Q1 2020 Earnings Call
Thursday
dead dead good day ladies and gentlemen, and welcome to the first quarter twenty-twenty has Midstream conference call. My name is Lawrence and I will be your operator for today.
At this time all participants are in a listen-only mode later. We will conduct a question-and-answer session. If at anytime you require operator assistance, please press star followed by zero and it'll happy to assist you as a reminder. This conference is being recorded for replay purposes. Oh, no like to turn the conference over to Jennifer Gordon vice president of investor relation, please proceed.
Thank you Laurence. Good afternoon everyone and thank you for participating in our first quarter earnings conference call. Our earnings release was issued this morning and appears on our website at w w w. I would first like to express our hope that all of you listening and your families are safe and well today's conference call contains projections and other forward-looking statements within the meaning of the federal Securities laws. These statements are subject to known and unknown risks and uncertainties that may cause actual results to differ from those expressed or implied in such statements these risks include those set forth in the risk factors section of Hesse midstream's filings with the m as a result of the covid-19 pandemic our operations and those of our business partners suppliers and customers including has Corporation wage.
Have experienced and may continue to experience adverse effects including disruptions delays or temporary suspensions of operations and Supply chains temporary inaccessible or closures of facilities and Workforce impacts. In addition. The pandemic has adversely impacted and may continue to adversely impact demand and marketability of crude oil natural gas and ngls that we gather process and terminal for Hudson other third-party producers to the extent. We are our our business partners suppliers and customers continue to experience these or other affects our financial condition results of operation and future growth prospects may be adversely affected wage timeline and potential magnitude of the covid-19. It is currently unknown to the extent the covid-19 pandemic adversely affects our business and financial results dead.
it may also have the
Fact of heightening many of the other risks described in our annual report on form 10-K for the year ended December Thirty One 2019. Also on today's conference call. We may discuss certain non-gaap Financial measures a Reconciliation of the differences between these non-gaap Financial measures and the most directly comparable gaap Financial measures can be found in the earnings release with me today are John Gatling president and Chief Operating Officer and Jonathan Stein Chief Financial Officer compliance with social distancing protocols. We are conducting the call remotely. So please bear with us in case there are audio issues. We will be posting transcripts of each month speakers prepared remarks on Midstream following their presentation. I'll now turn the call over to John Gatling.
Thanks, Jennifer. Good afternoon everyone and welcome to Hess midstream's first quarter 2020 conference call. I hope everyone is safe well and healthy during these exceptional challenging times today. I'll I'll review our operating performance and highlights as we continue to execute our strategy provide additional details regarding our 2020 plans and discuss these corporations latest results and outlook for the Bakken Jonathan will then review our financial results. First. I'd like to describe the action test Corporation and has Midstream are taking to protect the health and safety of our Workforce and assure business continuity in the midst of the global pandemic a cross-functional response team has been implementing a variety of health and safety measures in consultation with suppliers and partners that are based on current recommendations by our Public Health agencies and consistent with government and Regulatory directives.
this includes travel restrictions Health screenings enhanced cleaning protocols and physical distance initiatives such as remote working and minimizing the number of personnel on both sides whenever the issue as a result of these measures Hess Corporation and has Midstream have no reported cases of covid-19 among employees
now turning to our first quarter 2020 results has Midstream delivered impressive volume growth across all systems with strong performance from both Hess and third-party customers
Yes processing volumes average 322 million cubic foot per day in the quarter or 92% of nameplate capacity the volume increase of 5% compared to the fourth quarter of 2015 crew tourmaline volumes were 163,000 barrels of oil per day a 10% increase over the fourth quarter 2019 and water Gathering volumes were 54,000 barrels per day and 8% increase over fourth quarter 2019.
Strongbow and delivery was primary driver of Hess Midstream exceeding adjusted ebitda guidance for the first quarter. Now turning to has Upstream highlights earlier today has reported strong first-quarter production results capitalizing on the success of its plug and perf completion design and benefiting from mild weather conditions as a result test was able to achieve its two hundred thousand barrels of oil, per day goal for 11 days in March well ahead of schedule demonstrating the exceptional strength and production capability of hess's back in position.
first quarterback and production average
Will Oakland per day and increase of more than 46% from the year-ago quarter and above guidance of approximately 170,000 barrels of oil equivalent per day.
Full-year 2020s now expects to drill approximately 70 well and to bring approximately 110 Wheels online additionally has plans to complete Wells that are drilled and Pack 12 online unless net back price has dropped below variable cash production costs or has says unable to physically move. The barrels has does not expect to shut in any production due to marketing arrangements and the use of very large crude carriers or vlccs they put in place.
In the second quarter s forecast it's blocking net production will average approximately 885000 barrels of oil equivalent per day for full-year 2020s forecast production to average approximately with 125,000 barrels of oil per day.
Assuming in one rig program next year has forecast net box and production in 2021 will average between 155 and 160000 barrels of oil per day. Approximately 10% lower wage employee or Twenty $20.
Turning to have some entering throughput and our expectations for the rest of twenty-twenty s corporations ability to secure takeaway capacity for its production underscores the strength of our anchor customer and provides confidence to our throughput projections in the first quarter. We also continue to see strong third-party through puts which comprised approx 25% of our gas and 15% of our oil volumes in recent weeks third-party production curtailment have increasingly emerged as producers respond to lower commodity prices and product takeaway challenges.
Given uncertain duration of these curtailments we have chosen to act prudently and reset our full year twenty-twenty throughput and financial guidance to provide transparency to the already dead. Now, it's curtailment impacting third-party throughput
the low end of our updated guidance range reflects a conservative assumption that has Midstream will effectively receive zero third-party volumes beginning in May and continuing through the rest of 2020. We do not anticipate this being the most likely outcome this downside scenario demonstrates the strength of our contract structure with Hess Corporation, which also which allows us to continue to Thursday are targeted 5% annual distribution per share growth in 2020 with a coverage of greater than 1.1 times even in the event that we receive no further third-party volumes for the founder of the year.
Now focusing on the second quarter consistent with the midpoint of our second-quarter financial guidance, we expect gas processing and oil terminating volumes to each be approximately 15% life compared to the first quarter with water Gathering volumes being approximately 5% higher.
Midpoint of our financial guidance also assumes that third parties contribute approximately 10% of total oil and gas through put in the quarter primarily due to strong performance at April prior to them being third-party curtailment.
for the second half
Half of 2020 we expect the majority of our systems to be operating at or below sea level as our Outlaw Outlook incorporates the plan 45-day tgp turn around and we begin to see volume reductions from past later in the year driven by the reduced rate count.
You're continuing planning activities for the tgp maintenance turnaround in the third quarter while closely monitoring potential covid-19 risks. Our full updated volume guidance is not available on our earnings release which was issued earlier today.
Turning two halves midstream's Capital program our 2020 Capital guidance comprises approximately $255 million dollars of expansion capital and twenty million dollars of Maintenance Capital which incorporates a $70 reduction from our original 20/20 Capital program. We plan to invest approximately $160 in gas processing primarily related to the already announced and wage Advanced expansion of tgp. The expansion continues to progress ahead of schedule with plant tie-ins expected to be conducted during the maintenance turnaround facility construction is expected to be completed by the end of 2020 with incremental processing capacity is expected to be available in 20 21 coincident with residue and NGL takeaway expansion expansion of tgp competitively position test Midstream capitalize on continued development in the Basin and enables producers to meet tightening flaring targets particularly north of birth.
Missouri River where processing capacity is limited and well productivity is strong in addition under has midstream's contracts with Hess Corporation and consistent with all other Investments off as Midstream earns a contracted return on Capital deployed for the tgp expansion finally in 2020. We expect to invest $25 in gas compression and seventy million dollars an oil gas and water pipelines and well pad interconnects.
In summary will continue to meet the challenges of 2020 and Beyond with careful planning increase safety measures and focused execution. We're also able to provide a level of visibility and certain time as a result of our contract structure which provides for approximately 97% of projected revenues for the second half of the Year. This underpins our 2020 adjusted ebitda guidance range, six seventy five to seven hundred million dollars, which is broadly unchanged across a dynamic macro backdrop that is impacting overall volume and the industry at large additionally looking for a 20 21, we expect adjusted ebitda growth of 25% relative to our 2020 Guidance with approximately 95% in BC protection.
All of which demonstrates that has Midstream is well-positioned to whether the current market condition and continue to deliver strong operational and financial performance in 2020. And for the long term
I'll now turn the
Call over to Jonathan to review our financial results.
Thanks, John and good afternoon. Everyone has mystery continues to be differentiated based on our strong contract structure and the proactive steps that we have taken providing visibility and stability to our foreign trajectory through 2022 even during this period of significant uncertainty. Well, John is described recent third-party curtailment and houses reduction of activity from 6 to 1 month our contract structure and financial strength provide a unique level of stability or updated guidance supported by downside protection and cash flexibility mechanisms in our contract still delivers, our financial Target, including approximately 25% ebitda growth in 2020 and 2021 as well as $750. If we can't seem to find it even less capex in both twenty twenty one and twenty twenty-two sufficient to be free cash flow positive after growing distributions as a reminder off.
Our contract is actually include the unique combination of minimum volume commitments or mdc's and an annual redetermination mechanism that adjusts rates based on changes in volume and capex month to maintain a return on invested Capital including are approximately four billion dollars of historical investment in the current environment with throughput volumes are expected to be lower than has to divorce and plan at the end of 2019 are top rate will just hire as part of the annual rate redetermination to maintain our return on Capital.
Our contracts worked effectively during the commodity price downturn of 2015 and 2016 say which the inmate we reset mechanism work together in pain and grow adjusted ebitda even during a period of reduced activity and production by half.
Consistent with that experience or guidance for 2020 and 2021 is supported by the combination of MVC protection and the rate redetermination that will occur at the end of 2025. In addition to our best-in-class contact structure. We have taken proactive and prudent steps to reinforce our long-term Financial strength in March. We reduced our twenty-twenty and twenty Twenty-One thousand by a total of $200 essentially bringing our capital investment in 2021 to sustaining levels that is primarily related to oil gas and water pipeline interconnect. We also revised are targeted annual distribution per share growth rate to 5%
As I will discuss these proactive steps combined with our unique contract structure positions us to provide visibility through 2022 first the midpoint of our updated twelve or even a guidance still delivered 25% even to grow relative to 2019 despite pass reducing big activity from 6 Rings to one big and significant third-party curtailment.
second
Our twenty-twenty better guidance includes approximately 97% of our revenues protected by these in the second half of the year the lower end of our 2020 guidance conservatively assume zero party volume starting in May with revenues that are 95% protected by NBC's and still provides distribution coverage greater than 1.1 * third looking forward adjusted. Thursday is expected to increase by 25% in 2021 relative to our 2020 guidance supported by the annual redetermination at the end of 2020 and higher wage twenty one. And finally this even increase to gather with our pro-active capital expenditure reductions drives approximately 750 million dollars in annual free cash flow in both twenty one and twenty twenty-two with approx 95% of our revenues protected by NBC's sufficient to fully fund our interest expense in distributions while maintaining distribution coverage of a dog
21.4 time without the need for any incremental debt or Equity trading to our results. They'll compare results from the first quarter of 2022 the fourth quarter of 2019 for the first quarter of 2020 that income was $129 compared to $75 for the fourth quarter of 2019 fourth quarter 2019. Net income tax included approximately twenty-six million dollars of costs related to our acquisition of Health infrastructure Partners adjusted ebitda for the first quarter of 2020 was $195 compared to a hundred fifty eight billion dollars for the fourth quarter of 2019, excluding the transaction costs.
The change an adjusted ebitda relative to the fourth quarter was primarily attributable to the following our total revenues increased by 15% quarter-on-quarter increase revenues for a gathering segment increased by approximately $18 primarily driven by higher has production and higher tariff rate from the annual rate recalculation at the end of 2019 revenues for a processing segment increased by approximately ten million dollars primarily driven by the completion of the above the LM for gas processing plant and the continued back of TV p as well as higher tariff rates from the year and wait recalculation that accounted for the delay in start-up of Ellen four in revenues for our terminal a segment increased by approximately four million dollars off really primarily driven by higher production and higher tax rates from the end of 2019 in order recalculation.
Total operating expenses including g n a vehicle in depreciation and amortization pass through and transaction costs for lower increase in adjusted ebitda by approximately six million dollars including lower maintenance services and professional feeds During the period of approximately four million dollars a little over head of approximately 2 million dollars for processing fees that of our proportional share of earnings and depreciation reduced adjusted ebitda by approximately 1 million dollars resulting in first quarter $20 adjusted ebitda of a $195 23% increase relative to the fourth quarter of 2019.
first quarter
Maintenance Capital expenditures for approximately 2 million dollars and that interest excluding amortization of deferred Finance costs was twenty-three million dollars. The result was that distributor of cash flow was approximately $170 for the first quarter of 2020 covering our distribution by approximately 1.4 times expansion Capital expenditures in the first quarter worth $55 billion dollars at quarter. And that was approximately one point eight billion dollars representing approximately three times leverage on a trailing 12-month basis.
Change for the rest of 2020 and Beyond as mentioned we are uniquely positioned to provide visibility to our for introductory through 2022. We have prudently set wage lower end of our annual and quarterly guidance ranges for 20 22 assume zero third-party volume starting in May and continuing through the rest of the Year. This will end include the revenues that are not protected by NBC's with remaining revenues fully attributable to volumes of hats which has announced that they do not expect to curtail production as a result Revenue outcomes below end of our guidance. I'm not reasonably expected given the contractual mechanism in place.
In the second quarter of 2020 we expect net income to be approximately 90 to $105 and adjusted even as to be approximately 155 million to $117 second-quarter maintenance Capital expenditures and that interest excluding amortization of deferred Finance costs are expected to be approximately 30 million dollars result of expected DCF of approximately 125 million to 140 million dollars delivering distribution coverage at the midpoint of the range of approximately 1.1 time with approx 90% of projected revenues projected protected by mvc's at the lower end of our guidance. 95% of our expected revenues would be protected by NBC's
Relative to our first quarter results expected decrease in financial results is primarily driven by the reduction in third-party volume from reduced activities and curtailments as John describes while we expect to receive approximately five to ten million dollars of MVP payments in the second quarter revenues are expected to be lower than total volume including third parties while declining are affected not only be above sea level in the month of April in addition. We expect to Begin work on the TV turn around in the second quarter including approximately 7 and 1/2 million dollars of cost of operating expenses and maintenance Capital looking forward to the rest of twenty-twenty starting in the third quarter. We expect volume to be primarily below NBC's resulting in significant new protection in both the third and fourth quarters during the third quarter, we expect twenty to twenty-five million dollars of costs across operating expenses and maintenance Capital related to age.
planned maintenance turnaround
As a result, we expect distribution coverage of approximately nine five times in the third quarter with approx 97% of revenues protected by NBC's home without the one-time costs related to the turnaround our second quarter distribution coverage with the approximately 1.15 times.
In the fourth quarter with increasing relative to the second and third quarter and lower operating costs and maintenance Capital as a tgp tournament is completed. We expect distribution coverage to be approximately 1.2 times with revenues. I continue to be approximately 97% protected by mvc's for 2020 overall full year net income is expected to be in the range of 410 million to 135 million dollars adjusted ebit up is expected to be in the range of 675 million to $700,000. We still expect to maintain approximately 75% even a margin in twenty-twenty consistent with our historical margin highlighting our stability at the midpoint are updating adjusted even a guidance still delivers an approximate 25% increase over our 2019 results maintenance capital and cash interests are projected to Total approximately 110 million month.
For the full year twenty-twenty distributable cash flow for 2020 is expected to be in the range of $565 billion to $590 billion dollars resulting in an expect distribution coverage of approximately 1.2 times as noted the bottom of our guidance assumes no third-party volume starting in May of 2020 and still delivers distribution a coverage greater than 1.1 time.
Respect to end the year with leverage at or below are conservative three times adjusted ebitda leverage Target at the end of 2020 is part of the annual tax rate redetermination process operates for 20 21 and all forty years of the contract will be reset to maintain our contractual Returns on Capital deployed through this process rates or birth control volume delivered in 2020 as well as lower expected volumes in future years of the development plan going forward compared to the prior plan primarily driven by this rate increase as well as higher than 20 21. We expect a 25% increase in adjusted ebitda in 2021 based on this adjusted ebitda increased to gather with our previous lien 50% compact reduction in 2021 that brings us to sustaining expansion capital of approximately a hundred million dollars. We expect $750 free cash wage.
Both twenty twenty one and twenty twenty-two in both ears. We expect revenues that are more than 95% protected by embassies and distribution coverage of at least 1.4 time in summary considering the significant challenges and volatility of the macro-environment. We are truly differentiated by our financial strength and ability to provide more than 2 and 1/2 years afford visibility first or Twenty twenty guys still delivered 25% even if growth relative to 2019 includes revenues than the 97% for the second year and at least 1.1 * distribution coverage even conservatively assuming zero third-party volumes for the rest of the year. Second are lately determination at the end of twenty and increasing NBC's driving expected 25% growth in ibadah in 2021 and third this increased ibadah and our proactive compact reductions off.
sufficient to allow us to be
Free cash flow positive after distribution in both 2021 and 2022 without the need for any incremental debt or Equity this this concludes. My remarks will be happy to answer any questions. I will now turn the call over to the operator.
Ladies and gentlemen. If you have a question, please press star followed by the number one on your telephone if your question has been answered or you would like to withdraw your question, please press the pound key questions will be taken in the order received, please press star One to begin.
your first question comes from the line of donuts from credits with silver linings open you may ask you a question
hey after you guys it's like to start off high-level thinking about base and diversification and where your latest thinking is there I'm sure it's tempting to sit back at this point collect on your NBC app but don't see you guys taken that path so just walk us through your thinking about diversifying going to be away from the barking and then strategically pivoting the company when it's the right time to take that action
Sure, I guess just to start off. We just want to reinforce the the Bakken position we have and the relationship with has again. As you mentioned that we think, you know the strength of our anchor customer and the contract structure we have in place is is absolutely key and critical and I would say at this time, you know, we're really kind of focused on continuing to strengthen our position in The Walking Dead in support has some third-party. So continuing to build to build on that position as we said in Prior calls, you know, we We are continuing to look at other options. But right now we really are focused on the Balkan and focused on taking care of s and and the third parties in in the Basin again, if if you know, we'll we'll look at opportunities. But but but our focus at this point is really the bokken and and half
Understood and then thinking about next year obviously pretty locked in at this point. I don't see a lot of variability there. But but does have sort of asymmetric upside down think about your contract structure and I guess rather than count on volumes, um to sort of drive that hire think about two other factors that can maybe do it I asked one is cost and the other one is is capex. It's a curious on those two how much room is there for you guys to get leaner here on the opposite side and to be sent to test does drop that rig, obviously your top-line stays the same but that's that actually end up on your capex below that hundred million dollar number next year and actually drive free cash little higher. I guess I'll start off with the operational side of it and then hand it over to Jonathan free edition or he'd like to add but um, you know, we as test as always been I think has Midstream is is continued to
Discuss this as well as we are a a lean oriented organization. And so we're constantly looking for opportunities to drive costs out of the system and that that happens every day and it's going to continue to happen and it's an absolute full.
For us as we progress over the next several years and I would say that holds true on topics and Kaepernick. So we're constantly looking and rationalizing our Capital spin optimizing looking for a disease and in particular in a market where activity is declining. We we feel like there may be potentially some supply chain opportunity to go after as well. So I think we're walking we're walking up and down the value chain and work their suppliers working with the the the our customers in the basement and looking for ways to optimize effects and and tap opportunities. So I I think it's a I think it's a good point and it's definitely something we're focused on and we're constantly looking to to drive cost out of our system and and continue to get more efficient than everything we do offer. So Jonathan anything you want to add to that.
Yeah, thanks. I in terms of looking I think you know look at the assumptions that are in our forecast and the likes so I think starting on the capital side. So they're what we talked about is, you know with the proactive Capital read off that we made earlier that brings us to what we're calling sustaining capital of approximately a hundred million dollars of on the expansion Capital side that really just includes third party and half interest and as I mentioned in in John mentioned, so we think that that's about the level that would be required. You know, there'll be some fluctuations there plus or minus depending on particularly third-party South, you know in a route and depending on how that goes but essentially think of a hundred million dollars and you know that we do have on top of that get sustaining Capital you Dad maintenance Capital we do have 20 million dollars this month that may be a little bit higher than normal because of the tgb turn around so you could see that being a little bit lower next year, but that's you know, that would be step one and then step two would-be you mentioned on opposite side so dead.
Of course a contract start to also does include consideration of affects when we set the tough though the extent that you know, we maintain everything would be the same. Our office is generally fixed. We don't seem but sensitivity to changes in volume. That's particularly to certainly this year even more. So with the turnaround in the plan the next year as we look for 20 21, the turnaround will be behind us. So that is part of the driver of the 25% increase in ibadah is that so depending on you know, I think on a relative basis you could see some changes there and it's just that you know, we're continuing to work has has been down that they are looking at Cost reductions. We're working side-by-side with them and that could potentially do some additional effects reduction including particularly allocations that come through their hats. And as of right now, we have not Incorporated any of those any assumptions about reduction as part of that process in the midpoint of our guidance, so that could be potential upside. But I think you know, it's still early days on that until more than dead.
Right, maybe very helpful one other comment just on the capex and just a reminder that the bulk of our backbone system is in place. So really when we're talking about that sustaining Capital we're talking about Thai, you know, potential interconnects to the specific well pads and third-party customers and all that but the major infrastructure is is is already built out in place.
Thanks for the color guys do well. Thank you.
Your next question comes from the line of Phil Stewart from Scotiabank your line is open. Give me ask you question.
Good morning, everyone congrats on solid update.
Thank you. I wonder as we think about you know, the third party curtailments. I appreciate you know, you guys providing the the downside case scenario, you know, really helpful in pretty conservative on your end. But you know, it seems like you know, these third-party curtailments are going to be temporary just kind of curious, you know your view of of you know, I guess based on the current strip of when you know, some of these curtailed volumes would come back online, you know understanding you guys has not the operator there, but just curious, you know from a macro standpoint, you know, when you see, you know, third-party volumes potentially coming online, you know, what oil price kind of track that or if the current strip would would justify that on in your eyes?
Yeah. No, it's it's a good question. I guess it's it's a difficult one to answer because as you mentioned, I mean each of the the non Ops have their own scenarios where if they've got hedging pricing or marketing Arrangements in place. The one thing I would say that's a real positive is, you know, this production is behind pipe already, right? I mean we had an amazing first quarter. In fact arguably. The first quarter is was the best quarter we've we've ever delivered it's it's just unfortunate the market that we're in and and kind of scenario that's played out over the last couple of months, but we had a very very strong a very very strong quarter and that was driven by Hess and third parties and I would say as as curtailments and slowdowns happen, you know, those those Wells and those well pads are interconnected into our system. And so as those producers bring the activity back and actually, you know, whether they've shut in shut-in production direct existing proved develop production wage.
Where they're going to drill additional Wells, you know, the infrastructure is in place to support them. And that's really one of the key reasons why we're continuing to head down the path with the Tire Gas Plant expansion, you know in north of the river. We really see ourselves kind of as a as an unequal Midstream provider in the in north of the Missouri River there really is limited processing capacity there and kind of sit there with the with with a key asset that that can support both tests and and third-party producers. So I would say we're we're definitely positioned to capitalize on June third parties bring blinds back into the system or they end up, you know re initiating drilling programme. It's it's really going to depend on on the price environment and that's part of the reason why we went with a more conservative look we don't anticipate the low end of our range being kind of the expected outcome. But at the same time we felt like we wanted to add that level of of certainty around the low-end wage.
particular demonstrating the strength of our
Contract structure with has the MVC mechanism the contract, uh, um, you know recalculation process and all of that really really kind of supports that so Jonathan if there's anything else you'd like to add. Yeah. Yeah. No, thanks. I mean what I just maybe I'll maybe just you know, what the other side of the coin just so we're all clear that like you said, you know potential upside the extent that their way is third party, but and we're ready to handle that like John said, but if you look now just you know, starting really Q3 and Q4 and really going through 2022. We're really going to be running out of every sea levels not really going to be The Driver of course lower volume this year will contribute to the rate redetermination at the end of 2020 and that supports the 25% increase in even in addition to twenty Twenty-One. So, you know, if you think about what happened we originally had thought post that we have done that has announced in rigged activity. We expected that we would be adorable o m b c song
Thank you for what's really happened with the significant curtailment, you know, we're really hitting that level now in Q2 and that means that will really be now protected including the growth because of the whole nation into twenty twenty one and twenty five percent really for the next you know, two and half years from 3:20 all the way through 2022. And that really just says that that really just protect us and really gives us that level Financial Protection over that. While commodity prices have the potential of stabilized that's very similar to what we saw back in 2050 and 16 where when we after the. Station again, we had about two-and-a-half to three years of financial protection and at the end of that. We, you know has to be integrated problem with third parties driving growth again. So when that same scenario now to an a. Lance protection allowing commodity prices to see wise and all along the way while we're waiting we have differentiated visibility and stability during this time.
Great, I appreciate the details there and I wonder you know as we think about, you know, kind of corporate strategy going forward given that that you all are unique and your visibility to cash flows over the next two and half years as you mentioned, you know, just curious, you know on the m&a front, you know, do you think that provides you with a better advantage to maybe pick off, you know one off assets within the Bakken and then maybe a second part to that question, you know another asset that had been, you know, potentially contemplate life, you know for a drop-down was the Gulf of Mexico infrastructure assets, you know, just wondering what has his comments today about kind of slowing activity in the Gulf of Mexico based on kind of the current strip, you know, if that, you know pushes out that that potential drop-down opportunity further to the right.
Sure. So yeah, let me just start with your first part of your question on the Block and you know again, I think we're really kind of in a looking at focusing on Hess wage are third-party customers existing has to production and third-party customers and also supporting the development of of both of those but we are always looking for those strategic bolt-on opportunities that just our our own no brainers as far as adding additional capability to our system from our perspective. We see those as extremely low-risk. They would integrate very nicely into our contract structure would provide the same sort of downside protection in in those in those those opportunities to kind of pick up those. So we were absolutely looking at those things. I would say that they're going to be probably be the smaller side. There's not going to be anything anything major that we're going after cuz again, we're really focused on on the strength of our position, but also continuing to build on that strength. So I think again we're focused on Thursday.
Have but if we're also opportunistic and if if something kind of comes up that that makes a ton of sense.
And forth and help support our our customers both half in and our third-party customers will absolutely consider those those those opportunities and then the second part of your question on the Gulf of Mexico. So yeah, we're home absolutely continuing. I mean that's that's one real benefit that we have is the relationship that we have with with us and we're continuing to evaluate the Gulf of Mexico assets, even though the Gulf of Mexico activity has has slowed down there still substantial production there. There's 65,000 barrels of oil available there. There's water injection. There's there's infrastructure in place for that. So that that's absolutely something that's on our radar screen and something that we're looking at in our partnership with has to to continue to build on that. So we do see that as an opportunity for prefer their potential growth and wage in the nice thing about those assets similar to what we have in the Bakken is they would follow the same sort of contract structure model. It may be slightly different because they'll be different assets, but you suck.
Downside protection that we would be looking for in kind of our philosophy around the contract structure would absolutely apply and and again, I think we've demonstrated that that's that's a focus for us as we did with the water acquisition that we may as well that provides the same sort of downside perception. So the has the Gulf of Mexico assets would would probably fall into that into that category as well.
So Jonathan anything else you'd like to add? Yeah. I mean, I think that's I think you know one thing that's sort of underpinning this question and maybe previous question is, you know, look going into when a very unique and differentiated position where we should have, you know, 750 million dollars of free cash flow starting next year more than enough to fund our distribution therefore, you know, really decreasing debt without you know absent any other plans a giving us discontinuing relative to only two or three times already conservative leverage Target. So really just giving us increasing Financial flexibility, but as you know, particularly in an environment like this and as we've always been a even more so now we're going to continue to be you know, financially disciplined certainly opportunities. Like the Gulf of Mexico is John described are are great because they give us more free cash flow and a potential long-term service is John described as well. As you know, if there are opportunities like John descriptions of assets, but we're going to be very disciplined certainly another use of that Financial flexibility can also be returned a capital to shareholders dead.
Our we've talked about BuyBacks only not from the public doesn't make a lot of sense positive to our float side, but certainly buybacks on the sponsors could be very creative and another use of that potential Financial flexibility. But over violently as we've demonstrated historically until you looking for we're going to continue to be very financially disciplined with a focus on maintaining and all of our financial metrics within the targets that we've set.
All right, great guys. Thanks for the additional details. That's it for me.
Your next question comes from the line of Jeremy Ethernet from JPMorgan your line is open. You may ask you a question.
Hey, this is James on for Jeremy. Most of my questions re already asked but I guess just thinking high level here giving you guys are well covered in pretty unique in the space in terms of your your funding but just any updates off in terms of distribution growth know you guys reduced the 5% with in March update. But you know given where the space is or how or how the sector has changed the past month. Is there any kind of updates box there to go forward?
Sure.
So in terms of distribution growth, we like to say, you know distribution growth is an output not input and what we mean by that is it should be the growth and the growth rate should be second system with our financial metrics in terms of like a bridge and coverage Target that is supported by contract structure as well as the visibility that we have to fund distributions with free cash flow going forward as we talked about with, you know, just looking at 2020 alone with 97% M&C protection for the second half of the year and the ability to deliver even one point one time coverage even a scenario where we have zero third parties very comfortably and then with the weight reset increasing every season to 25% even a growth leads at 750 million dollars of free cash flow, which is enough to be free cash flow positive after distribution twenty one and twenty twenty-two. So therefore, you know, we really feel based on all of that that distribution goes at 5% is really called the right output therefore relative to the visibility that we have off.
Of our financial metrics and the stability that we get from our contract structure. So based on all of that really no change in terms of our thinking on distribution growth.
Got it. Thanks. That's it for me.
Thank you.
Thank you very much. This concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.
Thursday
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6 a.m.
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