up. I will give you a couple of comments on some things that have actually happened in the market and what we infer from them.
We have obviously seen two material asset transactions. One of them -- of note of transaction obviously happened very quickly from our process standpoint.
The price was, I would argue attractive from a seller standpoint but sold to the very strategic partner and it was for cash. And the other inference is with the EMP company, high quality EMP companies will capitalize the EMP company.
I am doing something this strategic. I am going to bring that up, we would expect to see more of that in the Permian basin Wollaston is.
The second transaction I would bring up happen in the Permian little bit smaller, all cash, start ups all about profit equity. I will bring it up because it was a cash transaction again one in a Permian basin.
Two, the buyer is bidding on a recovery and activities over the long term. And it probably emulates to what we are going to see going forward on the asset side both from the EMP companies, who are now looking at the sale as they are more attractive alternative to an IPO because of timing and the amount of cash they can get up front and the need and desire to put their capital into ground faster.
The third transaction obviously was consolidation among the affiliated parties that is of note which I will segway into kind of what from my perspective we think it's going to happen going forward and on a consolidation side, combinations it feels like we are going to see over the next 12 to 18 months I mean I don't just put the time frame in the next 12 months that we will see an increase in consolidation among the MLPs primarily because of the demographic side we have gone from 20 to 120 plus MLPs going into this we had a value $750 billion plus and we have had a major change in the underlying fundamentals of the business which will be the catalyst for consolidation. I do think, if A is going to be very constructive and B, a measure pace which is not going to be a sense of urgency, it will be a measured pace.
People seemed to be going through machinations of trying to understand what the impact of the downturn is on their existing assets, their growth projects and their access and cost to capital. Again they are kind of doing that right now over the next three to six months as people figure out what the best alternative for their businesses are you should see an increase in activity.
I don't expect it to be tomorrow. I mean it's going to again measured and what I would call constructive over the next 12 to 18 months and this will be retail serving, but hopefully we positioned ourselves both from a access to capital and where we’re at from capital perspective to participate on the asset side where cash is necessary.
And more importantly on the combination side because I don't think the value of the equity having a footprint, large footprint for businesses when you are talking about combination will be fair amount in this market. People are really going to deals to be better and the owners and boards will give a lot of thought to who they’re merging and taking equity from.
So, I think it will be a constructive environment, environment which we somewhat anticipated but plan for.
Greg Armstrong
Yes. And Brian I would just say, I think again as John said, we are not really kind of restrict in our thoughts for the next 12 months what we think is going to be 12 to 24 months window.
I do think that as John alluded to the synergies and commercial capabilities that we have has more value in this type of environment and they have had over the last three years when we were competing against, lots of availability of capital to everybody at very cheap levels. And the other thing I will just leave you with is that our goal is not to try and pick the bottom and say let’s wait until everything bottoms out before we make a move.
We are looking for opportunities to build our business make it stronger, make it accretive, and part of the negotiation for any transaction especially when you have got a lot of synergies that it takes to make a transaction work is who gets the benefit of those synergies to all of them and to the benefit of the buyer or do you have to share some of those with the seller to be able to get the deal done and the answer is probably the later. So we are not here to pick the bottom but we are here to looking for ways to as we look out five and ten and 15 years how do we improve the strength of our business franchise.
Brian Zarahn
I appreciate all the color guys. Thank you.
Operator
Our next question comes from Steve Sherowski with Goldman Sachs. Please go ahead.
Steve Sherowski
Hi, good morning. Just trying to drill down a little bit more on the guidance revision, I mean it looks like your volumes specially out of your transportation facility segment, are strong at least expectations are the strong volume going into 2015, and I am just wondering what was the primary revision with the guidance does that have anything to do with perhaps like lower your expectation for lower tears on certain pipelines or lower spot volumes just maybe you could talk a little bit about that?
Greg Armstrong
Yes, Steve if you look and we included this concept out there but we have slides like this on each and every area basin. Slide 8 is really an overview of what an $80 environment looks like versus the $50 environment and as you can see the volume growth in the red and the blue lines stays pretty strong through the first three, four, five months of the year and then you start to see a fall off.
So, you are correct in the projects that we have we have got good volume but at the margins, the volumes that were not included in the guidance now that we were before that may have been the un-contracted spot volumes we would expect to capture because of the overall material balance that you need to do to protect the capacity certainly adds a lot at the margin. The second thing is I think you saw the facility segment was flat to down slightly that’s the combination of volumes obviously as I mentioned in my comments, at the margin, our volumes competing for an exit out of the Rockies on rail are going to number one, more competition to try and everybody fill up their rail cars and two it's going to compress margin.
So the combination of expecting margin compression and having to adjust fees if appropriate to capture that value so it's really a augmentation of all that but it's all really driven by the change between the blue and the red line that you see there as it affects both pipeline and facilities.
Harry Pefanis
On the transportation segment, it's not tariff related. Its volume related.
It's the tariffs are the tariffs, we just, we had forecasted a low growth, small growth in 2015 and as Greg mentioned it's flattened out, slightly declining in the second half of the year. And hopefully, I mean we are running the $50 case and we are certainly aware that others maybe running expectation for $65 on average and we would just observe that in order to get to $65 average when we have already average done to $50 for the first 33 days of the year, prices would have to go tomorrow to $67 a barrel and stay there for the next 330 days or if you believe if we say $50 barrel for the first quarter, you are going to have to go to $71 barrel for the rest 330 days.
So, I think we have got a very realistic outlook about what capitals is going to be available and be invested, what’s going to get invested and more importantly if you go beyond the slide 8 and you look at each and every one of the areas that’s how we build that up. I hope at the end of the day they are right and we are wrong because our being wrong means we get up our numbers.
I think when somebody else is wrong that means they got to come down with their numbers and we are out looking up that would up there looking down.
Steve Sherowski
That makes sense and that’s helpful. I guess moving on to John's comment earlier, just on potential EMP mid stream asset sales is there any way that you could quantify or scope that opportunity?
Greg Armstrong
I actually like to prefer not to, okay. Talking too much is about sometime, most of the times I want to respond about lights and [shells] right okay.
And the group at the end of the table started to show it was, anyway. So, it really, I do want to kind of restrict some of my comment.
I actually think it will be fewer than most people expect because you are going to want to have high quality asset underlined in the mid stream asset and what you are buying. Those are by definition going to the people who have the most -- go through the down turn.
So, I think it will be fewer than most people expect today coupled with there are lot of people lining up on the private equity shops, lining up in particular that want to step in and do structured deals. So, it will be active but the under would be, I would take the under that it won't be as much as the market.
Thanks. I am probably, I think this will be the driver for the consolidation we have all been anticipating for the last decade and within the industry.
But, it will take 12 to 18 plus months to unfold and again it's going to be constructive. I mean that in a positive way.
It's not destructive consolidation. Okay.
Steve Sherowski
Got it. No it's helpful.
Let me just have a quick follow-up question. In the past you have mentioned that your supply logistics business has occasionally act as a private equity shop filling demand or back stopping volumes if you can't get those committed volumes from third parties, do you see any potential opportunities for that type of transaction or this sort of deal playing out over the next 12 to 18 months given the weaker commodity price environment?
Greg Armstrong
Well, I may have not understood the comment. I don't think we ever view ourselves like a private equity shop.
I think what we have - are able to do is we are able because we have a very active gathering and marketing effort and we basically purchase at the well head roughly 1.1 million barrels a day, where we have a better feel for the market at many and we are able to when we purchase those barrels to determine how we are going to get those to the vast market whether that we are going to move it by pipelines on our pipelines or by rail or on third party pipelines or in the case where we think there is let's say two competing new pipeline projects necessary where at least one is necessary to move product away from the market we certainly have the ability to make a commitment from our S&L group to transportation group because we again have under contract those barrels and we get to select which market they go to. So I wouldn't character that as a private equity approach at all.
I think they are just monetizing credit rating more than they are moving barrels on but that’s what the self help is that’s why during these down cycles that you saw on one of the slides I talked about we are able to make sure that the barrels go, the charity begins at home. We are going to send it to our pipelines.
Steve Sherowski
That’s helpful that’s it from me. Thank you.
Operator
Our next question comes from Jeremy Tonet with JP Morgan. Please go ahead.
Jeremy Tonet
Hi, good morning.
Greg Armstrong
Hey Jeremy.
Jeremy Tonet
I was just wondering if you could comment a little bit more on the market structure for container out there. It seems like it's pretty favorable right now and I know generally plains only basin with near term visible as far as guidance is concerned and I was just wondering what potential upside can we see as seeable canting environment persist to the balance of the year?
Greg Armstrong
You know certainly we haven’t put the bait all canting opportunities that are out there right now there is a lot of considerations that go into those. There is certainly some potential for upside and as you said we do factor into our near term guidance capturing that which is obviously available.
It makes sense to lock in. I think I would tell you at this point of time well again there is upside to our numbers, there is other things going on out there I mean if we go back to $44 or $40 price level you might see that yes, we can capture more canting but we may see producers producing less volumes than we forecasted.
So I go back to my comments and the conference call that we are comfortable with - we feel good about the guidance. We feel good about the distribution growth and we certainly feel good about the long term but I would hate to try to take one aspect of what’s going on in the market and say that will be added to but nothing else has changed because I think personally you are going to hear changes throughout the year and I think some producers think they can get by with only cutting their budget 20% and our numbers assume that they are going to have to cut 40% I think you are going to see some of those changes ripple through there.
So, and it could be difficult I mean there may be more opportunities to capitalize than what you currently see for the next couple of months as markets are dynamic but there will be all steadiness to it as well. So, I would want you to just hang your head on that one very positive note that yes, we were aware of it, we are participating but I just have to tell you there is a heck of a lot going on in the industry right now.
We are in a state of transition and I think some are in the state of denial and what we have tried to do is give you a very realistic approaches, it says if you think about it, if I gave you a forecast to say here is our numbers and they are right back where they were let's say before we revised it down, and we say we work on $65 oil that means production - excuse me price would have to go 40% from the current level. I mean it just doesn’t make sense.
I mean you wouldn't want me to tell you at $100 oil where it cannot be $140. And so I think we are just - we are not in control of the mechanisms that are driving prices.
We are in - on top of the issues that are driving volumes and that’s what we reflected on our guidance.
Jeremy Tonet
That makes sense. Thanks for that.
And I was wondering if you could comment a bit on rail and how rail fits into to this new environment where bases differentials are bit tighter, do you see much change in your outlook there?
Harry Pefanis
Yes, I think we forecasted it into, included into our forecast for 2015 that we expect part of the differentials to be tighter than the normal. It seems like lot of the volumes are going to Cushing because there is sort of the storage full there and once storage gets full Cushing you should see the differentials normalize again rather go to the natural market and Cushing selling up at a pretty high rate and two months it will be full.
Greg Armstrong
Yes, I think we have seen this before where differentials can get upside down for what you got historical relationships are. There is a really good chance we are going to see some of that happen here.
But I would tell you in general rail, whether it's the rail road companies, whether it's those that furnish cars, whether those who furnish load and unload fees, are just like service and supply guys coming under pressure to the producers that part of the market is going to come under pressure because there is a lot of excess capacity out there if volumes aren’t filling up everything and it's going to be margin compression. So as Harry said we try to factor that into our guidance hopefully wrong we get to revise our numbers up but it would then be bullish on our part to assume that we are going to do the same volume at the same price for the marginal barrel when we know that there is a excess of loading capacity certainly and then as one of the differentials would come in.
again we are seeing already in the last probably 45 days brand trade inside of WTI and today I think it's $6 outside of WTI that doesn’t sound to me like it's a steady state planning model.
Jeremy Tonet
Okay. Great.
So at this point would it be fair to say that you haven’t differed any of your growth CapEx plans on the rail side?
Greg Armstrong
No I think the - what we had in for August we were very confident, we put in service the Bakersfield facility we have got a few tweaks back by commitments on the few other facilities and then we were preparing for some additional optionality in some of our unloading facilities.
Al Swanson
And then we have got project campaign in Canada which we’ll move heavier Canadian crude.
Jeremy Tonet
Okay. Great.
Thanks. And then I suppose I will leave with the obligatory M&A question at this point and I was just wondering I mean you guys have a tremendous crude oil platform and I am wondering lot of the crude oil assets I don't think we have seen as much pain at this point or prices has necessarily come down where we have seen more pain in the mid stream markets more outside of crude maybe towards natural gas and gathering and processing, potentially cheaper assets to be picked up there and I am just wondering is that area would be of interest to you guys to diversify further into or is that something outside of what you were looking for?
Greg Armstrong
We obviously have a substantial NGL business and we have continuously looked at the NGL assets that have been on the market over the last several years and we will continue to look at them. They have probably been impacted from by the commodity downturn as anybody in the midstream space just because you of the processing contract, nature some of the processing contracts and have closed their all the well heads and so we’re trying to really kind of digest what the cash flow generating capacity of that those types of assets and businesses are.
I think that’s the first thing even I have to do.
Harry Pefanis
Yes, I think kind of add onto that Jeremy I think number one we are looking for good deals, we don’t really have the diversification as a strategy, we like the businesses that were in and we certainly like to be bigger in the businesses that we are in. I think where we have the most competitive advantages and then even playing field is which the absence of widely available cheap capital kind of levels playing field little bit is where we have synergies and we have most of those in the crude and the NGL areas so we are not against good deals in other parts of the business where we already have footprint but we are not looking to quote diversify for the sake of diversification we are looking at good deals we think the good deals are mostly come in the years, we have the synergy which will be the crude oil NGL.
Jeremy Tonet
That make sense, thanks for that color.
Operator
Our next question will come from Mark Reichman with Simmons & Co. Please go ahead.
Mark Reichman
Good morning just a few questions. With the [contango] in the crude oil market structure, could you just talk a little bit about the contract profile, crude oil storage, discuss your ability to benefit from perhaps were knowing capacity with high rates and also your plans to keep storage available for your own activities?
Greg Armstrong
Well, yes given that we’ve got 120 million barrels plus of storage capacity and I will probably tell you that we are not going to be the company that’s going to go out to our customers and say, there is contango market and we are going to trying the jag the rates up because of that. Primarily because the ones marked, we serve are the ones that are going to use it regardless whether it’s a contango or backward market so Cushing for example we’ve got over 20 million barrels and 90%, 95% is leased to long term customers that use it again regardless I mean, they’re the refiners, the gas that are operational storage and they were the ones that renewed with us when rates were low and at higher rates then what others were getting.
I think the ones that probably fall into the category that you are adhering to the ones not in the tier 1, the preferred area of Cushing but they are in tier 2 and tier 3 where they really the only utilization taken just for contango opportunities and I think certainly they are going to do is just what you said if they can. As far as we manage the portfolio of assets we haven’t disclosed exactly how much of that we use for own account but it's meaningful, I mean it's enough to where we can participate in the opportunities but not so much where we got a lot of dead assets so to speak when there is not containment of opportunities and beyond just by the way the contango, you see out in the street, for the WTI there has always been other opportunities on a grade basis or a location issue and so again I would just recap by saying I think we have 5% of our package in Cushing is really for own account.
Rest of it is for customer account that’s the way we want it, it's the way MLP with steady state fee based activities growing the distribution wants to have it throughout the rest of the 90 million barrels we have throughout the U.S. and Canada there are areas where we have strategically build off of opportunities or amounts of tankage for our own account and we will use that for these types of opportunities because you might expect the contango doesn’t just exist in Cushing, we are able to access it in other parts of the U.S.
and Canada.
Mark Reichman
With this challenging environment for producers, are you getting any request for discounts on like transportation contracts and under what circumstances might you discount?
Greg Armstrong
I can't think of 100 reason why I shouldn't answer that one way I should. Just because I mean our customers, we are here to get the best value for the service that we provide and so if I could respectfully decline to give our competitors or our customers road map as to how to get more money out of my pocket I will do that.
Mark Reichman
Okay. Fair enough and then just lastly, with respect to the state line pipeline what would you expect in terms of the mix between condensate and crude?
Greg Armstrong
I think state line is probably going to be more of a crude based line but that area you know that whole area is kind of very well, you get areas where you get pockets where there are 40 gravity crude and not too far away you get pockets where there is 50 gravity crude. So we are set up all those systems to segregate the condensate and crude not - crude into Black Tip and then we have got two pipelines from Black Tip to link and then multiple pipelines out of Wink, so we will be able to segregate the condensate if there is market demand we will have it segregated.
Mark Reichman
Thank you very much.
Greg Armstrong
Thanks Mark.
Operator
Our next question will come from Cory Garcia with Raymond James. Please go ahead.
Cory Garcia
Good morning guys. Two quick ones for you, I guess moving back to sort of your commentary on 2015 guidance and recognizing and appreciate actually the conservatives on that $50 price tag but curious if there is any rule of thumb or any color you guys can provide say on sort of different oil price sensitivity that we should just simply back into okay with $80 now it's $50, is the difference or is there different price points in terms of every $5 or $10 move higher from here it equates to x amount of cash flow.
Is there a rule of thumb to backing any sort of sensitivity there?
Greg Armstrong
No, there is not Cory and the reason for that you kind of normally get back to slide 8 to some extend we don't have any direct exposure to the commodity price of any significance at all. We are impacted by what producers have available to invest and that’s tied to their cash flow so we purely run areas for example where in the Permian for example, there is a project at $80 oil made them 35% rate of return and at $50 oil it only makes 5% rate of return.
Well that’s an area then we would say gosh we don't expect a lot of volume growth. On the other hand we run numbers that say in that area that only has 5% return if the service and supply cost that they are paying go down 20% that number may go back to 15% to 18% and so there is so many issues that dwell the surface that are going on that are going to impact that and so we do have perspectives in our company as to each areas what we think it's going to take to move that but there is no way that you could put that any kind of normal graph and say here is the impact on PAA because again it's not - we are not the mostly directly exposed to commodity prices to producers, but again there is a lot of factors that can affect their availability of capital and their willingness to drill in particular areas and you almost have to have all the information we have to be able to come up with that so I do think we try to combat that so we don't keep you in the dark.
I think we put the most detailed guidance out there on area by area pipeline by pipeline than anybody in the business and we will continue to do that.
Cory Garcia
Yes, absolutely appreciate that. There is a quite few moving pieces on equation.
I guess change in focus up and force to catch one, how should we be thinking about the phasing of cash flow from these projects, obviously a nice uptick in capital over the next two years. Should this be similar to your other projects where the cash flow gestation periods call it a year or 18 months or is there difference sort of phases to look in over the next 12 or 18 months where we can actually see some of that cash flow ramp sooner?
Greg Armstrong
Those are projects that take a little longer time to develop, developing caverns and rail facilities and buying capacity. So it's probably more like a 18 to 24 months, time so you probably starting kicking in mid 2016.
Harry Pefanis
And even there Cory, with catalog we had in Cactus where you are going to start off at one level and then the volumes would build up and that’s why when we talk about lot of the capital we are spending now is really not have any impact on 2015. It will start in 2016.
you will probably see the full run of it in 2017, some of them in the early 2018.
Cory Garcia
Yes, great. Thanks for the color guys.
Greg Armstrong
Thank you.
Operator
Our next question comes from Mathew Philips with Clarksons, please go ahead.
Matthew Philips
Good morning guys.
Greg Armstrong
Hey Mathew.
Matthew Philips
To really beat the dead horse on the M&A topic I mean in the past couple of years you have all invested a lot of capital in the Eagle Ford and the Permian mid count in general I mean did you expect to M&A opportunities to mirror that or do you see this as a chance to enter new basin and then increase the footprint in Canada, you know things like that.
Greg Armstrong
Again, I go back to we are looking for good deals. There is not an areas that we are in right now that we wouldn't want to be bigger and better in that so we are certainly looking at own backyard.
There is also areas that we believe that there is opportunities for volumetric growth where we don't have the biggest footprint currently as we like to have, but I know you want to ask me on this call to tell our competitors where we are looking so I don't have to worry about that. As far as again, we are not looking for diversification for the second diversification.
We are looking for good deals and areas we can have synergies. I will say that there is an opportunity because of the way we have inter connectivity and would intend to connect any area that we branch out into geographically to capture incremental synergies.
So, you shouldn't assume that just because we are not there currently, it doesn’t mean we wouldn't have synergies if we bought a footprint. That the kind of value we can bring to the table.
So it's more the same.
Matthew Philips
Okay great. Thank you.
Greg Armstrong
Thank you.
Operator
Our next question comes from Sunil Sibal with Global Hunter Securities. Please go ahead.
Sunil Sibal
Hi, good morning guys and thanks for taking my question. So my question is related really to the rail facilitates segment and the rail projects that you are bringing online in 2015.
how should we be thinking about especially volume commitments on those facilities, I mean what kind of in terms of percentages commitments are there and are the commitments sufficient to meet your hurdle rate of mid teens kind of returns on those products?
Greg Armstrong
Most of the projects that we are bringing on in 2015 in fact are supported by commitments I think Cactus for example, is one and was got a lot of commitment we also have some plumbing to do to be able to fully optimize the benefit of that. So even though we may have capacity today we hoping line to do - to put 200,000 barrels a day and we don't necessary have the capacity at the other end of the pipe to take 200,000 barrels a day out of it, move on to the systems that’s why it's important for us to expand the JV.
But having said that we have sufficient commitments on that and several of the other projects, Eagle Ford etcetera to support the expansion of those and meet our minimum return. In some cases the minimum rate of return is maybe 100 or 200 basis points over our cost and capital which won't get you to the mid teens, but then the optionality or the ability for spot barrels to fill up the Permian space to get you there which again is the function of kind of what the overall volume level is in the areas and what markets we serve versus others.
So, I think from the downside protection we are in very good shape. From an upside opportunities we have got room to run.
Sunil Sibal
Okay, that’s helpful. And then on the M&A front, I think you previously talked about support from the GP especially bidding on assets in this competitive environment, I was curious if there is any updated thoughts there with regard to the support from GP or IDR concessions?
Greg Armstrong
Well, we have been prepared for this type of market for a while. So, we have no less tools than what we had coming into this and we probably have more desire to use the tool that we have.
So, there is support today as they ever had been and probably more so specially when we see good deal.
Sunil Sibal
And then just last one from me, when you look at 2015 CapEx program in terms of the funding you obviously know did the $1 billion facility, how should we be thinking about supporting the 2015 program from dead end equity perspective?
Greg Armstrong
Yes, our plan will be to continue to finance our growth capital with equity in long term debt. The liquidity facility was designed to bolster our liquidity in, but we think will be fairly on certain times.
So again the plan will be raising equity either through our continuous equity offering program or through underwritten offering and accessing the senior notes market at some point.
Harry Pefanis
Yes, I would say Sunil, the important thing is we will continue to keep a balanced funding approach. We don't use the real low slightly higher than free short term debt rates when we look at our analysis.
So, we are using basically the ten year rate with our credit spread on top of it and then we are using the equity. So it's about 55%, 45%, 55% equity, 45% debt and that’s what we will continue to do.
So, no change there but again keep in mind we kind of entered into this opportunities in the fourth quarter last year prefunded with the opportunity to take advantage of acquisitions and we did and we have got additional funding this year on the capital program but again nothing that’s going to be significant hurdle.
Sunil Sibal
Okay. Very helpful.
Thanks.
Operator
Our next question comes from [Lin Chen with Height], please go ahead.
Unidentified Analyst
Good morning. Thank you for taking my question.
Can you comment a little bit more about their current contango market and how long do you think will it last. You just mentioned that Cushing is filling up very quickly maybe full in two months or so.
So how will it change their contango market?
Greg Armstrong
Well, part of it is going to be a function of what happens in the other market. Once it get forming obviously then the differential is going to change to pull the barrel out of Cushing, you are going to have to have some differential that supports the movement because to get from Cushing to gulf coast which is about $3 plus there and right now the markets don't support that movement at the margin.
So, I think the answer is, depending on what happens to demand and refinery turnarounds etcetera, you are going to see a little bit like if you are familiar with that name [Whack Molly] you are going to see certain things pop up and you are going to knock that down, and something else is going to pop up. So, if we had the absolute road map what it looks like we probably wouldn't share on this phone call because it would be a competitive advantage but we do think we have assets in all the right areas to be able to be a meaningful participant in that type of favorable market, favorable for our business model maybe not so favorable for others.
Unidentified Analyst
One of the refineries talk about their contango market yesterday or the day before yesterday on their conference call said, they expected their contango in the first half of this year and then like less contango in second half of this year or so. Do you think that makes sense?
Greg Armstrong
I had to know more what their fundamental assumptions are and again it maybe specific to their regions that they are in. So, I really couldn’t comment on those who are having more context.
Harry Pefanis
If you need more demand or less supply to change the dynamics of the contango market it will be contango fundamental balance and fundamental start pulling crude out of storage.
Al Swanson
Yes, there is some quality issues Lin, also will affect the ability to bleed the storage down so that you don't have a continued contango market because a lot of what we are producing today that is not wanted by the market is the lightest crude and condensate to the extend that’s getting stored, you are not only going to have to change in market structure but you got to change in quality differentials to be able to balance that out. So, I think we would probably - if we had the air, we would air on the side of it, once it gets in pulled in contango it could stay here longer than we think unless obviously Saudi Arabia comes out July 1, and so they are going to cut reduction a significant amount it might change the market almost immediately both more for perception and reality but it still changes.
So, I would say anybody that actually says they know what the market is going to do, well I’ll just leave it at that it will be tough to really have that kind of vision.
Unidentified Analyst
Thank you very much. I appreciate it.
Operator
And our final question will comes from _ please go ahead.
Selman Akyol
Thank you, good morning. One quick question here just regarding the facility segment guidance, your per barrel profit goes to $0.41 to $0.38 for 2015.
I think in some of the previous comments you made that that was really due to the more competitive rail rates and in the fourth quarter that you just reported facilities you really called out your reference to declining natural gas storage rates. So, the question I am asking here is that abated in terms of natural gas storage rates or is that still a fairly strong headwind going into 2015 and is reflected in the declining rates as well?
Greg Armstrong
It's included, but natural gas storage is only 4% of total EBITDA or something like - it's not huge. I mean it's - so point being is this going to be the driver for that, it's other factors but all that is wrapped up, I would say the natural gas storage is still placing headwinds.
I think we had indicated a year ago that we thought this was probably going to stay around for three years. Hopefully still only has two year left but there is no question it hasn’t abated from where it was.
Harry Pefanis
That’s not really a big between 2014, 2015. Gas processing in the gulf coast is also included in the facility segment and those margins will be tighter in 2015 than they were in 2014.
Selman Akyol
Alright thanks very much.
Greg Armstrong
Thank you, Selman.
Operator
We have no further questions.
A - Greg Armstrong
We really appreciate everybody dialing in, for those who have invested in Plains, we appreciate your confidence in this and we look to update you on activities in the first quarter, for the first quarter in May. Thank you.
Operator
Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T teleconference service.
You may now disconnect.