Q4 2019 Earnings Call
At this time, all participants are in listen only mode.
Later, we'll conduct a question and answer session.
At any time you require operative assistance. Please press star followed by zero and we'll be happy to assist you. As a reminder, this conference is being recorded for replay purposes.
I'd now like to turn the conference over to Jennifer Gordon Vice President Investor Relations. Please proceed.
Thank you to Lam good afternoon, everyone and thank you for participating in our fourth quarter earnings Conference call. Our earnings release was issued this morning and appears on our website Www Dot Hess midstream Dot 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 a risk factor section of husband streams filings with the FCC.
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 any earnings release.
With me today, or John Gatling, President and Chief operating Officer, and Jonathan Stein, Chief Financial Officer, I'll now turn the call over to John Gossling.
Thanks, Jennifer good afternoon, everyone and welcome to House Midstreams fourth quarter 2019 conference call today, I'll review, our operating performance and highlights as we continue to execute our strategy provides additional details regarding our 2020 plans and discuss Hess Corporation latest results and outlook for the Bakken Jonathan will then.
To review our financial results.
2019 was a year of strong performance and strategic execution for Hess midstream, we delivered year on year double digit percentage increases in volumes across all of our systems realized significant EBITDA growth and completed the acquisition of has infrastructure partners, eliminating IDR payments and converting to went up see corporate.
Structure as part of the transaction.
We entered 2020 as a large scale full service midstream company well positioned for visible adjusted EBITDA growth and increasing free cash flow generation with a platform that provides opportunity for brought investor participation.
Also in 2019, we made substantial investments to further expand our strategically positioned infrastructure, including significantly increasing our total gas processing capacity.
Acquiring houses water business and completing a series of key Hess midstream led gathering and compression projects, which were all delivered on time and on budget.
In partnership with harder resources, we started up the little Missouri for gas plant in mid year, expanding our base and processing footprint complementing our full fractionation capability at the Tioga gas plant.
One for increased our total nameplate processing capacity by 100 million cubic foot per day for an increase of 40% to 350 million cubic foot per day.
And our capacity, it's continuing to grow with the in progress expansion of TGP taken Hess midstream is total Bakken processing capacity to 500 million cubic foot per day.
Complementing our strategic projects. We also continue to expand or gathering systems to accommodate growth from Hassane third party customers and late in 2019 put our first test midstream operated salt water disposal well in service.
In addition to our organic growth investments in early 2019, we partnered with hip to acquire summits tioga oil gas and water gathering systems.
Adding to the acquisitions and JV investments that have some and hip have made over the past couple of years.
Our targeted investments to expand our system footprint combined with consistent and reliable operating performance enabled us to deliver strong volume growth in 2019.
In the fourth quarter of 2019, we completed our volume ramp through the Ellenpore gas plant, albeit at a slower pace than anticipated.
During the quarter, we also progressively backfill TGP, though we did experience minor delays integrating some new third party volumes.
Gas processing volumes averaged 308 million cubic foot per day in the quarter or approximately 90% of nameplate capacity and increase of approximately 20% over the third quarter and 30% over the second quarter, which was prior to the startup of Ellen for.
For full year 2019 gas processing volumes averaged 260 million cubic foot per day, a 12% increase over the prior year.
For our crude oil business fourth quarter 2019 crew Terminalling volumes were 148000 barrels oil per day, a 14% increase over the third quarter, primarily driven by increasing has production as has brought on 59, new wells online in the quarter.
For full year 2019 crude terminalling volumes averaged 131000 barrels oil per day, 30% increase over the prior year.
Water gathering volumes were 50000 barrels of water per day in the fourth quarter of 2019, and 11% increase over the third quarter driven by Hess has grown production and continued expansion of the water system.
For full year 2019 water gathering volumes averaged 100 averaged 41000 barrels of water per day, an increase of 64% increased over prior year.
Now turning to have upstream highlights earlier today has reported fourth quarter 2019 production from the Bakken of 174000 barrels oil equivalent per day, an increase of approximately 38% over the year ago quarter for full year 2019 has not Bakken production averaged 152000 barrels at well look on per day.
Reflecting reflecting the strong performance of the plug and perf completions and the quality of hesse's acreage position.
Before your 2020 Hess forecast block and net production to average approximately 108000 barrels oil equivalent per day or 18% about full year 2019.
In 2020 ethics fixed expects to drill approximately 170 wells and bring online hundred 75 compared to 160 wells drilled in one or 56 wells brought online in 2019.
In the first quarter of 2020.
Yes expects net production to average 170000 barrels oil come per day, reflecting lower activity levels due to seasonally difficult winter weather conditions.
Yes expects to bring online approximately 30, new wells compared to the 59 in the fourth quarter of 2019.
Yes, which has already hedged a substantial portion of its 2020 crude oil production expects to operate six rigs in the Bakken through 2020, and anticipates net production to increase throughout the year approaching 200000 barrels oil equivalent per day by the end of 2020, which is a key driver a volume growth for Hess midstream.
Now turning to Hess midstream guidance Hess Midstream project planning execution in 2019 laid an excellent foundation for another year of strong throughput and financial growth in 2020, driven primarily by the full year of L. them for operations and has just continued production growth.
For 2020 were reaffirming our previously provided guidance.
We expect gas gathering volumes to average between 300, and 310 million cubic foot per day and gas processing volumes average between 285, and 295 million cubic foot per day.
This guidance incorporates the previously announced 45 day TGP maintenance turnaround, which is planned to commence in the third quarter, reducing our annual gas gathering and processing volumes by approximately 30 million cubic foot per day.
First quarter 2020 gas volumes are anticipated be relatively flat compared to fourth quarter 2019, primarily due to seasonal winter weather conditions.
We continue to progress Backfilling TGP and as we integrate incremental third party volumes, we expect to realize further volume growth in the second quarter.
We continue to expect third parties to comprise approximately 30% of our total gas gathering and processing volumes underlying our advantage infrastructure position in the basin.
Turning to our crude oil assets, we anticipate continued growth in 2020, driven by increasing has production and a stable third party outlook for your 2020 crude oil gathering volumes are expected to average between 120 530000 barrels oil per day, an increase of approximately 10% compared to 2019.
And we anticipate crew terminalling volumes to average between 150 in 160000 barrels oil per day, an increase of approximately 18% compared to 2019.
Third party Throughputs are expected to remain at approximately 15% of our total crude oil volumes.
First quarter crude oil volumes are expected to be approximately flat with the fourth quarter, reflecting lower planned activity levels due to seasonal winter weather.
Turning to our water assets, we continue to expand our gathering footprint in 2020, which will bring more volumes into the system as hesse's production grows we anticipate 2020 water gathering volumes to average between 55 and 65000 barrels of water per day, an increase of 46% over full year 2019, demonstrating the growth.
Central hub these assets.
First quarter water volumes are expected to be modestly up from the fourth quarter as we continue our infrastructure buildout.
Before your 2020 volume increases I've described is a key driver to the expected 32% increase in adjusted EBITDA from 2019.
From the midpoint of our 2020 guidance to the midpoint of EUR 2020 guidance.
Looking to the longer term in this mornings press release, we provided or Mbcs for 2022, illustrating implied growth and system Throughputs and our capacity continues to expand.
Turning to has Midstreams capital program, our 2020 capital guidance remains unchanged, comprising approximately $335 million of expansion capital and $15 million a maintenance capital.
We plan to invest approximately $155 million in gas processing, which includes the 150 million cubic foot per day expansion of TGP. This increase will take us midstreams overall block and gas production capacity to 500 million cubic foot per day.
Expansion activities progressed in the fourth quarter of 2019, as we continue to advance civil construction and fabrication activities. We expected began major construction major facility construction in 2020.
The project is on pace to be completed by mid 2021.
In 2020 in 2020, we also plan to invest $60 million and gas compression and $120 million and oil gas and water pipelines and well pad interconnects forecasts and third party customers.
In addition to our capital investment program, we continue to evaluate business development opportunities to further strengthen our portfolio and deliver competitive returns to our shareholders.
In summary for 2020, we continue remain focused on executing our strategy and leveraging the new Hess midstream structure to drive long term sustainable growth I'll now turn the call over to Johnson to review our financial results.
Thanks, John and good afternoon, everyone.
As John described we are proud with the progress we made into 2000 2019 on executing our strategy.
Closing of the H.I.P. acquisition and associate that transaction in the mid December like significant milestone for us and we enter 2020, well positioned for significant adjusted EBIDTA growth and increasing free cash flow generation.
Well, maintaining conservative leverage without the need for funding from the equity capital markets to deliver our current plan.
With the midpoint of our 2020 guidance representing expected increases relative to at 2900 result, a 40% and that income, 32% and adjusted EBITDA and 88% and free cash flow defined as adjusted EBITDA less capital expenditures, we truly have differentiated financial metrics.
That's been team has a track record of shareholder value creation through consistent delivery of our financial metrics.
Since our IPO, we have delivered our targeted 15% annualized growth in our distribution per unit.
As we described will be announced the H.I.P. transaction, we are maintaining our commitment to our targeted 15% annualized distribution per share growth do 2021.
Consistent with that commitment on January 27, we announced our fourth quarter distribution that increased 3.6% quarter on quarter and 15% year on year. The distribution will be paid on February 14th the holders as of the February six record date.
Turning to our results I will compare results from the fourth quarter to that third quarter for comparability and consistent with the closing of the transaction in the fourth quarter.
Oh PPI period results have been restated for the acquisition of each IP.
For the fourth quarter 2019, net income was $75 million compared to $87 million for the third quarter.
Fourth quarter net income included approximately $26 billion of costs related to acquisition of each IP.
Adjusted EBITDA, excluding these transaction costs for the fourth quarter was $158 million compared to $136 million for the third quarter.
The change in adjusted EBITDA relative to the third quarter was primarily attributable to the following.
Total revenues increased by greater than 15% quarter on quarter, including revenues for our gathering segment increased by approximately $14 million, primarily driven by increasing has production.
Revenues for our processing segment increased by approximately $13 million, primarily driven by the ramp up of the l. them for gas processing plant and the continued backfill of TGP.
Had revenues for our Terminalling segment increased by approximately $2 billion, primarily driven by increasing has production.
Total operating expenses, including Gionee, but excluding depreciation amortization pass through and transaction costs were higher decreasing adjusted EBIT up by approximately $6 million, including higher seasonal maintenance activity during the period of approximately $3 million and higher seasonal overhead of approximately 2 billion.
Dollars.
Oh for processing fees net of our proportional share of earnings and depreciation reduced adjusted EBITDA by approximately $1 million.
Resulting in fourth quarter, adjusted EBITDA of $158 million, a 16% increase relative to the third quarter.
Fourth quarter 2019 maintenance capital expenditures were approximately $2 million and that interest excluding amortization of deferred finance cost was $16 million.
The result was that distributable cash flow was approximately $140 million for the fourth quarter 2019 covered our distribution by approximately 1.2 times.
Expansion capital expenditures in the fourth quarter, well hundred $7 million.
At quarter end that was $1.8 billion, representing approximately three times leverage on a 2019 basis.
Turning to our weight recalculation process at the end of 2019, we completed our nomination process with path and update our tariff rates, but 2020 and all four years.
As it far cycles, the nomination process consider changes at actual and forecasted volumes on capex to maintain our contractual targeted return on capital deployed.
<unk> increased 2020, probably bellies, probably covering reduced revenues more volumes and generating incremental revenues on higher Capex. During 2019 as result of the delay and Elm for which we had proactively integrated into our contract structure.
No. It rains release, we have also provide nvcs for the years 2020 to 2022.
But 2022 Nvcs when newly established providing line of sight to potential long term growth in system throughput.
For example, I 2022, nbcs the gas processing imply an approximate 18% annualized growth rate and dominated volumes fell by actual 2019 volumes.
Together with our gas gathering volumes. These gas assets comprise approximately 70% of our revenues are up our updated mbcs provides a solid baseline to a volume growth and are a key indicator of our financial strength beyond 2021.
Turning to 2020 in the first quarter, we expect net income to be approximately $110 million to $120 million and adjusted EBITDA to be approximately $175 million to $185 million, an approximate 14% increasing EBITDA at the midpoint relative to the fourth quarter.
First quarter maintenance capital expenditures and net interest excluding amortization of deferred finance costs expected to be approximately $30 million, resulting in expected DCF of approximately $145 million to $155 million living distribution coverage at the midpoint of the range of approximately 1.2 type.
Yes.
Relative to our fourth quarter 20 that he results.
Back to increase and adjusted EBITDA is primarily driven by higher attach rates and seasonally lower opex.
Looking through the rest of 2020, we expect to achieve our 15% distribution growth target was approximately 1.2 times distribution coverage with approximately 85% of our expected remedies protected by Nbcs add maintained adjusted EBITDA margin consistent with our historical margin of greater than 75%.
As John described we anticipate commencing a beat that try to buy the TGP and the third quarter.
Which time, we will incur a higher operating expenses I made this capital.
The lower volumes and revenues, resulting in lower distribution coverage during the period of the talking about.
The turnaround is expected to last 45 days has been fully incorporated into our 2020 volume and financial guidance already.
As a reminder has that you will receive MVC payments during the tournament.
The 2020 overall, we are reaffirming our financial guidance full year net income is expected to be in the range a 440 $480 billion.
Adjusted EBITDA is expected to be in the range of $710 billion to $750 billion, which represented at the midpoint and approximate 32% increase over our 2019 results.
This annual EBITDA increase is primarily driven by higher annual volumes and nbcs as well as higher tariff rates driven by the annual inflation escalator and the weight redetermination process offset by higher Opex, primarily from the plan TGP turnarounds.
Maintenance capital and cash interests are projected to total approximately $110 billion for the full year 2020.
Distributable cash flow for 20, and 20 is expected to be the wage of $600 billion to $640 billion.
Putting it all together, we are well positioned but continued and sustainable growth compared to 29 to result, or 2020 guidance represents expected increases a 45% net income, 32% and adjusted EBITDA at 88% and free cash flow.
Even with our continued gas processing and compression investments, we expect free cash flow of approximately $280 million at the midpoint of our 2020 adjusted EBITDA Capex guidance.
Looking forward to 2021, we expect approximately 25% annualized growth in adjusted EBIDTA relative to 2019 at approximately 75% free cash flow conversion funding, both our expansion capex and distribution with DCF.
Longer term our updated Nbcs highlight the continued organic growth we expect to continue in 2022.
After this into a structure that is more attractive for broad investor participation and then highlights has midstreams unique proposition of industry leading growth.
First in class contract structure strong free cash flow generation and conservative balance sheet.
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 a question. Please press star followed by one on your phone is your question has been answered or you would like to withdraw your question press the pound key.
Questions will be taken in the order received please press star one to begin.
Your first question comes from the line of sales Stuart's from Scotiabank. Please proceed.
Good morning, guys appreciate the a the commentary and the the update on the 2022 Nvcs.
I Wonder if we could start off with kind of the 120 million and ongoing or sustaining capex that you all identified kind of in the 2020 budget as you look out to 2021 and 2022, you know as Hess you know starts to ramp down activity and then kind of get into.
To that maintenance mode, how do you see.
That bucket of Capex trending kind of in the outer years is it declined materially or does that kind of sustain in that kind of $120 million range.
Yeah. So I think the way to think about a one way in terms of expansion capital going forward is that as we look forward will be wrapping up the compression expansion projects and TGP expansion, primarily completed in 2020 and into 2021.
So then based on that we'll be able to achieve our growth targets based on lower ongoing capital, which is basically the think of that 120, which has had some third party interconnects, representing our ongoing capital together with you know if you look at this year maintenance capital a 50 million that gets you. The total ongoing capital of about $135 million, Philadelphia, giving a specific.
But certainly if you look historically you know our ongoing capital has been together with a maintenance in that kind of range for comparison, our annual depreciation has been approximately $150 million. So that's also consistent with that level of ongoing capex. You can kind of think of that level, where we are kind of going for looking at that bucket plus.
Maintenance and it's only comparing it to our depreciation gives us some feel of what we expect going forward.
Great appreciate the commentary there and then I'm on TGP.
Do you have an estimate of.
How much capex that project will.
Include for 2021 understanding there's still a lot of moving pieces, there, but just kind of curious if you can identify how much.
Capex there is associated with that project Kinda currently plan for 2021.
Yes, so we're not providing any any real direction on 2021 capex for the expansion, but significant portion of the facility construction work will will be completed this year with some activities continuing into 2021, I would say them to real amount of spend for the project will be a primary.
Early in 2020, but there will be some residual spend and 2021 as we as we kind of wrap up activities.
Okay, great that makes sense.
No wonder if we could maybe step back a bit and talking about kind of the distribution policy post 2021, obviously you know you all have laid out.
Good plan of 15% I'm kind of annual growth through 2021, but just kind of thinking 2022 and beyond you know assuming no major third party acquisitions, how should we think about what the governors are to distribution growth.
Kind of beyond 2021, I'm thinking about it in terms of obviously understanding that you guys probably want to maintain a 1.2 times distribution coverage at least 1.2 times.
But also in terms of leverage I guess as I look at it seems like net debt to EBITDA is gonna be improving kind of throughout 2021 kind of maybe getting close to that 2.5 times range is that 2.5 times range kind of a comfortable spot for you all longer term as we think.
About potential governors too.
Distribution growth I know you've set the three times target, but just kind of curious.
How you guys are thinking about things longer term.
Sure. So as we look at how we've always that our distribution growth that's been a level that we can deliver consistently and you know with the transaction I knew platform that isn't changing.
So our 2022.
EPS growth will be the level, that's consistent with both organic growth and all saw financial targets a metrics, including the ones you mentioned starting on the again. It goes thought if you look at a nbcs. They provide some transparency to our organic growth there with the gas volumes, which represent 70% of our revenues growing approximately 15% from 2020.
I want to 20 to 22.
We'll also be consistent as you said with our fans on metrics, including gas the 1.2 times coverage and our targeted three times leverage target, even though we will be.
You know naturally de levering absent additional opportunities certainly that provides us a flex I'd like to do additional investments as we've talked about so with our assets being extremely castle generated and the ability to we expect to really be able to as I mentioned to fund our capex and distributions with DCF by 2021 left significant financial flexibility.
But we're also going to remain disciplined to set our distribution growth relative to organic growth and also to our financial targets and that's the approach we've taken historically and that's what you should expect I suddenly going forward as we got close to 2022, obviously, we'll provide more details but in terms of frameworks of thinking about how we're thinking about it it'll be using that plans for flexible.
But also we make discipline to our organic growth and offensive metric.
Okay, Great and then I guess, one last quick one for me.
You know obviously with the turnaround in Threeq you have this year.
When do we think about Fourq, you kind of gas gathering and processing volumes will those kind of be able to ramp back up to similar levels to maybe twoq you 20.
Or will there be you know kind of a us a slower ramp process. So I guess in Fourq, you coming off of the turnaround in Threeq you.
No I would say there they'll definitely be a ramp up I think there's a natural process the bringing the the system backup and kind of working through all of that but the big available gas is already there. So we would expect to see the volume to come into the system fairly quickly, but again, we want to be a bit cautious here and make sure that we do at the right way.
It's a big project for us to actually do the turnaround and then also to tie in some critical aspects of the a of the overall expansion.
So I would say that we will definitely see a ramp post Ah de bottlenecking and turnaround, but that that ramp will really be kind of primarily done in the third quarter, but there could be a little bit of impact and fourth. So I think we'll just we'll cautiously look at it and as we get closer to the actual turnaround time.
We will provide a little bit more transparency into that.
Alright, great. Thanks, guys. That's it for me.
Thank you.
Thank you I'm next question comes from Jeremy Tonet from JP Morgan. Please go ahead.
Good afternoon, guys. This is it all on foot Jeremy Oh, It's a one quick question here is there anywhere to be called the 25 plus sounds like why every capital between the volume from the fee uplift all unlike some more granularity on the today, but it got to listen all on what started by what's your thought the good.
It would be appreciated thank you.
And just so basically you're asking for full year, Oh, well going from 19 to 20 right yeah Yeah.
Yeah, so that that increase is about 32% your idea to.
To the midpoint, primarily two thirds of that is actually volume growth, that's coming from organic gaslight growth and gas processing as we have now elm for online they continue to backfill TGP well, so organic well growth has has continued to ramp up production towards the 200000 Boe per day.
We also have a higher nbcs, which have increased as the development plan that shifted and particularly with the turn of I'll provide some SBC revenue there as well divested the increase is really increase tariff rates as you mentioned offset by higher annual cost.
Increased half rates are really driven by revenue recovery from a volume and we turn on the incremental capital that we spent the 2019 from the delay in Elam for and therefore, the rate went up as part of the weight Redetermination process at the end of the year.
So the annual inflation escalated, which has an impact on increased rates and then that's offset by higher opex, which particularly primarily driven by just the turnaround cost that we expect during the year.
Understood. Okay. That's helpful color. Thanks, guys.
Thank you.
Our next question comes from Spyros Donis from Credit Suisse. Please go ahead.
Hey, this is stuck or went on for Spiro. Thanks for the question just real quick on the 2022, M.D.C. I guess kind of on its face the crude numbers imply a decline.
And I appreciate it based on a a different per cent of the nomination versus 2021, but can you maybe just help us think about it on an apples to apples basis and kind of what that means for crude drew longer term.
So yeah, so let's talk about how the Nvcs again as I mentioned in the script Nvcs provides a line of sight to could have grown so I'll give you. The mechanics and then John can talk about kind of bought volume growth and some of the drivers. So in general that 2021, Nbcs you know as as we as you mentioned does it not press released approximately 25% or higher.
It's also the contract mechanics that set the mbcs higher but they can't go lower so, particularly with the oil gathering nbcs, that's the sum of multiple sub systems.
So with the 2021, M.B.C. above 85% compared to 2022 NBC.
Well gathering volumes will be approximately flat year on year.
The other side on gas processing and gathering Nvcs. The 22, I do Mbcs would imply continued growth as you complete the TGP expansion I guess I mentioned the gas line growth, which is 70% of our revenues from 20 to 21 to 2022 is about 15%. So all of our business is really will be looking as we look forward mbcs really imply that got that weve.
Talked about all support of course by a the free cash flow positive free cash flow generation that we've talked about an ability to completely funded our capex and distribution. So you know relative to those metrics are really on the mbcs provide visibility to that you know really in a very differentiated position in terms of our long term outlook and unique platform that we have.
Yeah, and I would just a build on jonathan's point there I think just one thing to look at gas versus oil gas you you have to get it in pipe I mean, there's flaring constraints in the basin and so you've got to get it and pipe and so that's been a priority for producers in the basin and also other midstream companies providing services to producers. So that's how does a loud.
To capture more third party volumes and we'll actually be the things that will help us fill TGP going going long term.
On the oil side and on the gas just a reminder, that approximately 30% of our of our gas system is third parties on the oil side or 30% or sorry third parties represent about 15% of our of our total crude oil system. So there's definitely some run room there on the on the third party side to capture additional additional oil opportunity.
There's still a focus on getting more barrels off trucks and into the gathering system and then obviously with our flexible export options and we got the we've got the terminal North The River, we got the rail terminal and the we got the terminal south or wherever we essentially can access all markets from accrued perspective, and so we see that is a differentiator for us in the basin at.
We attract more crude volumes third party crude volumes into our gathering and Terminaling system. So while right now, we're we're saying that the the numbers kind about that 15%, we see we see some potential growth opportunities there for us.
Got it great. That's all for me thanks.
Thank you.
Thank you. Thank you ladies and gentlemen for attending this concludes the queuing they portion and today's conference. Thank you for participation you may now disconnect.
Have a great Dan.