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Operator
Good day and welcome to the Western Midstream Partners' fourth quarter 2020 earnings conference call. All participants will be in listen-only mode. Since you need assistance today, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touch-tone phone. To withdraw your question, please press star then two. Please note today's event is being recorded. I would now like to turn the conference over to Kristen Schultz, Vice President, Investor Relations and Communications.
Kristen Schultz
Please go ahead. Thank you. I'm glad you could join us today for Western Midstream's fourth quarter 2020 conference call. I'd like to remind you that today's call, the accompanying slide deck, and last night's earnings release contain important disclosures regarding forward-looking statements and non-GAAP reconciliations. Please reference our public filings for a description of risk factors that could cause actual results to differ materially from what we discussed today. Relevant reference materials are posted on our website. Additionally, I'm pleased to inform you that the Western Midstream Partners K-1s will be available on our website beginning March 12th. Hard copies will be mailed out several days later. With me today are Michael Ure, our Chief Executive Officer and Chief Financial Officer, and Craig Collins, our Chief Operating Officer. I'll now turn the call over to Michael.
Michael Ure
Thank you, Kristen, and good afternoon, everyone. Yesterday, we reported fourth quarter 2020 adjusted EBITDA of $484 million as a meaningful reduction in producer activity throughout the year relative to our plan, culminated with a decrease in fourth quarter throughput across all products. Remarkably, despite this reduced activity, we reported full year 2020 adjusted EBITDA in excess of $2.0 billion, a year-over-year increase of more than $310 million, or 18%. Due to our increased focus on cost and capital discipline, West delivered fourth quarter 2020 free cash flow totaling approximately $465 million, a 37% sequential quarter increase. For the full year 2020, we generated free cash flow totaling $1.2 billion. That's roughly 10% of our year-end enterprise value. Early in 2020, we pivoted our focus to free cash flow as a financial performance indicator, as opposed to the conventional MLP standard metrics of distributable cash flow and distribution coverage. By operating within free cash flow, we better align company and stakeholder interests of building a long-term successful organization, and while providing results that offer comparability in and outside our industry to demonstrate our excellent free cash flow and total return profile. During 2020, we generated $530 million of free cash flow after distributions by reducing cash capital expenditures by approximately 65% from 2019 and reducing the distribution. Although 2020 was the first year our company generated positive free cash flow after distributions, we have made a fundamental shift in our mentality as an organization to ensure this success continues. As we started 2020, we recognized it would be a historic year for West. as we executed several agreements with Occidental in December 2019 that established WES as a standalone midstream company. The ensuing global pandemic two months later confirmed this historic nature of 2020, but not for the reasons we initially believed. While the pandemic created numerous challenges that were not unique to us, our team seized the opportunity to re-examine every aspect of our operations to identify incremental cost-saving opportunities and pursue efficiencies. This deep dive into our business continued producer outperformance, and additional cost efficiency realizations from deconsolidation enabled West to exceed all expectations in our first year as a standalone company. Removing more than $175 million of O&M and G&A costs compared to our original 2020 guidance contributed to the highest annual adjusted EBITDA in Western Midstream's history. We compounded these cost savings with the efficient execution of our capital program, landing $590 million below the original 2020 guidance midpoint and $100 million below the revised 2020 midpoint. We priced a $3.5 billion four tranche senior notes offering, which was 6.2 times oversubscribed with more than $21 billion of demand. At the end of the third quarter, we announced a $250 million common unit buyback program, of which we've repurchased $49 million as of today's call. The careful protection and efficient management of our balance sheet and the significant work by our employees to discover cost savings enabled us to return more than $1.2 billion to stakeholders through debt repurchases, cash distributions, unit buybacks, and units acquired through the Anadarko Note Exchange. Furthermore, as a result of the unit buyback program and the Note Exchange, we've increased our free cash flow after distributions by over $22 million. On a year-over-year comparison, we increased throughput in every one of our products, with a 1% increase in natural gas throughput, 7% increase in crude oil and NGLs throughput, and a 28% increase in water throughput. Our teams implemented mutually beneficial commercial solutions with producers to keep volumes on our system and generate incremental capital advantage EBITDA for WES, while also providing near-term relief to customers adversely affected by lower demand for its products. Operationally, we benefited from the completion of three significant projects in 2020. The second Latham train, which commenced operations in the first quarter, added 250 million cubic feet per day of total processing capacity in the DJ Basin, and train three and train four at the Loving Roto in the Delaware Basin, the latter of which was completed nearly two months ahead of schedule and required 35% less capital than our previous North Loving trains. Our staff put forth a tremendous effort to complete these organizational and operational changes in 2020 and we're confident that the foundation we developed will continue to enter to the benefit of our stakeholders in 2021. This provides us with momentum to work toward further sustainable cost efficiencies safe and superior customer service and returning value to stakeholders. Our previously communicated 2021 guidance of adjusted EBITDA between $1.825 and $1.925 billion and capital expenditures between $275 and $375 million, along with maintaining our year-end debt to adjusted EBITDA ratio at or below 4.0 times is currently unchanged. While we are still evaluating the full financial impact of the recent winter storm, which will adversely affect our first quarter results, we do expect to make up those impacts throughout the year. We've already seen increased activity across the DJ and Delaware basins at the end of 2020 and into 2021. And we expect these increased activity levels to continue throughout 2021, allowing us to exit the year at higher throughput levels than our 2020 exit rate. With the increase in activity, we expect our capital requirements to be slightly front-end loaded to the first half of 2021. We also anticipate that our EBITDA will trend upward throughout the year as increased activity levels yield increased throughput. Overall, we expect the DJ Basin to account for 37% of our asset-level EBITDA, with an additional 40% coming from the Delaware Basin. In a few moments, Craig will provide further detail around activity levels and capital requirements, but I wanted to take a few minutes to discuss the impact of our cost-of-service rate contracts on 2021 guidance. As a result of declining 2020 volumes, we experienced upward pressure on cost-of-service rates. Fortunately, the impact of these increases was partially, and in some cases more than entirely, offset by the significant cost and capital savings achieved in 2020, which we believe will be sustainable on a go-forward basis. Specifically, our Delaware water and oil cost of service rates decreased as a result of these achievements. These cost savings and resulting downward pressure on cost of service rates demonstrate the symbiotic relationship that West values with its producer counterparts. We will continue to push forward cost reduction initiatives. These savings are proportionally shared with our partners, which we believe will continue to incentivize additional business. These are all reasons why WES is positioned to be the midstream provider of choice within the areas we operate, a goal we take very seriously. These anticipated rate changes were taken into consideration as we released our initial guidance at the end of third quarter. The impact of the rate changes was deemed immaterial to the total guided amount, and that remains the same after our final calculations. Our 2021 guidance also includes nearly all of the $175 million of cost savings realized in 2020. Through optimization efforts in our existing assets, the transition to a standalone business model, and strengthening our relationship with Occidental, we've identified sustainable opportunities that improve operability, more efficiently deploy capital, and ultimately drive value for our stakeholders. To reiterate our third quarter call, our strategic contractual protections minimize the impact a potential decline in throughput has on our EBITDA. Using 2021 guidance as an example, if DJ and Delaware throughput levels decrease by an additional 10%, it would result in only a 5% to 6% decline in our asset level EBITDA. With that, I'll turn the call over to Craig, to discuss our fourth quarter operations and provide more thoughts on 2021 activity and capital requirements.
Kristen
Thank you, Michael. Operationally, gas throughput decreased by approximately 282 million cubic feet per day, or 7%, on a sequential quarter basis as a result of minimal investment throughout 2020. Full year 2020 natural gas throughput averaged 4.3 billion cubic feet per day, representing a 1% increase from full year 2019. Our water throughput decreased by approximately 16,000 barrels per day, representing a 2% sequential quarter decrease as a result of lower producer activity in the Delaware Basin. Full year 2020 water throughput averaged 698,000 barrels per day, representing a 28% increase from full year 2019, resulting from additional volumes early in the year, the conversion of trucked water volumes from our existing producers onto our system, and incremental new business that we brought online throughout the year. Our crude oil and natural gas liquids assets experienced a sequential quarter throughput decline of approximately 70,000 barrels per day, or 10%. During the fourth quarter, volumes decreased across the portfolio as a result of minimal investment throughout 2020. The full year 2020 crude oil and natural gas liquids throughput averaged 698,000 barrels per day, representing a 7% increase from full year 2019. This growth was driven primarily by higher throughput from our DBM oil complex with the startup of Loving Rotif Trains 3 and 4 and higher throughput from our Cactus II equity investment. Our gross margin for crude oil and natural gas liquids increased by 15 cents for the quarter to $2.69 per barrel, which is attributed to the cumulative adjustment related to the annual cost of service rate resets. We expect 2021 crude oil and natural gas liquid margins to be slightly below third quarter 2020 margins as a result of lower Delaware Basin cost of service rates and lower gross margin contributions from equity investments. Before I provide some color around 2021 activity and capital requirements, I want to take a moment to thank our operational, engineering, and commercial teams for an outstanding year. Their passion to improving customer service and consistent care and concern for one another through our Live Safe culture continues to serve as cornerstones to our continued success in such a challenging time. Our operations team worked effectively to maintain our system availability above 99% for 2020, outperforming our internal target. Ensuring system capacity and operability enables us to move as much product as possible to market and further mitigate producers' needs to flare natural gas. Our commercial team's ability to create win-win solutions with producers during the depths of the pandemic helped to keep volumes on our system and protect our revenue streams. Finally, our engineering organization added 150,000 barrels per day of water disposal capacity, 210 million cubic feet per day of compression, and 60,000 barrels per day of oil treating capacity. They optimized processes, increased system reliability, reduced project cycle times, and identified significant cost savings, all which enabled our commercial team to build on their recent success and aggressively compete in the marketplace. Turning to 2021, the return of activity toward the end of 2020 and into 2021 brings us great optimism. We're expecting rig count to remain relatively constant in the DJ and Delaware Basin over the course of the year. With the anticipated activity levels and duct completions, we expect our producers to bring online approximately 315 wells across their portfolio in 2021, about 60% of which is located in the DJ Basin. We expect to exit 2021 with gas throughput relatively flat to our 2020 exit rate, while oil and water will increase compared to the 2020 exit rates by high single digit and low double digits, respectively. As we look at the increased regulatory environment and our related risk profile, our federal land exposure in the DJ and Delaware basins is incredibly limited. Currently, in these areas, less than 5% of our gas throughput originates from New Mexico federal lands. Water and oil exposure is immaterial. In the event federal land permitting issues jeopardizes new volumes, we believe the impact to our 2021 adjusted EBITDA is immaterial to the guidance ranges provided. Our analysis contains various assumptions concerning permitting locations and timing, but this projection is another demonstration of the minimal impact federal land regulations would have on our portfolio. Turning to capital, we expect our capital requirements to be slightly front end loaded to the first half of 2021 with the projected increase in producer activity. Our capital guidance of $275 million to $375 million supports a steady level of activity growth throughout 2021. Similar to recent years, we expect to deploy the majority of our capital, about 59%, in the Delaware Basin. The majority of our capital will be spent on expansion projects, including saltwater disposal facilities, additional pipelines, and well connections. With excess capacity in the DJ Basin, we do not expect any sizable projects to materialize in the foreseeable future. While the Delaware Basin does not have as much excess capacity as the DJ Basin, we expect the intensity of capital spending to continue to decline. Capital will continue to be required for regional projects, including additional saltwater disposal facilities and compression, as we alleviate areas of constraint. Now, I'll turn it back over to Michael to discuss our focus areas for 2021.
Michael Ure
Thanks, Craig. After executing separation agreements with Occidental in December 2019, much of our internal efforts last year were spent on standing up an organization, transferring more than 1,600 employees and contractors, establishing separate systems and processes, and creating an entrepreneurial culture unique to West. As we move through 2021, we intend to further strengthen and refine our business model and internal processes, enhance our focus on customer service and operational excellence. and continue our active work to minimize our environmental footprint. On the financial front, we believe we have identified most of the available O&M and G&A savings as part of our 2020 transformation. However, it is part of who we are as a company to continually examine our operations and challenge the status quo to identify innovative ways to reduce our cost structure and work more efficiently. We believe this culture of cost management, continuous improvement, responsible operations, and the use of technology to enhance safety and efficiency is imperative to provide value to our stakeholders. We regularly monitor costs as a percentage of gross margin and throughput, questioning and challenging the use of capital, and actively monitor spending to protect against cost creep when a higher level of activity returns. We remain committed to responsibly managing leverage and returning value to stakeholders through further debt repurchases, cash distributions, and unit buybacks. Our ability to generate free cash flow after distribution last year and into the foreseeable future enables us to repay all near-term maturities when due, totaling $1.2 billion in payments over the next four years. Coupled with expected EBITDA growth, we intend to further reduce leverage to at or below 3.5 times at year-end 2022. In addition to debt repurchases, we want to remain flexible and opportunistic in how we return value to stakeholders. We expect full year 2021 distributions of at least $1.24 per unit, and we're committed to evaluating distribution increases on a quarterly basis as a potential avenue to return excess cash to unit holders. The remaining $201 million of the $250 million common unit buyback program provides us with additional options to return value to unit holders. As you've seen in our inaugural ESG report posted on our website, We're proud of our recent ESG performance and the passion our people have to address ESG issues in a transparent way. We believe the world will continue to require hydrocarbons, in particular natural gas, to power our lives. The recent freezing temperatures in the southern U.S. is another example of the important role hydrocarbons play in providing fuel and warmth for our communities. We take seriously our responsibility to minimize emissions by thoughtfully designing, constructing, and operating our assets. and collaborating with state and federal regulatory agencies and environmental groups, producers, and industry to find the best solutions to today's climate-related challenges. Our ESG philosophy is rooted in three pillars, creating sustainable environments, focusing on people, and operating responsibly. Our operational philosophy and the design of our facilities dating back more than 12 years ago are a testament to how we view ESG. Specifically, the design of our Colorado COSIF and West Texas ROTIFs enables us to gather oil directly from producers' well sites, eliminating the need for well site storage tanks and associated oil vapor flaring, leading to emission reductions across the upstream sector. As a proactive measure to minimize our facility emissions footprint, WES began installing electric driven compression as early as 2008. Today, WES operates more than 350,000 horsepower of electric driven compression. returning more than 22 billion cubic feet of gas to the market that would otherwise be combusted in natural gas-driven compression. We have also been progressively designing our facilities to limit our flaring to activities to those required for safety purposes. For example, when feasible, we install closed-loop process vessels and systems to capture and transport gas to market instead of flaring product. We utilize technologies that recycle waste gases back into our process instead of flaring. That's not only the right way to operate our business, but it also ensures that our facilities can easily adhere to future regulatory changes. These forward-looking designs are unique to Western Midstream, and it demonstrates how our creativity, ingenuity, and planning can provide solutions to deliver resources to an energy-hungry world while protecting the environment. In addition, our customer focus drives our level of commitment to ESG, as our teams work closely with producers to minimize upstream flaring during the product lifecycle. Our commercial team works to have all infrastructure and pipelines in place before production commences, as well as the contracted capacity and reliability to receive and transport our customers' products through our natural gas pipeline infrastructure, compressor stations, and processing facilities. Employees stationed at our regional control centers use automated remote sensing equipment to continuously monitor our gathering and processing infrastructure. This helps us to ensure system availability, which reduces producers' need to flare natural gas. To demonstrate that we're part of the solution, we firmly believe our industry must work together to bring greater transparency to our environmental impact and actively communicate our mitigation efforts. Over the last few months, we have worked closely with the Energy Infrastructure Council, EIC member companies, and investors to create a standardized ESG reporting template for the midstream sector. We've also taken an active role in drafting GPA Midstream's climate policy principles, which, in part, supports our technological advances and solutions that minimize GHG emissions. That collaboration expands to local governments and regulatory bodies as well to generate economic solutions to environmental issues. In 2020, West supported a proposed rule from the Colorado Department of Public Health and Environment requiring emission reductions from existing natural gas-fired engines over 1,000 horsepower. As part of an effort to ensure real emission reductions occur, we will achieve NOx reductions by at least 800 tons over the next three years, starting in 2022. We also plan to permanently retire three natural gas fired compressor engines by mid 2024, eliminating 17,000 metric tons of CO2. This commitment to be good stewards of the environment starts at the board level and continues down through the organization to each of our employees. As further evidence of this commitment from the top, Wes recently appointed a board level ESG committee whose charter is to steer our efforts on issues and performance regarding environmental protection, social causes, and strong corporate governance. We as a management team are excited to work with this new committee to drive positive performance in each of these elements for the future. It's in that spirit of working together that I'm excited to announce our recent membership in One Future. The One Future Coalition is a group of 37 natural gas companies working together to voluntarily reduce methane emissions across the natural gas value chain to 1% or less by 2025. The coalition's approach to reducing emissions aligns with our priorities as we work together to identify policy and technical solutions that yield continuous improvement in the management of methane emissions. We look forward to continuing to demonstrate our commitment to ESG issues through operational changes enhanced customer service, and partnerships like OneFuture. I'd like to close with my appreciation to the 1,600 employees and contractors at Wess. While the global pandemic and the precipitous decline in commodity prices were not unique to Wess, our team's resiliency, outstanding determination, and long hours to stand up an organization while working remotely provided our stakeholders with a historic performance, one that may be unprecedented for a first-year standalone midstream company. Thank you for your efforts. I would like to especially thank those hardworking people who work through these freezing temperatures to deliver valuable fuel to those in desperate need during the recent storms. Today, while we continue to work through the day-to-day challenges that are inherent in our business, we are committed to delivering long-term value to our stakeholders by operating safely, delivering exceptional customer service, and returning cash to stakeholders. Furthermore, if 2020 taught us anything at Western Midstream, it is the importance of remaining nimble and adaptable when change occurs. Excelling in an evolving and fluid environment is a skill we've been perfecting since we undertook our current focused midstream strategy. With that, I would like to open the line for questions.
Operator
Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on a touchdown phone. If you're using a speakerphone, we ask that you please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. Today's first question comes from with UBS. Please go ahead.
Schnur
Hi. Good afternoon, everyone. You know, thank you for the thorough update today. I was wondering if we can start off with, you know, operating leverage potential within the Western midstream assets right now. You know, I was looking at slide 30 in your updated presentation where you talk about, you know, volume changes and changes in EBITDA and so forth. I was sort of looking at your 4Q throughput, you know, for example, natural gas being about 8% below kind of like your average for 2020. So, you know, clearly there has to be some degree of operating leverage. I was wondering if you can share with us how much operating leverage you think you have without needing to spend any material capex.
Michael Ure
Yeah, hey, Schnur, how are you? Thanks for the question. Let me comment a little bit as it relates to, you know, that trend and how that might, you know, play out going forward the way that we look at it. As noted, we did have a decline in volumes going through the back half of 2020 as we had expected. That decline, we would expect, will continue through the first half of 2021 is the increased activity levels have some delay before they find themselves into the volumes into our system. Some of the capital is a little bit preloaded so that we're prepared to take those volumes when it does occur. However, to give some indication, we would expect that if the activity levels for 2021 were to trend at the same level into 2022, given that we are expected to exit 2021 at a higher level than 2020, therefore on a growth trajectory, that that growth would trend into 2022 and the capital requirements associated with getting that growth we would deem to be similar to what we have projected or included in our budget for 2021.
Schnur
And just to clarify, do you have a sense of what your capacity actually is? So like you know, just sort of following the forecast that you have right now and you've given us the volume sensitivities, you know, could 22, you know, from a capacity utilization perspective, like, you know, entering 22, would you be at 80%, 85% or 90%? Like, is there some sort of like utilization level that you can give us so that we can sort of utilize the sensitivities that you outlined?
Michael Ure
Yeah, we don't actually provide a specific detail as it relates to our projected utilization, but again, I would indicate that even if you played that into forward years, we wouldn't expect that there would be a material increase in the amount of capital requirements for a foreseeable period of time. Obviously, there's limits to that, but as we project forward over you know, the next several years, we wouldn't expect that there would be a material increase in capital if the activity levels, you know, continued into the future.
Schnur
Okay, so you can handle a 20% volume increase without capital is kind of the takeaway from that slide then?
Michael Ure
Well, again, I never gave any specific detail as it relates to a 20% increase in volumes, but appreciate the probing question. But it did indicate that it would be on an upward trend going into 2022, and we would expect, therefore, the cash flow to increase in 2022 over 2021 and that the capital needs for that period would be relatively similar. And if you played that forward for a reasonable period of time, we would expect that that similar type of operating leverage would continue without the need for significant additional infrastructure.
Kristen
I would just add, This is Craig. I would just add that given the extensive footprints that we have in the Delaware and DJ basins, we continue to find ways to optimize and find new capital-efficient ways to expand our system incrementally that is very capital-efficient. So really exacting what that capacity is is somewhat of a moving target because we're continuing to find ways to change that number in an upward trajectory.
Schnur
Yeah, I definitely appreciate it, and obviously you give us more information. We always want more than you've provided, but kudos to the RR team for that presentation. Maybe as a follow-up question, you've had a lot of success adding third-party volumes this past year. Does it have the potential to get to a 55% or 60% type of level, or will Oxy grow faster than that rate, mitigating the increase? Just trying to think about you know, how we can, you know, can you potentially get to a point where you dilute Oxy's exposure enough to change the views of the rating agencies without notching?
Michael Ure
Yeah, why don't I comment that, you know, again, from our perspective, you know, we want to grow the pie. And, you know, we don't have a specific focus on, you know, a target level that we'd like any one of our partners to get to as a whole. You know, as we look into 2021, you know, a lot of that growth is, you know, going to be driven by activity levels from existing customers. But as we go forward, you know, we're very optimistic that through the cost-saving initiatives that we've been able to put forward, we can be a lot more competitive going forward as those new third-party opportunities, you know, find their way through the system. If that trends us down to, you know, a lower level, you know, from a customer concentration risk, then that's great. but it's not a specific focus for us. We want to make sure that we're growing the pie as a whole. Greg, I don't know if there's anything else you'd like to add there.
Kristen
Yeah, I think it's also important to note just the size of the pie that we have, and it's tough for that number to materially move from one year to the next, even given the successes that we've had and attracting new business. But what we love to see is the pie as a whole continuing to get larger and have each of our producers be as active as they can be in these basins. And so I think it's just tough to see a material change in that move or a material change in that allocation. But our focus is growing the pie.
Schnur
Perfect. Really appreciate the color and have a great afternoon.
Michael Ure
Thanks, sir.
Operator
And our next question today comes from Kyle May with Capital One Securities.
Kyle
Hi, good afternoon, everyone. Michael, I appreciate that you are still evaluating the impact of the recent winter storm, but just wondering if you have any preliminary thoughts or estimates about the impact to the business.
Michael Ure
Yeah, we don't have any. We're going through a thorough review overall. It definitely will impact Q1. We had a period of about 10 days where the volumes were definitely impacted and are still going through the impact from a cost perspective. What I can say is that we're working today at what we would deem normalized conditions, and so thankfully it's a period of time that has been – You know, there's sort of walls to it, if you will. So kudos to the team for getting back up and running in a quick manner in light of the conditions that we have, but we're still going through the full assessment on the financial impact of it. We do believe at this stage, you know, that in light of the fact that we're still early in the year, that we'll have an opportunity to make up, you know, that financial impact, but have not yet fully quantified what it might be.
Kyle
Understood. That makes sense. And then although the guidance for this year has not changed since November, can you talk about the recent conversations that you've had with customers? Just curious if any plans or positioning has changed over the last few months.
Michael Ure
Yeah, we actually haven't seen a ton of change over the past few months as it relates to behavior as a whole. You know, just generally speaking, some of the private operators have been a little bit quicker to respond to increased activity levels. you know, our public customers, you know, tend to be a little bit, have been a little bit more, you know, disciplined as a whole. And we haven't seen a material shift or change since the time that we put out that guidance.
Kyle
Got it. Thanks for that. Have a good afternoon. Thank you.
Operator
And our next question today comes from Spiro Dunes with Credit Suisse. Please go ahead.
Spiro Dunes
Good afternoon, guys. I want to go back to leverage, if we could, and tying that back to your advancement towards investment grade. Leverage so far, tracking better than initial expectations. You put out that new number now of at or below three and a half times by 2022. And so as you continue to advance towards investment grade, can you just tell us what the factors are you think that are going to be needed to get you there? Have the agency set some targets for you? I guess how close do you think that is?
Michael Ure
Yeah, I think, Spiro, it's a great question. From our standpoint, you know, take aside what the actual rating might be. You know, we definitely consider ourselves in the investment grade, you know, territory from a true credit standpoint. And thank you for noting, you know, the progress that we made up to this point. We had set a target of four and a half times by year end 2020. We obviously exceeded that target. And then we put out a target for ourselves in 2022. which will come as a result of us repaying our near-term maturities. So we've got a $431 million maturity that will pay off in Q1, and then a $581 million maturity that will pay off in 2022. That, along with, again, the upward trending cash flow or volumes as we exit 2021, will put us in a position to be able to get to those levels as we currently project. And so the conversations with the rating agencies have been, you know, very positive. They're, you know, from what we have heard, very appreciative of, you know, our focus on, you know, leverage reduction, the timing of which, you know, obviously is a little out of our control, but the way that we're functioning is under the assumption that we're really operating under a, you know, a true investment-grade credit profile, regardless of what the rating might say. The factors there obviously include, you know... how it is that we handled the pandemic, projections going forward, what it is that we're using with free cash flow, and then customer concentration.
Spiro Dunes
Got it. Okay, that's helpful. Second question is a bit of a two-parter on ESG. Sounds like you guys have been busy on that front since the last time we caught up last quarter. And so great initial steps, obviously on the emissions reduction and joining some of these industry groups. I guess as I think about next steps and other things you can do, you mentioned challenging the status quo. I guess two things come to mind, and so I'm curious, are any resources being deployed now to potentially transition over to C-Corp at some point in time? I'm sure you've been asked that in the past. And then as we think about advancing more commercial opportunities, as opposed to just the operational ones you're working on now? I'm thinking, obviously, direct air capture, carbon capture, and storage. How far away are those for you?
Michael Ure
Yeah, so first question is it relates to, and thank you for noting, you know, the progress that we've made. It's definitely an effort that we feel very strongly about, and, you know, that goes from the top, you know, with the creation of the new ESG committee, three-member committee, standing board committee, as well as all the way through the bottom of the organization to make sure that we're being as efficient as we can with the existing assets that we have. We, at present, don't consider a C-Corp conversion as being optimal for us and our unit holders as a whole, so not something that we currently believe is in the best interest of us as a unit holder organization. And then I apologize, or as a total stakeholder base, and I apologize, Spiro, I didn't get your last question. What was it? Commercial opportunity.
Kristen
Yeah, no worries.
Michael Ure
Yeah, yeah. So a couple things that I would note there, and I'll turn it over to Craig for additional commentary. Again, with the creation of the ESG standing committee, you know, obviously that's going to give significant focus for the organization to make sure that we're being forward-leaning around ways in which we can participate in the efforts as a whole. That committee includes a great connection back with Occidental, and we're very impressed overall with the efforts that they have made in that regard. And so obviously it facilitates some partnership in the event that those types of opportunities find their way down there. We've also even reallocated some internal resources with a senior team that is focused on those types of opportunities. And so together with the board committee, executive leadership, allocation, and connectivity back with Occidental, we think that there are definitely ways in which we can try and find ways that will enhance return or certainly be productive from a return perspective, but also be conscious of the climate situation that we have today. Craig, anything else that you'd add there?
Kristen
Yeah, I would just add that the resources that we've pulled together to lead this effort are led by one of our top commercial talents that's been with us for several years. And we think that that's really going to be an important element of how we advance some of these ESG opportunities is to figure out how to commercialize and get into opportunities in a way that makes economic sense for us, as Michael points out, but also reiterates and underscores the commitment that we have to to making advances on the ESG front. And so we're excited by the team that we have assembled to help lead that for us, and we're looking forward to what those opportunities will deliver in the coming months ahead.
Spiro Dunes
Great. That's all I had. Thanks for your time, guys. Take care. Thank you.
Operator
And our next question today comes from Sunil Sabal with C4 Global Securities. Please go ahead.
spk09
Yes, hi, good afternoon, guys, and thanks for all the clarity. So just one clarification on previous questions. So you obviously laid out a kind of a three-year deleveraging plan. Is that, based on your, you know, most recent discussions with the rating agencies, if you execute on that and nothing else changes on the macro environment, is that sufficient for you to get to IG in terms of the, you know, there is some more work to be done with regard to customer concentration, et cetera?
Michael Ure
Yeah, Sunil, thanks for the question. Again, there's a lack of specificity, as you might imagine, as it relates to specific targets that you need to be met in order to immediately trigger some sort of upgrade overall from a rating agency perspective. So I wish I could, and And each of them obviously are individual agencies themselves and have different perspectives on how it is that they assess ratings and credit as a whole. So I can't specifically point to anything overall that would then trigger an upgrade. But what I can say is that we're definitely doing everything that we can to put ourselves in the best position. We believe our metrics actually warrant investment grade. And especially as you trend forward, the way that we're handling the payoff of our near-term maturities and the overall leverage as a whole, we believe put ourselves in that position. But I definitely can't speak to any specific trigger that would ultimately result in an improvement in rating agency ratings.
spk09
Got it. Thanks for that. And then on the portfolio rationalization side, obviously you've done a little bit here, started it off. I was kind of curious how should we be thinking about that, both in terms of divesting assets or even maybe looking at other assets in other patients, which kind of, you know, give you more kind of readable businesses, et cetera.
Michael Ure
Yeah. So our position is the same that, you know, we've had for some time, and that is that, you know, we'll look at opportunistic opportunities both on the divestiture side as well as the acquisition side. You know, over the past 12 months, it's been a challenging environment to get anything executed on either side, whether you're selling or buying. You know, we do definitely have constant dialogues as it relates to some assets that may be deemed non-core for us, where if someone puts a higher value on it than what it is that we deem the value to be, then we'll execute on those things opportunistically. And And that activity level, I would argue, is in a better fundamental place today than it certainly was previously. But we're on a continuous portfolio optimization mentality and have been for the past 12 to 18 months.
spk09
Okay, got it. Thanks for the clarity.
Operator
Our next question today comes from Gabe Marine with Mizuho. Please go ahead.
Mizuho
Hey, good afternoon everyone. I just had a couple of questions around the cost of service arrangements and how cost reductions filter into that and the sharing mechanisms around cost reductions. Can you just speak to, I guess, how those cost reductions, whether they go all to, you know, how they filter through the cost of service mechanisms and are you sharing it all with your customer or are you sharing it within a band and I guess how much headroom you have on cost of service savings where you need at that point to share everything with your customer? Sorry, that was a long question there.
Michael Ure
Yeah, no, it's a good question, Gabe. Why don't I go ahead and take a shot at that, and then, Craig, you add anything that I may miss here. It's effectively like not all of our contracts are cost of service, and so it is a calculation that's based on the asset level cash flows associated with the capital and operating costs as well as volumes specific to that particular area in which that cost of service contract is relevant. And so as you allocate those costs, there's a determination as to what the rate might be based on, you know, historical volumes received and then future volumes projected for the area. What we did see, you know, as it relates to the recalculation for 2021 is that The significant effort that the team had done in order to reduce the overall cost to gather the projected volumes actually had downward pressure to the point where we reduced the rates in oil and water in the Delaware Basin as a result of those efforts. So that's effectively the way that it's calculated. The way that we look at it is that each dollar that we spend needs to be really thoughtful and needs to have an associated value with it. because regardless of where those savings might be shared, it's either incentivizing additional development on our acreage position or accruing to the benefit of our unit holders. So, Craig, is there anything else that you'd add?
Kristen
Yeah, I would just add that a big driver for this year, as we recalculated those rates, in addition to the 2020 volumes being well below what they were originally anticipated to be, Correspondingly, our capital in 2020 was well below what we originally anticipated. But then the other big dynamic in those models is the future expectations for capital and operating expense. And as we've been able to sharpen our pencils and get better costs around those facilities and assumptions around what would be required to deliver those future volumes, including our operating costs, you know, the combination of all that is just an internal rate of return calculation. And so that's what really drives that rate adjustment. And so it's both a function of, you know, 2020 impact, but also what we can extrapolate going out to deliver those future volumes that really drives those rate adjustments. And, you know, we're pleased that we've been able to find ways to reduce costs. As Michael pointed out, it's It's asset-specific for certain customers. And so to the extent that we get better at reducing our facility costs and our operating costs, it doesn't just stop inside those cost-of-service contracts, but it extends to our benefit and all the other contracts that we have that are at fixed rates.
Mizuho
Got it. Thank you. And then maybe Chenier asked about operating leverage, and I think also based on the metrics you were disclosing about leverage to volume increases or decreases. It seems like you have that. But I'm just curious, as you look across the portfolio and your assets that have MVCs at them, are there any assets where you are actually materially below your MVCs and where an increase in volumes may not filter through the bottom line, at least initially?
Kristen
Yeah, it is asset-specific. It's contract-specific. So I think it's probably not simple enough to address... through a response in the way that you would find helpful. I would say that we have all that baked into our guidance for 2021 and it's part of our long-term planning. We are optimistic that as producers continue to get their feet under them with a strengthening commodity price deck and increasing activity levels that that producers will be outperforming those minimum volume commitments. And we look forward to seeing that upward trajectory on volumes again.
Michael Ure
And, Gabe, to comment on that, I mean, there is an element of, you know, within that calculation, an element of, you know, if the volumes increase, you know, again, 10%, you know, the EBITDA increases, you know, as we projected, 5% to 6%. And so there is a little bit of an element where, that increase is being eaten up a little bit by, you know, the minimum volume commitments, and therefore it's, you know, a 5% to 6% increase as opposed to something more than that. Same works on the downside. Yep.
Mizuho
Got it. Makes sense. Thanks, Michael. Thanks, Greg.
Operator
And our next question today comes from Derek Walker, Bank of America. Please go ahead.
Michael
Good afternoon, everyone. Mike, appreciate the color today. Maybe just two quick ones for me. Hey, I think you talked about just on the ESG side, I think it was 350 horsepower was electric compression. I think you've done over the last few years. And you talked about some net gas compression retirements. Do you see any more opportunities to convert to compression? And do you anticipate those net gas compression retirements this year? Thanks.
Michael Ure
Greg, you want to?
Kristen
Yeah, I think, you know, the way we think about the compression is, you know, as we're adding new compression, we're looking for opportunities to electrify as much of that as possible. In some areas, in some basins, and even within certain locales in those basins, the proximity to reliable power sources sets up better for some of that compression than others. And so, it really becomes a function of how available and the proximity to, you know, reliable power, what that looks like. For example, you know, in the DJ base and given the proximity to, you know, urban development, the power availability is very attractive. It really facilitates opportunities for us to, to do more on the electric compression side, and we utilize quite a bit of electric compression up in the DJ basin, which is an important part of how we're running our business up there. Given the environmental regulations that continue to change, we try and stay out in front of those changes by being proactive in deploying that electric compression. In other areas, it becomes a little bit more challenging to find that readily accessible power grid infrastructure. And I think that's, frankly, one of the challenges or opportunities, if you will, that we see moving forward as the power grid continues to grow and expand to facilitate a broader electrification across the U.S. hopefully within some of the operating areas that we operate in.
Michael
I appreciate that. Then maybe just one quick clarification question. Mike, I think you said there's 315 wells in the forecast with 60% of the DJ. How do you see the cadence of those wells throughout the year? I think you mentioned some of that might be front-end loaded, but do you see that cadence difference between the DJ and the Permian? Thanks.
Kristen
Yeah, I think the cadence is going to be pretty rateable through the year, more or less. Our capital spend will be slightly front-end loaded to the first half of the year to get out in front of those volumes that will come online. But our producers, for example, in both basins right now have increased the rig activity relative to 2020 significantly. you know, in a way that gives us great confidence in our ability to see those volumes come onto the system throughout the year. As Michael noted earlier, you know, volumes really in the first half of this year are still going to be lower than where we expect to exit, but we see a continual climb throughout the year as that rig activity stays fairly steady.
Michael
Got it. Appreciate it. That's it for me. Thank you. Thanks, Terry. Thanks.
Operator
Our next question today comes from Jeremy Tonea with J.P. Morgan. Please go ahead.
Jeremy Tonea
Hey, good afternoon, guys. This is James on for Jeremy. Just one quick one on clarification. The three and a half times leverage target for year end 22, there's no asset sales embedded in that, right? And I guess any incremental asset sales will be applied to deleveraging first and foremost. Is that correct?
Michael Ure
Yeah. So we do not have any assumption of asset sales that is embedded in our ability to be able to get to that target. That is through the efforts of repaying our near-term maturities and then the expected EBITDA profile through 2022.
Jeremy Tonea
Got it. Thanks. And then as my follow-up, maybe if you could just speak to the cadence of buybacks going forward for the remainder of the year, particularly with recent performance, if maybe there's a slowdown or if maybe you allocate capital to increasing the distribution if the stock keeps working at these levels.
Michael Ure
Yeah, so as mentioned, we'd actually already been a participant in the first quarter as it relates to buybacks. We gave you an updated figure there that is slightly higher than our year-end number. And so it's obviously an opportunity that we still have to be able to use You know, this is something, as we've mentioned, that our primary goal is to get out of below four times by year end. And then we have multiple tools available to us to maximize the value to our unit holders, that being either a potential distribution increase or a buyback program. That's something that the board has engaged on and desired to engage on on a quarterly basis to assess which of those tools to use you know, at their disposal. That's an authorization, you know, by the way, that, you know, is outstanding out through the end of 2021 and was set so that we could, you know, meet that leverage target.
Jeremy Tonea
Got it. Thanks. That's helpful. That's it for me. Thanks, James.
Operator
And, ladies and gentlemen, our next question is a follow-up from Sherika Sherney. Please go ahead.
Schnur
A quick follow-up here, and actually just with respect to the last question that was asked with respect to the buyback plans, sort of a two-part question on it. Just the first part, do you expect to be buying in the open market as you execute on it going forward, or is there potential for you to be buying back from Oxy? I mean, As you've been executing on it, technically, their ownership stake goes up mathematically, and they do have an expectation of needing to get below 50% for the consolidation or deconsolidation. Just wondering if you have any thoughts with respect to that.
Michael Ure
Yeah. Our thought is that we'd love to buy back units regardless of where they come from. So up to this point, it's been through the open market, but we're definitely looking be interested in considering making a repurchase of some of the Oxy units as well. We're pretty agnostic. The way that we're thinking about it is that we've reduced our distribution burden by close to $40 million. Net of the interest being received from the note exchange, it's about $22 million worth of free cash flow after distributions that this effort has prompted. We've bought back a little over $300 million or right around $300 million worth of units, 31.33 million units as a whole. And so we view that as an opportunity for us to improve the free cash flow after distribution profile. That mentality exists, whether we buy it from the public unit holders or whether we buy it from Oxy. So we would be interested in either of those.
Schnur
Okay. And as a follow-up, I kind of was confused a little bit I'm not sure if the prior question is intimating that the stock had went up so much so you shouldn't, and whether you were saying you would or you wouldn't because of the stock, because they sort of look at it at the fact that, you know, when Oxy first bought its stake and you were installed as CEO, you were, you know, trading in the high 20s, you know, versus $17 today. So I'm just trying to understand if we're all trying to intimate that $17 is high enough or whether it's still cheap enough to continue buying.
Michael Ure
I will never indicate that the current unit price is high enough, Shanur. Always looking for ways in which we can improve the value of our unit price, without a doubt. What the comment was is that we don't have a specific threshold that we see today or going forward as necessarily – you know, an exact number at which we would, you know, start or stop the buyback program. It is an indication that the board, you know, would revisit the overall, you know, target levels on a quarterly basis and assess whether, you know, potential distribution, other ways, what are the best ways to return cash to unit holders, whether that's through, you know, a distribution growth target or whether that's through the continuation of the buyback program. And just, again, indicating that, you know, we have up to this point been very much utilizing the buyback program to the tune of close to $50 million that have been bought back since we announced it at the end of third quarter.
Schnur
Right. And if I understood, one of your other answers was at the end of the day, it does improve your FCFAD payout ratio effectively, right, by reducing the unit count as well, too.
Michael Ure
Right. Okay, perfect. So that's how we think about it. Yep, exactly. Perfect.
Schnur
Thank you very much, and sorry for all the questions today.
Michael Ure
No problem. Thanks, Jenner.
Operator
Ladies and gentlemen, this concludes the question and answer session. I'd like to turn the conference back over to the management team for any final remarks.
Michael Ure
Thank you very much, everyone, for joining our call today. Appreciate your time. Please be safe.
Operator
Thank you, sir. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.
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