Hess Midstream LP

NYSE:HESM

Earnings Call Transcript 2020-Q1

[Operator]

Good day, ladies and gentlemen, and welcome to the First Quarter 2020 Hess Midstream Conference Call. My name is Lawrence, and I'll be your operator for today. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to Jennifer Gordon, Vice President of Investor Relations. Please proceed.

[Jennifer Gordon, Director of IR]

Thank you, Lawrence. 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 www.hessmidstream.com.

I would first like to express our hope that all of you listening and your families our 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 Factor section of Hess Midstream's filings with the SEC.

As a result of the COVID-19 pandemic our operations and those of our business partners suppliers and customers including Hess Corporation have experienced and may continue to experience adverse effects, including disruptions, delays or temporary suspensions of operations and supply chains temporary and inaccessibility 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 Hess another third party producers. To the extent we are -- our business partners, suppliers and customers continue to experience these or other effects.

Our financial condition, results of operations and future growth prospects may be adversely affected. The timeline and potential magnitude of the COVID-19 pandemic is currently unknown. To the extent the COVID-19 pandemic adversely affects our business and financial results it may also have the effect of heightening many of the other risks described in our Annual Report on Form 10-K for the year ended December 31, 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. In 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 speaker's prepared remarks on www.hessmidstream.com following their presentation.

I'll now turn the call over to John Gatling

[John Gatling, President & COO]

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 exceptionally challenging times. Today, I'll review our operating performance and highlights as we continue to execute our strategy provide additional details regarding our 2020 plans and discuss Hess Corporation's latest results and outlook for the Bakken. Jonathan will then review our financial results.

First, I'd like to describe the actions Hess Corporation and Hess 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 have 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 worksites whenever possible. As a result of these measures Hess Corporation and Hess Midstream have no reported cases of COVID-19 among employees.

Now turning to our first quarter 2020 results. Hess Midstream delivered impressive volume growth across all systems with strong performance from both Hess and third-party customers. Gas processing volumes averaged 322 million cubic foot per day in the quarter or 92% of nameplate capacity a volume increase of 5% compared to the fourth quarter of 2019. Crude terminaling 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 of water per day, an 8% increase over fourth quarter 2019.

Strong volume delivery was primarily driven of Hess Midstream exceeding adjusted EBITDA guidance for the first quarter. Now turning to Hess upstream highlights. Earlier today Hess 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 Hess was able to achieve its 200,000 barrels of oil equivalent per day goal for 11 days in March, well ahead of schedule, demonstrating the exceptional strength and production capability of Hess's Bakken position.

First quarter Bakken production averaged 190,000 barrels of oil equivalent per day, an increase of more than 46% from the year ago quarter and above guidance of approximately 170,000 barrels oil equivalent per day. For full year 2020 Hess now expects to drill approximately 70 wells and to bring approximately 110 wells online. Additionally Hess plans to complete wells that are drilled and keep wells online unless netback prices dropped below variable cash production costs or Hess is unable to physically move the barrels. Hess 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 Hess forecast its Bakken net production will average approximately 185,000 barrels of oil equivalent per day for full year 2020. Hess forecast production to average approximately 175,000 barrels of oil equivalent per day. Assuming a 1-rig program next year Hess forecast net Bakken production in 2021 will average between 155,000 and 160,000 barrels of oil equivalent per day, approximately 10% lower than full-year 2020. Turning to Hess Midstream throughputs and our expectations for the rest of 2020. Hess Corporation's 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 throughputs which comprised approximately 25% of our gas and 15% of our oil volumes.

In recent weeks third-party production curtailments 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 2020 throughput and financial guidance to provide transparency to the already announced curtailments impacting third party throughputs.

The low end of our updated guidance range reflects and conservative assumption that Hess Midstream will effectively receive zero third-party volumes beginning in May and continuing through the rest of 2020. While 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 deliver our 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 remainder 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 terminaling volumes to each be approximately 15% lower compared to the first quarter, with water gathering volumes being approximately 5% higher. The midpoint of our financial guidance also assumes that third parties contribute approximately 10% of total oil and gas throughputs in the quarter primarily due to strong performance in April prior to the emerging third party curtailments.

For the second half of 2020 we expect the majority of our systems to be operating at or below MVC levels as our outlook, incorporates the planned 45-day TGP turnaround and we begin to see volume reductions from Hess later in the year, driven by the reduced rig count. We are continuing planning activities for the TGP maintenance turnaround in the third quarter, while closely monitoring potential at COVID-19 risks. Our full updated volume guidance is available on our earnings release, which was issued earlier today.

Turning to Hess Midstream's capital program. Our 2020 capital guidance comprises approximately $255 million of expansion capital, and $20 million of maintenance capital, which incorporates a $70 million reduction from our original 2020 capital program. We plan to invest approximately $160 million in gas processing, primarily related to the already announced and well 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 the incremental processing capacity is expected to be available in 2021 coincident with residue and NGL takeaway expansions.

The expansion of TGP competitively positions Hess Midstream to capitalize on continued development in the basin and enables producers to meet tightening flaring targets particularly North of the Missouri River were processing capacity is limited and well productivity is strong. In addition, under Hess Midstream's contracts with Hess Corporation and consistent with all other investments Hess Midstream earns a contracted return on capital deployed for the TGP expansion.

Finally, in 2020, we expect to invest $25 million in gas compression and $70 million in oil, gas and water pipelines and well pad interconnects.

In summary, we will continue to meet the challenges of 2020, and beyond with careful planning, increased safety measures and focused execution. We're also able to provide a level of visibility and certainty as a result of our contract structure, which provides MVCs for approximately 97% of projected revenues for the second half of the year. This underpins our 2020 adjusted EBITDA guidance range of $675 million to $700 million, which is broadly unchanged across a dynamic macro backdrop that is impacting overall volumes and the industry at large. Additionally, looking forward to 2021, we expect adjusted EBITDA growth of 25% relative to our 2020 guidance with approximately 95% MVC protection. All of which demonstrates that Hess Midstream is well positioned to weather 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.

[Jonathan Stein, CFO]

Thanks, John, and good afternoon everyone. Hess Midstream continues to be differentiated, based on our strong contract structure and the proactive steps that we have taken providing visibility and stability to our forward trajectory through 2022 even during this period of significant uncertainty.

Well, John has described recent third party curtailment and Hess's reduction of activity from 6-rigs to 1-rig our contract structure and financial strength, provide a unique level of stability. Our updated guidance, supported by downside protection and cash flow stability mechanisms in our contract still delivers our financial target including approximately 25% EBITDA growth in 2020 and 2021 as well as $750 million of free cash flow defined as EBITDA, less CapEx in both 2021 and 2022 sufficient to be free cash flow positive after growing distribution. As a reminder, our contract structure include the unique combination of Minimum Volume Commitments or MVCs and an annual rate redetermination mechanism that adjusted rates based on changes in volume and CapEx to maintain a return on our invested capital. Including our approximately $4 billion of historical investment.

In the current environment where throughput volumes are expected to be lower than Hess's development plan at the end of 2019. Our tariff rates, were just higher 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, still which the MVCs and rate reset mechanism work together to maintain and grow adjusted EBITDA even during a period of reduced activity and production by Hess.

Consistent with that experience our guidance for 2020 and 2021 is supported by the combination of MVC protection and the rate redetermination that will occur at the end of 2020. In addition to our best-in-class contract structure we have taken proactive and prudent steps to reinforce our long-term financial strength. In March, we reduced our 2020 and 2021 capital plan by a total of $200 million, essentially bringing our capital investment in 2021 to sustaining level that is primarily related to oil, gas and water pipeline and well pad interconnects. We also revised our 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 2020 EBITDA guidance still delivered 25% EBITDA growth relative to 2019 despite Hess reducing rig activity from 6-rig to 1-rig and significant third party curtailment. Second, our 2020 EBITDA guidance includes approximately 97% of our revenues protected by MVCs in the second half of the year. The lower end of our 2020 guidance conservatively assumes zero third-party volumes starting in May with revenues that are 95% protected by MVCs and still provides distribution coverage greater than 1.1 times. Third, looking forward adjusted EBITDA is expected to increase by 25% in 2021 relative to our 2020 guidance, supported by the annual rate redetermination at the end of 2020 and higher MVCs in 2021.

And finally, this EBITDA increase together with our proactive capital expenditure reduction drives approximately $750 million in annual free cash flow in both 2021 and 2022 with approximately 95% of our revenue protected by MVCs sufficient to fully fund our interest expense and distribution while maintaining distribution coverage of approximately 1.4 time without the need for any incremental debt or equity.

Turning to our result; I'll compare results from the first quarter of 2020 to the fourth quarter of 2019. For the first quarter of 2020 net income was $129 million compared to $75 million for the fourth quarter of 2019. Fourth quarter 2019, net income included approximately $26 million of costs related to our acquisition of Hess Infrastructure Partners. Adjusted EBITDA for the first quarter of 2020 was $195 million compared to $158 million for the fourth quarter of 2019 excluding these transaction costs. The change in adjusted EBITDA relative to the fourth quarter was primarily attributable to the following. Our total revenues increased by 15% quarter-on-quarter including revenues for our gathering segment increased by approximately $18 million, primarily driven by higher Hess production and higher tariff rate from the annual recalculation at the end of 2019.

Revenues for our processing segment increased by approximately $10 million, primarily driven by the completion of the ramp-up of the LM4 gas processing plant and the continued backfilled TGP as well as higher tariff rates from the year-end recalculation that accounted for the delay in start-up of LM4. And revenues for our terminaling segment increased by approximately $4 million, primarily driven by higher Hess production and higher tariff rates from the end of 2019 annual rate recalculation. Total operating expenses including G&A, but excluding depreciation and amortization, pass-through and transaction costs were lower.

Increase in adjusted EBITDA by approximately $6 million including our maintenance services and professional fees during the period of approximately $4 million and well overhead of approximately $2 million. LM4 processing fees, net of our proportional share of earnings and depreciation reduce adjusted EBITDA by approximately $1 million. Resulting in first quarter 2020 adjusted EBITDA of $195 million, a 23% increase relative to the fourth quarter of 2019. First quarter 2020 maintenance capital expenditures were approximately $2 million and net interest, excluding amortization of deferred finance costs was $23 million.

The result was that distributable cash flow was approximately $170 million for the first quarter of 2020 covering our distribution by approximately 1.4 times. Expansion capital expenditures in the first quarter were $55 million. At quarter end debt was approximately $1.8 billion representing approximately 3 times leverage on a trailing 12 month basis.

Turning to our outlook for the rest of 2020 and beyond, as mentioned, we are uniquely positioned to provide visibility to our forward trajectory through 2022. We have prudently set the lower end of our annual and quarterly guidance ranges, for 2020 to assume zero third-party volumes starting in May and continuing through the rest of the year. This low end include revenues that are 95% protected by MVCs with the remaining revenue fully attributable to volumes in Hess which has announced that they do not expect to curtail production. As a result revenue outcomes below the low end of our guidance are not reasonably expected given the contractual mechanisms in place.

In the second quarter of 2020, we expect net income to be approximately $90 million to $105 million and adjusted EBITDA to be approximately $155 million to $170 million. Second quarter maintenance capital expenditures, and net interest, excluding amortization of deferred finance costs are expected to be approximately $30 million. Resulting in an expected DCF of approximately $125 million to $140 million. Delivering distribution coverage at the midpoint of the range of approximately 1.1 times with approximately 90% of projected revenues projected -- protected by MVCs.

At the lower end of our guidance 95% of our expected revenues will be protected by MVCs. Relative to our first quarter results, the expected decrease in financial results is primarily driven by the reduction in third-party volumes from reduced activities and curtailment as John described. While we expect to receive approximately $5 to $10 million of MVC payment in the second quarter revenues are expected to be lower in total volume including third parties, while declining are expected to generally be above MVC levels in the month of April. In addition, we expect to begin work on the TGP turnaround in the second quarter, including approximately $7.5 million of costs across operating expenses and maintenance capital.

Looking forward to the rest of 2020 starting in the third quarter, we expect volumes to be primarily below MVCs resulting in significant revenue protection in both the third and fourth quarter. During the third quarter, we expect $20 million to $25 million of costs across operating expenses and maintenance capital related to the planned maintenance turnaround at TGP. As a result, we expect distribution coverage of approximately 0.95 times in the third quarter with approximately 97% of revenues protected by MVCs. Without the one-time costs related to the turnaround our second quarter distribution coverage will be approximately 1.15 times.

In the fourth quarter with increasing MVCs relative to the second and third quarter and lower operating costs and maintenance capital as a TGP turnaround is completed, we expect distribution coverage to be approximately 1.2 times with revenues that continue to be approximately 97% protected by MVCs. For 2020 overall full year net income is expected to be in the range of $410 million to $435 million. Adjusted EBITDA is expected to be in the range of $675 million to $700 million.

We still expect to maintain approximately 75% EBITDA margin in 2020 consistent with our historical margins. Highlighting our stability at the midpoint, our updated adjusted EBITDA guidance still below is an approximate 25% increase over our 2019 results. Maintenance capital and cash interest are projected to total approximately $110 million for the full year of 2020. Distributable cash flow for 2020 is expected to be in the range of $565 million to $590 million resulting in an expected distribution coverage of approximately 1.2 times.

As noted, the bottom of our guidance assumes no third-party volumes starting in May of 2020 and still delivers distribution coverage greater than 1.1 times. We expect to end the year with leverage at or below are conservative 3 times adjusted EBITDA leverage target. At the end of 2020 as part of the annual tariff rate redetermination process, our tariff rates for 2021 in all 4 years [ph] of the contract will be reset to maintain our contractual return on capital deployed.

Through this process rates are expected to account below volumes 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 MVCs in 2021, we expect a 25% increase in adjusted EBITDA in 2021. Based on this adjusted EBITDA increase together with our previously announced 50% CapEx, reduction in 2021 that brings us the sustaining expansion capital of approximately $100 million.

We expect $750 million of free cash flow in both 2021 and 2022. In both years, we expect revenues that are more than 95% protected by MVCs and distribution coverage of at least 1.4 times.

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 2.5 years of forward visibility.

First, our 2020 guidance still delivers 25% EBITDA growth relative to 2019 includes revenues than the 97% MVC protected for the second half of the year and at least 1.1 times distribution coverage even conservatively assuming zero third-party volumes for the rest of the year. Second, our rate redetermination at the end of 2020 and increasing MVCs drive an expected 25% growth in EBITDA in 2021. And third, this increased EBITDA and our proactive CapEx reductions are sufficient to allow us to be free cash flow positive after distributions in both 2021 and 2022 without the need for any incremental debt or equity.

This concludes my remarks. We'll be happy to answer any questions. I will now turn the call over to the operator.

[Operator]

[Operator Instructions] Your first question comes from the line of Spiro Dounis from Credit Suisse. Your line is open; you may ask your question.

[Spiro Dounis, Credit Suisse]

Hey, good afternoon guys. Just like to start off, high level thinking about basin diversification and where your latest thinking is there? I'm sure it's tempting to sit back at this point collect on your MVCs, but don't see you guys taking that path. So just walk us through your thinking about diversifying -- maybe away from the Bakken? And then strategically pivoting the company, when is the right time to take that action?

[John Gatling, President & COO]

Sure. I guess just to start off, we just want to reinforce the Bakken position we have and the relationship with Hess. Again as you mentioned, we think the strength of our anchor customer and the contract structure we have in place is absolutely key and critical. And I would say at this time, we're really kind of focused on continuing to strengthen our position in the Bakken and support Hess and third parties. So continuing to build on that position. As we've said in prior calls, we are continuing to look at other options. But right now we really are focused on the Bakken and focused on taking care of Hess and the third parties in the basin.

Again, if we'll look at opportunities, but our focus at this point is really the Bakken and Hess.

[Spiro Dounis, Credit Suisse]

Understood. And then thinking about next year, obviously pretty locked in at this point. I don't see a lot of variability there. But does have sort of asymmetric upside and we think about your contract structure. And I guess rather than count on volumes just sort drive that higher, thinking about two other factors that could maybe do it. I guess one is cost, and the other one is CapEx. And so curious on those two. How much room is there for you guys to get leaner here on the OpEx side?

And to the extent that has does throughout that rig, obviously your topline stays the same, but that actually end up lowering your CapEx below that $100 million number next year and actually drive free cash flow higher.

[John Gatling, President & COO]

Yes, I guess I'll start off with the operational side of it and then hand it over to Jonathan for any additional color he'd like to add. But we, as Hess has always been and I think Hess Midstream is continue to discuss this as well as we are a lean-oriented organization, and so we're constantly looking for opportunities to drive cost out of the system, and that happens every day and it's going to continue to happen and it's an absolute focus for us as we progress over the next several years. And I would say that holds true on OpEx and CapEx. So we're constantly looking and rationalizing our capital spend, optimizing that looking for efficiencies and in particular in a market where [Technical Difficulty] may be potentially some supply chain opportunities to go after as well.

So, I think we're walking -- we're working up and down the value chain and work with our suppliers, working with the, our customers in the basin and looking for ways to optimize OpEx and CapEx opportunities. So I think it's a good point and it's definitely something we're focused on, and we're constantly looking to drive costs out of our system and continue to get more efficient in everything we do.

So, Jonathan, anything you want to add to that?

[Jonathan Stein, CFO]

Yes, thanks. In terms of looking I think looking at the assumptions that are in our forecast and the likes. So I think starting on the capital side, so there what we've talked about is with the proactive capital reductions that we made earlier that brings us to -- kind sustaining capital of approximately $100 million of -- on the expansion capital side, not really just include third party and half interconnects and as I mentioned, and John mentioned. So we think that's about the level that would be required. There'll be some fluctuations there plus or minus depending on particularly third-party side in or out and depending on how that goes but essentially, think of a $100 million that CapEx. We do have on top of that I get sustaining capital, you'd add maintenance capital. We do have $20 million in this year, that maybe a little bit higher than normal because of the TGP turn around. You could see that being a little bit lower next year, but that would be step one.

And then step two would be; you mentioned on OpEx side, so of course our contract -- also does include consideration of OpEx when we set the tariff so to the extent that we maintain everything would be the same. Our OpEx is generally fixed. We don't see much sensitivity to changes in volume but particularly to this year, even more so with the turnaround in the plan. So next year, as we look at 2021 the turnaround will be behind us. So that is part of the driver of the 25% increase in EBITDA, is that also depending on I think on a relative basis, you could see some changes there. And as John said, we're continuing to work -- announced that they are looking at cost reductions. We're working side-by-side with them and that could potentially lead to some additional OpEx reduction including particularly allocations that come through the half. 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 it's still early days on that and so more to come.

[Spiro Dounis, Credit Suisse]

Great. Very helpful.

[John Gatling, President & COO]

May be just 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 potential interconnects to the specific well pads and third party customers and all that. But the major infrastructure is already built out in place.

[Spiro Dounis, Credit Suisse]

Thanks for the color, guys. Be well.

[John Gatling, President & COO]

Thank you.

[Operator]

Your next question comes from the line of Phil Stuart from Scotiabank. Your line is open; you may ask your question.

[Phil Stuart, Scotiabank]

Good morning, everyone. Congrats on the solid update.

[John Gatling, President & COO]

Thank you.

[Phil Stuart, Scotiabank]

I wonder as we think about the third-party curtailments, I appreciate you guys providing the downside case scenario really helpful and pretty conservative on year-end. But it seems like these third-party curtailments are going to be temporary. Just kind of curious, your view of, I guess based on the current strip of when some of these curtailed volumes would come back online. I understand that you guys Hess is not the operator there, but just curious from a macro standpoint when you see third-party volumes potentially coming online? What oil price kind of triggers that? Or if the current strip would justify that on -- in your eyes?

[John Gatling, President & COO]

Yes, know it's a good question. I guess it's a difficult one to answer because as you mentioned, I mean, each of the non-ops have there kind of own scenarios where if it got hedging or pricing or marketing arrangements in place. The one thing I would say that's a real positive is this production is behind pipe already, right. I mean, we had an amazing first quarter in fact; arguably the first quarter is the best quarter we've ever delivered. It's just unfortunate the market that we're in and the 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 Hess curtailments and [Technical Difficulty] wells in those well pads are interconnected into our system. And so as those producers bringing the activity back and actually whether they've shut-in production direct existing proved developed production or they're going to drill additional wells. The infrastructure is in place to support that and that's really one of the key reasons why we are continuing to head down the path with the Tioga gas plant expansion. In north of the river we really see ourselves kind of as an unequal midstream provider in north of the Missouri River. There really is limited processing capacity there, and kind of sit there with the key asset that can support both Hess and third-party producers.

So I would say we're definitely positioned to capitalize on when third parties brings mines back into the system or they end up re-initiating drilling program. It's really going to depend 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 certainty around the low end, in particular demonstrating the strength of our contract structure with Hess. In DC mechanism the contract recalculation process and all of that really, really kind of supports.

So, Jonathan -- is there anything else you'd like to add?

[Jonathan Stein, CFO]

Yes. Yes, no thanks. I mean what I just maybe add, maybe just what's the other side of the coin does so well clear that, like you said, potential upside to the extent that there is third-parties, 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 -- we see levels. And that's 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 EBITDA into 2021.

So, if you think about what happened we originally had thought post the ramp down that has announced in rig activity we expected that we would be added below MVCs in Q4. What's really happened is with the significant curtailment we're really hitting that level now in Q2. And that means that will really be now MVC protected including the growth because of the way because of the rate redetermination in to 2021 at 25% really for the next 2.5 years from Q3 2020 all the way through 2022, and that really just says that really just protect us and really gives us that level of financial protection over that period, while commodity prices, have the potential to stabilize, that's very similar to what we saw back in 2015 and 2016 where went after the period of stabilization again, we had about 2.5 years to 3 years of financial protection and at the end of that period, we has -- to ramp up along with third part of driving growth again.

So we are in that same scenario now, 2.5 years of finance protection allowing commodity prices to stabilize in all along the way, while we're waiting we have differentiated visibility and stability during this time

[Phil Stuart, Scotiabank]

Great. I appreciate the details there. And I wonder as we think about kind of corporate strategy going forward, given that you all are unique in your visibility to cash flows over the next 2.5 years, as you mentioned. Just curious on the M&A front, do you think that provides you a better advantage to maybe pick off one-off assets within the Bakken? And then maybe a second part to that question another asset that had been potentially contemplate it for a dropdown was the Hess Gulf of Mexico infrastructure assets?

Just wondering with Hess's comments today about can slowing activity in the Gulf of Mexico based on kind of the current strip if that pushes out that potential dropdown opportunity further to the right?

[John Gatling, President & COO]

Sure, so yes. Let me just start with your first part of your question on the Bakken. Again, I think we're really kind of in a looking at, focusing on Hess and our third party customers as existing Hess production and third party customers and also supporting the development of both of those, but we are always looking for of those strategic bolt-on opportunities that just are no brainers as far as adding additional capability to our system. From our perspective, we see those is extremely low risk. They would integrate very nicely into our contract structure provide the same sort of downside protection in those opportunities to kind of pick up those [Technical Difficulty]. So we were absolutely looking at those things.

I would say that they're going to be probably on the smaller side, there is not going to be anything major that we're going after, because again, we're really focused on the strength of our position, but also continuing to build on that strength. So I think again, we're focused on what we have. But if we're also opportunistic and if something kind of comes up that makes a ton of sense for us and help support our customers both Hess and our third party customers we'll absolutely consider those opportunities.

And then the second part of your question on the Gulf of Mexico. Yes, we're absolutely continuing, I mean if -- that's one real benefit that we have is the relationship that we have with Hess, and we're continuing to evaluate the Gulf of Mexico assets. Even though the Gulf of Mexico activity has slowed down, there is still substantial production there. There's 65,000 barrels of oil available there. There is water injection, there's infrastructure in place from that. So that's absolutely something that's on our radar screen and something that we're looking at in our partnership with Hess to continue to build on that. So we do see that as an opportunity for further potential growth. And again, 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 there'll be different assets, but the downside protection that we would be looking for and kind of our philosophy around the contract structure would absolutely apply.

And again, I think we've demonstrated that's a focus for us as we did with the water acquisition that we did as well that provide the same sort of the downside protection. So Hess, Gulf of Mexico assets would probably fall into that category as well.

So, Jonathan, anything else you'd like to add?

[Jonathan Stein, CFO]

Yes, I mean I think that. I think one thing that sort of underpinning this question and maybe previous question is look going into, -- we're in a very unique and differentiated position where we're going to have, $750 million of free cash flow, starting next year, more than enough to fund our distribution, therefore really decreasing debt without absent any other plans.

So, really giving us just continuing relative into our 3 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, but even more so now we're going to continue to be financially disciplined. Certainly opportunities like the Gulf of Mexico has John described are great because they give us more free cash flow and a potential long-term cost of service as John described as well as you know, if there are opportunities like John described in terms of assets, but we're going to be very disciplined.

Certainly another use of that financial flexibility could also be return of capital to shareholders. We've talk about buybacks, certainly not from the public, it doesn't make a lot of sense, market are float side, but certainly buybacks on the sponsors could be very accretive and another use of that potential plans of flexibility, but overall ultimately as we've demonstrated historically and certainly looking forward, we're going to continue to be very financially disciplined with a focus on maintaining all of our financial metrics within the target that we've set.

[Phil Stuart, Scotiabank]

All right, great guys. Thanks for the additional details. That's it from me.

[John Gatling, President & COO]

Okay. Thank you.

[Operator]

Your next question comes from the line of Jeremy Tonet from JP Morgan. Your line is open; you may ask your question.

[Unidentified Analyst]

Hey, this is James [ph] on for Jeremy. Most of my questions already asked. But I guess just thinking high level here given you guys are well covered in for unique in this space in terms of your funding, but just any updated thoughts in terms of distribution growth. I know you guys reduced to 5% with the March update, but given where the spaces? Or how the sector has changed in the past month? Is there any kind of updated thoughts there to go forward?

[Jonathan Stein, CFO]

Sure. So in terms of distribution growth we'd like to say distribution growth is an output, not an input, and what we mean by that is it should be the growth and the growth rate should be set consistent with our financial metrics in terms of leverage and coverage targets, 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've talked about with just looking at 2020 with 97% admin fee protection through the second half of the year and the ability to deliver even 1.1 times coverage even in a scenario where we have zero third parties very conservatively. And then, with the rate reset increasing MVCs linked to 25% EBITDA growth leads $750 million of free cash flow, which is enough to be free cash flow positive after distributions in about 21 and 22.

So therefore, we really -- based on all that distribution growth at 5% is really call it the right output therefore relative to the visibility that we have of our financial metrics and the stability that we've got some our contract structure. So based on all of that really no change in terms of our thinking on distribution growth.

[Unidentified Analyst]

Got it. Thanks. That's it for me.

[John Gatling, President & COO]

Thank you.

[Operator]

Thank you very much. This concludes today's conference. Thank you for your participation, you may now disconnect. Have a great day.