Q2 2020 Hess Midstream Operations LP Earnings Call

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I don't like to turn the conference over to Jennifer Gough Vice President Investor Relations. Please proceed.

Thank you Andrew Good afternoon, everyone and thank you for participating in our second 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 so we're 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 factor section of Hess midstream filings with the FCC.

Also on today's conference call, we may discuss certain non-GAAP financial measures 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, Incompliance with social distancing protocols as a result of covert 19th we are conducting the call remotely. So please bear with us in case, there audio issues, we will be posting trends.

Scripts of each speaker's prepared remarks on www Dot Hess midstream dotcom following their presentations I'll now turn the call over to John Gossling.

Thanks, Jennifer good afternoon, everyone and welcome to Hess Midstream second quarter 2020 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 block.

Jonathan will then review our financial results.

To begin with the results for the second quarter 2020, despite a volatile environment today, we're announcing that we exceeded our second quarter earnings guidance lowered expenses and raised our 2020 operational and financial guidance.

Additionally, we are reaffirming our 2021 guidance, including adjusted EBITDA growth of 25% compared to full year 2020, any targeted annual distribution growth per share a 5%.

Our second quarter results reflect strong market performance led by Hess Corporation, which drove our throughput above expectations and contributed to Hess midstream exceeding second quarter adjusted EBITDA guidance.

For the second quarter 2020 gas processing volumes averaged 289 million cubic foot per day decrease up 10% compared to first quarter and crude terminalling volumes were 144000 barrels oil per day, a 12% decrease compared to first quarter.

Both decreases were primarily driven by lower third party fruit patch, which was inline with our expectations and guidance.

Water gathering volumes averaged 66000 barrels of water per day in the second quarter 20, Twond, a 22% increase compared to the first quarter.

As we continue to capture incremental trucked water into our expanding gathering system.

Third parties contributed approximately 11% of our gas and 8% about oil volumes in the second quarter, consistent with our guidance and expectations at the midpoint of the range.

Now turning to have upstream highlights earlier today has reported strong second quarter production results capitalizing on the success of the plug and perf completion design and mild weather conditions.

Second quarter backing up production averaged 194000 barrels roller cone per day, an increase of 39% from the year ago core and above guidance of approximately 185000 barrels all of whom a per day.

Additionally, test was able to avoid production curtailments in the first half a 2020 by leveraging Hess midstream pipeline and rail terminal system, which provides significant export capacity and optionality, north and south of misery wherever two key markets throughout the United States, including deliveries to load has chartered very large.

Crude carriers.

For the full year 2020 has now forecast Bakken production to average approximately 185000 barrels all income per day.

Up from previous guidance of 175000 barrels oil equivalent per day.

Turning to Hess midstream Guy.

As announced earlier this month, the safety of our workforce and the communities, where we operate is our top priority and as such the planned maintenance turnaround for the Tioga gas plant originally scheduled for the third quarter of 2020, well be deferred until 2021 to ensure safe and timely execution in light of the cobot 19 pandemic.

The turnaround preparation activities undertaken to date positions us well to complete the work and 2021.

We continue to progress the expansion of the token gas plant with the project now well advanced and facility construction expected to be completed as previously announced by the end of 2020.

Incremental gas processing capacity is expected to be available in 2021 upon completion of the turnaround during which time be expanded plant and residue and natural gas liquids takeaway pipelines will be tied in.

As a result of the turnaround deferral, which removes previously planned downtime from our forecast.

We have updated our full year gas throughput guidance, we now expect gas processing volumes to averaged 275 to 285 million cubic foot per day for the full year 2020, an increase of 12% at the midpoint compared to previous guidance.

Our complete financial and operational guidance is available on our earnings release that was distributed this morning.

For the balance of 2020, we continue to expect the majority of our systems to operate close to our below MBC levels. The low end of our updated full year volume guidance continues to reflect a conservative assumption that Hess midstream will effectively received zero third party volumes for the remainder 2020.

While we do not anticipate this being the most likely outcome. This downside scenario demonstrates the strength of our contract structure with Hess Corporation, which allows us to continue to deliver our target is 5% annual distribution per share growth in 2020 with the coverage of approximately 1.2 times.

For the third quarter, we expect lower throughputs relative to the second quarter as test volumes decline due to the reduction operated rig count and lower third party volumes as producer curtailments persist.

Consistent with the midpoint of our third quarter financial guidance, we expect gas processing volumes to be approximately 10% lower than the second quarter with both crude oil terminaling and water gathering volumes expected to be approximately 5% lower compared to the second quarter.

Again, with all systems operating close to our blow NBC levels minimizing further throughput downside.

Turning to Hess Midstreams capital program, we've updated our full year capital guidance to $260 million, a reduction of 15 million from previous guidance.

Primarily to reflect the deferral of the turnaround and final tie in work on the Tioga gas plant expansion project.

Full year 2020 expansion capital is expected to be $250 million, comprising approximately 135 million in gas processing 20 million in gas compression and 95 million in gathering and well pad interconnects.

Maintenance capital has been reduced to approximately $10 million as a result of the TGP turnaround deferral.

In summary, we are well positioned to meet the challenges of 2020 M. beyond we continued to deliver a level of visibility uncertainty as the result of our contract structure, which provides nbcs for approximately 97% of projected revenues for the second half of the year.

This underpins our updated 2020, adjusted EBITDA guidance range of $690 million to $710 million, which has been narrowed and increased.

Additionally, looking for four to 2021, we expect to grow adjusted EBITDA by 25% relative to full year 2020, with approximately 95% NBC protection.

Demonstrating hess midstreams resilience to weather current market conditions and continue to deliver strong operational and financial performance in 2020 and for the long term.

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 remain our top priority.

Ill now turn the call over to Jonathan to review our financial results.

Thanks, John and good afternoon, everyone. As John described we're pleased with the progress we have made in the first half of Twentytwenty continuing to deliver strong result against the backdrop of an uncertain macro environment and further emphasizing how both our contract structure and financial strength differentiate our business.

Model.

Our second quarter results again beat our quarterly guidance add in combination with lower than anticipated cost this year due to the deferral of the TGP turnaround.

Allowed us to read our full year 2020 financial guidance.

We are increasing our full year 2020, net income guided to be in the range of 425 to 445 billion dollar.

Adjusted EBITDA is expected to be in the range of 690 $710 million, representing approximately 25% growth compared to full year 2019 result.

We still expect to maintain approximately 75% EBITDA margin in 2020, consistent with our historical margin.

Maintenance capital and cash interests are projected to total approximately $100 million for the full year 2020, and distributable cash flow is expected to be in the range of $590 million to $610 million, resulting in expected distribution coverage of approximately 1.2 time.

Expect to end the year with leverage at well below our conservative three times adjusted EBITDA leverage target.

Our 2020 adjusted EBITDA guidance includes approximately 97% of our revenues protected by Nbcs, the second half of the year.

Highlighting our stability the lower end of our 2020 guiding conservatively assume there or third party volumes for the balance I'm 2020, well still providing distribution coverage of approximately 1.2 time.

Our strong contract structure and financial strength and enable us to provide visibility ability to afford trajectory through 2022.

Supported by downside protection and cash flow stability mechanisms in our contract even with the deferral of the TGP try them out we continue to expect approximately 25% adjusted EBITDA growth in 2021 compared to full year 2020.

In both 2021 add 2022, we also expect approximately $750 million a free cash flow defined as adjusted EBITDA less capex that includes approximately 95% of our revenues protected by NBC sufficient perhaps energy to be free cash flow positive after funding.

<unk> expense and growing distribution, while maintaining distribution coverage of approximately 1.4 time without the need for any incremental debt or equity.

Turning to our results compared result from the second quarter to the fourth quarter.

The second quarter net income was $108 million compared to $129 million for the first quarter adjusted EBITDA for the second quarter was $173 billion compared to $195 billion for the first quarter.

The change in adjusted EBITDA relative to the first quarter was primarily attributable to the falling.

Total revenues decreased by $18 million, driven by lower half and third party production, including a decrease in processing revenues of approximately $10 million.

Decrease in gathering revenues of approximately $4 million and a decrease in termination revenues of approximately $4 million.

Total operating expenses, including GE, they exclude depreciation and amortization and pass through costs were higher decreasing adjusted EBITDA by approximately $4 billion, including seasonally higher maintenance and operating costs of approximately $5 million higher costs associated with the TGP turnaround of approximately.

$3 million.

Offset by lower general and administrative expenses of approximately $4 million.

Resulting in second quarter, adjusted EBITDA of $173 million exceeding the top end of our guidance range by approximately $3 million due to higher than expected volume and well operating costs due to the deferral of certain maintenance activity to the third quarter.

Second quarter maintenance capital expenditures were approximately $1 million and that it drift excluding amortization of deferred finance costs was $22 million.

The result was that distributable cash flow was approximately $150 billion for the second quarter covered our distribution by approximately 1.2 times.

On July 27, we announced our second quarter distribution that increased 5% on an annualized pizza.

Expansion capital expenditures in the second quarter were $78 million.

At quarter end that was approximately 1.8 billion dollar representing leverage of approximately three times adjusted EBITDA on a trailing 12 month basis.

Turning to guidance for the balance of the here in the third quarter of 2020, we expect net income to be approximately 90 to 100 million dollar and adjusted EBITDA to be approximately $155 million to $165 million.

Third quarter maintenance capital expenditure and that it's right.

Well the amortization of deferred finance costs are expected to be approximately $25 million, resulting in expected distributable cash flow of approximately 130 $240 million.

Delivering distribution coverage of approximately 1.1 time with approximately 97% a projected revenue protected by NBC.

Our third quarter guidance include updated cost based on the deferral of the TGP turnaround, which reduces expected operating costs by approximately $12 million and maintenance capital by approximately $8 billion.

We expect to spend approximately $8 million across operating costs and maintenance capital relate to the turnaround in the third quarter, including work completed before the deferral demobilization of the workforce and preservation of material. In addition, the third quarter guidance includes higher seasonal maintenance activity that together with low.

Our expected volume as our throughput decreased two NBC level increases expected adjusted EBITDA by $5 million to $10 million relative to the second quarter.

In the fourth quarter with expected revenue at MDC level and seasonally low operating costs, we expect distribution coverage to be approximately 1.2 time with revenues that continued to be approximately 97% protected by NBC.

Even in periods of great uncertainty the strength of our business model it's clear.

Revenues southern approximately 95% protected by NBC for the next two and a half year <unk>, leading termination mechanism. There just a rate the changes in volume and capital we have differentiated visibility to our financial metrics, including approximately 25% adjusted EBITDA growth in 2020 AD.

2021.

Derivative leverage up three times, adjusted EBITDA or less.

<unk> per share at target the increased 5% annually and expected free cash flow of $750 million in 2021, and 2020 to 2022.

This concludes my remarks, we'll be happy to answer any questions all know trying to call over to the operator.

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Questions will be taken in the order diversity.

Please press one to begin.

Your first question comes the line of Jeremy told me with JP Morgan.

[noise] ER, Rockland ice or disease Vinay on for Tammy I just wanted to click here does up on your EBITDA guidance fluctuate Wendy Yang 21, a bit on was approximately 70 million every dollar getting the books dog to hedge guidance seems to me when he got so they do.

I understand you guys have assumed is deal zito taught by good Williams assumption for the balance will feel like they always so seen approximately 11 bus and gossiping dual fuel vandeven notice that curtailments as one good to talk about like they do it on upsides or at least for the EBITDA guidance YOD.

And just talk about what are the moving pieces why you have assumed a regulatory body wasn't assumption even after seeing it out of a comedy and lock in production since two Q.

Yes, maybe maybe I'll start off with just addressed in the third parties and I'll hand, it over to Jonathan to address the financial aspects of it. So yeah. We had a very strong first quarter and even continued into our second quarter from a third parties perspective.

You know we averaged about 11% in in the in the second quarter I'm looking at our guidance right now the low end of our guidance has third parties approximately zero.

And the midpoint of our guidance has about 5% in there and the ups. The upper end has about 10%.

From our perspective, it really depends on what the producers are doing and were again trying to.

Take up a very conservative look at this and that's that's kind of what you're seeing with our guidance.

As it as it relates to that but just just a reminder, I mean, the third party producers there already hooked up to our system when they bring that volume on it will be available to us and we'll have the capacity the system capacity to handle it. So really we just wanted to kind of leave that lead that open for the for the producers as me as.

They bring additional volumes and so with that I'll hand, it over to Jonathan to address the financial side of that.

Sure I think John So let me to start we go through the drivers of the change in our guidance and then I can talk about how changes that would work. So in terms of if you look at the top end of our guidance change, we increase up by $10 million a the drivers of dot were a strong second quarter, so that was $3 million above the.

Upper end of our guidance, we defer the TGP turnaround that we do so opex by $12 million, we did add back some project into Q3 with into for all the turnaround that gives an opportunity now to do projects that we seasonally we typically do in Q3. So we added that back that part of the Q3 are there.

Talking about together with the revenue decline I've talked about $5 million to $10 million decrease was due to the Q3 two additional projects are included within that.

Terms of upside to that I mean, I think what I would highlight birth is that we are now out or below NBC that provide that 97% protection. The rest of the year, except the volumes come back a quest for us will have to get above the M. B C level fourth in order. It before we would see any upside and then we would see upside as those volumes come about.

M.B.C. I think critically even with the deferral and cost that we have this year into next year I think it's important that with the going through the rest is yeah, we have the 97% and with your production, but then that does lead to the 25% increase in EBITDA going into 2021, which supports our free cash flow of $750 million.

Yeah, that's even with the deferral costs in 2021, so a number moving pieces there potentially some upside but of course, we have to MVC levels love to get above and be seats for the upside to occur and that really sets. The seeds for continued growth into 2021.

<unk> cutting guys. Thanks, thanks for that but Oh, I mean, I just wanted to touch upon dad under 2021 guidance as when so couple of things how one of the base all screen to do any EBITDA guidance looks to be upside. So if he has given that all kind of guide of 700 million 710, and then they didn't Tonight.

Addition has all bags and demand and coming up in one or any way to anyone. That's another 10 to 15 million looks like it's some how much you see effect from your previous guidance and taken to 2021.

So did you say mode like all nautical upside that I didn't used to the L. formed all your 20 point if I wasn't every died when you're talking about what's actually driving the upside on the guidance YOD Oh, it from an increase to beef and also an increased opex site.

Yeah sure. So as you look to 2021, I mean does the judge the numbers, we deferred $20 million them Opex and maintenance capex gather across both Oh from 2020 for the turn around.

We had spent $12 million this year I would expect to fund future went you threw out the turn around some of that work will be preserve but something that will lead some ramp up costs. John talked about also some expansion capital that was the fortunately for the tie into the TGP expansion I thought $7 million that will occur at the time of the.

Of the tightening up the turnaround will occur at that same time, so that let's call it $20 million to $35 million an outside of work I'm costs on a going into 2021, but as we said and as you highlight was still thing we can how about 25% EBITDA growth going forward and well give more detail as we get closer we give our 2021 guy but clearly.

There will be some increase in decreases in underlying elements as we get closer certainly what we just talked about is a decrease to that the EBITDA and free cash flow. But then we are things like for example, our if you look at our interconnect capex of 2020 that that $95 million right. Now it's only we expect the left drilling and 21, so you could see dot.

And something that will go down. So there you know really a number of ins and outs at this point well gonna give more details we got closer, but certainly and a lot of this as well we have the we thought it would your cards that we ended the year that will take into account any increased cost incremental costs that are above the plan on a total basis. When you put all that together that's still supports our 20.

5% EBIT growth together with the fact that I'd be fees are going up that supports the revenue just on NBC business alone and then that really supports and $750 million a free cash flow that we have sufficient to fund our distribution next year without any incremental debt. So no change therefore to our EBITDA growth, our free cash flow metrics and that's true.

Got it thanks, guys. Thanks, very Ah thanks, very much a sort of for all against that I just want to click here to us up on they actually have debt. So you guys have subordinates 750 million of at sea activating and Clayton when you want on 22 I'm looking at you wouldn't you will have its substantial guys feel even after you all distributions Oh this one.

Do I understand your capital allocation strategy, a if you would have been looking at increased buybacks or at all if you wouldn't be looking I'd any or any smaller sites in the M&A side, how do I wouldn't think about it got that allocation tied to do that.

Yeah, maybe let me start off with you on the M&A side, and then I'll handover to Jonathan So I mean, I think what we said is we want to be very focused on our acquisitions. You know Bakken is our priority continues to be our priority to support growth has some third parties in particular, we're looking for opportunities to strengthen our footprint through bolt.

On acquisitions and kind of working through that so I would say, there's there's theres definitely opportunity for us to continue to grow and then as we've talked about before we also have you know the Gulf of Mexico assets has has Gulf next question. It's that would would would be an entry point for us potentially to enter a new basin through through it through that.

Relationship so from from our perspective, we do see some opportunity to deploy capital from an M&A perspective, but again, we have the luxury of being very selective with that we've got growth ahead of us even with without those acquisitions. So that there are opportunities for us to continue to strengthen our our asset base, but again.

It really needs to be focused and smart and make a lot of sense for how we do things in addition.

As we look at other you know other basins like Gulf of Mexico. As an example, yeah. We would continue to look to build on that the contractual structured we've got in place for the Bakken assets and would look to to do something very similar there. So again I think our we've got a very defined specific focused strategy around around or actually.

Addition targets and we're fortunate that we really don't have to chased acquisitions that we've got growth kind of built them. So so with that Jonathan do you want to talk a little bit about the financial side.

Yeah. Thanks, I think really only I would just added just echoing of course, John what John said that will be contributed very disciplined that or whatever the opportunity is our focus is on being you know using that free cash flow actually that we have after dividends and making sure we stay with our conservative leverage target at three times.

And then you know whatever financial flexibility, we have a absent opportunities as John said and disciplined basis. Then of course, yeah, we try to capital to shareholders is on the table, including buybacks no buyback for us given our fleet would be from the sponsor, but that would be very accretive opportunities for all of our shareholder. So certainly again, we'll remain disciplined but.

Certainly look at those opportunities as they come.

Thanks, guys odd that's it for me again, congrats on the good Florida.

Thank you very much.

[noise]. Thank you.

Your next question comes with a lot of steel duties with credit Suisse.

Hey afternoon, everyone I'm, just a follow up on that last question there around M&A and John you mentioned Gulf of Mexico, I know prior to covert hitting it sounded like you guys are getting fairly close to doing something there sounds like something we're spending a lot of time on.

I think since then that that's been tables a bit just curious do you have enough visibility now that you feel you can maybe pick up the pencils, there and do a little more work and to what degree is the election factoring into it really any strategic decisions at this point.

Yes, no. Thanks for the question and there I think both aspects of our good you know, we really never put the pencil down I mean, obviously with covance hitting in some of the.

Economic environment impact you know that that obviously changed a little bit of direction.

But we continue to see high quality assets in the Gulf of Mexico, I think has done a great job building assets that are our death.

Focus for Green for any midstream opportunities I think from from our perspective, we're we're obviously a a natural owner of those assets longer term. So I think we continue to evaluate that and look at that so that those you know we're still very excited about that and something we're focused on.

The political dynamic is definitely something that we have to look at and I understand.

But again I think hesse's has done a good job managing the assets I, we wouldn't anticipate there being any regardless of which administration is basically a making the decisions. We feel like we got some high quality assets there, they're well operated we know we're getting into where well established in the guy.

Our house is well established in the Gulf and I think we can continue to leverage that operational excellence just like we've done on the midstream.

In North Dakota, do that that same replicate that same model in the in the Gulf of Mexico. So from from our perspective, we see it is continuing to be a you know a good option for us and something that we're definitely continue to look out.

Great. That's a that's helpful.

Question also a follow up on on a previous one.

No you guys, obviously being conservative here in the guidance, but just sort of moving that aside could you just maybe give us some specifics around some of the discussion.

Because the customers one of your peers in the Bakken was on earlier alluding to I guess, some completion crews coming back pretty substantial DUC inventory. The fact that the current crude price environment because enough that the very least return shut ins to production out of course. The next question is when the rigs actually return to the basin just curious why.

Your discussions have been like with producers and now that's influencing your view.

Sure Yeah, no. We continue to maintain very very good relationships with all of our customers I mean, obviously password pre integrated and with Hess, but also the other producers in the basin. You know we have seen I mean, as you look at and I'm sure you guys look into two but as you look at the the weekly rig count its plus one minor.

Plus one minus one it's kind of bouncing around in that.

Just above the you know double digits, there and so we're continuing to monitor that and we do see some additional activity on the completion side.

The previously curtailed production is coming back on.

And we are seeing that across the basin, but but it really kind of its regional based and so where the producers are that they're they're bringing on production affects how the gathering systems are are set up so so from our perspective you know we just it's it's really unpredictable at the moment, we are seeing some impact.

I've been in prices and we are seeing some additional activity, but we just felt like the uncertainty around what the producers were going to ultimately do.

Just we just felt like the guidance range and offsetting the targets that we did made up made a lot of sense again as I mentioned previously I do think there is a there's opportunity there just because we've got pipe in place. We've got we've got capacity and we're already connected to those customers. So as they make the decisions to bring up the bring that production back online.

Line.

We're well positioned to capture and bring it into our system and I just do it again reiterate what Jonathan mentioned does and I do think it's an important point as you know in a lot of our systems were either worry the below or at near Nbcs. So again because of that kind of regional nature of our gathering system and how that's all set up.

You know really depends on where we are as it relates to our two R&D sea level. So so that'll be something that plays into that and all of those things are the things we considered as we as we established our guidance range.

Going into the balance of the year and also looking at 2021.

Got it.

Sorry, Yeah, no I, just going to say I know of Jonathan If you wanted out in Japan.

No no feel good.

Yeah, I know last one is the the obligatory dapple shutdown question. Just curious how you guys are thinking about that potential isn't an opportunity or a threat for yet any thoughts on that would be I appreciate it.

Yeah, I mean look the DAPL uncertainty and I think has addressed it in their call earlier you know obviously has is continuing to ship on dapple, we're monitoring or Hess is monitoring.

The decisions at the court went to stay.

So that's obviously playing into it but you know we've really been not that we've been planning for this specific event, but we've been planning for significant flexibility and capacity and optionality for all of our customers.

Both south of the Missouri River, North of Missouri River pipe terminals rail terminals.

We kept our rail terminal active throughout the entire operation from the time, we started it up to two now.

And I think it's really set us in a strong position that we can continue to provide reliable export support to both tests and third parties. So I definitely think that we differentiate ourselves with having high quality assets that have tremendous flexibility and ability to export crude pretty much anywhere in the United States So for from.

Our perspective, while you know if the dapple line was to be shut in that would create some some potential incremental costs for Hess.

As as John mentioned earlier on the call today.

We have tremendous flexibility to to get has to market pretty much anywhere they want to go and ultimately Ken can minimize that additional cost structure through our advantage infrastructure.

Perfect. Thanks for the time today, guys do well, but okay. Thank you you too.

Thank you all very much. This concludes todays conference. Thank you for your participation you may now disconnect.

Great day.

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