Buckeye Partners, L.P. (BPL) Q4 2018 Earnings Conference Call Transcript
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Buckeye Partners, L.P. (NYSE: BPL)
Q4 2018 Earnings Conference Call
February 8, 2018, 11:00 a.m. ET
Contents:
Prepared Remarks
Questions and Answers
Call Participants
Prepared Remarks:
Operator
Good day, ladies and gentlemen, and thank you for standing by. We welcome you to Buckeye Partners, L.P. Fourth Quarter 2018 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. If anyone should require operator assistance during today's conference, please press the * then 0 on your touchtone telephone. As a reminder, this conference call may be recorded.
I would now like to turn the conference over to Kevin Goodwin, Vice President and Treasurer. Please go ahead, sir.
Kevin Goodwin -- Vice President & Treasurer
Thank you, George, and good morning. Welcome to Buckeye Partners' Financial Results Conference Call for the fourth quarter of 2018. On this morning's conference call, Clark Smith, our Chairman, President, and Chief Executive Officer, will discuss key highlights from the fourth quarter and full year of 2018; Khalid Muslih, Executive Vice President and President of Global Marine Terminals will provide additional highlights of his segment; and Keith St. Clair, Executive Vice President and Chief Financial Officer will review our financial results for the quarter.
Also on the call are Bill Hollis, Senior Vice President and President of Buckeye Services; Bob Malecky, Executive Vice President and President of the Domestic Pipeline and Terminals segment; Todd Russo, Senior Vice President and General Counsel; Joe Sauger, Senior Vice President of Operations for Global Marine Terminals and Engineering Services; and Gary Bohnsack, Vice President and Chief Accounting Officer.
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After our prepared remarks, we will take your questions. I would like to remind everyone that we may make comments on the call that could be construed as forward-looking statements as defined by the SEC, including statements regarding our target leverage and coverage ratios. Future results are subject to numerous contingencies, many of which are outside of our control.
Any forward-looking statements we make are qualified by the risk factors and other information set forth in our Form 10-K for the year ended December 31, 2017, and our most recent Form 10-Q, each of which is filed with the SEC and available on the Buckeye Partners' website at www.buckeye.com. We undertake no obligation to revise our forward-looking statements to reflect events or circumstances occurring after today.
In addition, during the call, we will be discussing Buckeye Partners' adjusted EBITDA and certain other non-GAAP measures. Reconciliations of these non-GAAP measures to their most directly comparable GAAP measures are included in the press release issued this morning, which is available in the Investor Center section of the Buckeye Partners' website.
With that, I will turn the call over to our Chairman, President, and CEO, Clark Smith.
Clark C. Smith -- Chairman, President & Chief Executive Officer
All right. Thank you, Kevin, and good morning, everyone. We appreciate you joining our call today. Before I begin with an update on the actions we previously announced as part of our strategic review, I'd like to share the success of our safety initiatives during 2018. We're very proud of our 2018 safety performance. Buckeye had zero lost-time injuries among our employees, a significant achievement of our Goal Zero program. We also had a 70% reduction in OSHA reportable injuries among our employees, and a nearly two-thirds reduction in OSHA reportable injuries among our contractors. This level of performance reflects the focus and commitment Buckeye places on health and safety across all of our operations and functions.
Buckeye is also implementing a new safety and operations management system called SOMS, that we expect will contribute to continuous improvement in Buckeye safety and reliability in the future.
Turning now to the results of our strategic review. We closed on the divestitures that we announced in November. We completed the sale of the package of domestic refined product pipeline and terminal assets in December for $450 million. We recognized a gain of $343 million related to this transaction, which is reflected in our reported results for the fourth quarter. This gain was excluded from our reported adjusted EBITDA and distributable in cash flow metrics. Buckeye employees are continuing to operate these assets for the new owner under a long-term management contract through our Buckeye Development & Logistics, or BDL, platform. Importantly, this enables us to continue to maintain a profitable cash stream from these assets and minimize the impact to our employees.
We also closed the sale of our VTTI equity interest in January for proceeds of $975 million. It should be noted that, although we own the interest in VTTI for the full quarter, the terms of the purchase and sale agreement dictated that we do not have rights to any further cash distributions from VTTI beyond our third quarter distribution, which we received in November. Therefore, the fourth quarter results do not include any contribution from VTTI.
The significant capital proceeds generated from these two divestitures, combined with the adjustment to our distribution policy, have enabled us to address the three priorities we identified when we initiated our strategic review. First, we substantially reduced our leverage by using all of the proceeds to pay down debt. We utilized a combined $1.4 billion of proceeds to repay all borrowings on our credit facility and to retire our $250 million term loan. In addition, we've initiated the redemption of our $275 million 2019 senior debt maturity, which we expect to complete this month. As you would expect, these actions were well received by the rating agencies. All three agencies have reaffirmed Buckeye's investment grade credit rating and moved Buckeye to a stable outlook. These actions should also eliminate our need to access the debt capital markets until our 2021 maturity.
Second, we have improved our financial flexibility by increasing our distribution coverage, allowing us to self-fund the equity portion of our growth capital spend. This has eliminated the need for Buckeye to access the public equity markets for the foreseeable future.
And third, we are refocusing our capital and other resources to higher return growth opportunities across the Buckeye network. I will discuss some of these opportunities in a moment. The completion of the strategic review initiatives was a significant achievement for Buckeye. We believe we have enhanced the stability of our diversified businesses in our balance sheet. Our self-funding business model is expected to allow us to access sufficient capital at an attractive cost to finance our most promising expansion projects, to drive long-term returns for our lienholders.
Let me now turn to an update on several of our larger growth projects. Regarding the second phase of our Michigan/Ohio project, we continue to wait for FERC's ruling on our PDO, or petition for declaratory order, related to the proposed tariff for interstate deliveries through the planned bidirectional operation of our Laurel Pipeline. Unfortunately, it is not possible to determine when FERC will issue a ruling, but importantly we do not believe that the delay is related to issues with our specific request.
Upon receipt of our PDO, our next step is to conduct the hydrotest. We expect that we will complete the hydrotest and commence operations on the bidirectional pipeline within 60-90 days of receiving FERC approval. We are currently projecting that we will be able to commence pipeline movements on this project by mid-2019, but that timing is subject to certain seasonal restrictions on when the hydrotest can be conducted, and depending on receipt on the FERC approval of our PDO.
Another high value capital project in the Midwest is the expansion under way at our Chicago complex. This project continues to progress on budget and ahead of schedule. The $80 million project is backed by long-term contract and is part of a strategy to continue to expand our service offerings to our Midwest customers. This expansion includes the construction of additional product storage, the expansion of our truck rack, as well as enhancing our product blending capabilities. In addition, we are continuing to discuss with our customers the potential for further enhancements to the complex, which is already one of the premiere midstream hubs in the Midwest.
Turning to our South Texas Gateway project, we are very pleased with the continued strong interest in our new crude oil export terminals. We have continued to secure additional throughput commitments and storage contracts. The facility is up to 6.8 million barrels of contracted crude oil tank capacity, with a total investment of approximately $500,000 on a 100% basis. We also expect further expansions of Gateway, based on advance discussions with interested customers. Khalid will discuss more details about this project in his review of our Global Marine Terminals business outlook in a moment.
We are also advancing and have completed a number of smaller scale growth projects that require moderate capital investments and offer attractive return profiles. These return capital projects across our facilities include increasing capacity, adding connectivity and optionality for our customers, broadening our product handling, and adding new offloading and takeaway capacity. For example, in Woodhaven, Michigan, we recently completed customer supported improvements to our facility to provide a rail logistics solution to a customer moving cost advantage gasolines and distillates produced from Midwest refineries to markets not serviced by pipelines.
In Florida, we are expanding our Jacksonville and Tampa terminals to increase throughput capacity and adding ethanol and butane by rail capabilities. In Pittsburgh, we are creating an integrated and expanded complex to provide our customers with improved connectivity and incremental services in this market. In our Corpus Christi complex, we're evaluating enhancements and new opportunities around crude and LPG export capacity. These are a few examples of the opportunities that offer attractive investment profiles that our teams continue to identify across our diverse asset portfolio.
Overall, we expect our total growth capital expenditures for 2019 to be between $250-300 million, which includes our portion of expanding our South Texas Gateway joint venture. It is worth reiterating that this will be funded from our excess operating cash flow and borrowings on our revolving credit facility. The actions we have taken as a result of our strategic review eliminated the need to access the equity capital markets, or the senior debt markets, to fund these projects.
We continue to be diligent in our evaluation of potential projects to ensure that the forecast economics exceed our internal investment hurdle rates and represent the highest value use of our capital. Our commercial and business development teams remain focused on ensuring that any project that we undertake ultimately derives incremental value for our customers and our unit holders.
Turning to our distribution, the board approved a quarterly distribution of $0.75 per unit, which is in line with the distribution we declared last quarter following our strategic review. We expect to maintain his level of distribution throughout 2019. Our performance from the quarter also resulted in a reported distribution coverage of 1.24x. We targeted an annual distribution of 1.2x or greater coming out of our strategic review. And we expect to meet this target in 2019.
In summary, we expect incremental returns from growth capital investments, including those I discussed a few moments ago, as well as increased pipeline and terminal revenues to contribute to a solid performance in 2019. The year-over-year performance improvement will, of course, be offset by the impact of the sale of our equity interest in VTTI and the sale of the domestic asset package. I would like to note that we are continuing to evaluate the potential impact of the recently announced U.S. sanction on Venezuela state-owned oil company PdVSA. But at this time, we expect those sanctions to have little, if any, impact on our business.
And finally, as we've shared with you before, 2019 is expected to be a transitional year for Buckeye, with significant uplift in projected cash flows in 2020 and beyond. Buckeye's financial structure and balance sheet are clearly improved thanks to our strategic repositioning. Our employees are excited about Buckeye's future and remain focused on safe operations, capital discipline, and successful execution of our business and commercial strategies.
Now, I'll turn the call over to Khalid to discuss our Global Marine Terminals activities and outlook.
Khalid A. Muslih -- Executive Vice President & President, Global Marine Terminals
Thank you, Clark, and good morning, everyone. I will begin my remarks by providing and update on the capital projects and opportunities we advancing in the Global Marine segment. Following that update, I'll provide details on our segregated storage services and our outlook for 2019 and beyond.
Touching first on our opportunities in South Texas, we continue to see strong customer interest in contracting for our South Texas Gateway terminals, the open access marine terminal we are constructing in Ingleside, Texas. This terminal is one of the largest greenfield terminals designed for export of U.S. produced crude oil that is currently under construction. The advantage site benefits from its location near the mouth of the Corpus Christi Ship Channel, where it is ideally positioned to serve as a primary destination point and export outlook for Permian crude oil pipeline volumes that would be delivered to the Corpus Christi market, including from the Gray Oak Pipeline.
Our partners in the construction of the Gateway Terminal, Phillips 66 and Marathon, are also equity holders in the Gray Oak Pipeline. This pipeline is being expanded to meet the growing demand of the Permian producers to transport their barrels for export primarily out of the Corpus Christi area. Importantly, the Port of Corpus Christi recently announced the awarding of a construction contract for the first stage of this planned project to widen and deepen the Corpus Christi Ship Channel. Our Gateway Terminal is expected to be among the first terminals to benefit as the dredging project advances, given its location at Ingleside near the mouth of the channel.
The dredging project is expected to increase the depth of the channel to 54 feet, which when completed, will allow our Gateway Terminal to partially load very large crude carrier vessels with approximately 1.5 million barrels of crude oil from either of our two VLCC capable docks. Upon completion of the channel improvement project, both our Gateway and Buckeye Texas Partners terminals will also have the capability to fully load 1 million barrel Suezmax vessels.
We have continued to secure additional long-term minimum volume throughput commitments and storage contracts, and are currently planning to move forward with the third phase of our buildout, which is expected to increase the total storage capacity under construction to 6.8 million barrels based on current contracted throughput and storage volumes. We also continue to see strong incremental demand from existing customers and other potential counterparties, and we are advancing discussions around additional long-term minimum volume throughput and storage commitments that could lead to further expansions of the facility. The site will be permitted to allow for up to 800,000 barrels per day of crude oil throughput, and the 212-acre property has space available for the construction of up to 10 million barrels of tank capacity.
Our current expectation is that we will commence and ramp up operations at the facility by middle 2020. We expect to spend approximately $230-260 million on this project in 2019, on a 100% basis, with Buckeye responsible for funding half of that spend. Regarding our existing Buckeye Texas facilities we continue to the advance of modifications that will enable enhanced access and export growing volumes of crude oil and LPG. Infrastructure modifications at our Buckeye Field Services assets will facilitate initial receipts from the Cactus II Pipeline system through the Rio Bravo Pipeline to our facility. Direct connections into our Buckeye Texas Processing and Buckeye Texas hub facilities from the Cactus II Pipeline are expected to be completed in latter part of this year.
In addition, we are advancing various facility optimization projects to enhance our export and pipeline transfer capabilities, all supported by firm commitments from our customer. We believe that the combined storage, committed throughput, and significant export capabilities of our Buckeye Texas and South Texas Gateway facilities will position us a leading service provider for growing exports of U.S. crude oil, petroleum products, and gas.
We are also involved in ongoing efforts to further optimize our condo six footers and to expand our LPG storage system. We continue to work with our customer to determine requirements and project feasibility. However, final investment decisions remain subject to achieving necessary financial returns within our self-funding capital program.
Finally, I'd like to take a few moments to address our segregated storage services and our outlook for 2019 and beyond. First, I want to provide some context around the financial contribution of our segregated storage services relative to our consolidated EBITDA. Segregated storage in our Global Marine Terminal segment represented a little over 15% of our consolidated EBITDA in 2018. Importantly, our segregated storage position in the Caribbean, which includes our Bohemian facility, where we have experienced the more significant challenges, represents approximately 10% of our overall adjusted EBITDA.
In the near-term, we do not expect market structure to improve to level sufficient to incentivize incremental storage demand beyond existing structural flows. In the first quarter, we have experienced moderately increased demand for our differentiated services, but remain focused on shorter term contracts until market rates rebound from cyclical lows.
Looking forward, we anticipate 2019 results to be impacted by the roll off of certain higher priced crude oil contracts in 2018, and expect overall realized rates to be marginally lower with utilization levels also marginally lower in the first half of the year. We expect to see improvement in utilization rates in the latter part of the year as market participants prepare for implementation of IMO.
I'd now like to provide some commentary on market conditions affecting our assets. Tightness of the physical crude oil market, further exacerbated by contemplative supply, continues to have an impact on the business models of historical structural players that have traditionally used our assets. While the forward market structure for Brent has primarily been in backwardation, given OPEC's actions, we have experienced short episodes of moderate contango. However, those levels have been insufficient to incentivize meaningful incremental storage demands. Further, tightness in availability of heavy and medium grades have decreased customer demand for crude oil storage services.
As a result, we have experienced declines in utilization and rates for crude oil storage. However, we believe that the impact on our business has already been largely realized with the expiration of legacy contracts and repricing the contracted capacity. We expect crude oil utilization levels in the near-term may be impacted by evolving global crude oil flows as a result of fuel specification changes or continuing government and regulatory action.
Now, looking at clean products, we are experiencing stronger demand for storage, both in the New York Harbor and the Caribbean, as a result of infrastructure improvements we have made. Our new Raritan Bay in Perth Amboy pipeline connection, along with enhanced connectivity between our Perth Amboy and Port Reading terminals to our London Station, have enabled the capture of incremental market demand. As a result, our customers are able to take advantage of enhanced capabilities to provide further efficiencies and to capture market arbitrage opportunities.
Additional blending and handling capabilities in our Bahamas facility have attracted incremental market demand for our services. Increased length in global gasoline supply has provided further incentives for gasoline related storage with expectations for continued storage beyond the turnaround of summer peak demand periods. Additionally, we anticipate stronger demand for distillate capacity as improved market structure further incentivizes storage in the second half of the year.
Regarding residual fuels, we benefited in the fourth quarter from increased short-term demand for fuel oil and effecting gas oil handling services with higher contributions from increased vessel berthing and facility services. However, we may see further demand for residual fuel handling services in the first part of 2019 as a functioning of tightening supply of heavier crude oils, somewhat offset by some continuing demand for VGO handling services that are supported by positive SEC margins.
Looking further into the future, customer interest in blending low sulfur fuels at our facilities is continuing to develop as a result of IMO 2020. We expect increased demand for storage and blending services as global demand for high sulfur fuel significantly declines following implementation of the new standards. Even with our existing asset flexibility and handling capabilities, we are well positioned to quickly respond to increasing levels of demand without the need for significant incremental capital.
Now, I'll turn the call over to Keith.
Keith E. St. Clair -- Executive Vice President & Chief Financial Officer, Buckeye GP
Thank you, Khalid, and good morning, everyone. I'll now discuss the details of our fourth quarter 2018 financial results. For the quarter, we reported net income attributable to Buckeye of $482.5 million compared to the fourth quarter of 2017, where we had net income attributable to Buckeye unitholders of $126.3 million.
Fourth quarter 2018 financial results include a $343 million gain realized upon closing of the sale of the package of domestic pipeline and terminal assets Clark referenced earlier. Recorder throughput volumes for both our domestic pipelines and terminals, and strong operational performance by our Buckeye Texas Partners assets contributed to our performance during the quarter.
The quarter also benefited from lower interest expense due to the settlement of forward starting interest rate swaps in December. Those contributions were offset by the impact of the sale of our equity investment in VTTI, continued weakness in the segregated storage market, the expiration of a crude-by-rail contract early in 2018, and the impact of lower petroleum products pricing on settlement revenues in our domestic pipes and terminals.
Net income attributable to Buckeye was $3.13 per diluted unit for the fourth quarter of 2018 compared to net income of $0.85 per diluted unit for the same period last year. The diluted weighted average number of units outstanding during the quarter was $154.1 million compared to $147.3 million last year. This increase was primarily due to the January 2018 issuance of Class C PIK units which converted to common units in the third quarter.
On a consolidated basis, we reported fourth quarter 2018 adjusted EBITDA, which is our primary measure of financial performance, of $234.7 million compared to $289.9 million for the fourth quarter of 2017. The adjusted EBITDA for our domestic pipes and terminals segment totally $148.3 million for the quarter, or a reduction of $11 million compared to the prior year. This segment achieved record fourth quarter pipeline transportation and terminal throughput volumes due to strong demand on our Midwest systems and across our expanded Chicago complex.
We also benefited from higher butane blending revenue markets; however, this segment's strong operating performance during the fourth quarter of 2018 was offset by the expiration of a crude-by-rail contract in the Chicago complex during the first quarter of this year, lower petroleum product prices that negatively impacted pipeline settlement revenues, and reduced storage revenues, in addition to an uptick in operating expenses primarily due to the timing of maintenance activity within the year and some nonrecurring items that we reflected in the quarter as well.
Our average pipeline transportation volumes of 1.52 million barrels per day represents a record pipeline throughput level for Buckeye. This represents an increase of 2.2% compared to an average of 1.49 million barrels per day in the fourth quarter of 2017. Volumes were stronger across several of our systems, particularly in the Midwest, due to our ability to transport gasoline and distillate from cost advantage markets into markets with strong demand. A portion of our volume growth was driven by market share gains on shorter haul routes, which impacted our average tariff per barrel, which is reflected in the 1% increase in average pipeline tariff to 91.3 cents per barrel for the quarter.
Average terminal throughput volumes grew by 4.6% during the quarter, totally 1.35 million barrels per day across our portfolio, which is also a record for Buckeye. The year-over-year increase was primarily driven by market share gains due to volume incentive arrangements with key customers, principally through our Midwest facilities, partially offset by the loss of volumes at the facilities sold as part of the asset package as well as reduced throughput movements through our Chicago complex into Canada.
We expect to benefit in 2019 from recently negotiated tariffs as well as annual increases on our market-based and FERC index-based tariff pipelines. The majority of our market-based tariff increases were effective in January of 2019 and averaged between 4.5-5%. We expect our FERC index-based tariffs to increase by approximately 4-4.5% effective July 1, 2019.
Our domestic pipeline and terminal assets are also positioned to continue their track record of consistent performance and execution on growth projects for 2019. We expect to initiate service on the second phase of the Michigan/Ohio II expansion project and to complete the expansion of our Chicago complex, which both will provide meaningful contributions to future cash flows.
Our Global Marine Terminal segment produces adjusted EBITDA for the quarter of $78.8 million compared to $121.7 million last year. Adjusted EBITDA for the 2018 quarter declined compared to the prior year due in large part to the sale of our equity interest in VTTI, which contributed $35.8 million to the prior year performance. This segment also continued to face challenging market conditions and segregated storage.
Our Buckeye Texas Partners facilities generated incremental EBITDA contribution in 2018 as a result of our team's effort to improve operating performance year-over-year, including the completion of various optimization projects backed by incremental customer commitments. In addition, the acquisition of the remaining 20% minority interest in April 2018 also generated incremental cash flows.
Now, looking at New York Harbor, we are seeing the positive effects of the expanded connectivity and service capabilities in these facilities, coupled with our customer service commercial focus. We've been able to maintain higher utilization at these facilities as customers remain focused on incorporating these added capabilities into their commercial plans. The average utilization across all of our marine storage assets, based on total capacity, was 78% for the fourth quarter of 2018, compared to 82% for the same period last year.
Our commercial teams are focused on prompt marketing of short-term positions while developing and evaluating longer term strategic partnerships and opportunities. We're limiting contract tenor while rates at cyclical lows to allow us to quickly capture additional rate and term when the market inflection point is reached. One benefit of the shorter term contracts that we have seen is incremental customer demand for additional services such as berthing. During the quarter, both our Saint Lucia and Bohemian facilities saw strong ship traffic, with traffic on our Bahamas dock reaching record levels during the quarter.
Now, turning to our merchant services segment, BMS reports adjusted EBITDA of $7.6 million for the quarter, compared to $8.9 million last year. The decrease was primarily driven by unfavorable distillate spreads and lower rack margins, partially offset by favorable butane activity compared to last year. Despite these challenges, the merchant services segment posted a recorded quarterly contribution to the overall Buckeye umbrella of $14.5 million. It also posted its highest full-year contribution of $48.7 million, emphasizing the segment's continued focus on optimizing our portfolio of domestic assets to drive utilization and incremental value to Buckeye.
Now, turning to our balance sheet. $400 million of senior debt matured and was repaid during the fourth quarter, using funds available under our credit facility. The credit facility was subsequently paid down with the $450 million of proceeds from the sale of domestic asset package. Further debt reduction resulting from the $975 million proceeds from the VTTI sale in January of this year is not reflected in the reported debt balance as of December 31 as this occurred subsequent to year end.
At the end of the quarter, we had $1.8 million in cash and cash equivalents and approximately $4.5 billion in long-term debt, including the portion classified as current. We had $522.3 million outstanding on our credit facility, of which $177.7 million is reflected as short-term debt as it supports our merchant services segment's working capital requirements. We had $974.6 million of incremental liquidity available on our revolving credit facility, and our total debt to trailing 12 months of adjusted EBITDA, based on our credit facility calculation, was 4.1x.
Distributable cash flow for the fourth quarter of 2018 totaled $143.6 million compared to $188.9 million last year. The decrease in distributable cash flow was driven by reduced EBITDA contribution from our business segments and the sale of our equity interest in VTTI.
As discussed previously by Clark, our fourth quarter distribution to unitholders will be $0.75 per unit, and our distribution coverage ratio, based on distributions declared on units outstanding at the end of the quarter was 1.24x. This level of quarterly distribution allows us to preserve liquidity and support Buckeye's growth capital initiatives without the need to access the public equity markets. We believe this self-funding model will drive long-term value for our unitholders.
As previously indicated, following the completion of our strategic review, we are targeting annual distribution coverage of 1.2x or greater and leverage of 4.5x or less. Buckeye's maintenance capital spending for the fourth quarter of 2018 totaled $32.3 million compared to $35.5 million last year. We expect maintenance capital for 2019 to be within the range of $105-125 million. Returned capital spending for the quarter was $78.4 million, and we anticipate our total 2019 spend on return capital projects to be approximately $250-300 million. This includes estimated capital contributions to fund our 50% portion of the capital spending at South Texas Gateway joint venture.
In closing, we believe that the actions taken as a result of our strategic review have achieved our stated objectives of reducing leverage, maintaining our investment grade credit rating, providing increased financial flexibility, improving our distribution coverage, and reallocating capital to higher return growth opportunities across our portfolio of assets. Looking forward to 2019, we will continue to focus on cost control and disciplined allocation of capital while we reposition ourselves for long-term success with a constant focus on maximizing returns for our unitholders.
...
That concludes my remarks, and we'll now open the call for questions.
Questions and Answers:
Operator
Thank you. Ladies and gentlemen, if you have a question at this time, please press the * then the 1 key on your touchtone telephone. If your question has been answered, or you wish to remove yourself from the queue, please press the # key. In order to prevent any background noise, we ask you to please place your line on mute once your question has been stated. And again, that is the * then 1 to ask a question. Our first question comes from the line of Theresa Chen with Barclays. Your line's now open.
Theresa Chen -- Barclays Investment Bank -- Analyst
Good morning. Thank you for taking my questions. Khalid, really appreciate all of the color around the segregated storage business. There are a lot of moving parts to the outlook by product. So, just boiling it all down, your near-term outlook for that business right now versus three months ago, it is better, worse, or stay the same?
Khalid A. Muslih -- Executive Vice President & President, Global Marine Terminals
Hey, good morning, Theresa. Yeah, I tried to provide, obviously, a little bit more color around the various products. But I think in my remarks what I was trying to provide also was -- demonstrating that we've largely seen and realized, I think, just the impact of some of the contracts that we entered into a few years back that were maybe supported by market structure. So, I would say that, for the most part, particularly on some of the -- on the crude oil side, those particular positions that we have in place are largely to do with structural flows.
I think what I said in the remarks going forward, yes, we saw a little bit of stability perhaps in the fourth quarter. However, we do have some contracts that did well off in the latter part of the year. We anticipate seeing some impact of that through the balance of this year. So, we do feel like there will be some softness in perhaps the first half of the year. But as we mentioned before, we anticipate a pickup toward the latter part of the year as market conditions improve for segregated storage.
Theresa Chen -- Barclays Investment Bank -- Analyst
Okay, and just to be crystal clear, it's still your expectation that this part of your business troughs by midyear or so.
Khalid A. Muslih -- Executive Vice President & President, Global Marine Terminals
Theresa, it certainly feels that way. But of course, we need more time to really be able to establish a trend. We've seen, obviously, some positives here in the last few months, and certainly going into the first quarter. But again, just given, like I mentioned, some commentary around just the tightness of supply, of various materials -- obviously, some intervention by various governments, etc. -- have also had an impact. But I do believe that, when you look at our recontracting levels and we look at the rates that we've been able to establish, that have been largely supported in line, so to speak, we're not seeing much a deterioration there. But like I said, we are approaching this with cautious optimism.
Theresa Chen -- Barclays Investment Bank -- Analyst
Great.
Keith E. St. Clair -- Executive Vice President & Chief Financial Officer, Buckeye GP
[Crosstalk] Theresa, this is Keith. I was going to just add, I think it's fair to say that we certainly viewed 2019 as the trough given our outlook for the benefits of IMO and other potential changes in product flows that could positively impact our segregated storage assets. I think, specifically, defining is it first half, second half -- but, I mean, we expect to see conditions, as far as Khalid indicated earlier, improving in the back half of the year.
Theresa Chen -- Barclays Investment Bank -- Analyst
Great. And shifting gears to the South Texas Gateway Project. So, 6.8 million barrels backed by commitment. Are those all from Gray Oak or have you already signed up additional customers at this point?
Khalid A. Muslih -- Executive Vice President & President, Global Marine Terminals
Yeah, Theresa. I mean, obviously I can't get into some of the specifics, but look, we will have connections to other pipelines so we expect barrels to flow our way from some other pipelines that are also under development. So again, we feel very, very good about our Gateway project.
Theresa Chen -- Barclays Investment Bank -- Analyst
Okay. And could you just repeat what your expectations for the 2019 Gateway CapEx was, of which you have 50%?
Keith E. St. Clair -- Executive Vice President & Chief Financial Officer, Buckeye GP
115 to 130. That's our half.
Theresa Chen -- Barclays Investment Bank -- Analyst
Thank you.
Khalid A. Muslih -- Executive Vice President & President, Global Marine Terminals
Thanks, Theresa.
Keith E. St. Clair -- Executive Vice President & Chief Financial Officer, Buckeye GP
Thank you.
Operator
Thank you. And our next question comes from the line of Shneur Gershuni with UBS. Your line's now open.
Shneur Gershuni -- UBS Securities LLC -- Analyst
Hi. Good morning, guys.
Khalid A. Muslih -- Executive Vice President & President, Global Marine Terminals
Good morning.
Shneur Gershuni -- UBS Securities LLC -- Analyst
I guess I just wanted to start off looking at the storage market. I was wondering if you can talk about some signposts that we should be looking toward, specifically how it relates to contango. How big of a contango do we need to see to cover the cost the carry? And then, secondly, how long it would take to translate into earnings for [audio cuts out] PL?
Khalid A. Muslih -- Executive Vice President & President, Global Marine Terminals
Yeah, this is Khalid again. Look, I mean, I think what I would say is, in order for it to be something sustainable where a trader is obviously going to be able to cover their cost of debt and be able to generate a positive rate of return, I would say that you'd need to see contango materialize to a level of somewhere around, let's say, $0.45 a barrel a month -- maybe $0.50 a barrel a month. That way, what that does is, effectively, it gives that trader a free option. So, pretty much everything from there is gravy.
But I think -- when we see contango -- and I know that this came up, I believe, in the last quarterly call, where length at the time was showing mild levels of contango, at those levels -- which were somewhere in the $0.10-0.15, or $0.20, range, that really was insufficient to be able to cover the cost of capital and then, obviously, provide a rate of return. And so, that's part of the reason why we did not necessarily see any incremental demand beyond what we had typically seen in structural flows. Once you see that carried -- developed to those levels, then of course, other elements come into play where traders can obviously look at developing more positive margins around blending, etc. So, hopefully that answers your question.
Shneur Gershuni -- UBS Securities LLC -- Analyst
Okay. It does. And do you know how long it would take for it to translate into earnings once it materializes?
Khalid A. Muslih -- Executive Vice President & President, Global Marine Terminals
I would say fairly quickly -- very quickly. I mean, I think, we obviously are dealing with a customer base that would quickly react toward that. I'm not talking about prospective customers. I'm talking about existing customers. And I think it's just a function of being able to get a hold of the physical barrels. And that's partly the reason why you might be able to see something on the stream, but access to those barrels is also -- that needs to be taken into consideration. But again, I mean, our assets are available. We don't have any issues with being able to capitalize or monetize those opportunities should they arise.
Shneur Gershuni -- UBS Securities LLC -- Analyst
Fair enough. So, essentially, contract structure wouldn't get in the way. Maybe just transitioning to IMO 2020, I was wondering if you could help us quantify the potential impact to Buckeye? Is it something that's an upside potential of $20-30 million or is it something in the neighborhood of $100 million-plus for EBITDA when we think of 2020 or 2021? I was just wondering if you could talk about the magnitude of the impact given how much you've been talking about it?
Khalid A. Muslih -- Executive Vice President & President, Global Marine Terminals
Sure. I will try to help maybe give some guideposts around that. I think what you need to do is think about it in stages. Obviously, what we do know is, as we start approaching 2020, you'll probably see inventories of high sulfur fuel oil start rapidly declining because we do know is the price of that material will rapidly decline or fall off the cliff. I think, in anticipation, we probably see folks start building up inventories of diesel. That -- there is some challenge associated with that at the moment, because the market is extremely tight for diesel. It was a function of processing light oil. We're seeing, obviously, that incremental length in gasoline and not enough diesel.
That partly goes back to your initial question on how do we realize cash flow from contango. We're seeing that in the length of global gasoline oversupply, and that will continue for the foreseeable future. But look, after that, we quantified what we believe will be the oversupply of high sulfur fuel oil. I think maybe the best way to cuff this is that we've got somewhere between, call it 15-17 million barrels of capacity that we could easily switch over to service to be able to accommodate incremental IMO demand for very little capital.
Again, I can't obviously sit here and exactly predict the future, but I think, if we were to go back and look at levels back in 2010 -- 2009-2010 -- where fuel oil was obviously in contango, you can see the high utilization of that particular asset. So, hopefully that gives you some color around what that potentially could be. It could be rather meaningful.
Shneur Gershuni -- UBS Securities LLC -- Analyst
Okay. No, fair enough. So, I appreciate that. And one final question, just with respect to the PDO approval for Michigan/Ohio. Is it a function of the fact that the FERC only has four commissioners? Is that what's stalling it? And, secondly, can you give us a timeframe of when you need to receive the PDO so that you can remain on schedule for your on time start-up?
Robert A. Malecky -- Executive Vice President & President, Domestic Pipeline and Terminals Segment
Yeah, this is Bob Malecky. We don't have clear visibility into the FERC to exactly what's holding it up. We do not -- because of the preponderance of PDOs that have not been approved, we don't think it necessarily a function of the secretary -- or the commissioner -- but rather a function of the process and some challenges with that. We're starting to see some rulings this week that we're hopeful that this might be an opportunity that they're going to put some things out here, but we're not necessarily linking it to the commissioner at this point. Or we've got no information that points us in that direction.
We have a window, as far as turning to a window of timing on this -- we have a window of about 90 days with which we really need to hear to be able to execute the hydrotest in that period of time. And then, we're into a window that will be four or five months in which we likely will not be doing the hydrotest because of some of the process with the hydrotest. So, we have a somewhat short window in which we can get this done immediately to preserve our timeline. But again, it opens up dramatically after that and we absolutely believe this is going to move forward. We are just in a position of being held up because of the process in Washington.
Shneur Gershuni -- UBS Securities LLC -- Analyst
All right. Perfect. Thank you very much, guys, and have a great weekend.
Khalid A. Muslih -- Executive Vice President & President, Global Marine Terminals
You too, Shneur.
Operator
Thank you. And our next question comes from the line of Tristan Richardson with SunTrust. Your line's now open.
Tristan Richardson -- SunTrust Robinson Humphrey -- Analyst
Hey, good morning, guys. Just wanted to touch a little bit on the LPG opportunities you guys see out there. I think, in the past, you've talked about a full greenfield export option as well as just expansion around the Texas Partners facility. Just give us an update there, and then I think you also mentioned that FID will be highly dependent on return metrics. Because it's -- just some of the dynamics you're thinking about as you're looking at those projects.
Khalid A. Muslih -- Executive Vice President & President, Global Marine Terminals
Yes, absolutely. This is Khalid. I'll touch on that. Yeah, we're continuing to advance with feasibility around our LPG project. We have, obviously, worked on scoping out a stand-alone facility, however we are working with our customer around an expansion of the Buckeye Texas facility. That cyclical project is currently in feasible study. We've commissioned that particular endeavor. We think that that particular expansion of Buckeye Texas, obviously, would be more competitively advantaged than necessarily building a stand-alone asset.
However, with some of the projects that we see with regards to the potential for propane and butane to make its way into Corpus Christi, we'll obviously reach, at some point, some physical constraint on our ability to expand Buckeye Texas. So, that's part of the dynamic. And then, look -- and I do think that that particular project has, I think, a high likelihood of going into, I guess, the final investment decision-making. However, just given the fact that we do now have to deal with the parameters of self-funding, not only is a function of just the returns profile. It's also a function of making sure that we can fit this within our capital allocation program. So, I think that's what we were trying to indicate in our prepared remarks.
Tristan Richardson -- SunTrust Robinson Humphrey -- Analyst
Okay, that's helpful. So, I guess maybe the takeaway is that -- when you think about '19 growth CapEx, it's difficult to say that there's really a meaningful amount of LPG expansion spend this year, given where -- your early phases. Okay.
Khalid A. Muslih -- Executive Vice President & President, Global Marine Terminals
That is correct. We're not looking to -- what I'm trying to get at is, we're not looking to all of a sudden expand our currently announced capital expansion program.
Tristan Richardson -- SunTrust Robinson Humphrey -- Analyst
That's very helpful. And then, just to touch on an older topic, as you guys look at the opportunities created by IMO and your storage infrastructure footprint today, is there anything -- is there an amount we should think about in the growth CapEx number for 2019 that includes repositioning or reconfiguration of your existing infrastructure to better capture opportunities?
Khalid A. Muslih -- Executive Vice President & President, Global Marine Terminals
Yeah. Any modifications I would characterize as being immaterial. We've largely got the asset flexibility in place. Obviously, there may be some costs in the sense that if we wanted to convert a tank that was in some dirty product service -- they're cleaned. Obviously, there's some costs associated with that. But, the reality is that the incremental costs associated with this initiative are not significant.
Keith E. St. Clair -- Executive Vice President & Chief Financial Officer, Buckeye GP
Yeah, and again, Tris -- and Khalid mentioned this earlier. We have, in our Bohemian facility up to 17.5 million barrels of capacity that could be used to store high sulfur fuel oil. Now, some of that's currently in service. But there can be a significant uplift in capacity utilization if everything plays out in our favor relative to IMO.
Tristan Richardson -- SunTrust Robinson Humphrey -- Analyst
Great. Very helpful. Thank you, guys.
Khalid A. Muslih -- Executive Vice President & President, Global Marine Terminals
Thanks.
Operator
Thank you. And as a reminder, ladies and gentlemen, if you have a question, please press the * then the 1 key on your touchtone telephone. And our next question comes from the line of Spiro Dounis with Credit Suisse. Your line's now open.
Spiro M. Dounis -- Credit Suisse Group -- Analyst
Hey, good morning, gentlemen. I just wanted to go back to some of your comments earlier. You mentioned some small, quick hit, high return type projects. It just sounds like individually not a lot of high spend there, but I'm just wondering if you can give us a sense of maybe the aggregate amount of spend and what you think the full opportunity set looks like across the system.
Robert A. Malecky -- Executive Vice President & President, Domestic Pipeline and Terminals Segment
This is Bob Malecky. I think a lot of the single and doubles really emanate out of the domestic pipeline system. I think our team has much the larger project, generally, but certainly a few on these. I think, when you get into total capital spend expected in 2019 in the range of $250-300 million, $115-130 of which is for Gateway. The balance of those include our announced Chicago complex project, which is progressing and will get done on time and on budget here, actually a little early -- a little before midyear this year. We continue to have projects in Woodhaven, that are in different regions, that include rail activity in a number of locations that continue to demonstrate the flexibility customers want for our flexibility. Different service handlings in different areas are some of the attributes we look at to do.
We invest in economic or cost savings opportunity sets that include VRU maintenance issues and/or investments to improve the revenue stream from the half of those investments and/or assets. Those are some of the basic outlines I think Clark touched on in his outline as well.
Keith E. St. Clair -- Executive Vice President & Chief Financial Officer, Buckeye GP
Yeah, if you looked at the smaller projects, the three largest projects are South Texas Gateway, completion of Michigan/Ohio II, and then the expansion of the Chicago complex. That would then leave somewhere in the neighborhood -- round numbers of $100 million -- $100-125 million that's really pointed toward the smaller projects.
Spiro M. Dounis -- Credit Suisse Group -- Analyst
Got it. That's really helpful. Second question, just on -- you mentioned market share gains on some of the shorter haul pipeline routes. Just wondering -- can you give us a sense of maybe what enabled you to capture that market share during the quarter? And then, how much more opportunity there is to do that going forward.
Robert A. Malecky -- Executive Vice President & President, Domestic Pipeline and Terminals Segment
This is Bob Malecky again. We continue to have one of the most flexible and diversified pipeline networks across the systems. Our networking capability to go from multiple source points to destinations is unparalleled in some situations. That is continuing to resonate with our customers and allow us to gain market share in those locations.
Spiro M. Dounis -- Credit Suisse Group -- Analyst
Got it. Appreciate the color. Thanks, gentlemen.
Operator
Thank you. Our next question comes from the line of Tristan Richardson with SunTrust. Your line's now open.
Khalid A. Muslih -- Executive Vice President & President, Global Marine Terminals
Thank you.
Operator
Thank you. I show no further questions at this time. I would like to turn the call back over to Clark Smith for any closing remarks.
Clark C. Smith -- Chairman, President & Chief Executive Officer
Thank you, George, and thanks to everyone for joining us on the call this morning. As we've stated, we believe the actions we announced and completed after our strategic review have put Buckeye in a very attractive growth position moving into 2020 and beyond. We are excited about Buckeye's future and very much appreciate the support and confidence of our stakeholders. Have a great weekend.
...
Operator
Thank you. Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program, and you may all disconnect. Everyone, have a great day.
Duration: 58 minutes
Call participants:
Kevin Goodwin -- Vice President & Treasurer
Clark C. Smith -- Chairman, President & Chief Executive Officer
William J. Hollis -- Senior Vice President, Buckeye GP, and President, Buckeye Services
Keith E. St. Clair -- Executive Vice President & Chief Financial Officer, Buckeye GP
Khalid A. Muslih -- Executive Vice President & President, Global Marine Terminals
Robert A. Malecky -- Executive Vice President & President, Domestic Pipeline and Terminals Segment
Joseph M. Sauger -- Senior Vice President, Operations, Global Marine Terminals and Engineering Services
Todd J. Russo -- Senior Vice President, General Counsel, & Secretary, Buckeye GP
Gary L. Bohnsack -- Vice President, Controller, &Chief Accounting Officer
Theresa Chen -- Barclays Investment Bank -- Analyst
Spiro M. Dounis -- Credit Suisse Group -- Analyst
Shneur Gershuni -- UBS Securities LLC -- Analyst
Tristan Richardson -- SunTrust Robinson Humphrey -- Analyst
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