Natural gas liquids (NGL) margins dinged the first quarter results of Plains All American Pipeline LP, but increasing producer activity, particularly in the Permian Basin, bodes well for growing transportation volumes later this year, the partnership said.

“NGL margins were negatively impacted by warmer weather and tighter differentials between Canada and our U.S. demand markets, among other factors,” said CEO Greg Armstrong.

During a conference call Armstrong told analysts that to address the poor NGL situation, Plains is implementing some contractual provisions to protect it on the downside in exchange for giving up some upside potential. The company also is making changes to its inventory management practices, he said.

In February management had said it expected the first half to three-quarters of this year to be challenging. Improvement is expected near the end of the year as several multi-year capital projects are finished and volume growth in the Permian advances, Armstrong said.

“Although our cautious outlook for the near term is proving accurate, we definitely like the way the industry is shaping up for the latter part of 2017 and beyond,” he said.

Producer activity is more robust now than what the partnership was expecting earlier this year, especially in the Permian, Armstrong said. “Well productivity is increasing as new wells are coming in stronger than previously modeled,” he said. “Our outlook continues to incorporate an increasing time lag between increased drilling activity and increased production volumes as producers shift to multi-well pad operations. Accordingly, we continue to expect our transportation volumes to ramp up in the second half of this year.”

Existing and new incremental pipeline capacity is drawing shipper interest, he said. When producers succeed, the midstream succeeds.

“…[P]roducer drilling activity in almost every area is ahead of levels included in our outlook at the beginning of the year, especially with respect to the Permian Basin,” Armstrong said. “Rigs are becoming more efficient, laterals are longer, fracks are bigger, and well productivity is increasing.”

Since February, Permian rig counts have climbed by more than 20%, Armstrong said. And there have been more than $7 billion worth of acreage transactions announced in the Permian over the period, he said.

“All of these transactions involve meaningful acreage positions in the northern Delaware Basin,” Armstrong said of the Permian sub-basin. “It does not appear that rig counts currently fully reflect the expected increase associated with the recent upstream acquisitions, and therefore we believe that those transactions bode well for sustaining, if not actually increasing, drilling activity in the Permian Basin.”

First quarter transportation segment adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) decreased by 3% versus comparable 2016 results, mainly because of noncore asset sales and other volume decreases in the Rocky Mountain region primarily associated with pipeline downtime. Increased Delaware sub-basin drilling in the Permian helped to offset some of the transportation volume decline.

First-quarter facilities segment adjusted EBITDA increased by 13% versus comparable 2016 results because of contributions from Canadian NGL assets the partnership acquired last August, higher fees at NGL storage and fractionation facilities, and contributions from ongoing expansion projects at the partnership’s Fort Saskatchewan facility. Increases were partially offset by lower U.S. rail terminal activity, lower utilization of West Coast terminals, and the effect of noncore asset sales.

Supply and logistics segment adjusted EBITDA decreased by 72% relative to a year ago because of lower results from NGL activities caused by competition and continued margin compression, and unusually warm weather, the company said.

“What we did not anticipate [earlier this year] was weakness in our NGL business that would make the first nine months or so of 2017 even more challenging than we thought,” Armstrong told analysts. “The first quarter results in our supply and logistics segment, however, were meaningfully below expectations. This was due almost totally to our NGL marketing activities coming in approximately $50 million lower than anticipated.”

Overall, net income was $444 million (58 cents/unit) during the quarter, up from $202 million (7 cents) a year ago. Adjusted net income was $224 million (27 cents/unit), down from $355 million (45 cents) in the year-ago quarter.