Q3 2021 Hess Midstream LP Earnings Call
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Good day, ladies and gentlemen, and welcome to the third quarter 2021, Hess Midstream Conference call. My name is Michelle and I will 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. If at any time you require operator assistance. Please press star followed by the zero and we will be half.
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 Michelle good afternoon, everyone and thank you for participating in our third 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 set.
<unk> of Hess midstream filings with the SEC.
Also on today's conference call, we may discuss certain non-GAAP financial measures a reconciliation of the differences between these non-GAAP financial measures and the most directly comparable GAAP financial measures can be found any earnings release.
With me today are John Gatling, President and Chief operating Officer, and Jonathan Stein Chief Financial Officer in case, there are audio issues, we will be posting transcripts of each speaker's prepared remarks on www Dot Hess midstream dot com following their presentation I'll now turn the call over to.
John Gatling.
Thanks, Jennifer and good afternoon, everyone and welcome to Hess Midstream third quarter 2021 conference call today, I'll review, our operating performance and highlights as we continue to execute our strategy and discuss Hess Corporation's latest results and outlook for the Bakken.
Jonathan will then review our financial results.
We continued to deliver strong operational performance in the third quarter anchored by the safe and successful execution of the Tiger gas plant turnaround.
Extensive COVID-19 protocols were implemented to keep the workforce of more than 650 people safe.
We're proud of our team for their outstanding execution under challenging conditions.
Following the safe and quick ramp up of T. G. P. The team has turned their attention to the commissioning of the 150 million cubic foot per day expansion, which is underway and progressing well the.
The additional capacity is expected to be available at year end concurrent with the completion of the WBI residue export tie in.
Focusing on our third quarter performance gas throughput exceeded expectations as processing volumes ramped more quickly than anticipated following the turnaround.
Third quarter gas processing volumes averaged 285 million cubic foot per day, and as expected remained below MVC levels.
Third quarter crude terminalling volumes averaged 111000 barrels of oil per day and water gathering volumes averaged 75000 barrels of water per day.
Now turning to Hess upstream highlights earlier today <unk> reported third quarter production results with the Bakken net production, averaging 148000 barrels oil.
Oil equivalent per day versus our guidance of 145000 barrels of oil equivalent per day, primarily driven by the strong execution of the <unk> turnaround.
As confirmed that the third drilling rig commenced operations in September, allowing us to accelerate the development of their inventory of high return well locations.
A three rig program allows has to grow production and leverage our strategic infrastructure driving incremental volume growth for the midstream.
The additional rig combined with our aggressive cap gas capture strategy positions Hess midstream for strong organic growth.
For full year 2021, Hess expects Bakken net production to average approximately 155000 barrels of oil equivalent per day.
Now turning to our guidance for full year 2021, we now expect gas processing volumes to average approximately 300 million cubic foot per day modestly higher than previous guidance, primarily driven by the successful execution of the T. G P turnaround and strong rep ramp up upon resuming operations.
We expect full year 2021 crude terminalling volumes to average approximately 120000 barrels of oil per day and water gathering volumes to average approximately 75000 barrels of water per day.
Our full year throughput guidance continues to anticipate that third parties will contribute approximately 10% of our gas and 15% of our oil volumes.
Our higher expected full year gas volumes is the primary reason for increasing our 2021, adjusted EBIT guidance to $900 million at the midpoint.
Our full financial and operational guidance is included in our earnings release and is available on our website.
Now turning to our 2021 capital program, we continue to make good progress on our capital program. The commissioning of the T. G. P expansion and focused buildout of our gas compression system ensures that we're well positioned to meet Hess has accelerated development pace.
During the third quarter turnaround, we completed a series of plant tie ins for the T. G. P expansion, which is now being commissioned.
We expect final export tie ins to be completed at the end of this year concurrent with the WBI residue system startup taken Hess midstream total processing capacity up to 500 million cubic foot per day, enabling us to meet our customers' expected accelerated development pace.
In 2022, we anticipate substantial organic growth in our gas processing volumes, although we expect physical volumes to remain generally at or below MVC levels, which are approximately 15% higher compared to our 2021 physical volume guidance.
Above currently set N V six and 2023 in line with our previous guidance.
Construction activities have commenced on two new Greenfield compressor stations, which will expand our gas compression capacity by approximately 20% online in 2022.
Approximately 50% of the expenditures for the new stations and related infrastructure is expected to be incurred in 2021 with the balance planned for 2022 when complete.
When we complete construction and bring the station's online.
We're also executing our oil gas and water well connect program to meet Hess has accelerated development plan.
Full year 2021 capital expenditure guidance is unchanged at $180 million, we expect expansion capital to be approximately $165 million, which is comprised of $95 million for compression projects $60 million for low pressure gathering and well interconnects and $10 million for gas processing.
Maintenance capital is expected to be approximately $15 million.
In summary, we're continuing to execute our strategy, making focused investments to expand infrastructure to meet the needs of our customers delivering safe and reliable operating performance and strong financial results, which provides the flexibility to take advantage of future accretive growth opportunities, including potential incremental return of capital to our <unk>.
Shareholders.
I'll now turn the call over to Jonathan to review, our financial results and guidance.
Thanks, John and good afternoon, everyone.
During the third quarter, we continued to execute on our financial strategy that Optimizes, our capital structure and utilize this cash flow generation to provide increased capital to our shareholders.
On October 13th we paid our second quarter distribution, including a 10% increase in the distribution level compared to the first quarter of 2021. In addition to our quarterly increase consistent with Hess midstream targeted 5% growth in annual distributions per class a share.
During August we also completed a $750 million repurchase of units from our sponsors optimizing our capital structure and bringing our leverage to approximately three times adjusted EBITDA on a full year 2021 basis.
Together these actions delivered immediate accretive and meaningful return of capital to Hess Midstream shareholders. Hess Midstream continues to target annual distribution per class a share growth of at least 5% through 2023 with distribution coverage of at least one four times. In addition, we maintained significant.
<unk> financial flexibility, including expected ongoing free cash flow after distributions and leverage declining below our three times adjusted EBIT target in 2022.
<unk> for potential future accretive opportunities, including incremental return of capital to shareholders.
Turning to our results for the third quarter net income was $131 million compared to $162 million for the second quarter.
Adjusted EBITDA for the third quarter with $205 million compared to $230 million for the second quarter.
The change in adjusted EBITDA relative to the second quarter was primarily attributable to the following.
Gas processing revenue, excluding pass through revenue was lower by $1 million as a throughput summit generally below MVC levels in the third quarter driven by the planned turnaround at the tailgate gas plant.
Total operating expenses, including G&A, but excluding depreciation and amortization and pass through costs were higher decreasing adjusted EBITDA by approximately $23 million, including operating expenses related specifically to the tioga gas plant turnarounds of approximately $15 million higher others.
Seasonal maintenance activity at the tailgate gas plant of approximately $7 million and higher operating G&A of approximately $1 million.
L M for our proportional share of earnings and depreciation net of processing fees decreased adjusted EBITDA by approximately $1 million.
Resulting in adjusted EBITDA for the third quarter of 2021 of $205 million at the top end of our guidance, primarily driven by lower than expected seasonal maintenance and higher gas gathering revenues from the strong volume ramp following the T. G P trying them out.
Third quarter maintenance capital expenditures were approximately $7 million and net interest excluding amortization of deferred financing costs were approximately $26 million.
The result was that distributable cash flow was approximately $172 million for the third quarter covering our distribution by one three times.
Expansion capital expenditures in the third quarter were $52 million at quarter end debt was approximately $2 $6 billion, representing leverage of approximately three times adjusted EBITDA on a trailing 12 month basis.
Turning to guidance as John described strong gas capture performance has enabled us to once again increase our full year financial guidance. We expect net income to be in the range of $605 million to $615 million. Adjusted EBITDA is expected to be in the range of 890.
$5 million to $905 million, representing at the midpoint, 20% growth compared to full year 2020 results.
This capital and cash interest are projected to total approximately $115 million for the full year 2021.
Distributable cash flow is expected to be in the range of $780 million to $790 million, resulting in an expected distribution coverage of greater than one four times.
As implied in our full year 2020, one guidance, we anticipate fourth quarter net income and adjusted EBITDA to be significantly higher compared to third quarter results.
Ported by increasing volumes and low operating costs with the completion of the teach you'd be turnarounds and lower seasonal maintenance activity at the midpoint of our guidance, we expect fourth quarter adjusted EBITDA to be approximately $240 million or 15% higher than third quarter results with distribution coverage of a possible.
One six times with revenues that are approximately 95% protected by MVC.
We expect to end the year with leverage at a conservative three times adjusted EBITDA leverage target.
In 2022 in addition to organic growth, we expect higher revenues that are approximately 95% protected by generally increasing N V. C's. We expect this revenue growth to continue in 2020 three as a physical volumes increase above N V. CS for the higher has production and continued increase in <unk>.
<unk> capture.
As a result, we have visibility to continued growth in adjusted EBITDA and generation of adjusted free cash flow after distributions and expect to Delever below our conservative three times adjusted EBIT leverage target at 2022 provided continuing flexibility to take advantage of future accretive growth opportunities, including.
Incremental return capital to shareholders.
In January we released our 2022 operational and financial guidance, including 'twenty to 'twenty four N V sees this.
This concludes my remarks, we'll be happy to answer any questions I will now turn the call over to the operator.
Ladies and gentlemen, if you have a question. Please press star followed by one on your telephone. If your question has been answered or you would like to withdraw. Your question. Please press the pound questions will be taken in the order received please press star one to begin.
And our first question comes from the line of Brian Reynolds with UBS. Your line is open. Please go ahead.
Hi, good afternoon, everyone to start off on capital allocation you talked about in your prepared remarks about incremental return of capital opportunities going forward.
Given 2021 solid distribution step up a buyback in a secondary offering and given that 2022 at the similar free cash flow profile can we potentially have in all of the above scenario again in terms of return of capital as we look ahead into 2022.
Thanks, Yes, I mean, our financial strategy includes maintaining our optimized.
<unk> capital structure with targeted leverage at three times EBITDA as you mentioned this year, we did both the $750 million share repurchase in that 10% distribution increase.
The increase at the level of increase that accomplish that financial strategy by bringing our leverage back to three times EBITDA on a 21 basis and utilizing our free cash flow. So as we look forward as I mentioned, we're going to continue to be free cash flow positive after distributions and our leverage will decline below that three times adjusted EBIT target in 2022.
So therefore from a capital allocation point, you can certainly expect that part of our capital allocation strategy will be the continued buybacks and increased dividends to utilize that financial flexibility.
Yeah.
Great. Thanks for the color that was super helpful. As a follow up has talked about on its call about increased capex spend in the U S. Gulf of Mexico to spend on Tieback, then on money on an exploration well no.
Now from a <unk> perspective, what does <unk> need to see from upstream activity.
For those conversations to restart around the Gulf of Mexico long cycle assets could this be a 2023 event.
Results come back positive and has no continues to spend capital on the Gulf of Mexico.
Yes, thanks for the question Brian overall.
The <unk> transaction isn't immediate priority for us for the midstream or for Hess.
We are continued focus on our strategy around <unk>.
Building out the business in the Bakken.
The work that we did for the Gulf of Mexico remains active we're continually looking at the asset looking at the future opportunity I mean, it's definitely something that's available to us in the future. It just kind of depends on when the timing is right for that so at this point theres nothing immediate on the horizon, but but again.
We're continuing to look at the.
The development opportunity that that's that's going on in the Gulf of Mexico, and it remains definitely an asset that we're interested in in the in the long term, but but there isn't anything on our plans right now.
Great. That's all for me today I have a good day bye thanks, Brian.
Thank you and our next question comes from the line of Jeremy Tonet with J P. Morgan. Your line is open. Please go ahead.
Hi, Good afternoon, I just wanted to follow up on the earlier discussion here on the capital allocation priority. We did see some pick up in the king consolidation, especially in the Permian and Bakken can.
Can you share any thoughts on how it is.
Currently evaluating buybacks or.
M&A opportunities any thoughts you can share on how the market is right now.
Okay.
Yeah, maybe maybe I'll.
Take the first the last part of your question first and just talk about kind of our overall strategy and then Jonathan can talk a little bit about the financial side of it. So we're continuing to look at assets in the Bakken as it relates to bolt on opportunities things that will strengthen our footprint and our strategic infrastructure position.
Position in the Bakken in particular as it relates to supporting Hess and are currently connected third parties. So that's really our primary focus right. Now is just executing the Bakken plan and we're just as a reminder, all of those things are incremental to our current plan to the activities in the in the guidance that we've we've already provided so again those all represent.
Upside opportunities, but we're always looking for quality assets that strategically fit in with our with our infrastructure. So that's that's our focus from a from an M&A perspective, so I'll hand, it over to Jonathan for the for the first part of the question.
Yeah, I think John said, it well with our focus really not on a active M&A and really just looking at potential bolt on opportunities that really means that our flexibility and financials like so that we have are really primarily bolt ons would be utilized for China.
Like I mentioned again, you know as we move into 2022 will be below our three times EBIT target and can have a free cash flow positive. So that really allows for the capital allocation that I talked about before in terms of return of capital in terms of buybacks or dividends.
Creases as appropriate, but really will continue to execute our financial strategy, we have a very clean and soy with visible growth and so we'll continue to focus on that as John described.
Got it.
Just picking up on the buybacks.
So we didn't see you.
The strong sponsored by.
A few months back.
Okay.
So in recent public through a disappointment.
Just want to understand if you can.
She had any thoughts on what deficient stuff going on with it.
Sponsor machine.
Machine that sets a very.
But did you have any.
Over the next Julia.
With respect to JP audit.
Yes, it does.
Okay. It was a little hard to understand but I think youre asking intensive sponsored plans and relative to the secondary and the buyback that we did earlier. So I think look I think if you look at the two types of transactions. We did this past year. They each had different objectives. The secondaries were really focused on.
Technical ownership still too technical obstacles to ownership.
The feedback that we've gotten from investors that they see that relative to the float and liquidity. So those offerings were really targeted at addressing that issue since March transaction. Our average daily trading volume has more than doubled so in terms of focus on that objective.
<unk> been focused on achieving that value accretion does that transaction in March was offered in 'twenty, one and still early days on our recent.
Recent transaction, but again, it's targeted towards that focus of increasing our liquidity and increasing the float going forward. The again, there's no specific plan with regard to the secondaries.
J P recognize that there's continued demand for additional liquidity, but they're also very disciplined investors, who see the long term value and Hess midstream the buybacks are really different.
Different objective those are really geared at as I said before our financial strategy in terms of maintaining our optimized capital structure.
In terms of our targeted leverage, particularly at three times EBITDA. So they'll you know we've certainly got a lot of positive feedback from investors relative to the transactions. We did earlier this year in terms of the buyback in particular and as I talked about we can take on financial flexibility and certainly that will continue to be part of our strategy going forward to optimize our capital structure through by.
Backs and increase dividends as appropriate so really two different objectives really geared towards Hess midstream that all geared towards the sponsors I mean in terms of the secondary certainly those were relatively small amounts.
Relative to Hudson and VIP, So really the focus has been on how do we improve the liquidity and float how do we continue to execute our financial strategy in terms of having an optimized capital structure and using that financial flexibility if the return of capital to shareholders.
Got it that's helpful. That's in summit.
Yeah.
Thank you and our next question comes from the line of Doug Irwin with Credit Suisse. Your line is open. Please go ahead.
Hey, everyone. Thanks for the question.
Maybe just one on expansion Capex I was wondering if you could help frame kind of what we should expect in 2022 now that the Tgv turnaround is complete.
So it sounds.
It sounds like we should expect another $95 million.
Then on compression next year.
And then some well connect capex on top of that just kind of curious year over year, how we should be thinking about that move.
Yeah, I think what we've said is where we're planning to be at or below 2020 levels. We do expect capital to increase slightly in trying to give some indication of directionally, where that's heading.
It's definitely.
Well contained spend and its its primarily used in.
The focus of supporting Hesse's development plan over the next couple of years as you've ramped up to three rigs and then potentially ramping up to four rigs, but have you as you say I mean as with the expansion capital behind US. It really is more focused on the compression activity to support the development and then well connects so that's primarily.
<unk> our focus over the next over the next year or so.
And I would just add as you know with that with John.
Just add some context and just a reminder, as we've said we do expect EBIT to continue to grow in 2022 and 2023.
That space as we've talked about based on M. A c's provide line of sight to that both in terms of increasing can be seen in 2022, and it continued physical volume growth for 2023.
So with that driving our EBIT up and even with the higher Capex that John just mentioned in terms of 2022 will continue to be free cash flow positive after distributions as I've talked about continuing to delever below our three times target.
Okay. That's helpful. Thank you.
Maybe just on more of a macro level in the Bakken.
Obviously, you have just added.