Hess Midstream Partners LP (HESM) Q3 2020 Earnings Call Transcript

Hess Midstream Partners LP (HESM)
Q3 2020 Earnings Call
Oct 28, 2020, 12:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen. And welcome to the third-quarter 2020 Hess Midstream conference call. My name is Kevin, and I'll be your operator today. [Operator instructions].

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, Kevin. Good afternoon, everyone. And thank you for participating in our third-quarter earnings conference call. Our earnings release was issued this morning and appear on our website, www.hessmidstream.com.

Today's conference call contains projections and other forward-looking statements within the meaning of the federal securities laws. These statements are subject to known and unknown risks and uncertainties that may cause actual results to differ from those expressed or implied in such statements. These risks include those set forth in the Risk Factors section of Hess Midstream's filings with the SEC. 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 as a result of COVID-19, 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 prepared remarks on www.hessmidstream.com following their presentation.

I'll 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 third-quarter 2020 conference call. Today, I will review our operating performance and highlights as we continue to execute our strategy, and discuss Hess Corporation's latest results and outlook for the Bakken.

Jonathan will then review our financial results. Third-quarter results reflect continued strong Bakken performance by Hess Corporation an increased gas capture by Hess Midstream which drove throughput above expectations. This along with our continued disciplined approach to managing costs enabled us to exceed our guidance for the third quarter to have allowed us to again raise our full-year 2020 guidance. We now expect our 2020 full-year adjusted EBITDA to be in the range of $725 million to $735 million which represents a 33% growth year-over-year at the midpoint.

We're also reiterating adjusted EBITDA guidance for 2021 where we anticipate an approximate 20% increase from our expected 2020 outperformance. In addition, our targeted annual distribution per share growth of 5% through 2022 remains unchanged validating the strength, stability, and visibility of our financial outlook. Focusing more closely on our third-quarter results. Gas processing volumes averaged 296 million cubic feet per day, and crude tumbling volumes were 141,000 barrels of oil per day, both approximately flat compared to the second quarter.

Third parties contributed approximately 7% of our gas, and 9% of our oil volumes in the third quarter also flat with the second quarter, and slightly ahead of expectations at the midpoint of our adjusted EBITDA guidance range. Water-gathering volumes averaged 78,000 barrels of water per day in the third quarter, an 18% increase compared to the second quarter as we continue to capture incremental truck water into our expanding gathering system. Now, turning to Hess upstream highlights. Earlier today, Hess reported strong third-quarter production results with Bakken production averaging 198,000 barrels of oil equivalent per day, an increase of 21% from the year-ago quarter, and above guidance of approximately 185,000 barrels of oil equivalent per day.

During the quarter, Hess continued to leverage Hess Midstream's pipeline and well terminal system which provides significant export capacity and optionality, north and south of the Missouri River, to key markets throughout the United States. For full-year 2020, Hess forecast Bakken production to average approximately 190,000 barrels of oil equivalent per day, an increase from previous guidance of 185,000 barrels of oil equivalent per day. Turning to Hess Midstream guidance. As a result of continued strong performance, we have increased our full-year throughput guidance for gas gathering and processing through the first nine months of the year, the installation of an additional 40 million cubic foot per day of gas compression capacity has significantly improved our gas capture capability which helped mitigate the anticipated throughput impact from Hess's rig reduction.

Furthermore, we expect to add approximately 30 million cubic feet per day of additional compression capacity in the fourth quarter with the restart of two newly refurbished legacy compressor stations, an innovative solution that created near immediate capacity at a low incremental cost. This highly localized approach is an important component of our strategy to capture more Hess and third-party volumes that enable customers to continue to meet or exceed North Dakota's wellhead gas capture targets which are increasing to 91% effective November 1, 2020. As a result, we now expect gas gathering volumes to average 315 million cubic foot per day to 320 million cubic foot per day, and gas processing volumes to average 300 million cubic foot per day to 305 million cubic foot per day for the full-year 2020. Both increasing 8% at the midpoint compared to previous guidance.

Our complete financial and operational guidance is available in our earnings release that was distributed earlier this morning. For the fourth quarter, we expect gas throughputs which generate approximately 75% of our revenues to be roughly flat, compared to the third quarter. Fourth-quarter oil and water volumes are expected to decline compared to the third quarter, in line with Hess's guidance. The midpoint of our financial guidance also assumes third party activity remains consistent with the third quarter.

Turning to Hess Midstream's capital program. Our 2020 guidance remains unchanged. Full-year 2020 expansion capital is expected to be $250 million comprising approximately $140 million in gas processing, $25 million in gas compression, and $85 million in gathering and well pad interconnects. We continue to make excellent progress on the expansion of the Tioga Gas Plant.

And as previously announced, expect construction to be complete by the end of 2020. Incremental gas processing capacity is planned to be available in 2021 upon completion of the turnaround during which time the expanded plant including the residue and natural gas liquids takeaway pipelines will be tied in. Maintenance capital guidance remains unchanged at $10 million. In summary, we continue to demonstrate strong operation on financial performance in a challenging macro environment where again, increasing volume guidance, enabling us to raise our full-year 2020 adjusted EBITDA guidance to be in the range of $725 million to $735 million.

In addition, we're reaffirming our 2021 guidance where we expect another year of double-digit adjusted EBITDA growth, a growing distribution per share, and with the tie-in of 150 million cubic foot per day expansion of the Tioga Gas Plant which creates significant new opportunities for gas capture growth in the basin for years to come. Finally, we want to again emphasize our continued commitment to operating safely and reliably during this unprecedented pandemic. The safety of our workforce and the communities where we operate remains our top priority. I will now turn the call over to Jonathan to review our financial results.

Jonathan Stein -- Chief Financial Officer

Thanks, John. And good afternoon, everyone. As John described, we have continued our track record of delivering strong results within a challenging macro environment. Again emphasizing how both our contract structure and financial strength differentiate our business model.

Our third-quarter results again beat our quarterly guidance, and as a result of our continued strong volume performance and our expectation that we will maintain our higher third-quarter EBITDA level. In the fourth quarter, we are again raising our full-year 2020 financial guidance. We are increasing our full-year 2020 net income guidance to be in the range of $455 million to $475 million. Adjusted EBITDA is expected to be in the range of $725 million to $735 million.

Representing at the midpoint, a 33% growth compared to full-year 2019 results, and an increase of 4% compared to the midpoint of our previous guidance. We expect to maintain an approximately 75% EBITDA margin for 2020 consistent with our historical margin. Maintenance capital and cash interest are projected to total approximately $100 million for the full-year 2020, and distributable cash flow is expected to be in the range of $625 million to $635 million, resulting in expected distribution coverage of approximately 1.3 times. We expect to end the year with leverage at or below our conservative 3 times adopted EBITDA leverage target.

Our contract structure and financial strength enable us to provide visibility and stability to our forward trajectory. We are reiterating our 2021 adjusted EBITDA guidance which is growing 20% from our updated 2020 adjusted EBITDA guidance, primarily from our expected annual rate redetermination at the end of this year, as well as the contractual inflation escalator and increasing 2021 MVCs. In both 2021 and 2022, we also expect approximately $750 million of free cash flow defined as adjusted EBITDA, capex that includes approximately 95% of our revenues protected by MVCs. Sufficient to Hess Midstream to be free cash flow positive after funding interest expense and growing distribution, while maintaining distribution coverage of approximately 1.4 times without the need for any incremental debt or equity.

Turning to our results. I will compare the results in the third quarter to the second quarter. For the third quarter, net income was $116 million compared to $108 million for the second quarter. Adjusted EBITDA for the third quarter was $182 million compared to $173 million for the second quarter.

The change in adjusted EBITDA relative to the second quarter was primarily attributable to the following: total revenues increased by $12 million, including an increase in gathering revenues of approximately $8.0 million driven by higher Hess production, gas capture, and increasing MVCs; an increase in processing revenues of approximately $3.0 million driven by higher Hess production and gas capture, and an increase in terminal revenues of approximately $1.0 million during by increasing MVCs; total operating expenses including G&A but excluding depreciation and amortization and pass-through cost were higher, increase in adjusted EBITDA by approximately $4.0 million, including seasonally higher maintenance and operating costs of approximately $4.0 million; the higher overhead of approximately $2.0 million, higher insurance and property tax of approximately $1.0 million, offset by lower costs associated with the TGP turnaround of approximately $3.0 million. All in all, a proportional share of earnings and depreciation, net of processing fees increased adjusted EBITDA by approximately $1.0 million. Resulting in the third quarter, adjusted EBITDA of $182 million exceeding the top end of our guidance range by approximately 10%, primarily due to higher than expected volume. Third-quarter maintenance capital expenditures were approximately $4.0 million, and that interest excluding the amortization of deferred finance costs was $22 million.

The result was that distributable cash flow was approximately $156 million for the third quarter coming to our distribution by approximately 1.2 times. On October 26, we announced our third quarter distribution that increased 5% on an annualized basis. Expansion capital expenditures in the third quarter were $63 million, and quarter-end that was approximately $1.9 billion representing leverage of approximately 2.7 times adjusted EBITDA on a trailing 12-month basis and below are conservative 3 times adjusted EBITDA targets. Turning to expectations for the fourth quarter.

As implied in our updated full-year 2020 guidance, we anticipate fourth-quarter net income and adjusted EBITDA to be relatively consistent at the midpoint with our higher than expected third-quarter results that we reported today. In the fourth quarter with seasonally lower operating costs, we expect distribution coverage to be approximately 1.2 times with revenues that are approximately 95% protected by MVC. In summary, even in this period of macro uncertainty, the strength of our business model is clear, and we maintain differentiated visibility to our financial metrics, including adjusted EBITDA growth of approximately 33% in 2020 and approximately 20% in 2021 with revenues that are 95% protected by MVC. The expected free cash flow of $750 million in 2021, and 2022.

Distributions per share targeted to increase 5% annually and fully funded from free cash flow in 2021, and 2022. And conservative leverage expected to be approximately 2 times adjusted EBITDA in 2021 on a full-year basis. With our strategic asset base, visible financial metrics, and contract structure, we have a differentiated value proposition across the mission sector. This concludes my remarks.

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

Questions & Answers:

Operator

[Operator instructions]. Our first question comes from Phil Stuart with Scotiabank.

Phil Stuart -- Scotiabank -- Analyst

Good morning, everyone. Appreciate the time today. I guess my question. Sorry, I guess my question is on M&A.

Obviously, you guys have talked about it in the past. Just curious with all the volatility that we've seen in 2020. Has anything changed in terms of your views as to where you'd be interested in M&A. And I guess what I'm getting at is are you -- may be more likely to want to do an acquisition of the Gulf of Mexico assets from Hess as opposed to a potential bolt-on in the Bakken.

Just given that you'll have very strong counterparty strength with a deal with Hess, and a similar contract structure relative to maybe what's out there with some third-party Bakken assets.

John Gatling -- President and Chief Operating Officer

So, thanks. Thanks for the question. I think you hit it right on. I mean obviously, the most important thing that we've got obviously is our relationship with Hess.

Now Bakken remains our focus and whereas we're continuing to look to strengthen our strategic footprint. But fortunately for us with the contract structure, we have in place we're able to be highly selective on that. So it really comes back to focusing on the right assets that integrate well into the system and have immediate returns that can deliver immediate returns and benefits to Hess and third parties. So I mean, I think as we look at acquisition opportunities in the Bakken that's really our focus.

It is focused on those highly strategic well-integrated assets that strengthen our position and continue to support that Hess third parties. And as you mentioned, yes. We are absolutely interested in the process of evaluating the Gulf of Mexico assets. I mean, it is having a contract structure similar to what we have in the Bakken with Gulf of Mexico assets is extremely attractive.

It extends the relationship obviously between the midstream and Hess, and we see that obviously as a huge enabler and highly valuable from our perspective. So those are our focused there areas. I mean we're continuing to look in the Bakken. But again being selective, and then continuing to evaluate the Gulf of Mexico assets, and are excited about the opportunities there, and the ability to expand our relationship and enter a new basin with a bit of diversification as well.

Those are all very attractive things to us.

Phil Stuart -- Scotiabank -- Analyst

Ok. Great. Appreciate the color there. And the next questions are on the TGP expansion.

I guess my understanding is that the majority of the capital has already been spent. But I guess just curious about the timing of the turnaround in 2021 to finish that project up.

John Gatling -- President and Chief Operating Officer

Yes. And you're exactly right. So the plan would be as we're going to wrap up construction at the end of this year. We're well advanced on the actual construction activity.

In fact, we're in the process of essentially wrapping up construction. Everything will be prepared and ready for the turnaround activity in 2021. We're not really specifically discussing exactly the timing for the turnaround. It really will depend on what the environment is.

What COVID-19 the situation is. Again, as I mentioned in my opening remarks, really we are more focused on the safety of our personnel and the communities where we operate and that's our top priority. We do anticipate and expect to do the turnaround in 2021, and as soon as a turnaround has been scheduled the plan would be is that we would be fully capable of tie-in the expansion, and be ready to increase the total capacity at the gas plant.

Phil Stuart -- Scotiabank -- Analyst

Ok. Great. That's it for me. Thanks.

John Gatling -- President and Chief Operating Officer

Ok. Thank you.

Operator

Our next question comes from [Inaudible] with UBS.

Unknown Speaker

Hi. Good afternoon, everyone. Just a couple of quick questions here. Just to start off.

let me look at some of your peers in the Bakken talking about flat volume for 2021 has seemed to be maintaining a rig on its footprint. Well, I think about the COS structure should we expect Hess to keep production roughly flat as you enter this getting set up I guess for the second term of your COS contract. And given that it'll be a blended average of your 21 to 23 type of timeframe. Just wondering how we should think about that and toggling as to how we think about the set up for the next contract.

John Gatling -- President and Chief Operating Officer

Sure. I mean maybe I'll start off with the operational side, and then Jonathan can hit some of the financial aspects of it. But as you heard this morning has talked about two rigs to hold production flat of 180,000 barrels of oil equivalent per day. From our perspective as it has run at the current rates, and then moves into the future years, we definitely see the production plateau sustaining that as it continues into 2023, and then into the second term.

But I'll hand it over to Jonathan, just to address any of the financial components of that.

Jonathan Stein -- Chief Financial Officer

Thanks. I think as I have to say that certainly, they are looking to an out of rig as you get closer to Bakken 50. So, seeing at one rig it's done a long-term basis you not necessarily the plan that we would see. But even in that scenario, I think the contract structure really indoors, and we really have strong visibility to continue free cash flow.

I mean even at one rig on a long-term basis, we would still continue to be free cash flow positive after distribution at our expected 2022 level really put everything profitable future. And how that works is basically, as you described it's a combination of the cost of service over the next number of years leading to the long-term second term. And really where that worked as we look at 20% growth at the end of this year in terms of EBITDA will take it to a new level in terms of EBITDA. And then as John described, Hess will be able to hold production flat at one rig.

Totally we would expect that they would reach that level by 2023. And during that period, our annual rate reset would adjust the target that we'd be able to maintain our EBITDA approximately at 2021 level. Then as we get to 2024, we would convert to a fixed price contract deal with MVCs for a fixed price steadily increasing from 2024 through 2033 with the inflation escalator on flat production. So our revenue therefore would just be steadily increasing over that long-term period.

And then of course in a lower [Inaudible] we'd be sustaining capital which is what we expect to be anyways next year. We've said that $100 million to $150 million interest in this table because we have no incremental debt, and 2022 levels of distribution growing 5%. That's approximately $550 million. So you put all that together that said, we can be approximately $100 million free cash flow after distribution on a long term basis even if Hess were to stay at one rig on a long term basis.

And that is really I think a very unique business model that allows us to just continue to deliver that ongoing free cash flow after distribution even if it will cause stress scenarios. And I think it also highlights that even in that case, we still have free cash flow generation and low leverage which gives us financial flexibility and capacity. So when we have the opportunity to do things like John said, whether it be the Gulf of Mexico, whether it be bolt-on opportunities in the Bakken. But also gives us the opportunity things like buybacks from our sponsors which can be accretive to all shareholders.

So, we really do have a model that is very unique in terms of our contract structure, and also in particular in terms of our visibility to continue to deliver free cash flow, free cash flow positive after distributions on a long-term basis.

Unknown Speaker

Appreciate all the color and there is a lot of details there. If I can paraphrase a little bit and add my own assumption here. So basically with Hess in a flattish production type of environment has seemed to kind of be a billion-dollar base run rate business starting in let's say 2022. Is that the right way to think about it.

Jonathan Stein -- Chief Financial Officer

Yes. I think the way I would say is we're going to include even this year at 20% into 2021. And then with production things flat, there's increasing rates because as you go into the second term we'll be effectively increasing steadily, and then everything else whether it be interests or capital is the same. And not all of that is more than enough to fund our distribution on a long-term basis.

Maybe if we got some positive after it.

Unknown Speaker

Maybe just one last question has just given the discussion about free cash flow. I see you're on a free cash flow basis and at the same time there isn't a large float on your stock and everyone is talking about buybacks and so forth. I'm just wondering if you can toggle between some of the ideas that you're kicking around as to how to deploy your leverage is fairly low. You don't want to reduce your liquidity with buybacks, but is there a way to pro-rata buyback.

Let's say yours and GIP has and GIP stake as a way to return capital to shareholders and so forth. I'm just wondering if you can walk through the options that you're thinking about both inside and outside of the box.

Jonathan Stein -- Chief Financial Officer

Yes. I mean I think that's actually right. We do have the ability in our structure to be able to buy back shares directly just from Hess GIP. As you imagine our float is too small that we wouldn't be doing buybacks from the public.

But we were able to just buyback shares from Bakken GIP, and that would obviously be accretive to everybody. And that would be also a good use of the financial flexibility we have. We do have opportunities though. As John said, again Gulf of Mexico potential bolt-ons and a very disciplined way that we're gonna need to be very disciplined, and together the good news for us is we don't have to do just one of these things.

We can do a Gulf of Mexico transaction and we can also do buyback a month or so given a financial bottom billion a position we're in, and we really have the ability to do many of these things. Of course, we're going to do them all in a very disciplined way, as we've always done in the past.

Unknown Speaker

But maybe one last one actually that just popped into my head here. In all the responses so far you've brought up Mexico's assets acquisition and so forth. What do diligence has Hess done in terms of if there is a buying victory as to what it does to the Gulf of Mexico with the whole ban on drilling on federal lands and so forth. I was wondering if you had some comments you'd like to share.

John Gatling -- President and Chief Operating Officer

Yes. The only thing I'd say there, I mean there's obviously uncertainty in the upcoming election. But we do not anticipate there being any significant impact as a result of either continued administration or a change in administration.

Unknown Speaker

All right. Perfect. Well, thank you very much, everyone. Appreciate the time today.

John Gatling -- President and Chief Operating Officer

Thank you, very much.

Operator

Our next question comes from Spiro Dounis with Credit Suisse.

Spiro Dounis -- Credit Suisse -- Analyst

Good morning, guys. The first one for Jonathan. Just going back to M&A and thinking not even there's really more room growth and thinking how you're going to fund that in various ways whether it be Gulf Mexico or other organic expansions. Is there a blueprint that you guys are thinking about when it comes to the debt-equity mix on a go-forward basis.

I know you've been focusing on naturally deleveraging over the next year or so, but as we think about the debt-equity mix on future spending, what does that look like. And then how are you thinking about sourcing the equity component.

Jonathan Stein -- Chief Financial Officer

Right. So I mean, I think for us the good news is we really can do all the things that we've talked about really through our free cash flow after distributions together with the debt. If you look at what we've said for next year expect the wage to be approximately 2 times even are well below our target. That's on a full-year basis, and that would continue because there's no incremental debt.

So absent any other things that we've talked about, we have all that flexibility available to us. So that's the whole turn of EBITDA even relative to our conservative 3 times EBITDA target. And of course in a situation like for example, if we were able to do the Gulf of Mexico that of course would come at EBITDA as well. So that even would give us additional flexibility.

And then on top of that, as we've talked about starting next year, we'll be free cash flow positive after distribution. So that also creates even additional balance sheet strength in order developed to fund that. So we fully anticipate that all the things we're talking about. We'll be able to do just on balance sheet things and have no plans for any equity needs in order to meet these targets that we've talked about to build to fund and the opportunities that we've talked about.

Spiro Dounis -- Credit Suisse -- Analyst

Great. Ok. Good. And I appreciate that Jonathan.

The second question on M&A again, maybe a little bit differently. Obviously, we're seeing a lot of combinations in the upstream space and certainly expanding your sponsor would become involved in M&A at some point. How do you guys think about the potential impact to have midstream. Does anything ever actually really change for you in that scenario.

Jonathan Stein -- Chief Financial Officer

Yes. I mean I think from a contract there obviously, we see that is very unlikely, but there would be no change in terms of the contract, the dedication, the governance would also stay in place with the Hess Midstream being taken by the court. They were quite happy but they would have a minority position relative to GIP, and the independent director and so forth versus the GIP independent that SEC. And then Hess some of course has its own capital structure and owns 110% of our own assets.

So there'd be no change in terms of our ability to operate independently with the same underlying contract and the same dedication.

Spiro Dounis -- Credit Suisse -- Analyst

Great. Thanks for the color guys. Do well.

Operator

Our next question comes from Vinay Chitteti with JP Morgan.

Vinay Chitteti -- J.P. Morgan -- Analyst

Hi. Good afternoon. Thanks for taking my questions. I wondered primarily I was going to accept, but I guess [Inaudible].

Just starting up with the gas capture and gas pricing volumes for the third quarter. I guess you are still able MVCs right now and looking at what you guys have talked about adding additional compression capacity about 30 MMcf for day two and a full queue that looks very somewhat upside and it could be still greater than MVCs next year as well. I mean, of course, there is some decline dates with respect to Hess. but just trying to understand what is driving that additional volume.

Is there any shift in what Hess is doing from moving from more gas here to raise or is it just increased gas captivates if it's gas capture. What upside do we still have from what you achieved in 3Q.

John Gatling -- President and Chief Operating Officer

Sure. Maybe what I'll do is I'll address the general gas capture question and more of the operational aspects of it. Then I can hand over to Jonathan to talk a little bit about the MVC levels. Overall, we've seen a significant improvement in overall gas capture in the basin.

I think as we've continued to build out our own infrastructure in support of Hess and our third-party customers, we've seen gas continuing to increase. Now, it's a positive for us because the oil is very stable and it's either meeting or exceeding expectations. We are starting to see a little bit more gas come. And as a result of that, we're putting the infrastructure in place to support that.

And that's been our strategy for the last several years. I mean, this is a continued execution plan that we've had in place for three-plus years, and it will continue into 2021 as well. And really, it just follows the development plan from the upstream. We continue to add infrastructure like we've done the first three quarters of this year.

We added 40 million cubic feet of a -- million cubic foot compression capacity. And then in the fourth quarter, we saw an opportunity to actually go leverage some idle equipment, some legacy facilities that we had not planned on bringing back online, we refurbish those facilities and that was really something that came up in the middle of the year. As we were looking at the development plan and looking at opportunities to improve Hess's gas capture but also improved the throughput through our system. We went and spent a bit of time with our operational and project teams to reevaluate those facilities and refurbish them and get them back on line.

And we expect them to be online in the fourth quarter which again adds another 30 million cubic foot a day of total compression capacity. So overall, we see that as continued optimization of our infrastructure. I mean I think that's one thing that we've been -- we've done a very good job on is not overbuilding infrastructure. We've been very disciplined in our execution plans, and our investment opportunities.

And we're really leveraging our infrastructure to its maximum. And I think that just shows through the ability to actually bring back on facilities, legacy facilities and immediately capture volumes. So, we do see that as upside as far as throughput. And I think that's what supported muting some of the impacts of the rig reduction by Hess, and it continues to create opportunities for us.

As far as the MVC, I'll handle that, and then over to Jonathan to talk a little bit about the MVCs and especially how that plays in 2021.

Jonathan Stein -- Chief Financial Officer

Thanks, John. So, yes. I mean I think with the rest of this year you can see based on our Q4 implied volumes that in general, we're going to be most of our systems are going to be just about it. And MVCs are below so that being from a physical side.

So those will be primarily the driver that MVCs of our volume going through into Q4. And that is really one of the drivers at the ports our ability to maintain our EBITDA expected at the same level as our Q3 EBITDA. A combination of that together with some seasonally lower opex. That's only the MVC are providing that for that we have revenue for on our revenue.

And as we look to next year, we do have increasing MVC with the higher volumes of course that we have this year, compared to where we were even just three months ago. So the growth rate is all that lot because of our higher volumes this year, our physical volumes are going into next year MVCs. But we do still see a bit of growth. Oil and gas generally flat or that maybe growth on the gas side outside of the turnaround period.

But then water for example is increasing by approximately 25% relative to 2020 levels relative to MVC. So we see some growth there as well, but certainly, we will be running expecting at MVC level to said really '21 and 2022 because of those MVCs with that under the prior department plan. And so that will really create a level that we would expect revenues to be at going into '21, and then continuing into 2022.

Vinay Chitteti -- J.P. Morgan -- Analyst

Got it. Thanks. And then just wanted to follow up on the 2021 guidance. So you guys did mention about 20% growth.

I mean it's usually your guidance has been very conservative on the third-party business without performance in the quarters right now. I just want to understand what is included in your 2021 guidance that 20% growth. What kind of third party activities included, and do you see any upside on that.

John Gatling -- President and Chief Operating Officer

So maybe I'll just hit the third parties for a second here. So we're keeping the third parties flat as what we've seen over the last several quarters in 2021. We're trying to be somewhat conservative there, but I would say that as we think about the third parties as Jonathan mentioned, they're going to be largely below our MVC levels. And as such, we don't anticipate there to be any revenue impacts on that.

Now I would say on the upside is we've got volume behind pipe currently. We're in the process of expanding the gas plant. The timing of that is a bit uncertain that it's planned to be in 2021. So, we do see some opportunity there, and again we're very fortunate to have a highly strategic footprint asset base that I think is a natural system that will attract volumes to it.

So we do see the opportunity there. But we're trying to be realistic in the forecast and what we see today as what we're projecting on. But again, I think as Jonathan mentioned, we're going to be largely at MVC levels, and we're not expecting much uncertainty on the revenue side. I think Jonathan has anything else you want to add to that.

Jonathan Stein -- Chief Financial Officer

No. I think that's right. So on the third-party John gave that overview, so that leaves and comes with the 20% growth is really the big majority of that growth is going to come from the rate reset which will occur at the end of this year. As part of our annual nomination process that of the 20% almost like 15% of that growth is really 15% out of the 20% is really from that rate reset.

And that's because we'll have a lower development plan this year than it had last year. Last year with six rigs going on the four rigs maintaining 200,000 barrels per day. Now obviously, we're starting at one rig, so that will develop playing well. I know to maintain our target return capital will increase rates.

The other 5% is really just the combination of our inflation escalator which was part of that calculation as well as MVC. But as we've talked about with the higher volumes that we have now this year going into MVC we'll be really buying with the MVC level. So not as much a driver. Really the big driver will just be the rate reset.

And of course, as John described that we have all the capacity. So you know I guess that could be a potential upside above that, but our expectation is that we would want the 20% growth and then running at MVC level mostly driven by the rate resets.

Vinay Chitteti -- J.P. Morgan -- Analyst

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

John Gatling -- President and Chief Operating Officer

Thank you.

Operator

[Operator signoff].

Duration: 39 minutes

Call participants:

Jennifer Gordon -- Vice President of Investor Relations

John Gatling -- President and Chief Operating Officer

Jonathan Stein -- Chief Financial Officer

Phil Stuart -- Scotiabank -- Analyst

Unknown Speaker

Spiro Dounis -- Credit Suisse -- Analyst

Vinay Chitteti -- J.P. Morgan -- Analyst

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