DCP Midstream, LP Common Units

Good day and thank you for standing by. Welcome to the DCP midstream second quarter 2021 earnings conference call. At this time, all participants are in responding mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Mike Fullman, Director of Investor Relations. Please go ahead.

Thank you, Shannon. Good morning and welcome to the DCP Midstream second quarter 2021 earnings call. Today's call is being webcast and I encourage those listening on the phone to view the supporting slides which are available on our website at dcpmidstream.com. Before we begin, I'd like to point out that our discussion today includes forward-looking statements. Actual results may differ due to certain risk factors that affect our business. Please review the second slide in the deck that describes our use of forward-looking statements, and for a complete listing of the risk factors, please refer to the partnership's latest SEC filings. We will also use various non-GAAP financial measures, which are reconciled to the most comparable GAAP financial measures in the schedules in the appendix section of the slides. Bauder Van Kempen, CEO, and Sean O'Brien, CFO, will be our speakers today, and after the remarks, we'll take your questions. With that, I'll turn the call over to Bauder.

Thank you, Mike, and good morning, everyone. We appreciate you joining us today and hope you're all safe and well. On today's call, we will discuss our second quarter and first half results for 2021 and our outlook for the remainder of this year. Before getting to that, I would like to say thank you to Team DCP for delivering another strong quarter of results. Compared to the last 15 months, the second quarter was relatively quiet. Instead of managing through unprecedented events and responding to historic volatility, we focused 100% of our time and efforts on executing our strategy, providing safe and reliable operations for our customers, accelerating progress on ESG and sustainability, and investing in our employees and our culture. Our second quarter results in highlights that demonstrate the strength of our diversified portfolio, the transformation we've undertaken over the last five plus years, and the earnings power of the DCP business model, which was recently recognized by Moody's with a full-turn upgrade. For the quarter, we generated $333 million of adjusted EBITDA and $225 million of DCF, representing 21% and 29% increases versus Q1 as volumes strengthened across the portfolio. Within the quarter, we generated a record $132 million of access-free cash flow, which was the fifth consecutive quarter generating positive access-free cash flow, which we defined as cash flow after paying our distributions and funding our capital programs. This strong quarter and fast start to the year, coupled with a favorable commodity environment and producer activity, has us confident that we will meet the upper end of our financial guidance. The DCP business model, strategy, and track record of execution has the partnership well-positioned as we look towards the second half of the year. As we aim to close the year with a strong second half and build momentum for 2022, we're also taking steps to position DCP for the long-term future as we accelerate our ESG and sustainability efforts, which brings me to our next slide. On Monday, we published our second annual sustainability report, Resiliency and Evolution, which highlights our sustainability performance from the 2020 calendar year, announces forward-looking goals on greenhouse gas emissions reductions and inclusion and diversity, and outlines our strategies within a variety of ESG-related efforts. Importantly, we substantially increased our disclosures by aligning with SASB, the Sustainability Accounting Standards Board, the Energy Infrastructure Council, EIC, and the GPA Midstream Association ESG reporting template, the latter of which we helped to create as a participant in the joint ESG working group. Before I review the highlights of our report, I want to set some context. The United Nations expects the global population of 7.7 billion people to increase to almost 10 billion by 2050, with the potential to peak at 11 billion by the century's end. As one of the largest natural gas processors, natural gas liquids producers in the United States, DCP plays a critical role in meeting the rapidly increasing energy demands of a growing global society that is constantly striving for enhanced living standards. From creating electricity, fuels and heat sources, to providing feedstock for countless consumer and industrial products, the natural gas and NGLs that DCP processes and transports are a fundamental pillar to improving quality of life, both here in the United States and abroad. And this is why our company purpose is building connections to enable better lives. We know that hydrocarbons continue to fuel our global society, with increased long-term demands for natural gas for decades to come. We also know that we have a duty to ensure that our role in the energy value chain is as clean, as responsible, and as sustainable as possible. We've established a sustainability council and energy transition team focused on building and executing long-term strategies to ensure our company sustainably enhances values for our stakeholders and that we are a proactive participant in the energy transition. Our council has established concrete three-year strategies to drive our sustainability performance and in our newly published report, we outlined how well the team executed last year. At DCP, 2020 was not defined by the challenges we faced, but by the achievements we celebrated, including our financial and strategic execution, as well as our ESG performance. Several highlights of our team's hard work during our company's most trying time include a 46% decrease in recordable injuries since 2016, with an industry lead in TRIR of 0.44 in 2020. 16% reduction in scope one and scope two greenhouse gas emissions, and a 23% reduction in methane emissions since 2018. We established a company-wide inclusion and diversity committee, and we increased diversity on our board of directors. We achieved an employee engagement survey score of 76%, which was above the industry and represents a three percentage point increase since 2018. And as a company, we donated a million dollars to our community partners, including 325,000 to local food banks during COVID-19 crisis. We're proud of the progress that we've made. We're excited about setting new forward-looking targets, which brings me to slide five. Looking forward, we must continue to evolve and proactively meet the needs of our employees, our customers, our investors, and communities. There is a remarkable opportunity for our company to thrive and ensure the sustainability of DCP for the long term. We've been a strong midstream company for over nine years, and by successfully enhancing our ESG outcomes, we ensure we can operate as a leading midstream business for decades more to come. In our report, you'll find that among many targets and aspirations for improvement, we've highlighted several new forward-looking goals. We have two goals for emission reductions, including that by 2030, we will reduce our total Scope 1 and Scope 2 greenhouse gas emissions by 30% from the 2018 baseline, and that by 2050, we will achieve net zero greenhouse gas emissions. We plan to achieve those targets, through three strategic horizons focused on clean the core, adjacent to the core, and beyond the core. Clean the core means continuing to improve our emissions profile to increase efficiency and modernization of existing operations. And we know that we're going to spend most of our efforts here over the next decade. Adjacent to the core focuses on expanding our business portfolio where DCP's existing intellectual and social capital is relevant to compete in complementary business lines that improve our outcomes and provide solid returns. And this can include carbon capture and sequestration and other emerging technologies. And beyond the core is a strategy to ensure that DCP is positioned well for the rapidly changing energy ecosystem and tomorrow's energy solutions. In addition to our emissions reduction targets, we've also established formal inclusion and diversity goals. And these include, by 2028 and 2031, ensuring our workforce, our leadership, and our succession pipeline represents the gender and racial demographics of the local communities in which we operate. Secondly, we continue to invest in our people and are committed to maintaining at least satisfaction and belonging scores above the industry benchmark over the next five years. And finally, on an annual basis, ensuring that representation of veterans in our workforce aligns with national demographics. When aligned with our focus on safety, reliability, transformation, efficiency, and culture, these goals are about continuing to do what is right while strengthening our company. And we're proud to back our words up with action. We also announced renewal for $350 million accounts receivable securitization facility with the addition of ESG-linked KPIs. This is a first-of-its-kind agreement within the entire energy industry, as we have leveraged our annual pricing against our safety performance, relevant to our peers, and year-over-year reductions in our greenhouse gas emissions intensity rate. Our goal is to demonstrate accountability to improving our sustainability performance. As always, we welcome your feedback on our reports, our targets, and our strategy looking forward. And with that, I'll turn things over to Sean to run through the second quarter financial results.

Thanks, Valder, and good morning. On slide six, I'll hit the key drivers to our strong second quarter performance. We generated $333 million of adjusted EBITDA and $225 million of DCF. which were significant improvements from the first quarter, as the industry rebounded from the impact of winter storm Yuri in Q1. Volumes across our G&P business continued to strengthen through the quarter, which allowed us to maximize the impact of the favorable commodity environment. Sandhills and southern hills volumes were up 26% and 10% versus Q1, as the pipelines benefited from growing G&P volumes and increased third-party ethane recovery early in the quarter. As expected, we realized higher costs and sustaining capital as deferred maintenance work from Q1 took place in the second quarter. While there was an increase in spend quarter over quarter, we will continue to aggressively manage our costs and capital as we finish the year. We're committed to maintaining the savings we realized in 2020 while managing the impact of inflationary pressures on the business. We saw a slight increase in leverage for the quarter, moving from 4.1 to 4.2 times due to the timing of working capital, which was primarily a result of collateral posted associated with our 2021 and 2022 hedging programs. We fully expect this to normalize over the next two quarters and position us to finish the year in line with our 4.0 times guidance. Now moving to slide 7, I'd like to provide an update on our second half outlook. We continue to see favorable indicators as we move into the second half of the year. GMP volumes were up 6% quarter over quarter and trending favorable to Q2 2020 after normalizing to account for the large contract expiration in the Eagleford that took effect on January 1st. We're seeing producers accelerate drilling plans, resulting in improved volume outlooks, specifically in the DJ and Permian, as we close the year. Within the logistics business, we continue to forecast sand in Southern Hills at high utilization rates, as Southern Hills continues to benefit from the steady supply of volumes from our MidCon business, as well as the growth we're seeing coming out of the DJ Basin. On Sandhills, we are currently seeing third-party ethane rejection, as natural gas prices have increased over the last two months. In this environment, DCP's commercial team has done an outstanding job working with our customers to incentivize some level of ethane recovery to generate incremental value for DCP and our customers. As for the rest of the year, we do anticipate volumes on Sandhills continuing to improve and there remains potential upside with increased methane recovery over the last five months of the year. The commodity outlook is stabilized and the forward curve remains strong with all three commodities trading at higher prices than we realized in the first half of the year. This will provide a nice tailwind given our unhedged equity positions. And while we will see increased costs in sustaining capital relative to the first half of the year, we are tracking in line with our four-year expectations. With favorable volume trends we're seeing and assuming the forward of the curve remains strong, we are well-positioned to meet the upper end of our financial guidance. And with that, I'll turn it back over to Vowder.

Thanks, Sean. So to close us off on slide eight, the DCP team continues to deliver strong results and has us well-positioned to meet our 2021 commitments. Our diversified business model and execution of our long-term strategy continues to deliver value for unit holders. Over the last five plus years, we've built our stable fee-based logistics business, generating almost 60% of our earnings. We permanently removed $150 million of costs from the company. We executed the capital efficient supply loan capacity short strategy, and all of this while retaining favorable commodity upsides. This transformation and execution sets us up well to generate significant cash flow during these favorable commodity environments. Within the first six months of the year, we generated nearly the same amount of excess free cash flow as we generated in all of 2020. Our capital allocation priorities remain unchanged as we're committed to reducing our absolute debt and strengthening our balance sheets. Looking forward, we're seeing favorable indicators, which has us optimistic to deliver towards a high end for 2021 financial guidance. We're very well positioned as we enter the second half of the year and look to build momentum heading into 2022 as we transition to returning additional value to unit holders. We'll take the next step in the DCP journey as we accelerate and continue to derive step change improvement on the ESG and sustainability who set aggressive targets that I'm confident that the DCP team will deliver on. We're incredibly proud of the accomplishments of our team to date, and we're excited to continue our sustainability journey for decades to come. With that, I look forward to taking your questions, and Shannon, please kick us off.

Thank you. As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from Jeremy Tonette with J.P. Morgan. Your line is open.

Hi. Good morning. Good morning. Good morning, Jeremy. For the guidance out there, I just wanted to confirm the deck, commodity price deck being used there, is that kind of unchanged from what you said last quarter? And so if you kind of mark to the strip? you might get to something a bit higher. And just want to see exactly what's baked in for Essay and Expectations there, recovery pricing, and do you see, you know, Southern Hill volumes picking up there and that helping as well?

Yeah, sure. So I think you're thinking about it right, Jeremy, what we've done for the second half of the year. And look, I'm excited that we went to the high end of the guidance. Obviously, that includes, you know, if you think about Q1, that includes more than covering, well more than covering the URI impacts. But Specifically to the price deck, you know, if you take the current strip, you're going to get some more upside than probably what we have baked in, right? We sort of have a view where it's in line with what we've seen in the first half of the year, maybe, and slightly better than that. The current spot, if that holds for the remainder of the year, you definitely have some upside to the guidance that we gave. But, you know, definitely we've baked in some favorable price uplift in the second half of the year. Could be better. On the FAME recovery rejection side of the fence, I'll remind you, we came into the year assuming, you know, full recovery. Obviously, that, you know, it's been sporadic. Q1, we didn't see a lot. We saw a little bit in Q2. And I'm going to be clear, this is third-party. Because of our value chain, we've been in recovery the whole time. So the barrels that we control, we've been in full recovery. But on third-party, you saw a little bit. We incentivized some recovery early in the quarter. People went back into rejection mode. You know, I think Douda and I talked about it. Gas has just been screaming. So that kind of pushes people in their economics back into probably rejection. That also, by the way, if we see recovery, you know, click back on the remainder of the year, all boats rise, that would be upside for us. We are assuming rejection, third-party rejection for the remainder of the year. A couple good things that could go our way as spot prices continue to hold and we see something a little stronger than our outlook. Awesome. And then, obviously, if we move into recovery, that's upside above and beyond what we've thought, what we've baked in.

Got it. That's helpful. So spot and ethane recovery upside to the top end of the guide as you wait out there. So that's great to hear. Maybe just kind of pivoting towards producer conversations at this point. You know, commodity prices moving up here. producers have really been kind of disciplined on production growth, but the privates, you know, are a bit more active. And then it seems even with the public, I guess, if the leveraging is going down, maybe there's more kind of activity picking up there, especially as we go into 22. Just wondering if you could peel the onion a little bit more with your producer conversations and how you see things trending across your footprint there.

I can start, Jeremy, with some of the big producers there. you're spot on. So, you know, there's obviously a lot of optimism. They like the environment that they're seeing, but the discipline continues. I actually think that's a pretty good thing because we are seeing some rigs, you know, some rig increases. We're seeing some activity. Obviously, the growth that we did assume in areas like the DJ and the Permian are not only happening this year the way we thought. In a lot of cases, they've been accelerated a little. So that's good, and I think that bodes well for the second half of the year. You know, Bowder can talk a little bit, but we are seeing more around the small guys. Not as big of a driver, but you definitely are seeing more activity there. As you think about 22... And that's sort of the picks we were trying to set. We feel like we're going to exit the year pretty strong based on, you know, what we're seeing from our producers, what we're hearing. And I think that discipline will continue, but it will drive, I think, a nice, even keel growth outlook and volume outlook for 22. And I think that's really good for our industry at this moment. So definitely significantly better than what we would have thought six or eight months ago.

That's really helpful. Just one last quick one if I could. When it relates to CCUS and given there's a lot of pending legislative efforts out there, that could change the picture. But just wondering specifically as it relates to DCP, if you could build a bit more about what specific initiatives, you know, could be pursued if the right policy support comes through there. Sure.

Yeah, so maybe I'll take that one. So if we think about CCUS, that really is probably, you know, I spoke about CleanCore. So those are the tangible projects that we have where we already are kind of doing things around modernizing our footprint, asset reliability, you know, and then you've got the adjacent to the core. CCUS, or for us probably more CCS, is really going to be around adjacent to the core. We are already doing a significant amount of carbon capture and sequestration in our Southeast New Mexico business today. And we have additional opportunities to do that in New Mexico, in Colorado, in Michigan. If you think about it, gas processing plants are fairly significant aggregation points for carbon. And if we can find a way where both from a regulatory regime at the federal level think 45 queues as well as kind of a speed to the ball at state levels and I'm then thinking about hey how do you get class six wells permanent in a in a reasonably fast time period you can build a good returning business there and where we would earn above a rated average cost of capital and take a very, very significant amount of carbon and scope one emissions out of your footprint. So it's something that the team is looking at quite diligently. There's a lot of opportunity. We're already doing it. So it's something that we're familiar with. We do need to have, you know, the 45 queues to be, you know, going up a little bit from where they're sitting today. We do expect that there's bipartisan support for that, and that will happen. And then you're kind of thinking about how you can get from a permitting point of view, how can you get things in place in an expedient manner.

Got it. Makes sense. Hopefully the Railroad Commission gets primacy there, and that would help with the classics wells a lot. So thank you for all your thoughts there. That was very helpful.

Thank you, Jeremy.

Thanks.

Our next question comes from Jared Gershawney with UDS. Your line is open.

Hi. Good morning, guys. I just wanted to clarify one of your responses to the prior questions on guidance. You had sort of said there's extra cushion with respect to commodity pricing, but do you also have some extra cushion with respect to volumes, just given how strong the volumes were this quarter as well, too?

You know, I would tell you, Shanier, where I see the potential cushion, and I was alluding to it, is on the pipelines potentially. And, you know, if we end up going into full recovery, that would bode very well for Sandhills. I mean, we're seeing good – look, the capacity utilization on both pipes we're very happy with, but there is some upside there. You know, it's still – look, volumes have come back strong. I think we have some growth. Per my written remarks, the remainder of the year – Is there some upside? I think we've baked in mostly what the big guys have told us, but, you know, there's always potential that things could come in a little bit stronger. But I keep an eye. The bigger thing, I think, is recovery. And then, of course, if commodities stay screaming like the spots, that would be upside for the company as well.

Okay. Thanks for the clarification. Let me just pivot to the questions that I had. Just curious, if you do end up in kind of an excessive guy type of mode with excess cash generation, you sort of labeled your priorities as reducing debt. You talked about the Moody's upgrades and so forth or the Outlook upgrades and so forth, and that does remain a priority. Just kind of curious, though, is like kind of, you know, you've been pinning off maturities as they come up. But when I sort of look at your capital structure right now, most of your debt is trading above par. You know, obviously, that's good as to your performance. But kind of curious if you'd be looking at other parts of your capital structure, you know, for example, the junior subnotes, which do trade at a discount and do actually have pretty high coupons. Would that become kind of a focus kind of in between maturity expirations?

As you know, yeah, I started and then Sean, you can jump in as well. I think in general, we believe that this is the perfect time to set the company up well for the long term, and that means getting to a very strong balance sheet. We are very committed to 4-hour leverage by the end of this year. And I think if things, you know, stay as is, and that's kind of what Sean was talking to, if you have commodity prices like they are today with our continued kind of, you know, good management around reliability, how we manage cost, capital, things like that, you get to an access free cash flow profile where we should be somewhere in the three and a half range in 2022. And that provides you a massive amount of flexibility. Three and a half is kind of a key number for us. That's really where we want to be. And after that, you're absolutely right. There is a tremendous amount of flexibility. And that flexibility can be anywhere from, hey, are we going to raise the distribution, going to give dollars back to our unit holders that way? Is there a way to buy back units? Is there something to do around the preferreds that you're talking about? Some of those are trading at a premium as well. As you know, some of them are a little bit below, but we also get significant equity credit there, which we have to balance those two things together. But I think the key takeaway, you know, here in the short run, continuing to get the balance sheet right, this is the perfect moment. We will get this company to a very, very strong balance sheet with investment grades type of metrics, and after that, and if commodity stays like where we are today, you've got massive, massive flexibility in 2022 and beyond, and that's pretty exciting.

Oh, perfect. Appreciate the color there. And maybe just to pivot, I was looking kind of in your appendixes around the hedging that's been in place. Looks like you've added some 22 hedges right now, and I think you're now at about 41% hedged. versus 15% last quarter. Is that kind of enough? Is that kind of where you kind of need to be at this point right now? And also, as you've been layering on the hedges, especially on the GAF side, just given the basis issue from last quarter with Richard Strong-Urey, have you sort of adjusted the way that you're putting your hedges on and so forth?

Yeah, so two things on that. First question, you know, I couldn't have said it better. I mean, I think A couple things, this price run-up has given us the ability, Shanier, so those 22 hedges, when you really think about them, are at pretty significantly higher prices than 21. So if you're just going to mark hedge to hedge, there's a pretty good cash flow pickup there going to the pricing in the 22. I do think you're thinking of, you know, everything we've said thus far puts us a little more bullish around outlooks for next year. So I do think we will not go and be as hedged as we were in 2021. I mean, we're about consistency in cash flows, taking advantages and knocking in at good rates. But I do think we feel really good about where we're at in 22. So we probably will feel like that we probably are where we need to be at the moment. So yes to that question. And in terms of the URIs, The equity hedges did not pose any problem. They have longer duration. Obviously, they're not impacted by the volatility. Like, jury was all about volatility around spot prices and gas daily prices in, like, a five-day period. So the longer-term hedges always perform well. That was more around selling the product that you had. in those days, and obviously the product wasn't there. And we have, by the way, to answer that question, we have added, we have taken some different approaches that will safeguard the company so that we'll be in a better position if you were to see another type issue like that in the winter. Perfect. Really appreciate the call today, guys.

Thanks, Junior.

Our next question comes from Michael Blum with Wells Fargo. Your line is open.

Thanks. Good morning, everyone. Just two quick ones for me. One, I wonder if you could just give us your outlook on the mid-continent specifically, what you're seeing there from a producer activity level, and also, I guess, related, you know, what's your view of how Southern Hills volumes will sort of trend here for the rest of the year and into next?

Michael, so far, you know, Southern Hills showed a bunch of impact or positive improvements going into Q2. And a lot of that is, you know, Mid-Continent was obviously affected by URI. But we're seeing, you know, we're not seeing massive growth, but we are seeing the Mid-Continent kind of hold the line, which is probably a little better than what, you know, if you and I were talking coming into the year than where we would have been. And you are seeing that. Southern Hills is a little different than Sandhills in the sense that the majority of the volumes do come from barrels or gas that we control. So, so far, Southern Hills Outlook improved pretty good in Q2. I think we expect it to improve even more in Q3 and Q4, and that is partially driven by a slightly better Mid-Tottenham Outlook than we would have thought. And the DJ is just going through the roof, right? The DJ is doing quite well, and you're seeing some pretty good stuff in terms of that feeding Southern Hills as well. So good outlook on Southern Hills, and definitely, you know, volumes in areas like the Mid-Continent and the DJ catching up. I think I said on the last call, things started a little slow in the year, and then you had URI. We're definitely seeing things catch up to where we had anticipated. Mid-Continent probably slightly better than what we would have thought.

Got it. Second question I wanted to ask was about the A&D market. Clearly, I think it's been pretty active, more active lately in the midstream space. Looks like companies both looking to pick off some assets that fit their portfolio and also divest where it makes sense. Is there anything from your perspective? I just want to get your general perspective on that. Is the assets that you own today where you want to be? Do you see divestitures? Do you see anything you might want to add?

Yeah, good question, Michael. I'm like, you're right. You see a little bit more activity. At the same time, I don't think you are seeing the type of activity yet that what you're seeing, for instance, on the producer side of the house, where you're seeing more broad-scale consolidation. There are definitely some assets coming to market where people are, you know, trying kind of discrete asset transactions for us. You know, I'm absolutely not saying no to that in any way, shape or form. I also am not saying that, hey, We're having 10 things here on the table that we're very actively looking at from an acquisition point of view. From a divestiture point of view, we are pretty happy where the portfolio is sitting today, so we're not running any active projects there either. I do continue to believe, and I've answered your questions and your colleagues' questions multiple times over the last six, 12 months, that the midstream industry as a whole needs to consolidate. And I think that is something that is very, very important. There continues to be some pretty significant overcapacity in various areas. And I don't see that overcapacity being fully utilized anytime soon. So, you know, if you get into a more mature industry, state of this industry, which we clearly are. You went from the big growth cycles into a much more mature harvesting cycle. Then I do think M&A on a broader scale is something that is tremendously important. You know, are you going to see us do that? I obviously cannot opine on that. I do believe that DCP as I've said before, has earned the right to be a consolidator. I think we, you know, if you think about what we have done around optimizing our asset base, lowering our costs, upping our reliability, you know, I spoke about our sustainability performance, you know, our scope one, scope two, green out debt, reductions, things like that. You know, I do believe that we know how to take assets and optimize them, but You know, it's also M&A is not a strategy. I think M&A is an execution of a strategy eventually. But we'll see where it goes.

Thanks, John.

Thanks, Michael. Thanks, Michael.

As a reminder, to ask a question, please star then 1 on your touchtone telephone. Our next question comes from Spiro Donis with Credit Suisse. Your line is open.

Hey there. Hey, John. First question on propane. I'm curious, can you just point a little bit on the strength we're seeing in that market right now? I'm just curious, I guess, how sustainable you think that is. And, Sean, on the hedge position for 2022, that's 74 cents a gallon. It kind of seems to suggest maybe that gravitates closer to 80% as you layer in more hedges. But you mentioned that sort of big step up in the hedge position from 2021 to 2022. Can you share roughly what your sort of propane hedge position is from a price perspective in 2021?

Let me quickly start and then hand it over to Sean Spiro. In general, around propane, I'm like, you know, you're taking a look right now where inventory levels are sitting compared to five-year average, and we're obviously fairly low. We're starting to get close to the end of the summer and going into winter. You know, I feel pretty good about things right now. I think we also know that You know, if you don't get a winter start kicking in in November, December, then quickly you're going completely the other direction. But, you know, obviously quite helpful where things are today. And then, Sean, maybe you can talk about the hedging side of the house.

Yeah, so, Spiro, in terms of 22, I think we're – you know, obviously propane was constructive, so – If you think about 21, the biggest opportunities for hedges in 21 have been gas. Obviously, we've been able to do some stuff since then. As you think about 22, NGLs and crude have been constructive, but we're still pretty lightly hedged on the NGL side. We probably have about no more than one-fifth or 20% of those types of hedges on the books for NGL, and propane would make up a chunk of that. So there's still a fair amount of propane upside there. as we think about 22. Your 80% mark, I think, is about right. I think that's where we would probably, if we gave a number on 22% or on 2022 right now, we'd be about 80% for your hedge. As you think about 21, we're closer to 90%. So that's my comments earlier about leaving some of that position open because we're a little bullish was alluding to that 10% delta. But still a lot of room on propane. We've been able to get some of those hedges on. Obviously, the heavier end of the barrel, we've been able to get some hedges on as well. But a lot of room still left if propane is to run.

Okay. Just to make sure, if you can provide, just trying to compare that 74 cents a gallon hedge position in 2022 for propane, is there a similar number you can provide for 2021 kind of where you're hedged right now?

For propane specifically? Yes. Yeah. We'll shoot that to you.

Yep. That's perfect. We'll follow up on that later. And then just on ethane, I understand you don't really have the ability to obviously recover or reject, make that decision each time, but it sounds like commercial team working hard there. You want to send more recovery. I guess what would it take to grab more out of the stream from here? Is it simply a function of lowering the path downstream to make it more economic? I suspect it's more complicated than that. And have you been able to quantify at all kind of what the upside is, you know, if you ever get to a full recovery scenario, what that could mean from an earnings perspective?

So a couple things. The big lever is obviously you're incentivizing people by lowering the rate. The frack spread, you know, the good news is I know the frack spread hasn't been conducive to recovery, but let's, you know, the positive is that's because gas is running so has NGL. Gas just happens to run more than In terms of the upside for the company, I don't know if we've ever given a number, Spiro, but I can tell you it's tens of millions of dollars for the remainder of the year if we can get into full recovery. You know, that's the benefit of having a very stout value stream, right, having the pipeline, getting to be able to make money in various chunks of the value stream. So it could be, you know, a couple of tens of millions of upside for us if we were to go into full recovery for the remainder of the year. Great.

Helpful as always. Thank you, gentlemen. Thanks.

If you wish to ask a question at a time, please press stars and one on your touchtone telephone. Our next question comes from Tristan Richardson with Truist Securities. Your line is open.

Hey, good morning, guys. Just appreciate all the comments on what you're seeing near term and even looking out into 2022. Just thinking maybe a bit longer term, you know, once you've kind of achieve some of those medium-term targets, getting the balance sheet to that three handle. I'm just thinking about CapEx. You've noted on past calls there's some niche-y capital opportunities here and there, out there. But I guess just thinking about 22 and beyond, as we kind of go in and out of potential commodity cycles, does DCP have everything it needs from an earnings engine perspective to – you know, to sustain multiple commodity cycles and keep the balance sheet exactly where you'd like it? Or are there project opportunities, expanding the downstream business further, et cetera, that you're thinking about longer term?

Yeah, Tristan, let me take that one. I think what's first and foremost, the most important thing as a commodity business to go through commodity cycles is get that balance sheet fortified. So, you know, we're running. Internally, we're running, obviously, a lot of different decks and models, but where I look at most of that is kind of the downside model and say, okay, if we get into a prolonged low commodity environment, are we comfortable running the company, having the balance sheet to get through that? continuing to generate excess free cash flow and continuing to obviously pay the distribution. And the answers to all of those are yes, which is a great, great thing. If you think about this industry over the last 10 plus years and the cycles we have seen for many companies, including ours, that answer was fairly often, unfortunately, no, because the industry was levered fairly highly. So getting to that is absolutely, first and foremost, the most important thing for us. Because after that, you've got enormous flexibility. If you talk about, hey, what are the different kind of pieces of the puzzle that you would like to have, I think we've made a tremendous improvement to the business model over the last decade. If you think about where we were as a 90-plus percent gathering and processing business, massively commodity exposed, Now we're a much more vertically integrated company. But would we like to have more of that? The answer is an absolute yes. I do believe and we believe as a management team that having a well-head-to-water type of business is going to be important, call it for the next 10 plus years, kind of the longer term that you're looking at. So we made good improvement there, but could there more be done? The answer is probably yes. So those are things that we continue to look at and say, are there opportunities around that? And so then I think the other piece that you have is there will be some investment opportunities where we believe you can make a return like around CCS and some other business models that we're pursuing. But yeah, it's a great question. It's something that we're looking at, spending a lot of time on short answer. Get the balance sheet really, really strong. We have line of sight to that. Now you have massive flexibility and see what you can do to move the business further downstream.

Thank you. Our next question is James Carriker with U.S. Capital Resources. Your line is open.

Hey, guys. Thanks for the call. Just wondering if you can expound any on some of the working capital tie-up that you've seen year to date and the confidence in that reversing. Is any of that related to disputes relating to URI, and could some of that drag into 2022? Yeah, James, this is Sean.

Yes, yes, yes, and yes, but I'll give you some clarity. Because, you know, the price movement that's been so strong, since we do have hedges in place for 21, 22, and a little bit of 23, you know, there is collateral requirements on those hedges, obviously. Price run-ups are good things for DCP in the industry, but it does put some temporary collateral requirements on the company. Sixty percent of that particular collateral requirement rolls off by the end of the year. So, yes, we do see that one obviously improving, and that's assuming prices stay really strong. But 60 percent of that will be gone because we'll have realized those hedges and, again, realized a pretty strong environment. And then on URI, I mentioned in Q1 that we've done a pretty good job of coming right out of URI with about 90% of our collections in hand. We've been able to improve on that. I think we've picked up another roughly $20 million since Q1. There are some disputes still outstanding. Those probably, I think you're thinking about it right, those could be longer term. But we definitely see the working capital situation improving significantly. significantly between now and the end of the year. But I think some of those URI disputes, look, we were very confident in the revenues we booked, but obviously some of those are going to get held up and maybe have to get litigated over time. But we'll keep you in the loop on that, but not a big driver, and I think some of that helps itself by the time we get to the end of the year, a little bit of carryover into 2022. Okay, then.

Maybe just a clarification, I guess. I think your year-to-date working capital usage has been around $200 million. So if it's not yearly, is there any item or set of items that's driving the big use of capital?

Yeah, it would be... Temporarily. It's the collateral on the hedges is the biggest driver on that working capital.

Right, but I guess... I thought I saw that the collateral is about $200 million... and then separately working capital is about $200 million. Yes.

Oh, so you've got some normal timing. This was a heavy payout period for the company. So that's just going to happen normally. But the big, I would call it temporary drivers, are going to be the collateral and the hedges and the URI collections.

Gotcha. If I could follow up with one more. I think I saw one of your parents announced a resumption of, um, a frack floor at Sweeney. And I know you guys previously had that option for fracks two and three. Does the resumption of that construction, um, bring potential ownership of some of those fracks block on the table? Now that you're balancing some better shape, any opportunities around that, uh, that you see?

Well, we obviously know Phillips 66 fairly, fairly well, as you, uh, as you alluded to, um, We used to have an ownership option for tracks two and three and decided that last year during kind of massive COVID time not to exercise that. We haven't had any conversations since. again earlier our real focus is around getting the balance sheet right you know could that come back to the table at some moment you know as I said we know Phillips 66 fairly well they know us fairly well and if there's something that makes sense then that probably could come back or we just keep it where it is right now so I would say there's no active conversations around it great thank you thanks James

Our next question comes from Christopher with Mizuho Securities. Your line is open.

Hi, how are you doing? This is Chris for Gabe. I was just wondering your kind of thoughts on the consolidation in the DJ basin as far as the producers, and I know that they also have some midstream capabilities. I'm just kind of wondering how that impacts the outlook for the DJ. Okay.

You know, I think it's not that big of an impact for us. If you think about it, you know, the three companies that are coming together, so they're all in various ways, shapes, or forms. You know, we have customer relationships with them. At the same time, even combined, they will be one of our smaller overall customers. So they're still, you know, the focus on some of the main customers that we're having there that are larger than them at the same time. You know, we do see it as a good thing when producers come together, kind of focuses their effort, they cost out so they can direct in the end more of their dollars not to GNA or overhead or corporate functions, but to the drill bit. You know, with all of those where we have contracts in the DJ Basin, they are life of lease, dedicated acreage. So there really is not a competitive issue if someone has a small midstream business themselves. Then they say, hey, we can take stuff off of that acreage and direct it somewhere else. Contractually, that is not allowed. That's not possible. So net-net, I look at it as probably a small positive for us.

Got it. Thanks. And then just as far as cost expenditures, the cadence for the rest of the year, should we expect more deferred costs from Q1, some chunkier kind of timing at the end, or was that less what you had?

No, you definitely – Yeah, Chris, there's definitely still some catch-up. You know, obviously Q2 was higher than Q1, but, you know, the run rates that we've had so far this year are just very, very, very low. So – You know, the good news is we may recall back when we gave guidance, we took $120 million-plus out of our cost base, you know, in 2020, and we said we were going to hold on to all of that, and we still were on par and feel confident about that. But there is still some dollars to catch up on. You know, URI was a big event. It really set some of our progress back, and we're in catch-up mode, and you'll see that continue through the second half of the year. That will also impact sustaining capital. Got it. Appreciate it, guys. Thanks.

Thank you. And I'm currently short of the questions at this time. I'd like to turn the call back over to Mike Fullman for closing remarks.

Thank you all for joining us today. If you have any other follow-up questions, feel free to reach out and give me a call. And with that, have a good day.

This concludes today's conference call. Thank you for participating.