Q3 2019 Earnings Call

You are seeing has production along with contracted and connected third party volumes from a range of upstream and midstream customers maintaining TGP near its nameplate capacity of 250 million cubic foot per day.

In line with guidance provided on the July call total third quarter gas processing volumes increased by 9% compared to the second quarter.

We anticipate further growth in gas gathering and processing volumes in the fourth quarter as LM for continues to ramp towards full utilization.

We are reaffirming our volume guidance for the full year 2019, we anticipate gas gathering volumes to be between 280, and 290 million cubic foot per day and gas processing volumes to be between 265, and 275 million cubic foot per day.

Over the long term, we continue to expect third parties to comprise approximately 30% of our total gas processing volumes underlying our strategically advantaged infrastructure position in the basin supporting Hess and third party customers.

For our crude oil business third quarter crude terminalling volumes were 130000 barrels of oil to per day, and approximate 6% increase over the second quarter, primarily driven by increasing has production.

We anticipate further growth in crude throughputs through the fourth quarter as has continues to execute it six rig drilling program.

Third party Throughputs are expected to remain at approximately 15% of our total crude oil volumes.

Again, consistent with prior guidance, we anticipate full year 2019 crude gathering volumes to be between 100 515000 barrels oil per day and crew terminalling volumes to be between 120, and 130000 barrels of oil per day.

Now turning to has upstream highlights earlier today has reported third quarter 2019 production from the Bakken of 163000 barrels of oil Ocwen per day, representing an increase of approximately 40% over the year go quarter.

For full year 2019, Hess has increased its Bakken production guidance from 140 to 145000 barrels oil equivalent per day to approximately 150000 barrels oil per day, demonstrating the strength of its acreage position and success of the plug and perf completion design, which is delivering the expected uplifted initial production.

Rates estimated ultimate recovery and most importantly value.

As previously announced has plans to grow production to approximately 200000 barrels oil equivalent per day by 2021, which is a key driver of sustained volume growth for Hess midstream.

Now turning to Hess Midstream is capital program, we continue to make excellent progress on executing our capital program focused on the expansion of gas gathering compression processing assets and pipeline and well pad interconnects, perhaps than third parties.

During the third quarter, we began civil construction and fabrication activities for the plan 150 million cubic foot per day TGP expansion, we expect to begin major construction activities in 2020 and the project is on place to be completed by mid 2021.

The TGP expansion is expected to increase Hess midstreams overall gas processing capacity to 500 million cubic foot per day.

Our full year capital guidance remains unchanged from our October 4th announcement.

2019, consolidated capital expenditures, including equity investments from LM for and excluding acquisition capital are expected to be between 310, and $345 million of which $300 million to $330 million is allocated to expansion activities, including $120 million to $130 million in gas gathering and compression.

$75 million to $85 million in gas processing, and $105 million to $115 million in pipeline and well pad interconnects.

Total expansion capital attributable to Hess midstream for 2019, including equity investments related to the Elam for gas plant and excluding acquisition capital is expected to be between 60 and $65 million, which is unchanged from prior guidance.

In summary, we're on track to meet our 2019 financial and throughput guidance, while continuing to focus on strong execution of our expansion program.

The new Hess midstream platform lays a solid foundation to drive long term and sustainable growth, creating significant scale financial strength and flexibility with the opportunity for broad investor participation, which enables us to unlock future value for Hess midstream shareholders I'll now turn the call over to Jonathan to review our financial results.

Thanks, John and good afternoon, everyone.

We are pleased with the positive response to October 4th announcement as.

As we have highlighted the transaction will deliver important benefits unit holders.

First contribution of HIV AIDS, 80% remaining economic interests in the oil and gas midstream assets and 100% ownership and HIV is water business, creating significant scale for the new enterprise.

Second it transaction that is expected to be immediately accretive to Hess midstream you holders and deliver long term accretion on distributable cash flow per unit basis.

Third maintaining our commitment to 15% annualized distribution per unit growth through 2021, and increasing our targeted distribution coverage to 1.2 times fourth eliminating IDR payments, the sponsors and converting to an uptick corporate structure with broader investor appeal and finally to achieve all this and.

Manoj expected to be nontaxable decline has mitts reveal holders and with a generous tax shield, resulting in no material tax is expected to be paid for the next several years.

These changes position has midstream for visible adjusted EBITDA growth and increasing free cash flow generation.

Well, maintaining conservative leverage without the need for funding from the equity capital market to deliver our planned growth.

One of the first steps in the proposed transaction, we commenced an offer to assume approximately $800 million of outstanding HIV notes.

In a par for parks change and as of October 20, Onest 2019, we receive can sense for greater than 99% of the aggregate principal amount of existing outstanding notes.

The proposed transaction is expected to close in the fourth quarter of 2019 subject to customary closing conditions and receipt of regulatory approval.

As John noted, we are continuing to execute our strategic plan this year.

Complementing our volume metric growth with strong financial results.

The startup of Elm for an expected ramp in gas volumes through the rest of the air will drive continued growth in our revenues adjusted EBITDA and coverage, which we expect to be at least 1.2 times in the fourth quarter.

Our third quarter results met the guidance, we provided on our July conference call and we are reaffirming all financial guidance for the full year 2019.

Net income guidance remains $415 million to $440 million consolidated adjusted EBITDA is expected to be $550 million to $575 million and adjusted EBITDA attributable to Hess midstream is anticipated to be in the range of $108 million to $113 million.

Our full year adjusted EBITDA guidance implies an increase in adjusted EBITDA attributable to has mid stream of at least 20% from the third quarter to the fourth quarter. As we continued to increase processing volumes towards our new total nameplate capacity of 350 million cubic feet per day.

With maintenance capital and cash interest attributable to has midstream projected to total approximately $5 million for the full year I distributable cash flow guidance for 2019 also remains unchanged as expected to be in the range of $103 million to $108 million.

Highlighting our expected strong growth on an annual basis in 2019, we expect to deliver 15% distribution growth with at least a 1.1 times coverage with revenues that are 85% protected by Nbcs any competitive EBITDA margin consistent with historical margin of greater than 75%.

Turning to third quarter 2019 results I will compare results on the third quarter to the second quarter.

The third quarter 2019, consolidated net income was $100 million compared to $91 million for the second quarter consolidated adjusted EBITDA for the third quarter was $136 million compared to $125 million for the second quarter.

The change that consolidated adjusted EBITDA relative to the second quarter was primarily attributable to the falling.

Revenues for our gathering and processing segment increased by approximately $13 million, primarily driven by increasing gas volumes, including the ramp up all of the elm for gas processing plant.

Revenues for our Terminalling segment increased by approximately $2 million driven by increasing has production.

Total operating expenses, including DNA, but excluding depreciation amortization, well transportation pass through costs and Alan for processing fees were higher decreasing adjusted EBITDA by approximately $4 million, including.

Higher seasonal maintenance activity during the period of approximately $2 million initial work on the plan TGP turnaround project of approximately $1 million.

Had higher charges from half under omnibus and then plays a comment agreements of approximately $1 million from higher activity levels.

As a reminder, since elm for with integrated into our contract structure to create a signal processing fee.

Revenues from volumes process that Elm for are included in our affiliate revenues.

Alan for processing fees of approximately $1 million included in operating expenses were offset by approximately $1 million of adjusted EBITDA based on our share of JV results included earning some equity investments and Alan for depreciation.

Third quarter 2019 maintenance capital expenditures attributable to has midstream we're point $3 million and cash interest was point $6 million. The result was that distributable cash flow was $25.7 million a third quarter 2019, covering our distribution by 1.08 times.

In the fourth quarter, we expect distribution coverage of at least 1.2 times, yielding a full year average coverage of at least 1.1 times inline with our guidance.

On October 24th we announced that the board of directors, our general partner approved our third quarter distribution that increased 3.6% quarter on quarter and 50% year on year consistent with our distribution growth target.

Gross expansion capital expenditures, including equity investments in Elam for in the third quarter were $110 million or $22 million attributable to has midstream.

Highlighting our ability to grow I, primarily self funding both our distributions and expansion capital program. We finished the quarter with just $11 million drawn on our 300 million dollar credit facility.

As we continue to execute our plan for 2019, we also look forward to the closing of our transaction, including the acquisition of HIV assets and IDR simplification.

We will continue with our long term business strategy and our commitment to consistent and visible growth supported by a unique cost of service contract structure, while also having a business with meaningful scale financial strength and flexibility does open to our broad set of investors with our new platform, we will offer a differentiated value proposition.

And with adjusted EBITDA growth fee Castle conversion and conservative leverage metrics that are best in class among meeting leading midstream companies. This concludes my remarks, we'll be happy to answer any questions I'll now turn the call over to the operator.

Ladies and gentlemen, if you have to question. Please press star followed by one on your phone.

For your question has been answered or you wish to withdraw your question press the pound G.

Questions will be taken in the order received please press star start once again.

First question comes from the line of steel Steward of Scotia, Howard Weil.

Line is open.

Good afternoon.

Jonathan I Wonder if we could circle back to the transaction.

And talk about the decision to pursue an up see corporate structure as opposed to a full see conversion and maybe kind of what what were the puts and takes there and what kind of the benefits might be to tune up see versus a full corporate conversion.

Sure. Thank you so.

You know the upside structure really provides multiple benefits Firth. It allows us to have access to a broader investor base, obviously together with the idea of simplification. We also have aligned interest between the sponsors and a public equity holders, but in addition, it also because ultimately the ups. The has a partnership at space a allows us to maintain.

Significant integration with Hess Corporation, which has says our anchor customer and also as we co develop if you will the Bakken together to optimize it and it's a 20% production growth is really underpinning our growth. So that integration is really critical so really the ability to have that broader investor base, but the same time be able to maintain that integration was wrong.

Really a key and allowed to up seemed to be a ideal choice for us.

Great. Thanks.

And then I guess moving onto the TGP expansion.

I know you've talked about a turnaround period at some point during next year and you've kind of already provided guidance for what the full year throughput volumes will be just wonder if you could maybe provide a little more clarity in terms of the actual timing of when the turnaround will take place.

Sure. Thanks for the question, we're still in the planning phases of the turnaround and that's it so it still moving around as far as the actual duration of the turnaround itself again. This is a maintenance turnaround that was already in the plan as it was built in and we're actually taken advantage of the maintenance turnaround to complete the expansion activities over that period of time.

Okay.

And all of this has been built into our plan. So it's in Hesse's plan. It's also in.

In Hess midstream is plan as well.

And we'll we'll provide more information on the turnaround itself in the in the just during the January call.

Okay, Great and then I guess, one last one from me if I can.

On the salt water disposal business.

So the understanding its new to to the structure.

Can you just talk about.

Capex requirements for that business to continue to grow it over the next couple of years and how that kind of fits in with your ongoing maintenance.

And kind of sustaining Capex program of well tie ends on an annual basis going forward.

Sure I.

I guess, it's important to note as as far as the water business goes we've been kind of running the midstream business for some period of time, both the obviously the has superstructure partners Hess midstream, but also some of the midstream assets that sat with Hess. So this is these are not new assets to us we've been actually operating these assets with the.

Tend to have.

You know packaging them and selling them into our has selling them into hessam structure partners us acquiring and then ultimately making them available for Hess midstream.

So thats been the plan and we've actually been actively manage and business and growing the business as as part of that.

As far as Vik the capital requirements go again this is a growth business for US. This is considered expansion as you know.

Essentially all of the what I would say non traditional which would be like equipment replacements things like that.

It goes into our expansion line from a from a capital perspective, this would all be expansion capital for us.

It is has been and I would say the basin generally speaking has been under invested in water services. So it is a growth opportunity for us. It's got a substantial growth profile I would say, it's a modest investment it's not going to be a significant portion of our overall capital portfolio, but it is it's attractive at grows rapidly.

It's going to create a lot of EBITDA for us in the future and we're going to continue to attack it aggressively for both to support both past and third parties as well.

Great. Thanks, that's it for me.

Thank you.

Thank you very much. This concludes todays conference. Thank you for your participation you may now disconnect have a great day.

[noise] [noise].

Yes.

[noise].

[noise].