Logo of jester cap with thought bubble.

Image source: The Motley Fool.

Shell Midstream Partners LP (NYSE:SHLX)
Q2 2020 Earnings Call
Jul 31, 2020, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning. My name is Trusso, and I'll be your conference operator today. At this time, I would like to welcome everyone to today's webcast for Shell Midstream Partners. [Operator instructions]

I will now turn the call over to Jamie Parker, Investor Relations Officer. You may begin your conference.

Jamie Parker -- Investor Relations Officer

Thank you. Welcome to today's webcast for Shell Midstream Partners. With me today are Kevin Nichols, CEO; Shawn Carsten, CFO; and Steve Ledbetter, VP Commercial and Business Development.

Slide 2 contains our Safe Harbor statement. We will be making forward-looking statements related to future events and expectations during the presentation and Q&A session. Actual results may differ materially from such statements, and factors that could cause actual results to be different are included here as well as in today's press release and under Risk Factors in our filings with the SEC.

Today's call will also contains certain non-GAAP financial measures. Please refer to the earnings press release and Appendix 1 of this presentation for important disclosures regarding such measures, including reconciliations to the most comparable GAAP financial measures. We will take questions at the end of the presentation.

With that, I'll turn the call over to Kevin Nichols.

Kevin M. Nichols -- Director, Chief Executive Officer and President

Hey. Thanks, Jamie. Good morning, everyone and welcome to our second quarter earnings webcast. Before I begin talking about our quarter performance, I want to take a pause and a moment to acknowledge the impact that the pandemic has had on individuals, from our staff, to our customers, to our investors and my heart goes out to those who have been affected by COVID-19. As I know, these are difficult times, and I hope through all of this that you're able to stay safe.

As I reflect back on the quarter and the uncertainties that the world was facing from the pandemic, demand destruction, supply/demand imbalance, we were unsure of the potential impacts and there were as many views as there were people willing to give them as to how the quarter would unfold. We believed in the resilience of our assets. However, there were many questions surrounding what would happen to demand and where production cuts would take place. Now as I look back on the quarter, we fared better than expected, both from our strong performance of our assets against the evolving landscape, but also from the real-time actions we were able to take to mitigate the impacts of these challenges.

So today, I'll focus on three areas. First, I'll provide an update on the actual impacts we saw this quarter against the uncertainties that we have been monitoring since the global pandemic and economic challenges began, and second, I'll share some detail on the levers we're pulling to enhance our long-term sustainability. And finally, I want to again highlight the resilience of our partnership assets.

So let me start with the impacts we saw across our business and how the quarter progressed operationally. As I mentioned before, we were observing two key market drivers, demand destruction around finished products and crude production levels specifically in the Gulf of Mexico. In March and April, like the rest of the industry, we experienced impacts of lower refined products demand which affected pipeline throughputs as refineries lowered their respective run rates and in even some cases shutdown.

In early May, we saw signs of refined products demand recovery, as some states lifted their stay-at-home orders. As the quarter progressed, refined products demand levels across the United States continued to improve and we saw increased throughputs on our pipelines, not only because of the demand recovery, but also because of our assets and they're the most cost-efficient means to move products to the Northeast and Midwest markets.

Shifting to our crude oil systems, we knew that production levels would have to come down to balance with overall lower demand, and we believe that the Gulf of Mexico basin would hold up better than the other basins, due to its connectivity to refining centers, access to water, storage, as well as favorable crude type. As the quarter progressed, production cuts primarily took place onshore. The Gulf of Mexico basin performed well throughout the quarter as medium sour barrels were in demand both by Gulf Coast refiners and global customers. So with the combination of improving demand, higher refinery utilization and actions taken by onshore producers to curtail production, the level of stress on the Gulf Coast logistic systems and the Gulf of Mexico basin improved throughout the quarter.

Now let me turn to some of the self-help measures that I alluded to last quarter, where I shared with you that we'd be taking steps to reduce our cost to enhance our partnerships resilience both now and sustainably into the future. Currently, we're focused on two areas, initiatives to reduce our operational costs, without sacrificing long-term value and reducing the size of our organization in a responsible way, allowing us to safely run our assets and ensure financial delivery.

On reducing our operational costs, the team has reviewed all spend in search of ways to preserve cash. A few quick wins include the rescoping of projects and the elimination of some discretionary work to immediately deliver bottom line savings. We're also looking at process and program efficiencies that will lead to sustainable cost reduction, ultimately, driving toward a more profitable partnership. These include initiatives like optimizing our helicopter fleet and our approach to air travel in the Gulf of Mexico, making it fit for purpose for the size and scale of our offshore locations, and the risk profile of our business.

Second, we're taking steps to optimize the size of our organization, putting work execution and decision-making closer to the asset and reducing the use of third-party contractors. So what does this all mean? We expect to enter 2021 with approximately $10 million in direct savings or increased contributions from JVs that we operate, and we expect to ramp this up to an annualized savings between $30 million and $40 million by the end of 2021. These cost savings are an example of how we are looking at everything we spend now and into the future. And we'll continue to look for ways to sustainably reduce costs and add partnership value as we go forward.

So let me close with the resilience of our assets and why I feel confident in the outlook for Shell Midstream Partners. Overall, we have some of the best-positioned assets in the sector. Starting with the offshore, we have one of the premier corridor networks, which not only provides transportation for advantage medium sour crude grades but also provides unique optionality to our customers, allowing them to maximize netback pricing. Additionally, our onshore assets span the commodity supply chain from crude to clean products and they're uniquely advantaged longer term to ramp up with the US and global recovery. I still expect to see volatility and uncertainty throughout the second half of the year, but we are confident in our portfolio of assets and our ability to manage through the environment.

With our asset performance through the end of July, the Partnership intends to maintain a distribution of $0.46 per common unit for the third quarter. Given the uncertainties that still remain in the marketplace around the pandemic, the Partnership's Board of Directors will continue to monitor the business environment and make decisions regarding future distributions on a quarter-by-quarter basis.

So with that, I'll now hand the call over to Shawn for the financials. Shawn?

Shawn Carsten -- Director, Vice President and Chief Financial Officer

Thanks, Kevin. As I reflect on the full quarter results in this extraordinary quarter and really given the way the world looked at our last earnings call, I'm really pleased with how our assets have performed in this volatile economic environment. On April 1, we closed on our previously announced transaction which eliminated our sponsors' IDRs and converted the economic GP interest into a non-economic interest. The Partnership also acquired Shell's interest in the Mattox pipeline along with the Norco refinery logistics assets. We're pleased to have completed the April transaction in a timely manner, which allowed the Partnership to receive a full quarter benefit from those assets, while eliminating the IDRs and fully aligning all unitholder economic interests. The commercial construct of these acquisitions will also help underpin our portfolio with long-term stable cash flows.

So now let me cover a few of our key financial metrics for the quarter. Our total revenue was $120 million, roughly even with the prior quarter. Now this is primarily related to lower volumes on Zydeco of $9 million and on our Eastern Corridor of about $6 million. Both of these were impacted by supply/demand volatility resulting from the continuing effects of COVID-19 along with some -- with a few shallow water producer curtailments.

I'll remind you that our Zydeco shippers still pay cash for their space, as reflected in CAFD, so we booked credits and deferred revenue for the shippers to utilize at a later date. Now we're also down about $5 million lower product revenue when compared to the prior quarter. This is due to lower sales volume of allowance oil. All of this was partially offset by the acquisition of the Norco assets, which contributed $22 million in the quarter.

Our operating expense was $79 million, that was an increase of about $3 million from the prior quarter. Now most of this increase is related to the addition of the Norco assets, which added about $12 million in expense and a one-time severance accrual of $5 million, which is related to the self-help measures that Kevin described earlier.

These were partially offset by a decrease in the cost of allowance oil of $13 million, as we sold less allowance oil this quarter and we did not have the lower cost of market adjustment that we did in Q1. Our income from equity investments was $109 million, now this is down about $3 million from the first quarter, mostly due to lower demand on our refined products pipelines caused by pandemic related imbalances in our key markets.

Now this was partially offset by the contribution from the newly acquired Mattox pipeline. Other income was $11 million, an increase of $2 million compared to the prior quarter. Now beginning this quarter, you will also notice interest income coming through our financials, this is related to the Norco assets transferred to the Partnership in second quarter of 2020. In connection with the acquisition, the Partnership simultaneously lease those assets back, this transaction for accounting purposes is treated as a failed sale leaseback.

And what this means is that the Norco assets are booked as a financing receivable on the balance sheet and cash received from the Norco take or pay contract will be split between revenue, interest income and an amount titled principal and interest received on financing receivables. You'll see this in the walk from EBITDA to CAFD.

Going forward, we expect the amounts booked for the Norco assets to be fairly stable given the structure of the contracts, with all of this adjusted EBITDA attributable to the Partnership was $192 million and after interest expense, maintenance capital and other adjustments, total cash available for distribution was $163 million. Our Partnership declared a distribution of $0.46 per LP unit. So this resulted in a coverage ratio for the quarter of one times.

As you'll recall at the beginning of Q2, we will benefit from the sponsors' distribution waiver of $20 million per quarter for four quarters. And finally, in the capex space, we incurred $6 million in the second quarter with $5 million related to maintenance capital and $1 million to growth.

So now let me turn to the Partnership's balance sheet and liquidity. As of June 30, the Partnership had total debt outstanding of $2.7 billion, now this equates to a debt to EBITDA ratio of 3.5 times based on an annualized Q2 adjusted EBITDA. We're comfortable with our balance sheet and we believe it allows us the desired flexibility to continue to effectively manage our business.

So now let me turn to a few updates for the rest of the year. In the offshore, we expect to have several planned producer turnarounds during the third quarter. Now these turnarounds are expected to negatively impact both net income and cash available for distribution by approximately $10 million. And as part of our cash preservation and self-help initiatives which Kevin highlighted earlier, our teams have removed or deferred projects of roughly $13 million for 2020. This includes $5 million in maintenance capital and roughly $8 million in growth capex.

So as we close, we're pleased to have a strong suite of high-quality midstream assets, which provide us a ratable and stable cash flow, and this coupled with our strong balance sheet position the Partnership well for the long term. So with all of that, we'll now take your questions. Operator?

Questions and Answers:

Operator

Thank you. [Operator Instructions] And our first question comes from Shneur Gershuni from UBS. Your line is open.

Kevin M. Nichols -- Director, Chief Executive Officer and President

Good morning, Shneur.

Shneur Gershuni -- UBS -- Analyst

Hi. Good morning, everyone. Maybe to start off, you declared the distribution flat this quarter, and you've signaled that you expect to pay at the same level next quarter. I was wondering, if you can talk about the signpost that you're following besides the day-to-date flows on your system and so forth, but what are the signposts that you're following that gives you the confidence and things that we should be tracking? Is it refinery utilization? Is it demand flows? Is it congestion? What are the signposts that you are looking at right now as you sort of make your prognostications?

Kevin M. Nichols -- Director, Chief Executive Officer and President

Yeah, thanks, Shneur. And I appreciate that -- you as well as others are looking for a longer-term outlook and we'd like that. And as we gave the -- we're in the middle of July, we see the assets performing right now. Hence the confidence in our ability to give you the guidance for Q3. It's the same things we've been watching before, which is really the demand and how that plays out as well as production, but it's really around the pandemic and the recovery and the long-term sustainability of that, there's just so much uncertainty right now in the marketplace as you see hotspots flashing up, as you see states and cities looking to actually reimpose restrictions, there's just a lot of uncertainty with the pandemic right now, we'd like to see a longer term sustainable recovery. But actually, that's while there is uncertainty in the short term, as we look at the mid-term and long term, our view has not changed.

So we're still looking at the growth prospects and the growth coming to our systems offshore from the Vito project, which is pretty much complete, just needs to be installed to the Powernap to our Mars expansion project and some other things we're doing offshore. So our confidence in the medium and long-term and our story hasn't changed.

Shneur Gershuni -- UBS -- Analyst

Great. Fair enough. And then -- and maybe as a follow-up, as you sort of look at the operational flows on your system, has anything surprised you in terms of your expectations? I mean, you did note that things were obviously better than you had thought last quarter, but as you look at the individual products and you look how everything is flowing, are there some interesting trends that are emerging that -- both positive and negative that were very different than how you thought things were going to flow when you last updated us last quarter?

Kevin M. Nichols -- Director, Chief Executive Officer and President

Yeah. Maybe I'll start then I'll turn it over to Steve. I mean I would start by saying that the theories that we have and what we believed we would experience have kind of come to fruition, right. So we've talked about the resilience of our assets on our product side. So for Colonial and Explorer being the premier products pipelines and the most cost-efficient effective way to move to those demand centers, as recovery has picked up, you see those systems performing not only catching some of the demand recovery but also be in the first place people go to -- to actually for that demand recovery.

And then I think the other one is the Gulf of Mexico basin and how well that held up from a cost perspective and the optionality that we'll provide against the other basins as production cuts came on the onshore versus the offshore. So, and Steve, if you want to add?

Steven C. Ledbetter -- Vice President of Commercial

Yeah. I think you captured it well. I mean, so surprised, I think we're happy that the thesis that we believed in, and in relative to our position in terms of heavy concentration of assets in PADD III, with options for export and storage and ways to move crude and product around and advantaged product out of the Gulf Coast up to the premier refining assets, we're happy with that.

So surprised, I don't know that we would say surprised, but we're happy that the thesis that we expected and thought might happen would happen. Again the uncertainties were there around overall supply and demand imbalance, demand patterns and then refinery cuts against production, but our basins have held up well and our assets are in those proper geographies too performed well.

Kevin M. Nichols -- Director, Chief Executive Officer and President

It was interesting that we saw exports when there was complete global lockdown in that early Q2 timeframe, but there was still a pull for products for crude types from the US to global markets.

Shneur Gershuni -- UBS -- Analyst

No. That's -- yeah, that was definitely surprising. And maybe one final question, you went through some details about the steps you're taking from a cost control perspective and how you're rethinking everything? How much of this progress should we expect to be as long-term sustainable, obviously, you're doing a lot of things right now because of how difficult environment, but how much can we expect is going to be kind of a long-term trend or are you going to be able to capture 80% of these cost reductions, kind of on a permanent basis or 90%. Just wondering if you can give us a little bit of color around that.

Kevin M. Nichols -- Director, Chief Executive Officer and President

Yeah. So some of the short-term things that we alluded to right now with deferral of some projects or discretionary spend, those are more one-off, but the actual cost that I talked about in the opening, those are all sustainable cost reductions. So -- and some of those will come in 2020. For example, the resizing of our organization and the reduction in our staffing, that will all be complete by the end of the year and then these other initiatives that we're starting now or we have under way and some of them that will put in place in 2021. Those cost savings are sustainable into the future.

Shawn Carsten -- Director, Vice President and Chief Financial Officer

Yeah. And Shneur, this is Shawn, I think just the only thing I'd add is that just to make our lives more challenging, we did implement a brand new ERP in our business just in during this quarter as well. That implementation was a great success, and we're actually really pleased with what it offers us, right, so as Kevin highlighted, it's already providing us some new cost transparency that we didn't have in the past, I think that will be a big help. And it will also give us new efficiencies. So the ability to do work orders in the field, that pulled up on your phone versus having to fill out a bunch of paperwork. So I think our sustainability is going to be enhanced by this new ERP implementation.

Shneur Gershuni -- UBS -- Analyst

Perfect. Thank you very much, guys. And enjoy the weekend.

Kevin M. Nichols -- Director, Chief Executive Officer and President

Thank you. Be safe

Operator

Thank you. Our next question comes from Theresa Chen from Barclays. Your line is open.

Kevin M. Nichols -- Director, Chief Executive Officer and President

Hey, Theresa.

Theresa Chen -- Barclays -- Analyst

Hi, there. Thanks for taking my questions and I was very happy to see you affirm the third quarter distribution. I was hoping to maybe get a little bit more granularity and clarity on the demand picture as we are one month into the second half. Just through July, what you -- have you seen on your refined product systems maybe by region and how it's trending?

Kevin M. Nichols -- Director, Chief Executive Officer and President

Yeah, I think I'll -- Steve may have more of the details to share with you. It's a really difficult thing to talk about demand recovery as one number, because it varies across the United States and across different markets as they are approaching different things. In the areas that we're in, the Gulf Coast to the Northeast, and everything, we've seen different parts of that system along the way get to where it's now 17% down from previous levels. But it can vary between the 20s to 15s.

Steven C. Ledbetter -- Vice President of Commercial

Yeah. I think that's right. The demand pattern -- we were pleased with the demand recovery in terms of overall gas and diesel held up well, jet obviously still significantly off, but the ability for our refined products systems to continue to flow and have probably a bit more resiliency is the advantage to the cost of the supply and the flexibility around getting out over the water and storage opportunities, particularly in the New York Harbor. And so they've been very resilient and we see that the demand pattern is depending on what happens, obviously, if they continue as they are, we're comfortable with their ability to continue as performing as they are today.

Theresa Chen -- Barclays -- Analyst

Got it. And related to one of your comments, Steve, about the export market being a lever and option in your toolkit. So I think a lot of the facilities that have been brought online recently has been seeing good throughput because the volumes are unsold on a contracted basis, but just in your broader affiliate marketing viewpoint, given that there are a few areas of pain in refining economics abroad, how do you see the US export story evolving over time?

Steven C. Ledbetter -- Vice President of Commercial

Yeah, that's a difficult one to be honest, I think -- and I appreciate the question. What I'd tell you is, with this level of volatility and uncertainty and the hyper dislocations in terms of pricing between areas, it's hard to paint that picture clearly. What we do believe though is the flexibility around our assets to be able to get to water and use waterborne vessels as storage opportunities for our shippers and partners in terms of trading that we are in a better position than maybe some of the others who may be landlocked, not have that access, but you see different things happening with the European are opening up and what happens in the New York Harbor. But given the current uncertainty, I don't think I can paint a picture of longer-term trends at this point.

Kevin M. Nichols -- Director, Chief Executive Officer and President

Except for that the Gulf Coast is advantaged from a cost perspective, from a price perspective and will continue to play out on the global stage that way.

Theresa Chen -- Barclays -- Analyst

Understood. Thank you very much.

Kevin M. Nichols -- Director, Chief Executive Officer and President

Thanks, Theresa. Be safe.

Theresa Chen -- Barclays -- Analyst

You too. Thanks.

Operator

Thank you. And our next question comes from Derek Walker from Bank of America. Your line is open.

Kevin M. Nichols -- Director, Chief Executive Officer and President

Hey, Derek.

Derek Walker -- Bank of America -- Analyst

Good morning, guys. Hey, good morning. Appreciate the time. Maybe just got a couple -- maybe start with a clarification question, I appreciate the clarity or the color around the self-help measures. I just wonder if I heard you right, so I think you alluded to kind of I think in the aggregate number of $30 million to $40 million, with $10 million coming in 2020. So I think that means $20 million to $30 million next year. Does that -- the cost savings next year, does that include some of the rescoping that you alluded to around I think you -- I think you just give an example around some of the helicopter programs, does that also include the ERP implementation, while I just want to trying to figure out what's the 2021 scenario that could actually increase based on some of the commentary release.

Shawn Carsten -- Director, Vice President and Chief Financial Officer

Yeah, Derek, this is Shawn. So yeah, it's that. First of all, the one-time cash preservation measures we've taken that's not included in those numbers. So that's just -- that's a -- it's a one-time event, we're not calling that sustainable cash savings. As you will see and I think you probably better to talk to Jamie, Derek, because there's not an exact way to model it, because we're kind of working through. We do know that by the end of this year, we will be in a run rate of about $10 million sustainable savings at the end of 2020, and then we look to be at a run rate of sustainable savings by the end of 2021 in the range of $30 million to $40 million. And it's a combination of things, it's around staff savings, it's around new cost initiatives and new cost transparency that will be enhanced by our new ERP. So how you ramp that up and model it, I'll let you work that with Jamie.

Derek Walker -- Bank of America -- Analyst

Okay. That's helpful. And then I think last quarter you guys gave just general guidance around just the coverage ratio, where you thought that would actually going to go given the coverage is around 1. So will it do some turnarounds in 3Q, the things are slightly improving, is there -- how should we think about the coverage -- distribution coverage for 3Q?

Shawn Carsten -- Director, Vice President and Chief Financial Officer

Yeah. So, again we're not providing any guidance, because we're still trying to understand that where these markets going to go, we reaffirmed the distribution. I think it will be easier for us to provide that guidance once the market kind of return to what's kind of more normal, whatever normal it might look like after COVID-19. But at this point, we're not providing any further guidance.

Derek Walker -- Bank of America -- Analyst

Okay. So that's fair. Maybe I'll just ask maybe a little bit, I know we're only one quarter end from this last dropdown, but are you looking at and things kind of normalized here maybe as against 2021. How are you guys thinking about just the dropdown strategy going forward, do you expect that to be more kind of moderate-sized dropdown and how are you thinking about the funding and is there certain coverage ratios are you looking at, in order to actually execute that?

Kevin M. Nichols -- Director, Chief Executive Officer and President

Yeah. Let me start by talking about the strategy and then I'll let Shawn talk to you about kind of the mechanisms of funding those kinds of things. When we did the transaction with the Norco logistics and the Mattox assets that we acquired as well as the IDR elimination, that transaction, we knew we would be thin [Phonetic] in coverage for a while, hence waivered from the sponsor as we build our way back into coverage with some of the growth that we see, some of the savings that we're putting online.

And then we've always talked about as we build the balance sheet as we build the coverage, the unique position that we're in is that we can kind of look at a number of different ways of deploying that cash. We can look at acquiring additional assets or pieces of those assets from the runway, which will be immediately accretive and have cash flow.

We can look at organic projects like we have the March expansion and some other things or we can look at if it makes sense of, or it was the best use to look at that from a return to shareholders and distribution, this sitting here right now, it's hard to say what the best use of that's going to be when we get there, but we have all of those options available to us. Shawn?

Shawn Carsten -- Director, Vice President and Chief Financial Officer

Yeah. And the only thing I'd add probably is that from a funding standpoint, I mean, I think we're almost in an enviable position, we have 3.5 times debt to EBITDA, on our leverage. So we have capability, liquidity on our balance sheet to work with, as Kevin highlights, we'll continue to build cash and continue to build coverage and how we ultimately deploy that will be very much kind of the facts and circumstances [Technical Issues] at the time and what the markets are rewarding us for.

Derek Walker -- Bank of America -- Analyst

Got it. Thanks, Shawn, and thanks, Kevin. Appreciate the time.

Kevin M. Nichols -- Director, Chief Executive Officer and President

Yeah. Thanks so much.

Operator

Thank you. Our next question comes from Gabe Moreen from Mizuho. Your line is open.

Gabe Moreen -- Mizuho Securities -- Analyst

Hey, good morning, everyone. Couple of quick ones from me, it seems like your sponsors are pretty forthright at this point about having -- being in a sales process for a couple of refineries, including some of the -- are ancillary to your assets or essential to your assets I should say. Can you just talk about the implications from potential sales there and contracts and things like that and how that might develop?

Kevin M. Nichols -- Director, Chief Executive Officer and President

No. Yeah, I'll take that first. So I really don't think it really has a material impact to our business from a logistics perspective, we will continue to supply the refineries regardless of who owns them, that be in the mix in the US energy landscape, we've always said that things will come and go in our runway that it's dynamic, but we have a long list of assets in our runway to choose from.

So I don't really see that having a major impact around the assets that we could acquire or would have options to acquire long term, and they're going to do what makes sense for them from a partnership perspective. The Norco logistics assets that we just acquired around the Norco refinery that's very strategic to the Group. And as a matter of fact, it's not ramped down, it's production, partnered with the chemical plant, it generates products for that go into hand sanitizer, medical supplies, cleaning supplies, actually all in high demand in the current environment. So I don't -- that doesn't really have a read through to us.

Gabe Moreen -- Mizuho Securities -- Analyst

Okay. Second question for me would be just drilling down a little bit more in terms of Zydeco, volume seems I think kind of healthy there. Can you just talk about does the volume ramp continued here into July? And then also any preliminary discussions with some of your counterparties on reupping those contracts that I think come due in the fourth quarter of this year?

Steven C. Ledbetter -- Vice President of Commercial

Yeah. Hi, this is Steve. Just to be clear, I didn't quite understand the first question. So, could you repeat that for me? I got the second one, but what was the first?

Gabe Moreen -- Mizuho Securities -- Analyst

Yeah. Just really what the trends have been on Zydeco volumes here in July relative to the second quarter?

Steven C. Ledbetter -- Vice President of Commercial

Okay. Yeah. So I'll take that the -- currently, the system is still performing well. But what I would say is the uncertainty and volatility that we see right now with this abnormal dislocation may not represent kind of long-term dynamics. So we'll see how that plays out, but we still see the system is being very strategic given what shippers need meaning optionality and flexibility connecting all the trading hubs and refining centers and the export market. So that plays into the question you asked about contracts, and we have two contracts that expire in November, but there are six-month renewal options for each one of those and we are in active conversations right now discussing options with current and potential shippers. So we believe strongly in the asset and that it remains strategic for the Gulf Coast, and it's important that what we've done over the past to connected to as many sources and destination points plays out well for us into the future.

But I also think another follow on, it's important to say that we've been real purposeful and continuing to grow and diversify our portfolio away from any one geography or asset. We're in the onshore and offshore refined products, gas gathering and this recent acquisition of Norco, and we feel good about our total position and the capability of our assets longer term.

Gabe Moreen -- Mizuho Securities -- Analyst

Thank you. That's helpful. And then last question for me is just in terms of what you're seeing right now in the Gulf of Mexico. I think you talked about some of the Eastern Corridor volumes being shut in, is all of that back online at this point? And then also some tie-in activity being delayed, had the tie-ins happened at this point, so just how that's shaping up for 3Q?

Steven C. Ledbetter -- Vice President of Commercial

Yeah. So some of the initial shut-ins in the shallow water platforms mainly impact us in the East, but it was very minor, those were economic reasons not containment reasons and we started to see some of those come back on. You've seen some producers take advantage of the situation to go ahead and accelerate some of the turnaround activity in those areas. And in some cases, the tiebacks has still remained predominantly on target, but there have been a couple of that they are pushing a quarter, it's not material. But overall, we're starting to see that production come back online. And our thesis around the Gulf being resilient and our position there has been maintained.

Gabe Moreen -- Mizuho Securities -- Analyst

Great. Thank you.

Operator

Thank you. Our next question comes from Spiro Dounis from Credit Suisse. Your line is open.

Spiro Dounis -- Credit Suisse -- Analyst

Hey. Good morning, everyone. Good morning. If you could just maybe go back to the distribution briefly, Kevin, you mentioned confidence in the long term, and I don't imagine the distribution will be cut for some short-term issue. So I guess what I'm trying to figure out, is it fair to say that the question at this point each quarter is whether or not keep it flat or increase it. I just want to make sure that I understand your point on being very confident in the long term, which I thought the board is looking at when making these decisions versus some short-term issue here?

Kevin M. Nichols -- Director, Chief Executive Officer and President

Yeah. So I think -- and I know you're looking for a kind of guidance and some long-term certainty. I'm just not going to be able to provide that today specifically, but look from the day that we took the Company public, we take our commitments to the marketplace extremely seriously. So when we say that we're going to deliver on something, we deliver on it.

And right now, management is focused on getting the most out of the assets, driving cost out of the business, managing through the current landscape. What we can't control is this uncertainty in this landscape that we're operating in. So it's just very difficult for us to give -- give a guidance longer term, when we would then commit ourselves delivering it without the marketplace and knowing the marketplace.

So as I mentioned earlier on the response, we'll continue and the Board will continue to monitor the pandemic really. And what's happening associated with that and how it impacts demand and production and hopefully we'll see the current environment improve from here.

Spiro Dounis -- Credit Suisse -- Analyst

Yeah. Okay. That's fair. And then mentioning the uncertainty, I guess just a layer onto that, obviously, we have an election coming up. So I'm just curious how much of the election playing into your decision-making process at this point? When it comes to the distribution itself or just growth in general, it seems like the relevant factor here would be a restriction on federal lands and lots of uncertainty around what that would even look like? Just curious how much that's weighing on your decision making? And I guess if we shouldn't really expect anything strategic to occur I guess before November?

Kevin M. Nichols -- Director, Chief Executive Officer and President

Yeah. So I mean, I'm not going to speculate on how the election will turn out and what it will look like even depending on who gets into office and what area. We believe in the value of the hydrocarbon chain and to the importance of energy landscape in the United States for many years to come, and we've demonstrated that our existing assets can continue to operate in multitude of different environments. I think the -- whether those restrictions on new growth and you've seen other permit issues for new construction, we've actually navigated through some of those challenges quite well or some of the new construction that we've done and we're proud of that. But we believe we have a really robust set of assets that are up and running and well-positioned to provide the energy that the markets need, and so we're confident in the performance long term.

Spiro Dounis -- Credit Suisse -- Analyst

Okay. Perfect. Last one, a little bit from last field, but I know RDS is ramping up its hydrogen production and distribution. And I guess, while most of that is European base, I do believe there are some assets in California. So just curious, how big an opportunity is there for SHLX to benefit from hydrogen expansion over time. Do you see yourself trying to get into that to differentiate yourselves I guess from an ESG perspective?

Kevin M. Nichols -- Director, Chief Executive Officer and President

Yeah, we've always said we're going to work in mainstream midstream assets. But that said, we also said that where there's a logistics need, partnered with something that our sponsor does. And before we go look at getting that logistics need filled from someone else then we'll consider it. But really with all the opportunities that we have in front of us to choose from now up and running that are -- that can generate cash from day one, where that would sit in the priority of things is uncertain.

Spiro Dounis -- Credit Suisse -- Analyst

Understood. Thanks for the time today, guys. Be well.

Kevin M. Nichols -- Director, Chief Executive Officer and President

Thank you. You too.

Shawn Carsten -- Director, Vice President and Chief Financial Officer

Thank you.

Operator

Thank you. Our next question comes from Joe Martoglio from JPMorgan. Your line is open.

Joe Martoglio -- JPMorgan -- Analyst

Hi guys, thanks for taking my question. Wanted to ask on the Mars expansion and it seems like kind of discussions they are progressing, how big could that potentially be and do you have an idea of kind of just ballpark how significant the contribution to SHLX that would be?

Steven C. Ledbetter -- Vice President of Commercial

Yeah. Joe, hi, this is Steve Ledbetter. Appreciate the question. Indeed, the expansion is still progressing. We're pleased with that and we have the LOIs in place. And we anticipate the project to come online in 2021 in advance of the previously announced Vito and Powernap fields. At this point, we're not giving any guidance just yet on the impact in terms of incremental cash to the Partnership.

Kevin M. Nichols -- Director, Chief Executive Officer and President

I do believe in the past what we've said that it's -- it's about 65,000 barrels a day.

Steven C. Ledbetter -- Vice President of Commercial

Yeah. And in the conversations with the producers and customers, everyone is still very, very bullish on the Gulf of Mexico. And I think that's testament to the fact that we do have LOIs in place and the project continues to move. So anticipate somewhere around that number. It just depends how things play out over the next year and a half.

Joe Martoglio -- JPMorgan -- Analyst

Okay, thank you. That's helpful. And then building on Spiro's question about the new administration. Just kind of digging deeper in there, do you -- if there is a restriction on federal land and no one knows what will happen with that. But kind of how would you see GoM production progressing kind of do you have an idea of what the clients will look like and kind of what that would mean for you guys?

Kevin M. Nichols -- Director, Chief Executive Officer and President

Yeah. So I think you have to think about this as when would that impact take place and when would that affect the business, right? So what's happened in the Gulf of Mexico between existing productions and producers, they've got leases already contracted up, and it's a long process to prove out wells commercialize the prospect. Then in some cases build a host or connect it to a system.

So from a medium to longest-term view, we're very bullish about what's already in the funnel and that will continue to come to our assets because they are well-positioned in the Gulf of Mexico. Where this may play out, is future leases and development. But that would be many years out before that would ever have an impact to the funnel.

Joe Martoglio -- JPMorgan -- Analyst

Okay, great. That's helpful and thanks for taking my questions.

Kevin M. Nichols -- Director, Chief Executive Officer and President

Thank you.

Operator

Thank you. And our next question comes from TJ Schultz from RBC. Your line is open.

Kevin M. Nichols -- Director, Chief Executive Officer and President

Hey, TJ.

TJ Schultz -- RBC Capital Markets -- Analyst

Hey, good morning. Any update on Colonial rig-based negotiations and potential impact to you all?

Steven C. Ledbetter -- Vice President of Commercial

Yeah, so Joe [Phonetic], this is Steve. We're not going to give any guidance on the current situation. I think there is public information that's out there and for further questions on Colonial, we'd point you back to them for comment.

TJ Schultz -- RBC Capital Markets -- Analyst

Okay, fair enough. And then just in the Gulf, any update on timing on Mad Dog 2 and then impact to your pipeline volumes?

Kevin M. Nichols -- Director, Chief Executive Officer and President

We'll have to get back to you on that one. I'm not aware of that, but certainly, I'll ask Jamie to take a look at it and he can clarify up for you.

Operator

Thank you. And that does conclude our question and answer session for today's conference. I'd now like to turn the conference back over to Jamie Parker for any closing remarks.

Jamie Parker -- Investor Relations Officer

Yeah. Thank you very much for your interest in Shell Midstream Partners. If you have any additional follow-up questions following today's presentation, please feel free to call me directly, my contact information can be found on the presentation materials as well as on our website, shellmidstreampartners.com. Thanks, everyone. Have a great weekend.

Operator

[Operator Closing Remarks]

Duration: 42 minutes

Call participants:

Jamie Parker -- Investor Relations Officer

Kevin M. Nichols -- Director, Chief Executive Officer and President

Shawn Carsten -- Director, Vice President and Chief Financial Officer

Steven C. Ledbetter -- Vice President of Commercial

Shneur Gershuni -- UBS -- Analyst

Theresa Chen -- Barclays -- Analyst

Derek Walker -- Bank of America -- Analyst

Gabe Moreen -- Mizuho Securities -- Analyst

Spiro Dounis -- Credit Suisse -- Analyst

Joe Martoglio -- JPMorgan -- Analyst

TJ Schultz -- RBC Capital Markets -- Analyst

More SHLX analysis

All earnings call transcripts

AlphaStreet Logo