Q1 2020 Earnings Call

<unk> answer session will follow the formal presentation.

If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.

As a reminder, this conference is being recorded.

It's now my pleasure to introduce your host Mark shocked senior Vice President Investor Relations. Thank you Sir you may begin.

Good morning, everyone and welcome to target hospitality first quarter 2020 earnings call.

A press release, we issued this morning outlining our first quarter results can be found in the investor section of our website.

In addition, a replay of this call will be archived on our website for limited time.

Please note the cautionary language regarding forward looking statements contained in the press release.

The same language applies to statements made on today's conference call.

This call will contain time sensitive information as well as forward looking statements.

Which are only accurate adds up today may 28 2020.

Target hospitality expressly disclaims any obligation to update or amend the information contained in this conference call to reflect events or circumstances that may arise after today's date.

Except as required by applicable law.

For a complete list of risks and uncertainties that may affect future performance. Please refer to target hospitality periodic filings with the FCC.

We will discuss non-GAAP financial measures on todays call. Please refer to the table in our earnings release posted in the Investor section ever website to find a reconciliation of non-GAAP financial measures referenced in today's call and their corresponding GAAP measures.

We would call today, we brought Archer President and Chief Executive Officer, followed by Eric Ti caliber Executive Vice President and Chief Financial Officer.

After their prepared remarks, we'll be joined by Troy shrink.

Commercial officer.

And open the call for questions.

I'll now turn the call over to our Chief Executive Officer, Brad Archer.

Thanks, Mark Good morning, everyone and thank you for joining us on the call today.

In addition to discussing our first quarter performance I will also touch on the cumulative steps we've taken in response to cope with 19 pandemic and the current market conditions as well as our priorities for the remainder up 2020.

As we sit here today, we are operating at a vastly different environment that any of us could've imagined just a couple of months ago.

The impact of the Cobot 19 pandemic is being felt around the world and has had an unprecedented effect on the global economy.

Same time global commodity markets are being Deltic Dole shock of all my old demand erosion, coupled with the resulting oversupply.

Amidst these headwinds target delivered solid first quarter results only slightly below our expectations.

The momentum we witnessed building late in 2019 continued through the first two month for the quarter and then tomorrow.

Average utilize beds for the quarter were 9798 up slightly from the first quarter of 2019.

Additionally, we continue to have strong cash generation, which discretionary cash flow for the first quarter of approximately $10 million.

We also received positive news late in the first quarter when TC Energy announced it will proceed with the construction of the Keystone XL pipeline project.

As a reminder.

Market will provide hospitality and catering services for the duration of this project.

Which is anticipated to last into 2023.

At this time.

It has begun providing a limited amount of services related to planning and logistics prior to the full scale start of the project.

We're in the process of finalizing the full project scope and anticipate increased project revenue over the remainder of 2020.

Turning to our focus in this challenging environment.

As we ended the first quarter the effects of the Cobot 19 pandemic began to accelerate across the United States.

In the face of these unprecedented event target quickly implemented a comprehensive operational response plan to ensure the health and wellbeing of our employees and customers.

As a result, we have not had any cases of cobot 19 impact our business.

We've also taken decisive steps to appropriately positioned our business for what is shaping up to be a challenging 2020.

As activity levels have decline, we are dynamically managing capacity across our network to align with demand and our customers need.

Many components of our cost of services, our variable, allowing us to rapidly reduced cost across the organization in response to lower utilization.

All our cost containment initiatives have been taken to maintain operating leverage into 2021 and beyond.

Which will lead to continued cash flow visibility over the long term.

We have positioned target for long term success and as market dynamics, the Bob there's the potential to gain additional market share as we returned to a more normalized pace of activity.

Although we came into 2020 with improving expectations across our business the global pandemic and rapid decline in commodity prices has significantly altered those expectations.

We're cognizant of the tremendous stress these global macro events have put on the businesses around the world, including our customers.

One core principle underpinning the success of this company, it's it's strong customer relationships.

We are focused on preserving these mutually beneficial partnerships to position target any place of strength as activity begins to normalize.

We have had discussion with our <unk> quality top tier customers regarding their existing contracts and have taken proactive steps to modify select commercial contracts for the long term benefit of target.

These modifications utilize multiyear contract extensions to maintain contract value and provide target greater visibility on long term revenue and cash flow this approach, which aligns with our larger customers long term investment horizon balances 80, our contractor.

Providing us with consistent cash flows and solidifying contract commitments into 2024.

We have maintained the integrity of these contracts, while delivering a mutually beneficial outcome for target and our customers.

We will always work with our customers to ensure we maintain a strong partnership which is critical for our mutual long term success and is the foundation of our 90% kind of contract renewal rate.

We believe these modifications accomplish this goal while preserving target strong capital structure and financial position to thrive in the eventual economic recovery.

While the second quarter is likely to be challenging we do anticipate incremental improvement as we move into the back half of the year.

As activity begins to progress towards normalizing, we will provide the marketing revised 2020 outlook when enough clarity is available.

We have created a structurally sound business with the flexibility to adapt to a rapidly changing environment.

We have taken decisive steps, both operationally and financially to ensure the long term success target hospitality.

We continue to navigate these uncharted waters, we remain focused on preserving our operational flexibility strong financial position and liquidity.

I'll now turn the call over to Eric to discuss our first quarter results and provide more detail on the steps we have taken to mitigate the financial impact in the current environment.

Thank you Brad and good morning, everyone.

I will begin with the discussion of our results review our capital program.

Glad with details on continued steps, we're taking to mitigate the ongoing economic uncertainty.

While we did experience positive momentum through most of the core.

A combination of covered my team and rapid deterioration in global commodity markets modestly impacted our results late in the first quarter.

However, we still produced solid quarterly result, and importantly continued to generate meaningful discretionary cash flow.

First quarter 2020, total revenue was approximately $72 million adjusted EBITDA was approximately $32 million and discretionary cash flow was approximately $10 million.

Turning to our segment performance the Permian Basin delivered first quarter revenue of $49 million, a decrease of 7% versus the prior year quarter.

This decrease was primarily driven by lower average 80 hours due to reduced uncontracted utilization is activity moderated across the region.

In the Bakken first quarter revenue.

It was approximately $4 million, 12% decline from the prior year, mainly due to decreased utilization, reflecting also lower activity levels.

Our government segment remained consistent with <unk> quarterly revenue of approximately $17 million.

Our all other segment, which consists primarily of construction fee revenue from the Tcseventy pipeline project had revenue of approximately $2 million for first quarter of 2020 compared to 8 million in the same period last year.

Revenue decreased as result of significantly less activity associated with this project.

As Brad mentioned well encouraged by the recent announcement that TC energy will proceed with the construction of the Keystone XL pipeline and anticipated additional revenue associated with this project over the remainder of 2012.

Recurring corporate expenses for the quarter were approximately $8 million.

As we have online we have taken decisive steps to reduce cash corporate expenses across the organization in response to the continued economic uncertainties. As a result, we expect I will refilling corporate expenses to be around $6 million to $7 million per quarter for the remainder of the year.

We generated cash flow from operations of approximately $11 million for the first quarter 2020.

Even in this challenging environment, we expect to continue generating positive operating discretionary cash flow provided sufficient capacity to fund all normal course business activities.

Capital expenditures for the first quarter were approximately $7 million.

Putting 6 million related to previously announced investments in new communities less than 1 million means capital.

As a result of the deterioration in global commodity markets, we anticipated reduced activity levels.

Hi, good anticipates capital expenditures to be less than $10 million through the remainder of the year.

We ended the quarter with $425 million, a total long term debt.

Coding $85 million drawn under our revolving credit facility.

In consolidated net leverage of 2.8 times.

As a reminder.

Our long term debt consists of $340 million and senior secured notes due 2024, and the other 25 million JBL facility, which had no near term maturities for immediate financial covenants, providing us with significant flexibility and liquidity within our capital structure.

Now turning to the mitigating steps, we're taking in response to the continued economic uncertainties.

The cobot Nike pandemic in simultaneous shocks commodity markets have dramatically loaded global crude oil demand resulted in meaningful oversupply.

These events have created significant volatility and uncertainty across global financial and commodity market [laughter], possibly negatively affected our energy end market customers.

In this environment, we're planning for a range of scenarios, taking immediate actions to manage our business in cash flow was shaping up to be a challenge here.

The first quarter results reflect a small portion of what is anticipated to be a pronounced reduction customer activity and utilization levels.

Our business structure does provide meaningful variable cost of services, which will offset a portion of reduced utilization over the remainder of 2020.

We anticipate this variable cost dependent to reduce cost of services by approximately 30% or the <unk> over the remainder every year and provide the ability to properly manage margins in this challenging environment.

Along with these variable cost we have taken additional steps to further reduce cash expenses across the company and restructured the organization to match activity where appropriate.

We have significantly reduced our workforce.

Reduced discretionary spending and eliminate all medicines will travel in addition, our board of directors executive and senior management.

I don't really taken so cash salary reductions.

We anticipate these measures in their entirety reduce cash expenses by more than 30% over the remainder of 2020.

Excuse me what steps have all been taken with focus on preserving liquidity protecting our balance sheet in retaining financial flexibility.

We believe that the strength of our balance sheet and liquidity position along with the continued focus on capital stewardship will provide the opportunity for target to prevail, a stronger and more resilient company.

With that I'd like to turn the call over to Brad for closing remarks.

Thanks, Eric.

We're living in a vastly different world today, while it is encouraging to see progress being made and signs of a gradual return of some normalcy. It is difficult to predict the duration or scope of the current market uncertainty.

As we continue to navigate this unprecedented situation we remain focused on the things that we can control, ensuring the health and safety of our employees and customers, while maintaining a heightened focus on protecting our balance sheet and preserving liquidity.

We have positioned target to navigate a variety of business cycles, and I've taken decisive action and the current environment to proactively adjust our business to changing market conditions.

We believe these actions will ensure target remains in a strong financial and operational position to take advantage of the eventual market recovery I.

I appreciate everyone joining us on the call today and thank you again for your interest in target hospitality.

Operator, you May now open the line of question.

Thank you we will now be conducting the question and answer session. If he would like to ask the question. Please press star one on your telephone keypad.

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Our first question comes from the line Steven Madden Girl with Stifel. Please proceed with your question.

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Oh, Thank you and good morning.

I hope everybody is doing well.

Oh, a couple of things if you don't mind I guess I'd start with you know clearly in the oil patch March got tops in the second quarter looks looks.

Very difficult I mean with expectations I mean, we're hearing from service companies, you know, 70% to 80% reductions in completion activity.

Can you give us any sense for what the Permian looks like in April versus you know February March.

As far as occupancy is concerned.

Sure Hi, Stephen Good morning, Thanks for the thanks for the the the question.

Well because again, it's a good question I think we look to your point.

Yeah, Alex you Utilizations down quite a bit you've obviously seen a lot of the metrics. You know look I think whether we whether we're thinking about April or whether we're thinking about second quarter I think it the look at the macro environment in total and whether you think about in terms of crews being out what do you think about in terms of capital being reduced.

Just a whether you're thinking about in terms of of rigs being you know being stacked look I think you'd assume that the utilization.

For April.

May timeframe, you know just reflects that in general so I think we want to avoid getting specific number on it but I was just tell you that it's not drastically different than I think law. The other macro data points that you would you would've heard about and thought about.

Sure. So in other words thinking about it if we thought.

Activity on the drilling and completion side was going to be down 75% is there.

Then he variables, we should think about which would make your outcome better or worse than that.

Well I think when it comes utilization it probably a they got in this environment. It probably mirrors mirrors that today you know, we certainly have a better contractual profile, but I think you based on what your what you're describing I wouldn't disagree with that having a little bit of differences some.

Still kind of moving through this but some of the differences I think we're going to be set up for multiple services is our contract some of the guarantees right.

So I don't think it's a one for one when you look at some of that where we should be better on some of those because of our because of our contracts.

Great. Thank you and then just one follow up and I'll get back in line here, but.

If we look at the.

First quarter E.D.R.M., we thought about I know you talked about the absence of effectively spot activity, which which which hurts that which makes sense.

He's Oh, we did we see the full impact to that in the first quarter.

Or or should we think about.

Adjusting that going forward.

So when do we think about the modifications in HDR <unk> SAR, just say from from first quarter second.

Yeah, we start seeing a this I'll I'll say at a high level first quarter was shaping up to actually be a really nice quarter and and certainly ahead of our expectations.

As we enter into second half of March we started to see some fairly meaningful shifts downward largely from the transient activity that would have pulled that 80 or down.

When we think about that going forward.

Yeah, you're going to see the full effects of that really from that end of March period onboard to partially through today. So I think you just saw a portion of LDL [laughter].

[laughter].

Okay.

Thank you I'll pass it on to get back in line. Thanks.

[noise]. Thank you. Our next question comes from Jeff Grampp with Northland Capital markets. Please proceed with your question.

Good morning, guys I was hoping Brad or maybe for Troy. If you guys can talk on the a the modified contracts maybe to dig in on that a little bit more can you guys touch on maybe some of the gives and takes I mean, I guess simplistically, we think that are likely exchanging a utilization and or 80 our for.

Maybe some some longer contract terms. So I guess just first wanted to see if we're on track with those thoughts and maybe if we look at I don't know your top top 10 customers are so what what percent of those have those types of conversations taking place.

Hi, Jeff Good morning, it's a fair kalamaras.

A couple of things so so when we when we looked at contracts Yeah. We're focused on a few things. So as we had some customers who wanted to have those discussions what we were trying to balance really anflu mechanisms. What we're trying to balance was was 80, our with a with term I would tell you that in.

In a nearly all cases, we kept 80 are flat through the third the contract period I think the biggest point to bear in mind as we as we look to extend term under contract. We we came out with a contract structure that is better for target in the long term and I think that's it that's going to be a significant.

Causative in addition to that we also established additional revenue commitments going out a number of years as well. So I think we have to bear bare those things in mind I think when we look at big customers that were.

There were a engaging in discussions with you know really we were talking about kind of the top five which were meaningful meaningful discussions were being had I think given total we've had discussions with you know probably yeah, 30, 40, 50 customers, but I think the biggest you know the biggest line chairman of the revenue.

Well, it's going to become the top five.

And you look we feel good about where we ended up certainly 2020 going to be difficult year, but I think when we look going forward into 2021 as we see the contract profile, we don't see it looking drastically different than what we expected coming into 2020, which I think is a which I think it's a positive going forward.

Hey, Jeff This is Brad let me a little bit too that little color.

What I would also say is that.

Leap these contracts do work we've said this forever in the company. It's it's what help helped us true.

You know the North Dakota, a issue back in the day.

But look we could have held our ground here with our customers on our contracts. We could have had a really good 2020, when factoring in the unprecedented blow and get delivered by the pandemic.

With that said as contracts come up for renewal and 2021 2022.

The outcome would not have been a favorable one for target if we want to set down in negotiating on somebody's contract and some of these with us reaching out to the customer or to go ahead and get in front of death and talk to them. Let them know we are here to help.

So look the contract modifications were no doubt as Eric said, a win win for Targa hospitality and the customer and agreements are really set us up for many years or future success, but we won't start to see that's rolled through a until demand picks back up.

And hopefully in 2020, but the outer years get better no matter what on that and get you know as demand does get back to normal even more so what we were coming up on somebody is contractors to be Frank that we're coming up next year for you know negotiation, while we hated to feed as pandemic Uh huh.

Good.

It actually saw some some things that we're probably going to come up next year, a in that and we gave a customer what they want it some relief and 2020. So at the end of the day I like this as being a a positive as we move out of 2020 and end up you know the further years.

Got it that sounds good I appreciate that for my follow up as you guys are kind of thinking about the right network size and I know you don't want obviously, you know reconfigure the business for the demand dynamics today, but if we think about your footprint in the Permian and just thinking about you know operators, maybe consolidating took a certain core areas of their acreage.

Positions might there be any considerations to consolidate or shut down any communities are you guys just not seen that type of degradation and utilization in certain areas.

As we've always said, a good or bad or we have a lot of variable cost in this business right and today, we have consolidated some of our facilities that.

Or lower on utilization. So we we wanted to higher utilization, we put two together, we're still able to service our customers and you know under our contracts go and that's kind of kind of how we've also reduced our costs.

But our footprint kinda remain the same as far as the coverage on our largest will continue to do that we think these will open back up we look at them at the temporary as demand comes back utilization comes up we built these losses, we can open them back up within a week.

But for now and what we've had to do is you don't.

Consolidate some of them get the variable cost out of it and reduced our cost structure.

Got it I appreciate the time thank you.

Thank you. Our next question comes for Scott Schneeberger with Oppenheimer. Please proceed with your question.

Thanks, Good morning.

Hi, guys I know, a not providing guidance, but just curious on and the on the pipeline project, how I guess it progressive build in revenue is what you would anticipate and then on our end we have to think about 2021 at this juncture would it be best to be perhaps conservative into.

20, $21 and based on outcome and be a the U.S. election. Thanks.

Sure Hi, Scott good morning.

So so first first we'll take TC you know look I think that as a that is still a moving project for us in terms of in terms of our how where my we're modeling that I mean, just give you a little bit of color. You know, we're working through a series of change orders, but but those don't come months in quarters necessarily at this.

Point in advance so we're working through those a little bit.

A month or two in advance so I will tell you would we do think it absolutely is progressing from from modeling perspective is what I would but I'm comfortable you on so I think that's a REIT assumption there at this point in time and want to be a little bit guarded in terms of what that notional number is hopefully hopefully we can do that at some point here in the future, but I think you would expect the incremental movement.

You know really back half weighted specifically.

As we think about 2021.

I think what our base assumption is and we'll see if you know how right. We are but our base assumption is that we think we start seeing.

Some progression and the November December timeframe, which means that you start ramping up through 2021 from a from a revenue and EBITDA perspective. So look is that that may be conservative. It may not be so I think from a modeling perspective, I think you have to look at 2021 still because.

Service around it but at the end that they make your own macro assumptions about how long you think.

The commodity cycle last and how long do you think it will take to get ultimately get a good personnel fully back engaged.

In West Texas.

Thanks, I appreciate that just as a follow up or the this is getting a little under the details, but it speaks to a broader theme in the first quarter. The gross margin was flat year over year, a in the Bakken and a you know that was on on some pressure there.

Revenue line.

Just kind of curious to see what what action was taken to maintain that level and obviously, there's a lot of talk of what you're going to try and do with a whole business over the over the next couple of quarters, but I'm curious to hear what you did there and and then add it kinda its expands into our thoughts about.

What we might see on margin levels, so across the segments over the over the next few quarters that sure sure. So I'll pause on the and the margin longer term because that's really only because as we've said we haven't provided 2020 outlook yet so it's tough to do it and this is such a dynamic environment as you can.

Imagine that I think we really need a lot more time go through ended the second quarter before we can make a you know really getting a reasonable this assessment on that to the point in the Bakken I think it at the end of the day really comes down to a pretty aggressive expense management that thing I think the company's done a really good job of doing that in a dynamic environment. So you know we quickly adjusted.

Variable cost and that was able specifically in the Bakken relate to your question is how we're going to maintain that I think look is quick expense management environment. Like this when you have the structure to do it is the key and we were able to do that.

Great Thanks opportunity.

Thank you. Our next question comes from the line as Kevin Mcveigh with Credit Suisse. Please proceed with your question.

Great. Thanks, Hey, I'm wondering.

Can you give us a sense I guess, even though it's a high level.

You know the types of contract modifications like how the discussions were no. This cycle as opposed to the last because obviously it seems like you've come out of the last one in the stronger position given higher retention and just a better incremental market share, but just any right even that much higher level like what we're calling smoking.

For needs concessions as opposed to lets just say that a broader.

Oh level.

Well to be Frank the first call as always they want everything right because when the pandemic hit dip was unknown.

Here's the good thing we have a strong relationship with these 10 plus years in some cases, because the contracts do have tea.

So what we left that calm down we sat down and we talk to him what we weren't going to do with give up everything, but we ended up somewhere in the middle or for us, giving up some things in 2020, we needed to as those back in years. Some of these contracts were again strong enough renewal and 2021 in 2022, we took the time now.

Now to negotiate to get those extensions now instead of waiting for the out years, when we believe demand and everything is going to be much better right. So.

We gave a little.

And they gave a little as well, but most of them started off with a much bigger asked them, where they take a where we ended up and what I I'll say it again it turned into what we believe will be a nice positive for us and it was a positive for the for the customer at the end 2020, so it ended up being fairly.

A good deal for both sides.

I think I think Kevin the one other thing that I would add is the biggest thing. We gave them is the element of time in 2020 for contract fulfillment right. So so that coupled with with maintaining forward margin.

In addition to contract duration with extended commitments beyond that.

Look I think when we when we couple of all that together you get to a spot where the 2020 was gonna be challenging really under under a given all the things that happen under any situation. So.

I think we look at that and said, let's really position the company for a really solid 2021, and 2022 and I think that's that's how it's going to shake out.

It's helpful. And then just I guess you know obviously, there's there's a ton going on but it probably just underscores condos in a strategic rationale for diversifying a little bit and you gave the thoughts as Jean other kind of revenue areas. It just kind of help balance out some of the energy exposure longer term.

Huh.

Sure block, where where we talked about this a couple of times those are still our cars were going to continue to look at diversification.

Even more so today right now we don't want to be back in this position and again, we think diversification for the for the business is good but there's a lot of things that we do really well from from catering to facilities management. Those are pieces of the business that we can do with very little capital spent really almost zero. So we'll continue to go after those on the outside.

Outside of what we do day to day, a and then we'll continue to look at some other other adjacent businesses.

As the economy, you know gets better, but we definitely diversifications, we think as the company.

It gets out of 2020 is is a big piece of that business.

Got it and then my list just real quick I just wanted to <unk>. You said you haven't had any cobiz Casey said any or campuses is that right.

Weve. So we have had two cases that are at our campuses are they were isolated they were removed they were really yet.

Towards the beginning of a have a pen pandemic, it's been weeks or actually more than that mark.

Since we've had any cases and zero employees, a target hospitality had been factor, which I think even more there you know there feeding their cleaning their face to face with these folks are living with them.

It's easier to control your own employees than it is somebody coming from outside but we did temperature checks, we knew where they were coming from we have some a really good customer base as well that was helping with that from the Halliburton is to the chevron after that.

The bigger what does that help us a along with that so we had very limited effect on operationally on the business other than things we changed we shut down the gems, we shut down the cafeterias, where we had to prepare all mills to go where they eat in their rooms.

Those types of things everything you would have all other restaurants that in hotels, but we had to keep.

Taking care of the customer.

But minimal effect.

On on that business other than a utilization in revenue right. Those are things that got hurt, but operationally, we fared and continue to fared very well.

Thank you.

Thank you. Our next question comes from the line of Ashish Sabadra with Deutsche Bank. Please proceed with your question.

Oh, Thanks for taking my question. So Oh follow question on the contract extension right. As you mentioned you gave some concessions and 2020, but helps you going forward I was just wondering historically, 85% yeah revenues, what our net long term contracts.

How should we think about these contract extensions going into 21 and 22.

Can you think about it didn't know some of the Oh, we extended do you have 85% revenues under contract.

Sure. So she is good morning, So I think the way you have to look at it is truly twofold right. So there's the there's there's the cold total contract portion and then there's the contract portion that's under committed volumes.

So while we haven't provided and what we what we have pro forma numbers going to be yet. It's just too early I think the way you should think about this.

Is in a more normalized environment and that would really apply to probably 2021. So I think for modeling purposes in the way you would handle that assumption going forward is two to mirror or your assumptions you had 420 20, when we entered the year and.

Roll that into 2021, an enormous more normalized sort of environment.

And then let me, let let the a lumpy when you were kind of revenue shake out how you want but that's how I would that's how I think about the contracts.

In total really heading into 2021.

That's helpful and maybe just a follow up question on the capacity so industry.

Capacity.

It was just wondering.

Yeah again, there was some comments made around consolidation that you've already done on facility side, but I was just wondering what all the capacity that's still available in the Permian I was wondering if you can comment on that if you've seen any consolidation day.

Have you seen some reaction I like <unk> or more rational capacity in the space. Thanks.

And are you referring to some from a competitor perspective.

Industry in general Yeah, Yeah, indistinct, yes definitely.

Yeah. So ashish good morning, guys as Troy, absolutely when you look at the capacity or the total available supply in the market today definitely has contracted whether it will there be hotels. There are other direct competitors that offer this type of combination or similar accommodation profile.

Clearly a week, we continue to monitor that supply.

On a on a real time basis.

And it has contracted right. So as we think about our opportunity as things start to normalize and our ability to capture market share Oh, we we've got a plan to do so but in terms of our I think Brad mentioned earlier in terms of our consolidation in the Permian, we're able to service our customers.

Throughout the entire Permian basin in each of the sub markets that we were operating prior to covert 19, and we'll continue to do that on a go forward basis.

Thanks tried I was very helpful. Thank you.

Thank you. Our next question is from the line of Stephen Gengaro with Stifel. Please proceed with your question.

Oh, Thanks, just as a follow up and I know the visibility here, it's tough, but there's there's two things I want to hit a one is.

When you look at.

You know the potential occupancy levels in the second third quarters, obviously in the oil patch being being low.

Sure.

Is it a reasonable assumption that you'll still be fairly EBITDA positive.

Hi, Stephens there yeah look I don't think theres any a related question, whether or not we're going to be EBITDA positive that's not even it hasnt even been discussion point.

I got to further just because you asked a question so look under any scenario that we've modeled them involved some pretty negative ones. We don't have we have not envision any any scenario in that application and even a step further than that there's not a scenario that we have modeled where we are not discretionary cash flow positive.

Great Great benefit that's very helpful.

And then the only other one I had was dramatically.

Any updates as we think about the government contract I mean, I guess, it's sort of still up in the hurdle post election, and you get to the renewal I think it's about what's that 18 24 months away right now.

Yes definitely that.

You're exactly right and that contract we continue to say this on each call. It is.

It just moves along right. It's very consistent you can see it in the numbers it doesn't change much it's well ran facility.

And we just don't see much change the getting probably more of your question, we don't see any negotiations until late.

Part of the year, probably first of next year, just because there is time there to get that done there an election and everything else what I would tell you there's still a big need it's being used to being ran as that if it has always been so not much not much there on that government side.

Thank you and just one final one when you.

We talk to your customers now I know you gave some very good detail about conversations your pets.

Does in a cost cutting world that we're in.

Do you.

You find that your value proposition.

Is even.

It's easier to sell I mean, I understand that you know hotel rates have come down et cetera, but but on a relative basis, you're still I think providing a better value is [laughter] does that help at all and is it easier in an environment, where these guys are so cost conscious, but I would yeah I'll tell you that so we balanced 80, our return we extended the terminology.

Right.

We maintain the integrity of the contract so what I would tell you is it definitely helps in an environment like this.

Well you know how how we're set up or they were they would have not been willing to step in negotiate with us and we'd have stuck with our own.

Contract that we hadn't had so it does become easier in times like this and you know proof in the putting we did the same thing in North Dakota, and I think it was Kevin I mentioned earlier, we ended up better as we as we move out enough and became much stronger we gained market share we see that happening you know, we talked consolidation of our own.

Logic, but what I say as consolidation of the larger left that's companies a larger companies in the Permian who were already contracted with that should help us as we move on and demand starts to come back and in future years.

I think the other thing you have to bear in mind, Stephen as well is that what targets has by far right with the largest platform I mean by by four or five turns right. So he was everything that's happening in commercially is that when customers are looking for long term partners now they know targets going to be there.

Dan and right now you look at the space and I think yeah, I think what we're seeing is we're seeing a lot of contraction from from competitors right to who are not too. We're there to six months ago over three months ago and there are no longer there today.

So I think I think that adds a lot of value as well I'm. Realizing that you know who your partner is going to be with and yeah. We offer the most cost flexibility across the platform.

Hi, Great Great you, that's a lot of guarantees I appreciate it thank you.

Thank you we have reached the end of our question and answer session. So I'd like to turn the floor back over to Brett Archer for any additional closing comments.

Yeah, I first want to thank all of the target hospitality team members that have been out on the front line. During this pandemic a these folks are away from their families for weeks at a time, taking care of our customers to ensure they remain safe and healthy I frontline team members are truly what sets us apart in our industry.

I also want to thank all of you for joining our call today and we look forward to speaking again on next quarter's call. Thank you.

Ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation and you may disconnect your lines at this time.

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