Earnings Call Transcript - HESM Q1 2020

Operator, 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. 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, Vice President of Investor Relations

Thank you, Lawrence. Good afternoon everyone, and thank you for joining our first quarter earnings conference call. Our earnings release was issued this morning and is available on our website. I would first like to express our hope that you and your families are safe and well. Today's call includes projections and forward-looking statements as defined by federal securities laws. These statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ from those expressed or implied. The risks include those outlined in the Risk Factor section of Hess Midstream's SEC filings. Due to the COVID-19 pandemic, our operations and those of our partners, suppliers, and customers, including Hess Corporation, have suffered and may continue to suffer negative impacts, such as disruptions, delays, or temporary halts in operations and supply chains, inaccessibility or closures of facilities, and workforce effects. Furthermore, the pandemic has negatively affected and may continue to negatively affect the demand and marketability of crude oil, natural gas, and NGLs that we gather, process, and terminal for Hess and other producers. If our partners, suppliers, and customers continue to face these or other effects, it may adversely impact our financial condition, results of operations, and future growth. The timeline and potential extent of the COVID-19 pandemic remain uncertain. If the pandemic negatively affects our business and financial results, it may exacerbate many of the other risks outlined in our Annual Report for the year ended December 31, 2019. We may also discuss certain non-GAAP financial measures during this call. A reconciliation of these measures to the most directly comparable GAAP financial measures can be found in the earnings release. Joining me today are John Gatling, President and Chief Operating Officer, and Jonathan Stein, Chief Financial Officer. We are conducting the call remotely in line with social distancing protocols, so we appreciate your patience. In the event of audio issues, we will post transcripts of each speaker’s prepared remarks on our website after their presentations. I will now turn the call over to John Gatling.

John Gatling, President and Chief Operating Officer

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 ensure 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 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 feet 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 of 2019, and water gathering volumes were 54,000 barrels of water per day, an 8% increase over the fourth quarter of 2019. Strong volume delivery was primarily driven by 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 of 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 drop 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 forecasts its Bakken net production will average approximately 185,000 barrels of oil equivalent per day for the full year 2020. Hess forecasts production to average approximately 175,000 barrels of oil equivalent per day. Assuming a 1-rig program next year, Hess forecasts 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 continued 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 the 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 a 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 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 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 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 where 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, Chief Financial Officer

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. While 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 targets 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 includes the unique combination of Minimum Volume Commitments or MVCs and an annual rate redetermination mechanism that adjusts 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 adjusted 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, 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 discuss these proactive steps, combined with our unique contract structure position us to provide visibility through 2022. First, the midpoint of our updated 2020 EBITDA guidance still delivers 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. 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 times without the need for any incremental debt or equity. Turning to our results; 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, which 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 in our gathering segment, which increased by approximately $18 million, primarily driven by higher Hess production and higher tariff rates 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 backfilling of TGP as well as higher tariff rates from the year-end recalculation that accounted for the delay in start-up of LM4. 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, increasing 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 the 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 includes 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 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 payments 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 the 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 the 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 reflects 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 our 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 four years 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 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, 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 and includes revenues that are 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

Your first question comes from the line of Spiro Dounis from Credit Suisse. You may ask your question.

Spiro Dounis, Analyst

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 and collect on your MVCs, but I 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 and Chief Operating Officer

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. At this time, we're really 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 taking care of Hess and the third parties in the basin.

Spiro Dounis, Analyst

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 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 Hess does throughout that rig, obviously your top line stays the same, but that actually ends up lowering your CapEx below that $100 million number next year and actually drive free cash flow higher.

John Gatling, President and Chief Operating Officer

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 continuing to discuss this, we are a lean-oriented organization. We are constantly looking for opportunities to drive cost out of the system, and that happens every day. It's going to continue to happen and it's an absolute focus for us as we progress over the next several years. That holds true on OpEx and CapEx. We're constantly looking to rationalize our capital spend and optimize that, looking for efficiencies and, in particular in a market where there may be potential supply chain opportunities to go after as well. I think we're working up and down the value chain, working with our suppliers, working with our customers in the basin, and looking for ways to optimize OpEx and CapEx opportunities. So, I think it's a good point and definitely something we're focused on.

Jonathan Stein, Chief Financial Officer

Yes, thanks. In terms of looking at the assumptions that are in our forecast and the likes. Starting on the capital side, we've talked about the proactive capital reductions that we made earlier that brings us to sustaining capital of approximately $100 million. That includes third-party and half interconnects. There will be some fluctuations there, plus or minus, depending on the third-party side in or out and depending on how that goes. But essentially, think of a $100 million of CapEx that we do have on top of that. As I mentioned, we have $20 million in maintenance capital this year, that may be 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. Step two would be on the OpEx side; of course, our contract also includes consideration of OpEx when we set the tariff. 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.

Spiro Dounis, Analyst

Great. Very helpful.

Phil Stuart, Analyst

Good morning, everyone. Congrats on the solid update.

John Gatling, President and Chief Operating Officer

Thank you.

Phil Stuart, Analyst

I wonder as we think about the third-party curtailments— I appreciate you guys providing the downside case scenario that is 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, in your eyes?

John Gatling, President and Chief Operating Officer

Yes, know it's a good question. It's a difficult one to answer because as you mentioned, each of the non-ops have their own scenarios with 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. I mean, we had an amazing first quarter; in fact, arguably, it was the best quarter we've ever delivered. It's just unfortunate, the market that we're in and the scenario that's played out over the last couple of months, but we had a very strong quarter driven by Hess and third parties. Hess curtailments and Wells in those well pads are interconnected into our system. As those producers bring the activity back and whether they've shut-in production from exiting proved developed production or whether they are going to drill additional wells, the infrastructure is in place to support that. That is one of the key reasons why we continue with the Tioga gas plant expansion. North of the river we see ourselves as a unique midstream provider where there is limited processing capacity and strong well productivity. So I would say we're positioned to capitalize when third parties bring their production back or re-initiate drilling programs. It's going to depend on the price environment. We went with a more conservative look. We don't anticipate the low end of our range being the expected outcome, but we wanted to add certainty around the low end, demonstrating the strength of our contract structure with Hess.

Jonathan Stein, Chief Financial Officer

Yes. Yes, I mean I think that— I mean what I just maybe add, maybe just what's the other side of the coin is. Clear that, like you said, there's potential upside to the extent that there are third-parties, and we're ready to handle that, like John said, but if you look starting really Q3 and Q4, we are going to be running out of MVC levels. That is going to be the driver. Lower volume this year will contribute to the rate redetermination at the end of 2020, supporting the 25% increase in EBITDA into 2021. We're at this same scenario now with 2.5 years of financial protection allowing commodity prices to stabilize, which is very similar to what we saw back in 2015 and 2016. At the end of that period, we anticipated to ramp up along with third parties driving growth again.

Phil Stuart, Analyst

Great. I appreciate the details there. And I wonder as we think about 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 contemplated for a dropdown was the Hess Gulf of Mexico infrastructure assets? Just wondering with Hess's comments today about slowing activity in the Gulf of Mexico based on the current strip if that pushes out that potential dropdown opportunity further to the right?

John Gatling, President and Chief Operating Officer

Sure. So yes. Let me just start with your first part of your question on the Bakken. I think we're really focused, on Hess and our third-party customers as existing Hess production and third-party customers, and also supporting the development of both of those. If we're also looking for those strategic bolt-on opportunities that are no-brainers as far as adding additional capability to our system. From our perspective, we see those as extremely low risk and will integrate very nicely into our contract structure providing the same sort of downside protection. They are probably going to be on the smaller side, there is not going to be anything major that we're going after, because again, we're focused on the strength of our position, continuing to build. We're going to be opportunistic and consider those opportunities if something comes up that makes a ton of sense for us and helps support our customers both Hess and third-party customers. The second part of your question on the Gulf of Mexico, 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 are continuing to evaluate the Gulf of Mexico assets. Even though the Gulf of Mexico activity has slowed down, there is still substantial production available there. So that's something on our radar and something that we're looking at in partnership with Hess to continue to build on that. Those assets would follow the same contract structure model, it may be slightly different due to different assets, but the downside protection would apply. We've demonstrated that focus as we did with the water acquisition that provides the same downside protection. The Gulf of Mexico assets would probably fall into that category.

Jonathan Stein, Chief Financial Officer

One thing that is underpinning this question is 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. Overall, we are going to continue to be financially disciplined. We are going to look for opportunities, like the Gulf of Mexico assets or any other assets that offer free cash flow potential, but we are going to remain disciplined. Another use of that financial flexibility could also be a return of capital to shareholders. We've talked about buybacks which could be very accretive. But overall, we will remain financially disciplined with a focus on maintaining all our financial metrics within the targets we've set.

Unidentified Analyst, Analyst

Hey, this is James on for Jeremy. Most of my questions have already been asked. But just thinking high level here given you guys are well covered and 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 sector is or how the sector has changed in the past month, is there any updated thoughts there going forward?

Jonathan Stein, Chief Financial Officer

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 we have to fund distributions with free cash flow going forward. As we've talked about the 2020 guidance still delivers 25% EBITDA growth relative to 2019 including revenues that are 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. Therefore, based on all of that really, no change in terms of our thinking on distribution growth.

Unidentified Analyst, Analyst

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

John Gatling, President and Chief Operating Officer

Thank you.

Operator, Operator

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