Q1 2021 Hess Midstream LP Earnings Call
Good day, ladies and gentlemen, and welcome to the first quarter 2021 Hess Midstream conference call. My name is Andrew and I'll be your operator for today.
At this time all participants are in a listen only mode. Later, we will conduct a question and answer session and ease of.
But any time you require operator assistance. Please press star followed by zero and we will be happy to assist you.
As a reminder, this conference is being recorded for replay purposes.
I would now like to turn the conference over to Jennifer Gordon Vice President of Investor Relations. Please proceed.
Thank you Andrew Good afternoon, everyone and thank you for participating in our first 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 the risk factors section of Hess midstream is filing the S E T.
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's prepared remarks on www Dot Hess midstream dotcom following their presentations.
Now I'll turn the call over to John Gatling.
Thanks, Jennifer good afternoon, everyone and welcome to Hess Midstream first quarter 2021 conference call.
Today I'll review, our operating performance and highlights as we continued to deliver our strategy and discuss Hess Corporation's latest results and outlook for the Bakken.
Jonathan will then review our financial results.
We're pleased with the progress we're making on executing our strategy and we're excited about the stable and visible earnings growth ahead of us.
Over the past 24 months Hess midstream has undertaken a strategic effort to increase our gas capture capability by expanding our gas compression and processing capacity. This.
This year, we expect to progress construction of two new Greenfield compressor stations, which went online in 2022 will meaningfully expand our gas compression capacity by another 20%.
In addition, the final tie ins of the Toyota of gas plant expansion will increase our processing capacity and solidly position us to capture incremental volumes as we support Hess and third party customers meet north Dakota's tightening flare reduction targets.
Our contract complements our strategic asset base and provides resilience and stability to our financial performance as demonstrated by the strong financial results. We delivered in the first quarter. Despite the challenges of the last year.
And further supports our 2021 said EBITDA guidance, which is underpinned by 95% revenue protection.
Now turning to Hess midstream first quarter 2021 performance throughput and operating results in the first quarter were in line with expectations, though adverse weather did impact operations in February.
For some planned maintenance activities pushing into the second quarter.
First quarter got gas processing volumes averaged 302 million cubic foot per day crude terminalling volumes were 125000 barrels of oil per day and water gathering volumes averaged 70000 barrels of water per day.
Third parties contributed approximately 10% of our gas and 15% of our oil volumes in the first quarter consistent with the fourth quarter and in line with our guidance.
Now turning to Hess upstream highlights.
Earlier today Hess reported first quarter production results in the Bakken production averaged 158000 barrels of oil equivalent per day as.
As previously announced Hess added a second operated drilling rig to the Bakken in February.
For for year, 2021 Hess forecast Bakken net production to average between 155 and 160000 barrels of oil equivalent per day reduced from previous guidance of 170000 barrels of oil equivalent per day per.
Primarily driven by lower NGL volumes received by Hess under percentage of proceeds contracts or pop.
And the previously announced sale of non strategic Bakken acreage.
Pop volumes relate to the recovery of non operated processing fees directly received by Hess and does not impact Hess midstream throughput.
Furthermore, the acreage has agreed to sell is not being or plan to be gathered by Hess midstream.
Hess expects Bakken net production to build in the second half of 2021 and exit the year between 170, and 175000 barrels of oil equivalent per day.
Turning to Hess midstream guidance, we're reaffirming our full year financial and operational guidance, which was included in this morning's earnings release and is available on our website.
For full year 2021 we expect gas processing volumes to average between 270 and 280 million cubic foot per day are processing guidance incorporates the previously announced 45 day maintenance turnaround at the time of the gas plant, 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.
Turning to our crude oil assets for full year 2021 we expect crude terminalling volumes to average between 120 and 130000 barrels oil per day.
Our full year guidance continues to anticipate that third parties will contribute approximately 10% of our gas volumes and 15% of our crude oil volumes consistent with levels. We achieved in the first quarter of 2021.
As physical volumes on most of our systems are at or below MVC levels. Our revenue forecast is approximately 95 per cent protected and expect it to deliver adjusted EBITDA guidance in the range of $860 million to $890 million, an increase of approximately 17% at the midpoint compared.
The full year 'twenty 'twenty.
We expect second quarter gas oil and water volumes to each be modestly lower compared to first quarter as the increasing wells online and recovery from winter weather is offset by production declines and planned maintenance activities.
Turning to Hess Midstream is 2021 capital program.
We're making excellent progress on executing our 2021 capital program with activities, primarily focused on strengthening our gas capture and water gathering and disposal capacity for.
For full year 2021 capital expenditures are expected to total $160 million approximately 35% lower than full year 2020, reflecting lower ongoing capital needs. Following the completion of expansion construction activities at the Tayo the gas plant.
We continue to forecast expansion capital of approximately $140 million and maintenance capital of approximately $20 million.
In summary, we continue to advance our strategy as we build out our infrastructure and prepare for future organic growth with 95% revenue protection through 'twenty 'twenty. Two we are uniquely positioned and expect to deliver sustainable and growing adjusted EBITDA adjusted free cash flow and distributions with low leverage and <unk>.
Contract protection.
Now I'll turn the call over to Jonathan to review, our financial results and guidance.
Thanks, Scott and good afternoon, everyone.
As John described we continue to make good progress in executing our strategy.
Pleased to have delivered another strong quarter to start 2021, the demonstrates how about the contract structure and financial strength.
Thanks, John and good afternoon, everyone.
As John described we continue to make the progress in executing our strategy and I'm pleased to have delivered another strong quarter to start 2021 that demonstrate a bowl of our contract structure and financial strength differentiate our business model for the.
The first quarter of 2021 net income was $160 million compared to 100.
$32 million for the fourth quarter of 2020, adjusted EBITDA for the first quarter of 'twenty, 'twenty, one with $227 million compared.
Compared to $199 million for the fourth quarter of 2020 the.
The change in adjusted EBITDA relative to the fourth quarter of 2020 was partly attributable to the following.
Total revenue increased by $26 million.
Well, the only driven by higher tariff rates, resulting from our annual rate Redetermination process.
The offset by lower throughput volume, resulting in segment revenue changes as follows.
The increase in gathering revenues of approximately $13 million.
And the increase of processing revenue of approximately $8 million at.
The increase in traveling revenue of approximately $5 million.
Total operating expenses, including G&A, but excluding the pre.
Initiation of an amortization of pass through costs were lower.
Increasing adjusted EBITDA by approximately $2 million, including lower seasonal maintenance activity in our processing segment of approximately $3 million, partially offset by higher G&A expenses of approximately $1 million primarily related to our equity offering.
The resulting in adjusted EBITDA for the first quarter of 2021 of $227 million modestly above our guidance.
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The resulting in adjusted EBITDA for the first quarter of 2021 of $227 million modestly above our guidance, primarily due to lower operating costs as adverse weather conditions resulted in certain planned maintenance activities being deferred to the second quarter as John described.
First quarter, 2020, one maintenance capital expenditures of approximately $1 million and net interest excluding amortization of deferred finance cost was approximately $21 million.
Was that distributable cash flow was approximately $205 million for the first quarter of 2020, one covering our distribution by approximately one point in the next time.
On April 23rd we announced our first quarter of distribution that increased 5% on the annualized basis, representing our 15th consecutive quarterly distribution increase since our IPO.
The expansion capital expenditures in the first quarter were $22 million at quarter end debt was approximately $1 $9 billion, representing leverage of approximately 2.5 times adjusted EBITDA on a trailing 12 month basis and below our conservative three times adjusted EBIT of target.
Turning to guidance.
For the second quarter of 2020, one we expect net income to the approximately $145 million to $155 million and adjusted EBITDA to be approximately $210 million to $220 million modestly lower at the midpoint relative to the first quarter of 2021, primarily driven by higher.
Operating costs from seasonal maintenance and activity of deferral due to winter weather in the first quarter as physical volumes on our system remain generally below MVC levels, we expect second quarter revenue to be relatively stable compared to the first quarter.
Second quarter of maintenance capital expenditures and net interest excluding amortization of deferred finance costs expected to be approximately $25 million, resulting in expected distributable cash flow of approximately $185 million to $195 million with distribution coverage at the midpoint of the range of.
The approximately 1.5 time.
For the third quarter, we anticipate commencing a maintenance trying them out at T. G P.
As John described we expect to incur additional operating expenses of approximately $15 million and maintenance capital of approximately $15 million related specifically to the trade around as a reminder, Hess midstream will receive MVC payment J of the turnaround as a result with operating cost income.
They turn around and expect it to be higher in the second quarter and relatively stable every support revenue.
The lower net income adjusted EBITDA and distribution coverage in the third quarter relative to the second quarter.
In addition, we are reaffirming all full year of 2021 financial guidance, including at the midpoint full year 2020, one net income of $605 million and adjusted EBITDA of $875 million.
This adjusted EBITDA guidance represents annual growth of approximately 17% of full year 'twenty 'twenty for valley from our annual rate Redetermination and increase in 2020, one N V C, which provide approximately 95% protection to our revenue.
With no change to our full year financial guidance of lower expected net income and adjusted EBITDA in the second and third quarters relative to the first quarter. We expect increased financial reasons in the fourth quarter supported by MVC protected revenue well operating costs with the completion of the T. G of each other out the lowest seasonal activity.
Highlighting our financial strength, we expect adjusted free cash flow to be in excess of distributions by approximately $100 million in 2020 one.
With the positive adjusted free cash flow after distribution together with the expected the leverage of approximately two times adjusted EBITDA on a full year basis that is below our conservative three times adjusted EBIT of target, we maintained significant financial flexibility for accretive capital allocation, including the potential of each one of them capital to shareholders.
Our revenues continued to be 95% protected by generally increasing N V sees in 2020 two.
We expect continued higher revenues in 2023, and physical volumes I expect it to be above N V C.
With this increasing expected revenue and law of ongoing capital spending we have visibility to continued growth adjusted EBITDA and adjusted free cash flow.
In summary, with our strategic asset base visible financial metrics and unique contract structure, we have a differentiated value proposition across the midstream sector. This concludes my remarks, we will of happy to answer any questions I will now turn the call over to the operator.
Thank you ladies and gentlemen, if you have a question. Please press star followed by one on your phone.
If your question has been answered or you would like to withdraw your question Chris pound.
Questions will be taken in the order receipt. Please press star one to begin.
And our first question comes from the line of Brian rentals with UBS.
Hi, Good morning, everyone just to start off on capital out of location comments around the return of capital to shareholders could you just provide a little bit more color on how we should think about return of cash just given the 5% distribution growth target and leverage below the state of target of three point in times.
Are there any other use of cash that we should be thinking about over the next.
For medium term thanks.
Sure.
So in terms of where the fortunate position, where we have significant financial flexibility, which as I mentioned in my comments could include.
The opportunity for accretive opportunities like we try the capital we have.
Have multiple options available to us, including potential buybacks from our sponsors and the increased dividends of something for them.
Each of these options and certainly have their strength.
We're just at the point now where trading of free cash flow positive. After the distributions are this is our first quarter actually that we're free cash flow positive after the distribution since the IPO so of real inflection point and we're just starting to have declining leverage relative to our conservative three times EBITDA leverage target. So as we continue to build our flexibility will continue to evaluate these options.
And that will provide opportunities for it but that's what we're trying of capital and then that will continue to be disciplined in terms of our financial strategy and protecting our balance sheet.
Great I appreciate the feedback second question here is a little bit more operational focus as it relates to the Bakken are you seeing the higher G. P. M on your footprint today and going forward net.
So could you provide color on whether it's more from reduced flaring or one of the wells are just getting gassy in nature. Thanks.
Yes, so Brian I'll take that question. This is John So yeah. We were we're definitely seeing higher gas rates. Its its primarily a function of gas capture we're not really seeing the the G are substantially changing at the well are the wells are are very stable really strong producing wells.
Both on the oil and gas side, and it's really just more of a function of of continuing to capture more gas. We've we've installed a lot of compressor.
Compression and processing capacity over the last several years and that's really kind of opened it up to to help Hess reduce flaring and get the gas in the pipe.
Great. Thanks, and just as a quick follow up on northern border should.
Should we expect any incremental ethane recovery on your footprint do the high Btu content concerns and just any commentary around how the has test them relationship looks to solve the issue long term. Thanks.
Yeah sure. So obviously the the Hudson has some relationship as is outstanding I mean, we work very close together with our upstream partner were pretty much in any and all development decision, making processes and participating in that in and the system is fully integrated and to your point on ethane you know again.
One of kind of our unique strategic advantages is our gas plant the tayo got it.
As for ethane extraction capability, and we actually deliver that ethane to Canada.
Through the vantage pipeline to Nova <unk>.
Overall that the capacity has really been great for us and it's it's provide an outlet for them.
For our our ethane through the through the type of gas plant. So from our perspective, we really don't see any constraints going into northern border in fact, with our of Btu content of our residue gas going in northern border is able to use our lower btu content gas to blend in some of the the higher btu content gas they've got in the in the basin. So so overall.
We're actually very well positioned to support Hess.
Super helpful. Thank you everyone have a great day.
You too Bryan thanks.
Thank you for your next question comes from the line of Jeremy Tonet with JP Morgan.
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Sure Yeah, I think I understand your question, so you're asking about Hess, bringing on the second rig and potentially adding additional rigs and upside into 2022. So just a reminder, for 2021 and and a good portion of 2022, where we're kind of we're at our MVC levels. So so from that perspective, it's it's very predictable.
<unk> as we roll into 'twenty, two 'twenty, three and as Hess continues to evaluate the opportunity to bring additional rigs on it just as a reminder, hess brought on the second rig in February So we're going to start to see additional wells coming coming out of that rig line later this year and that's and as Greg mentioned in the earnings call earlier, they're expecting the exit rate to be.
Between 170, <unk> hundred 75000 barrels oil per day, and then there was some discussion depending on oil price the potential to add a third rig in the fourth quarter and then potentially add additional rigs later on depending on oil price and again the way Hess is focusing on the Bakken is really kind of leveraging it as of as a cash engine to generate cash for the.
The company so for for.
From our perspective, we're well positioned to support Hess is growth. That's part of the reason why we're making the the further investment in gas capture and water gathering and disposal systems to to help Hess as a as it looks for to growing so.
We're well positioned to support the growth we see some increased activity coming on from the second rig and hopefully prices stabilize and continue up and we will continue to see additional opportunity to bring a third and potentially a fourth rig on but the but again, where we're fully integrated with the upstream and working with them on the <unk> on the development.
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Okay, I'm still having trouble hearing you, but I think you were asking about third party activity and I'll just make a general comment about third parties that similar to Hess as perspective, we are seeing some additional activities from third parties and again as we've talked about previously we're piped up to support those third party activities as.
As we built our forecast and as we saw the first quarter of of 2021 we're expecting gas to be at about 10% of of total throughput volumes and oil to be approximately 15% now again, there's opportunity for upside there as we continue to evaluate and look at you know growth from third parties, but that's.
What are kind of that's what our long term forecast is based on and then I think you asked the question about dapple I'll just make a general another general comment on dapple for for everybody on the call overall.
Overall Hess has you know has long term contracts in place and will have no problem.
Operating even in a environment, where we're dapple is constrained are shut down and then just a reminder, we have our our rail terminal as well that's continued to operate throughout the duration of of the downturn.
It's it's both the crude oil terminal, but also our NGL terminal for us as well and we're well positioned to support Hess on whatever it needs. We can get has access to pipe, but we can also get access we can get Hess Hess and third party of the access to our car rail terminal as well.
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Okay. Thank you.
Thank you and our next question comes from the line of Spiro <unk> with credit Suisse.
Doug Irwin on for Spiro Thanks for the question.
Just one from me I wanted to ask about the recent secondary from the sponsors.
I'm just curious if there's been any indication that that could be part of a broader strategy of moving forward, where where maybe we see some additional offerings.
Adding some liquidity to the to the class a shares.
And then you'd mentioned the potential for buybacks from directly from the sponsors just curious if that was something that was discussed when when this offering was announced.
Sure Yeah. The I mean, the Hudson J P are have been very disciplined. This was the first secondary offering off of any kind of since the IPO in 2017.
As you know the proceeds you know relative to have the J P were relatively small for them, but the objective was to increase the public float.
Certainly we did that by increasing the public float by about 40%.
Really beyond that I was the entrance of offerings, you'll have the J P remain disciplined investors and really see the long term value of Hess midstream.
In terms of buybacks. It's I would say are similar in that sense of course of buyback from the sponsor as the only which is what we would do in that that we've talked about that would again be baseball at the house of J P. C a value of proposition for that.
Okay got it that's all for me thanks for the time.
Okay. Thank you.
Thank you very much of this concludes today's conference. Thank you for your participation you may now disconnect.
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