Q4 2021 Hess Midstream LP Earnings Call

January 26, 2022

Good day, ladies and gentlemen, and welcome to the fourth 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 zero, and we will be happy to assist you.

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 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 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.

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 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.

Now I'll turn the call over to John Gatling.

Thanks, Jennifer and good afternoon, everyone and welcome to Hess Midstream fourth quarter 2021 conference call today, I'll review, our operating performance and highlights as we continue to execute our strategy provide details regarding our 2022 plans and discuss Hess Corporation's latest results and outlook for the Bakken.

Jonathan will then review our financial results two.

2021 was a year of strong performance and strategic execution for Hess Midstream, we're proud of our continued safe and reliable operating performance and project delivery highlighted by the successful execution of the planned maintenance turnaround and tie in of the gas processing expansion at the <unk> gas plant.

Following the turnaround stable and reliable operating performance in the fourth quarter enabled us to finish strong year with record gas gathering and processing volumes driving full year, adjusted EBITDA above guidance to $909 million, an increase of 21% compared to 2020.

And 4% above the midpoint of our original 2021 adjusted EBITDA guidance.

Looking forward the continued investment in low risk system expansion gives us the needed capacity to capture volume growth through mid decade.

We remain focused on operational infrastructure and commercial execution to capture increasing gas volume growth, which by 2024 is expected to increase by more than 30% relative to <unk> 2021 nomination.

We expect gas gathering and processing volumes to continue to comprise approximately 75% of our revenues and with a visible growth trajectory, we expect volumes to rise above <unk> in 2023 and continue to grow into 2024.

Now focusing on Hess midstream fourth quarter 2021 throughput performance gap.

Gas processing volumes averaged 330 million cubic foot per day, as our post turnaround ramp up drove results above expectations.

Fourth quarter crude terminalling and water gathering volumes averaged 113000 barrels of oil per day, and 72000 barrels of water per day, respectively.

Now turning to Hess upstream highlights earlier today <unk> reported fourth quarter results with Bakken net production, averaging 159000 barrels of oil equivalent per day, reflecting increased drilling activity strong development performance and continued focus on gas capture.

For full year 2021, Bakken net production averaged 156000 barrels of oil per day in line with guidance.

For 2022 has plans to operate a three rig program and expects to drill approximately 90 gross operated wells and bringing on approximately 85 new wells.

An increase of 67% compared to 2021.

This leaves more than 2000 future drilling locations beyond 2022, which generate attractive returns at $60 <unk> per barrel and represents approximately 70 rig years of activity.

In 2022 has forecast Bakken net production to average between 165 and 170000 barrels of oil equipment per day, a 6% to 9% increase over 2021 and expect production to steadily ramp over the year and average between 175 and 180000 barrels of oil per day and.

In the fourth quarter.

Additionally, Hess reiterated its commitment to sustainability as a top priority.

Announced its endorsement of the world Bank's zero routine flaring by 2030 initiative and set company targets to eliminate zero routine flaring from its operations by the end of 2025 <unk>.

Hess midstream is proud to partner with Hess to achieve its sustainability and climate goals.

Turning to Hess midstream guidance, our complete financial and operational guidance was released yesterday and is available on our website.

For full year 2022, we expect gas processing volumes to average between 330, and 345 million cubic foot per day, representing growth of approximately 11% compared to full year 2021, primarily driven by hesse's production growth and focused gas capture.

Gas processing volumes are expected to remain generally at or below MVC levels in 2022.

Which are approximately 13% higher compared to 2021 physical volumes.

For full year 2022, we anticipate crude terminalling volumes to average between 110 and 115000 barrels of oil per day.

Water gathering volumes to average between 70 and 75000 barrels of water per day.

As physical volumes on most of our systems are at or below MVC levels. Our 2022 forecast is approximately 95% revenue protected giving a high degree of confidence to our financial guidance, which projects adjusted EBITDA in the range of $970 million to $1 billion an increase of.

Approximately 8% at the midpoint compared to full year 2021.

We expect first quarter physical gas oil and water volumes to each be approximately flat compared to fourth quarter 2021, reflecting severe winter weather in North Dakota.

Turning to Hess Midstream is 2022 capital program.

Full year 2022 capital expenditures are expected to total $235 million comprised of $225 million of expansion activity and 10 million of maintenance activity.

Approximately $135 million of the 2022 capital expansion budget is focused on the completion of two new compressor stations and associated pipeline infrastructure in.

In aggregate the new stations are expected to provide an additional 85 million cubic foot per day of installed capacity in 2022 and can be expect expanded up to a 130 million cubic foot per day in the future.

In addition, Hess midstream expects to initiate construction on a third compressor station in 2022, which is expected to provide additional 65 million cubic foot per day of installed capacity in 2023.

Other enhancing our gas capture capability and supporting development in the basin.

By the end of 2023, we will have more than doubled our compression capacity from a few years ago growing it in line with Hess as drilling activity and our increased processing capacity.

Reflecting increasing drilling activity by Hess approximately $90 million is allocated to gathering system well connects.

In summary, we're continuing to execute our strategy, making focused low risk infrastructure investments to beat basin demands delivering safe and reliable operating performance and strong financial results, which enables us to take advantage of future accretive growth opportunities, including potential incremental return of capital to our shareholders.

I'll now turn the call over to Jonathan to review, our financial results and guidance.

Thanks, John and good afternoon, everyone.

Today, I will summarize our financial highlights from 2021.

To discuss our recently completed nomination process with Hess provide details on our 2022 guidance, our long term outlook as well as our framework for continued return of capital to shareholders.

We delivered strong results in 2020 , one going full year, adjusted EBITDA to $909 million.

An approximate 21% increase compared to the prior year.

We look forward to 2022 and beyond we have clear visibility to expected revenue and adjusted EBITDA growth supported by increased <unk>. In 2022, followed by continued organic growth in 2023 and 2024 as John described.

Return of capital to shareholders is a key priority of our financial strategy in 2020 , one we optimized our capital structure and utilize our excess free cash flow beyond our growing distributions to provide increased return of capital to our shareholders through both a temporary increase in our quarterly distribution level.

Add a $750 million repurchase of units from our sponsors together. These actions delivered immediate accretive add meaningful return of capital to our Hess midstream shareholders.

Forward, we will continue our financial strategy that includes consistent and ongoing return of capital as a primary objective.

Return of capital framework includes the following key elements.

With distributions that are targeted to grow 5% annually on a per share basis to at least 2024.

Second continued incremental return of capital beyond these annual distribution increases through share repurchases and additional distribution increases funded by leverage capacity below our conservative three times adjusted EBIT target.

Adjusted free cash flow after distributions.

But 2022, we expect to have significant financial flexibility for potential incremental return of capital beyond the distributions that our target to grow 5% annually on a per share basis.

Turning to our results we continued to deliver strong performance with fourth quarter of 2021 result, beating our quarterly guidance for.

For the fourth quarter net income was $165 million compared.

Compared to $131 million for the third quarter adjusted EBITDA for the fourth quarter was $247 million.

Compared to $205 million for the third quarter.

The change in adjusted EBITDA relative to the third quarter was primarily attributable to the following.

Total revenues excluding pass through revenues were up by $20 million driven by a strong volume ramp following the tioga gas plant turnaround is all.

<unk> segment revenue changes as follows.

An increase in processing revenues of approximately $11 million.

The increase in gathering revenues of approximately $10 million.

And travelling revenues decreased by approximately $1 million driven by slightly lower MVC level.

Total cost and expenses, excluding depreciation and amortization pass through costs and net of our proportional share of element for earnings decreased by $22 million as follows.

Operating expenses related specifically to the Tioga gas plant turnaround that.

That was completed in the third quarter of approximately $14 million.

Lower other seasonal maintenance activity at the tailgate gas plant of approximately $5 million and lower other costs and expenses net of our proportional share of Allen for earnings of approximately three 8 million.

Resulting in adjusted EBITDA for the fourth quarter of 2021 of $247 million exceeding our guidance, primarily driven by lower than expected operating and maintenance expenses.

Fourth quarter maintenance capital expenditures were approximately $2 million.

Net interest excluding amortization of deferred finance costs was approximately $29 million.

<unk> was that distributable cash flow was approximately $250 million for the fourth quarter covering our distribution by one six times.

Expansion capital expenditures in the fourth quarter were approximately $52 million, resulting in adjusted free cash flow of approximately $163 million.

Year end debt was approximately $2 6 billion.

Representing leverage of approximately two nine times adjusted EBITDA on a trailing 12 month basis.

Turning to our annual nomination process.

Contracts continued to provide a unique and differentiated level of downside protection through a combination of our annual rate redetermination process that maintains a contractual return on capital.

And <unk> that provide revenue floors set at 80% of expected throughput three years in advance.

With the contract extension is completed at the end of 2020, we now have commercial contracts with path with downside protection through 2033.

At the end of 2021, we completed our nomination process with Hess and update our tariff rates for 2022 and all forward years.

As with prior cycles, the nomination process considered changes in actual and forecasted volumes at <unk>.

Capex to maintain our contractual targeted return on capital deployed.

22 tariff rates were generally stable relative to 2021 is higher expected volumes from Hess is accelerated development activity were mostly offset by higher expected capital investment.

In our recent guidance release, we provided MVC through the year 2022 through 2024 as part of the nomination process.

For 2022, and 2023 were reviewed and where required increased while MVC as a 2024 were newly established based on 80% of the dominate volumes for each system in that year.

<unk> provide line of sight to expected long term growth in system throughput.

Rental revenue growth each year through a combination of increasing <unk> in 2022, followed by higher expected volumes in 2023 and 2024.

For 2022, MVC has remained substantially unchanged from those previously set at a higher historical pre pandemic based on activity levels, and we expect 2022 physical volumes to be generally at or below MVC.

Most of our 2023 Fmc's were revised higher in fact, it has this accelerated pace of development in the Bakken and additional gas capture we anticipate physical volumes will go above MVC levels in 2023.

<unk> for 2024, where does that 80% of dominate throughput.

Line of sight to potential long term growth in system throughput for example, looking at gas processing has his nomination for expected volumes for 2024 was 425 million cubic feet per day.

They get an MVC of 340 million cubic feet per day set at 80% of the domination level, implying greater than 30% growth and an approximate 12% annualized growth rate and physical volumes from 'twenty to 'twenty. One actuals, we continue to expect gas gathering and processing to comprised approximately.

75% of total affiliate revenues excluding pass through revenues as a result, we have clear visibility to revenue and adjusted EBITDA growth through 2024 with MVC supported growth in 2022, followed by year on year organic growth in 2023 and 2024.

Turning to guidance for 2022 for the first quarter of 2022, we expect net income to be approximately.

$150 million to $160 million.

And adjusted EBITDA to be approximately $235 million to $245 million.

First quarter maintenance capital expenditures.

Interest excluding amortization of deferred finance costs are expected to be approximately $30 million.

And expected distributable cash flow of approximately $205 million to $215 million.

Delivering distribution coverage at the midpoint of the range of approximately one six times.

For the full year 2022, we expect net income of $630 million to $660 million and adjusted EBITDA of $970 million to $1 billion.

At the midpoint of guidance full year adjusted EBITDA is expected to increase by approximately 8% from 2021.

<unk> driven by higher gas gathering and processing MVC levels as we expect a physical volumes to be at <unk> with an adjusted EBITDA margin consistent with our historical margin of greater than 75%.

By 2022 with total expected capital expenditures of $235 million, we expect at the midpoint to generate adjusted free cash flow of $630 million.

Highlighting our financial strength, we expect distribution coverage greater than one five times and excess adjusted free cash flow of approximately $90 million after fully funding our targeted growing distributions.

As a result, we expect declining leverage of approximately two six times adjusted EBITDA on a full year basis in 2022 below our conservative three times adjusted EBIT target the combination of adjusted free cash flow beyond our distributions add leverage below our target provides significant financial flexibility.

For potential incremental return of capital to shareholders beyond our targeted 5% annual distribution distribution per share growth.

Looking beyond 2022 as described our MVC provide visibility to continued expected growth in adjusted EBITDA supporting our ability to continue to fully fund our growing distributions from growing adjusted free cash flow through at least 2024 and to maintain ongoing financial flexibility for disciplined capital allocation.

In summary, we are very pleased to have delivered a strong 2021 and look forward to a visible trajectory of growth and our operational and financial metrics that underpins, our unique and differentiated financial strategy with a focus on consistent and ongoing return of capital to our shareholders. This concludes my remarks will 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 phone. If your question has been answered or you would like to have a trailing your question press. The pound key questions will be taken in order received please press star one to begin.

Our first question comes from the line of Doug Irwin with Credit Suisse. Your line is open. Please go ahead.

Hey, guys. Thanks for the question.

Maybe just to start with 2022 guidance.

Given that volumes are expected to be below nbc's were at MPC Mpc's. This year, just curious if you could elaborate a bit on some of the other factors that kind of drives the high versus the low end of that range.

Primarily cost variability and timing of these compression projects are there other factors involved.

Yeah.

Yes, so in terms of our EBITDA guidance for the year and kind of the cadence of that if you all through the year gave.

Gave guidance for Q1.

As we've said there in Q1 Opex is going to be broadly flat relative.

Relative to Q4 that is consistent with lower seasonal opex that we usually see during these quarters and then in terms of revenue, which will be the driver. Therefore in Q1 really driven there by oil and water a combination of lower volumes.

Whether as John mentioned, and then slightly low nbc's there on oil year on year, but for the rest of the year. What we'll see is that Opex will fall seasonality.

With Q2 and Q3 those are typically higher for us when we have more activity going on and then revenue will steadily increase through the years. Our MVC is why we give annual averages are actually quarterly and they are increasing throughout the year. So we'll see increasing revenue from that and then physical volumes as well as the extent that we have some systems like water.

Or above MVC will be consistent with the Hess production map that has discussed so in terms of EBIT for the rest of the year, we see kind of Q1 as the starting point and then see higher EBITDA quarter.

The rest of the year relative to Q1 and that will get us to that $985 million midpoint of our EBITDA.

Okay. That's helpful. Thank you.

And then maybe just a follow up on the Capex guidance. You gave I know you pointed to $135 million on the compression projects.

Does that include any of the spend for the expected third project that you talked about here.

Or is there going to be some more spend on that next year and then I guess just on the $90 million well connect Capex should we look at that as a decent run rate beyond 2022 or is that still a bit elevated this year with rigs coming back in the Bakken.

Sure. So I'll start off with the $135 million question. The bulk of that spend is the completion of the two stations that will be coming on this year. There is some spend some pre construction spend.

Engineering that is focused on that third station, but the bulk of that spend will be towards the end of this year and really into 2023, So that's where the bulk of the spend is from a compression perspective on the $90 million.

90 million dollar question.

Related to well connects.

The third rig comes on and well start to start to ramp up in 2022, we see that as a more representative spin profile associated with the well count.

As Hess brings that third rig on and we actually start to see wells coming off that rig line. But also then as has looks at potentially adding a fourth rig next year as well.

Okay. Great. That's helpful. That's all for me and I'll hop back in the queue. Thanks.

Okay. Thank you.

Thank you and our next question comes from the line of Jeremy Tonet with Jpmorgan. Your line is open. Please go ahead.

Hi, everyone. This is Dan walk on for Jeremy.

Just a couple of quick ones from from Us.

The first I guess in light of Yesterdays updates from Hess and and from Hess.

Just extending the financial framework through 'twenty four.

And given the significant flexibility it sounds like Youll have even as early as by year end I think you mentioned two six times.

Just curious if you could give an update.

On the opportunity set, particularly potentially the Gulf of Mexico.

A good deal of discussion on the head.

Call earlier today.

About <unk>.

Their plans this year so.

Just curious if we could get a quick update on that.

Yeah, sure and I'll hand, it over to Jonathan for the financial flexibility piece of this but from a Gulf of Mexico perspective. The transaction is an immediate priority for the midstream more Hess Corporation and were continued to be focused on executing our strategy and supporting housing development in capturing third parties.

In the Bakken So that's primarily our focus at this point.

So I'll hand, it over to Jonathan for the for the financial flexibility question part of the question.

Sure. Thanks, John Yeah, I mean, I think with that background on Gulf of Mexico, and we've already talked about our capital program that.

<unk> delivers the growth that we expect that you can see the emphasis that I walked through so that really means again, our focus will be on exiting our financial strategy. The two elements I described the increased 5% annual distribution per share growth that will go through.

24, and then incremental return of capital beyond that distribution growth either through share repurchases and dividend increases as we did last year and as were saying that was really a part of our ongoing financial strategy and our return on capital framework. So for this year as you highlighted we have two six times expected EBIT on a full year basis.

So thats declining relative to where you are now and certainly below our three times target.

You can do the math relative to the midpoint of our EBITDA that $400 million in capacity that could be utilized to fund a potential incremental return of capital really with the Gulf of Mexico, not being a priority that really is the focus party of our return of our financial strategy in terms of actual size.

Timing, obviously, we'll evaluate that with the board during the year.

And that just gives us the full capacity, but certainly as I have said about the return of capital is a key part of our financial strategy. This year.

Okay, great. Thanks for that and then just I guess a bit more more granular.

Just.

If following the Tioga plant expansion and the North Bakken expansion.

Could you just give us a little bit more detail I guess from your perspective how.

I assume all of those volumes are flowing down to northern border.

And Btu content is relatively high I think there's an 1100 btu cap.

Where where do you see that going in terms of.

I guess potential.

<unk>.

Extraction or.

Just the diet.

The dynamic from from your perspective.

Sure I mean, I think we're uniquely positioned with the <unk> gas plant.

<unk> expanded the plant now by 150 million cubic foot a day, that's got us up to $400 million. There and then we have $100 million down at our <unk> partnership with Targa as well from the Btu content perspective, and northern border. We've got a number of export options, we've got a connection with.

Alliance.

For both for our wet gas, we also have our ethane connection or long term contract.

As well to deliver ethane.

Canada and then we have our as you mentioned you have our export with northern border from our perspective. The plant is very efficient and has a high recovery efficiency. So we have no trouble meeting Btu specs, if northern border decides to get more aggressive with with their btu spec. The plan is.

Designed for.

For significant.

Btu recovery, so we don't really see that being an issue for US and then we've also got the NGL takeaway capability.

Tied into one oak as well so again the plant is both plants are very well strategically placed with a number of export options and we really don't see any constraints from our perspective as far as getting getting our tailgate products to market.

Great. Thanks, that's very helpful.

Okay. Thanks.

Thank you and our next question comes from the line of Michael Webber participants.

In fact your line is open. Please go ahead hey.

Hey, guys. Thank you for taking my question.

Congrats on Nbc's for 2024 really healthy numbers, obviously implies a pretty big pickup in production by Hess in the airport flowing through had some.

Just curious as you think about capital spend needs for 2003, and 'twenty four and I know you won't give guidance on that for another year, but should we assume that there is a pretty material pickup in capital spend in 'twenty three 'twenty four.

To help kind of facilitate the increase in volume levels that Hess expects in 2024 would you think by the end of this year early part of next year. Your system will be built out enough to handle the 'twenty four volumes.

Sure Michael Thanks for the question from our perspective, our compression is really phased with the development. So when we made the decision back in 19 to go out and expand the <unk> gas plant up to 400 million cubic foot per day now brought our total processing capacity up to 500 million cubic foot per day.

Between <unk> and the little Missouri, four gas plant partner partnership with Targa. So from our perspective, the processing is well set and then we've been phasing in compression as Hess has made its decision.

To accelerate it.

Its development activity and so the continued phasing I mentioned that we're going to be bringing on two stations. This year, we're going to be bringing on a third station potentially next year.

From from our perspective, the infrastructure is in our plan it set that supports that.

The 2024 volume projections that we've got set out there based on the <unk>.

So I would say its materially there we're going to continue to see some investment in and compression over the next several years to get up to our processing capacity.

And then obviously the well connects will be something that will be a bit more fluid as hess decides its pace of development, but from an infrastructure perspective, we are not expecting to see any significant increases in our capital spend I don't know Jonathan if there was anything else you wanted to add to that.

No no I think that you hit it well I mean, I think where the unique position where.

The capital needs that John described really now just focused on well connects and compression.

Really.

At at or below the levels that we have now will achieve the growth that's in our plant. So that really leaves us with potential significant financial flexibility going forward as we've talked about.

Not considering as we've been clear about any large scale M&A. So obviously, we'll look at investment opportunities as we've done in the past that are different.

Disciplined way, but really as we've hopefully been very clear about our priority for us and our financial strategy is using that financial flexibility.

Certainly for continued return of capital to shareholders.

Got it thank you for that and then just.

Just one quick follow on can you remind me in and I was kind of part of the Hess call. What's the timing had to thinking about for the fourth rig.

Sure so the.

Timing that Greg mentioned in the call was really looking at 2023, so the plan would be as the <unk>.

Prices hold and as Greg.

Greg and John mentioned, there's over 'twenty 100 wells well locations that are that are available for future development.

At $60 <unk> per barrel, so from a from an overall inventory perspective economic inventory perspective.

It has a very very strong portfolio. So the plan would be is to continue with a third rig this year and then potentially bring on the fourth rig in 2023.

Got it. Thank you guys much appreciate it.

Absolutely. Thank you.

Thank you. This concludes today's question and answer session as well as today's conference. Thank you very much. This concludes today's conference call. Thank you for your participation and you may now disconnect everyone have a great day.

[music].

Yes.

[music].

Good day, ladies and gentlemen, and welcome to the fourth 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 zero and we will be happy to assist you.

Minder. 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.

<unk> 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.

<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 in the 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.

Jonathan will then review our financial results.

Following the turnaround stable and reliable operating performance in the fourth quarter enabled us to strip finished strong with record gas gathering and processing volumes driving full year, adjusted EBITDA above guidance to $909 million, an increase of 21% compared to 2024.

<unk> percent above the midpoint of our original 2021 adjusted EBITDA guidance.

Looking forward the continued investment and low risk system expansion gives us the needed capacity to capture volume growth through mid decade.

Now focusing on Hess midstream fourth quarter 2021 throughput performance.

Gas processing volumes averaged 330 million cubic foot per day, as our post turnaround ramp up drove results above expectations.

Fourth quarter crude terminalling and water gathering volumes averaged 113000 barrels of oil per day, and 72000 barrels of water per day, respectively.

For full year 2021, Bakken net production averaged 156000 barrels of oil per day in line with guidance.

For 2022 has plans to operate a three rig program and expects to drill approximately 90 gross operated wells and bringing on approximately 85 new wells.

An increase of 67% compared to 2021.

This leaves more than 2000 future drilling locations beyond 2022, which generate attractive returns at $60 <unk> per barrel and represents approximately 70 rig years of activity.

In 2022 has forecast Bakken net production to average between 165 and 170000 barrels of oil equivalent per day, a 6% to 9% increase over 2021 and expect production to steadily ramp over the year and average between 175 and 180000 barrels of oil per day.

In the fourth quarter.

Additionally, Hess reiterated its commitment to sustainability as a top priority.

Announced its endorsement of the world Bank's zero routine flaring by 2030 initiatives and set company targets to eliminate zero routine flaring from its operations by the end of 2025 Hess midstream is proud to partner with Hess to achieve its sustainability and climate goals.

Turning to Hess midstream guidance, our complete financial and operational guidance was released yesterday and is available on our website.

Gas processing volumes are expected to remain generally at or below MVC levels in 2022.

Our approximately 13% higher compared to 2021 physical volumes.

For full year 2022, we anticipate crude terminalling volumes to average between 110 and wondering if 15000 barrels of oil per day.

Water gathering volumes to average between 70 and 75000 barrels of water per day.

As physical volumes on most of our systems are at or below MVC levels. Our 2022 forecast is approximately 95% revenue protected giving a high degree of confidence to our financial guidance.

Which projects adjusted EBITDA in the range of $970 million to $1 billion, an increase of approximately 8% at the midpoint compared to full year 2021.

We expect first quarter physical gas oil and water volumes to each be approximately flat compared to fourth quarter 2021, reflecting severe winter weather in North Dakota.

Turning to Hess Midstream is 2022 capital program.

Full year 2022 capital expenditures are expected to total $235 million comprised of $225 million of expansion activity and $10 million of maintenance activity.

Approximately $135 million of the 2022 capital.

Expansion budget is focused on the completion of two new compressor stations and associated pipeline infrastructure.

By the end of 2023, we will have more than doubled our compression capacity from a few years ago growing it in line with Hess as drilling activity and our increased processing capacity.

Reflecting increasing drilling activity by us approximately $90 million is allocated to gathering system well connects.

In summary, we're continuing to execute our strategy, making focused low risk infrastructure investments to beat based on demands delivering safe and reliable operating performance and strong financial results, which enables us to take advantage of future accretive growth opportunities, including potential incremental return of capital to our shareholders.

I'll now turn the call over to Jonathan to review, our financial results and guidance.

Thanks, John and good afternoon, everyone.

I will summarize our financial highlights from 2021.

Discuss our recently completed nomination process with Hess provide details on our 2020 guidance, our long term outlook as well as our framework for continued return of capital to shareholders.

We delivered strong results in 2020 , one going full year, adjusted EBITDA to $909 million.

An approximate 21% increase compared to the prior year.

$750 million repurchase of units from our sponsors together these actions delivered immediate accretive and meaningful return of capital to our Hess midstream shareholders. Looking forward. We will continue our financial strategy that includes consistent and ongoing return of capital as a primary objective.

Return of capital framework includes the following key elements first distributions that are targeted to grow 5% annually on a per share basis through at least 2024.

Second continued incremental return of capital beyond these annual distribution increases do share repurchases, Andrew additional distribution increases funded by leverage capacity below our conservative three times adjusted EBIT target.

Adjusted free cash flow after distributions.

But 2022, we expect to have significant financial flexibility for potential incremental return of capital beyond our distributions.

We're going to grow 5% annually on a per share basis.

Turning to our results we continued to deliver strong performance with fourth quarter 2021 results, beating our quarterly guidance.

For the fourth quarter net income was $165 million compared to $131 million for the third quarter.

Adjusted EBITDA for the fourth quarter was $247 million compared to $205 million for the third quarter.

The change in adjusted EBITDA relative to the third quarter was primarily attributable to the following.

Total revenues excluding pass through revenues were up by $20 million driven by a strong volume ramp following the tioga gas plant turnaround resulted in segment revenue changes as follows.

An increase in processing revenues of approximately $11 million.

Increase in gathering revenues of approximately $10 million.

And travelling revenues decreased by approximately $1 million driven by a slightly lower MVC level.

Total costs and expenses, excluding depreciation and amortization pass through costs.

Net of our proportional share of element for earnings decreased by $22 million as follows.

Well operating expenses related specifically to the toga gas plant turnaround that was completed in the third quarter of approximately $14 million.

Lower other seasonal maintenance activity at the tailgate gas plant.

Similarly $5 million.

And lower other costs and expenses net of our proportional share of alum for earnings of approximately $3 billion.

Resulting in adjusted EBITDA for the fourth quarter of 2021 of $247 million exceeding our guidance, primarily driven by lower than expected operating and maintenance expenses.

Fourth quarter maintenance capital expenditures were approximately $2 million and net interest excluding amortization of deferred finance costs was approximately $29 million. The result was that distributable cash flow was approximately $258 million for the fourth quarter covering our distribution.

And by one six times.

Expansion capital expenditures in the fourth quarter were approximately $52 million, resulting in adjusted free cash flow of approximately $163 million a year.

And that was approximately $2 $6 billion representing.

Representing leverage of approximately two nine times adjusted EBITDA on a trailing 12 month basis.

Turning to our annual nomination process.

Our contracts continue to provide a unique and differentiated level of downside protection through a combination of our annual rate redetermination process that maintains a contractual return on capital.

And <unk> that provide revenue floors set at 80% of expected throughput three years in advance.

With the contract extension is completed at the end of 2020, we now have commercial contract with Hess with downside protection through 2033.

At the end of 2020 , one we completed our nomination process with Hess and update our tariff rates for 2022 and all forward years.

As with prior cycles, the nomination process considered changes in actual and forecasted volumes and capex to maintain our contractual targeted return on capital deployed.

22 tariff rates were generally stable relative to 2021 is higher expected volumes from Hess is accelerated development activity were mostly offset by higher expected capital investment.

In our recent guidance release, we provided MVC through the year 2022 through 2024 as part of the nomination process MVC for 2020 , two and 2020 three were reviewed and where required increased while MVC as a 2024 were newly established based on 80% of the dominate.

For each system in that year.

<unk> provides a line of sight to expected long term growth in system throughput and incremental revenue growth each year through a combination of increasing <unk> in 2022, followed by higher expected volumes in 2020 , three 2020 four.

2022 MVC has remained substantially unchanged from those previously set at a higher historical pre pandemic based on activity levels, and we expect 2022 physical volumes to be generally at or below MVC.

Most of our 2023 Mec's were revised higher in fact, it has this accelerated pace of development in the Bakken and additional gas capture and we anticipate physical volumes will grow above MVC levels in 2023.

<unk> 2020 , four where does that 80% of dominate throughput and provide line of sight to potential long term growth in system throughput. For example, looking at gas processing has his nomination for expected volumes for 2024 was 425 million cubic feet per day.

I'll take an MVC of 340 million cubic feet per day set at 80% of the domination level, implying greater than 30% growth and an approximate 12% annualized growth rate and physical volumes from 'twenty to 'twenty one actual.

We continue to expect gas gathering and processing to comprised approximately 75% of total affiliate revenues excluding pass through revenues as a result, we have clear visibility to revenue and adjusted EBITDA growth through 2024 with MVC supported growth in 2022, followed by year on year organic.

Growth in 2023 and 2024.

Turning to guidance for 2022 for the first quarter of 2022, we expect net income to be approximately.

$150 million to $160 million.

And adjusted EBITDA to be approximately $235 million to $245 million.

First quarter maintenance capital expenditures and net interest excluding amortization of deferred finance costs are expected to be approximately $38 million, resulting in expected distributable cash flow of approximately $205 million to $215 million delivering distribution coverage at the midpoint of the range of approximately.

One six times.

For the full year 2022, we expect net income of $630 million to $660 million and adjusted EBITDA of $970 million to $1 billion at the midpoint of guidance full year. Adjusted EBITDA is expected to increase by approximately 8% from 2021.

Primarily driven by higher gas gathering and processing MVC levels as we expect our physical volumes to be at <unk> with an adjusted EBITDA margin consistent with our historical margin of greater than 75%.

For 2020 , two with total expected capital expenditures of $235 million, we expect at the midpoint to generate adjusted free cash flow of $630 million.

Highlighting our financial strength, we expect distribution coverage greater than one five times.

And excess adjusted free cash flow of approximately $90 million after fully funding our targeted growing distributions as a result, we expect declining leverage of approximately two six times adjusted EBITDA on a full year basis in 2022 below our conservative three times adjusted EBIT target.

The combination of adjusted free cash flow beyond our distributions and leverage below our target provides significant financial flexibility for potential incremental return of capital to shareholders beyond our targeted 5% annual distribution distribution per share growth.

<unk>.

Are there 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 phone. If your question has been answered or you would like to withdraw your question press. The pound key questions will be taken in order received please press star one to begin.

Our first question comes from the line of Doug Irwin with Credit Suisse. Your line is open. Please go ahead.

Hey, guys. Thanks for the question.

Maybe just to start with 2022 guidance.

Given the volumes are expected to be below in Dcs. We're at MPC Mpc's. This year, just curious if you could elaborate a bit on some of the other factors that kind of drive the high versus the low end of the range.

Primarily cost variability and timing of these compression projects or are there other factors involved.

Yeah.

Yes, so in terms of our EBITDA guidance for the year and kind of the cadence of that if you all through the year.

I gave guidance for Q1.

As we've said there in Q1 Opex is going to be broadly flat relative to Q4, that's consistent with lower seasonal opex that we usually see during these quarters and then in terms of revenue, which will be the driver. Therefore in Q1 really driven there by oil and water a combination of lower volumes.

Leather as John mentioned, and then slightly low nbc's there on oil a year on year, but for the rest of the year. What we'll see is that Opex will fall seasonality.

With Q2 and Q3 those are typically higher for us what we have.

More activity going on and then revenue will steadily increase through the years are empty seats, while we give annual averages are actually quarterly and they are increasing throughout the year. So we'll see increasing revenue from that and then physical volumes as well as the extent that we have some systems like water that are above embassies will be consistent with the Hess production ramp.

That has discussed so in terms of EBITDA for the rest of the I always see.

Q1 is the starting point and then see higher EBITDA quarter.

The rest of the year relative to Q1 and that will get us to that $985 million midpoint of our EBITDA.

Okay. That's helpful. Thank you.

And then maybe just a follow up on the Capex guidance. You gave I know you pointed to $135 million on the compression projects does that include any of the spend for the expected third projects that you talked about here.

Or is there going to be some more spend on that next year and then I guess just on the $90 million well connect Capex should we look at that as a decent run rate beyond 2022 or is that still the elevated this year with with rigs coming back in the Bakken.

Sure. So I'll start off with the $135 million question. The bulk of that spend is the completion of the two stations that'll be coming on this year. There is some spend some pre construction spend.

Engineering that is focused on that third station, but the bulk of that spend will be towards the end of this year and really.

Into 2023, so that's where the bulk of the spend is from a compression perspective on the $90 million.

The 90 million dollar question related to well connects.

As the third rig comes on and well start to start to ramp up in 2022, we see that as a more representative spin profile associated with the well count.

<unk> brings that third rig on and we actually start to see wells coming off that rig line. But also then as has looks at potentially adding a fourth rig next year as well.

Okay. Great. That's helpful. That's all for me and I'll hop back in the queue. Thanks.

Okay. Thank you.

Thank you and our next question comes from the line of Jeremy Tonet with Jpmorgan. Your line is open. Please go ahead.

Hi, everyone. This is Dan walk on for Jeremy.

Just a couple of quick ones from from Us.

First I guess in light of Yesterdays updates from Hess and and from Hess M. Just extending the financial framework through 'twenty four.

And given the significant flexibility it sounds like you'll have even as early as you know by year end I think you mentioned two six times.

Just curious if you could give an update.

On the opportunity set, particularly potentially the Gulf of Mexico, There's a good deal of discussion on the house call earlier today.

About their plans this year. So I'm just curious if we could get a quick update on that.

In the Bakken So that's primarily our focus at this point.

So I'll hand, it over to Jonathan for the for the financial flexibility question part of the question sure.

Sure. Thanks, John Yeah, I mean, I think with that background on Gulf of Mexico, and we've already talked about our capital program that <unk>.

So thats declining relative to where you are now and certainly below our three times target.

So you can do the math relative to the midpoint of our EBITDA, that's $400 million in capacity that can be utilized to fund a potential incremental return of capital really with the Gulf of Mexico, not being a priority that really is the focus party of our return to all of our financial strategy in terms of actual sizing.

Timing, obviously, we'll evaluate that with the board during the year.

And that just gives us the full capacity, but certainly as I said incremental return of capital is a key part of our financial strategy. This year.

Okay, great. Thanks for that and then just I guess a bit more more granular.

Just.

You know if following the Tioga plant expansion and the North Bakken expansion.

Could you just give us a little bit more detail I guess from your perspective, how are you.

I assume all those volumes are flowing down to northern border.

And Btu content is relatively high I think there's an 1100 btu cap.

Where where do you see that going in terms of.

I guess you know potential.

<unk>.

Extraction or.

Just the diet.

The dynamic from from your perspective.

Sure I mean, I think we're uniquely positioned with the <unk> gas plant.

Alliance.

For both for our wet gas, we also have our ethane connection or a long term contract.

As well to deliver ethane up to Canada, and then we have our as you mentioned you have our export with northern border from our perspective. The plant is very efficient and has high high recovery efficiency. So we have no trouble meeting Btu specs, if northern border decides to get more aggressive.

Ziv with with their Btu specs the plan is designed.

For significant.

Btu recovery, so we don't really see that being there being an issue for US and then we've also got the NGL takeaway capability tied into two one oak as well. So again. The plant is both plants are very well strategically placed with a number of export options and we really don't see any.

<unk> from our perspective as far as getting getting our tailgate products to market.

Great. Thanks, that's very helpful.

Okay.

Thank you and our next question comes from the line of Michael Smith.

Sachs. Your line is open. Please go ahead hey.

Hey, guys. Thank you for taking my question.

Congrats on a on Nbc's for 2024 really healthy numbers, obviously implies a pretty big pickup in production by Hess and their pork flowing through have some.

Curious as you think about capital spend needs for 2003, and 'twenty four and I know you won't give guidance on that for another year, but should we assume that there is a pretty material pickup in capital spend in 'twenty, three and 'twenty four.

To help kind of facilitate the increasing volume levels that Hess expects in 2024, where do you think by the end of this year early part of next year your system will be.

The bill pay out enough to handle that 'twenty four volumes.

Sure Michael Thanks for the question from our perspective, our compression is really phased with the development. So when we made the decision.

<unk> 19 to go out and expand the <unk> gas plant up to 400 million cubic foot per day that brought our total processing capacity up to 500 million cubic foot per day.

To accelerate its development activity and so the continued phasing I mentioned that we're going to be bringing on two stations. This year, we're going to be bringing on a third station potentially next year.

From from our perspective, the infrastructure is in our plan. It set that supports the 2024 volume projections that we've got set out there based on the <unk>.

So I would say its materially there we're going to continue to see some investment in and compression over the next several years to get up to our processing capacity.

And then obviously the well connects will be something that'll be a bit more fluid as Hess decides its pace of development, but from an infrastructure perspective, we are not expecting to see any significant increases in our capital spend I don't know Jonathan if there was anything else you wanted to add to that.

No no I think that you hit it well I mean, I think we're unique position, where you know the capital needs that John described really now just focused on well connects and compression.

Really at at or below the levels that we have now will achieve the growth. That's in our plan. So that really leaves us with potential significant financial flexibility going forward as we've talked about we're not considering as we've been clear about any large scale M&A. So obviously, we'll look at investment opportunities as we've done in the past that a disciplined way, but really.

As we've hopefully been very clear about our priority for us at our financial strategy is using <unk>.

So flexibility certainly for continued to be trying to capital to shareholders.

Got it thank you for that and then just.

Just one quick follow on can you remind me in and I guess kind of part of that has call. What's the timing has been thinking about for the fourth rig.

Sure so the timing.

Timing that Greg mentioned in the call was really looking at 2023. So the plan would be is that if.

If prices hold and as as as Greg and John mentioned, there's over 2100 wells well locations that are that are available for future development.

At $60 <unk> per barrel, so from a from an overall inventory perspective economic inventory perspective. The house has a very very strong portfolio. So the plan would be is to continue with a third rig this year and then potentially bring on a fourth rig in 2023.

Got it. Thank you guys much appreciate it.

Absolutely. Thank you.

Thank you. This concludes today's question and answer session asthma Today's conference. Thank you very much. This concludes today's conference call. Thank you for your participation and you may now disconnect everyone have a great day.

Q4 2021 Hess Midstream LP Earnings Call

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