Q1 2022 Hess Midstream LP Earnings Call

April 27, 2022

Good day, ladies and gentlemen.

Welcome to the first quarter suites wanted to Hess Midstream conference call. My name is Livia 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. If any time you require operator assistance. Please press star followed by zero and we will be happy Joseph Zhou.

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 Olivia 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 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 first quarter 2022 conference call.

Jonathan and I will review the highlights from our recent transactions as we continue to execute our financial strategy to return additional capital to shareholders.

I will also discuss our operating performance progress of our capital program and review Heska Corporation's results and outlook for the Bakken.

Jonathan will then review our financial results and guidance.

We recently delivered several positive announcements for Hess midstream and.

In early April we completed a $400 million unit repurchase from our sponsors.

The repurchase provided significant and immediate accretion to our shareholders, while optimizing our capital structure to a conservative three times adjusted EBITDA leverage target on a full year 2022 basis.

In addition earlier this week, we announced a 5% increase in our distribution per share level relative to the previous target.

Using our financial flexibility to return free cash flow to shareholders on an ongoing basis, while maintaining a conservative distribution coverage ratio of at least one five times in 2022.

With the announcements, we again demonstrate our financial strength and commitment to consistent and ongoing return of capital to our shareholders.

Now turning to Hess midstream operations in the first quarter throughput volumes averaged 316 million cubic foot per day for gas processing 108000 barrels of oil per day for crude terminalling and 72000 barrels of water per day for water gathering reflecting impacts from severe winter weather.

As physical volumes were expected to be at or below MVC levels. There was no material impact to our first quarter financial results.

Now turning to Hess upstream highlights earlier today <unk> reported first quarter results with Bakken net production, averaging 152000 barrels of oil equipment per day.

Reflecting impacts of severe winter weather.

Poor weather conditions, which continued into April are transitory and Hess expects to recover and resume normal operations over the balance of the second quarter.

Reflecting weather impacts Hess forecast Bakken net production will average between 140 and 145000 barrels of oil equivalent per day in the second quarter and they expect to come in near the low end of their full year 2022 guidance range of 160 to 165000 barrels of oil equipment per day.

Has this well results remained strong with IP <unk> and EUR is largely in line or better than expected and Hess anticipates production to build in the second half of the year, reaching an average of between 175 and 180000 barrels of oil equivalent per day in the fourth quarter.

Hess is currently operating a three rig program in the Bakken and as giving strong consideration to adding a fourth rig later this year.

Four rig program would accelerate hesse's production ramp to approximately 200000 barrels of oil equivalent per day and drive material growth through Hess midstream infrastructure.

Turning to Hess midstream guidance, which was included in this morning's earnings release and is available on our website.

We're reaffirming our previously announced throughput guidance for full year 2022, despite the severe weather that impacted based on operations over the last two weeks.

We expect second quarter gas oil and water volumes to be approximately 5% lower compared to first quarter.

In the second half of 2022, we anticipate significant organic volume growth on our systems as Hess plans to bring 54, new wells online compared to 31 wells in the first half.

For full year 2022, we expect gas processing volumes to average between 330 and 345 million cubic foot per day.

Additionally, we expect crude terminalling volumes to average between 110, and 115000 barrels of oil per day and water gathering volumes to average between 70 and 75000 barrels of water per day.

We expect physical volumes to remain at or below MVC levels in 2022, providing approximately 95% revenue protection to.

Our forecast, giving a high degree of confidence to our financial guidance, which continues to project adjusted EBITDA in the range of $970 million to $1 billion.

Looking beyond 2022, we expect physical volumes to rise above <unk> in 2023 and continue to grow into 2024.

Turning to Hess Midstream is 2022 capital program, we're making excellent progress on executing our capital plans with activities, primarily focused on expanding our gas capture capacity and supporting Hess as development in the basin.

In the first quarter, we brought online the first of two new compressor stations planned to this year. The project was completed ahead of schedule and below budget construction is progressing well on the second station, which we expect to bring online in the third quarter 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 130 million cubic foot per day in the future.

As previously announced we expect to initiate construction on a third compressor station in 2022, which is expected to provide an additional 65 million cubic foot per day of installed capacity in 2023 further enhancing our gas capture capability and supporting has the pace of development.

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

Leveraging our unique integrated development planning process with Hess and phased infrastructure execution approach, we are well positioned to accommodate an acceleration of hesse's development activity. The infrastructure is already considered in our plan and supports the volume projections implied in our 2020 for Nbc's.

And finally, we're proud to have achieved a significant milestone in the first quarter with the publication of our inaugural 2020 sustainability report detailing our environmental social and governance strategy and performance.

Sustainable.

Responsible operations are the foundation of our business and creates value for the benefit of all stakeholders shareholders business partners and the communities where we operate.

Hess midstream is aligned and supports Hess Corporation's aim to help the world's growing energy needs, while reducing emissions, we support hesse's greenhouse gas emissions reduction efforts, but providing the infrastructure to move natural gas to market and reduce total flaring and equally important take action to reduce Hess midstream.

Ghd emissions, which are included in our hesse's overall emissions footprint.

In summary, we continue to execute our strategy, making focused low risk infrastructure investments to meet 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.

As John described we have continued to execute our financial strategy that includes delivering consistent and ongoing return of capital to our shareholders as a priority.

First we completed an accretive $400 million repurchase of units of our sponsors utilizing our financial flexibility that brings our leverage to three times adjusted EBITDA on a full year 2022 basis.

The purchase price per class B unit of $29 50.

Was the same class a share paid by the public in a simultaneous approximately $300 million underwritten secondary public offering by the sponsors that supports continued increasing liquidity in our shares.

Highlighting the opportunity for increase in taxation from the tighter liquidity Hess Midstream was recently included in the <unk> MLP index.

The repurchase transaction reduced the consolidated number of outstanding shares as an approximately 4% accretive on a distributable cash flow per class a share basis.

<unk> of the repurchase transaction, we had animas Lee approved by the board based on the approval recommendation of its conflicts committee composed solely of independent director.

The unit repurchase closed on April 4th and together with the secondary offering public ownership of Hess midstream on a consolidated basis has now increased to approximately 18%.

In addition, supported by the repurchase we recently announced a further return of capital to our shareholders through an immediate 5% increase in our quarterly distribution levels utilizing our excess adjusted free cash flow beyond our growing distributions.

Midstream continues to target, 5% annual distribution growth per class a share through at least 2024 from this new higher level with expected annual distribution coverage greater than one four times, including distribution coverage greater than one five times in 2022.

Our recently announced distribution increase of six 3% includes the new 5% increase in the distribution level as well as the targeted 5% annual growth in distributions per class a share.

The quarterly distribution will be payable on may 13th to class a shareholders of record as of the close of business on May five.

As we execute our plan, we will continue to pursue our financial strategy that includes consistent and ongoing return of capital as a primary objective.

Expect to continue to have financial flexibility.

The expected ongoing adjusted free cash flow after distribution add leverage declining below our three times debt to adjusted EBIT target as early as 2023.

<unk> for potential further return of capital to shareholders.

Turning to our results for the first quarter of 2022, net income was $160 million compared to $165 million for the fourth quarter of 2021.

Adjusted EBITDA for the first quarter of 2022 with $242 million.

<unk> two $247 million for the fourth quarter of 2021.

The change in adjusted EBITDA.

Relative to the fourth quarter of 2021 was primarily attributable to the following.

Total revenues excluding pass through revenues were down by approximately $6 billion.

Primarily driven by lower volumes impacted by severe winter weather and lower MVC levels, resulting in segment revenue changes as follows.

A decrease in determinant in revenues by approximately $4 million.

And a decrease in processing revenue of approximately $2 million.

Total costs and expenses, excluding depreciation and amortization pass through costs and net of our proportional share of <unk> earnings decreased by $1 million as follows.

Maintenance activity at the telco gaslit of approximately $3 million, partially offset by higher operating G&A property taxes, and other costs of approximately $2 million.

Resulting in adjusted EBITDA for the first quarter of 2022 of $242 million.

First quarter maintenance capital expenditures were approximately $1 million.

In that address excluding amortization of deferred finance cost was approximately $29 million.

The result was that distributable cash flow was approximately $212 million.

For the first quarter covered our distribution by one six times.

Expansion capital expenditures in the first quarter were approximately $37 million.

Resulting in adjusted free cash flow of approximately $175 million at quarter end prior to the completion of the unit repurchase debt was approximately $2 6 billion.

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

Turning to guidance.

For the second quarter of 2022, we expect net income to be approximately $145 million.

And adjusted EBITDA to be approximately $235 million.

Reflecting the impact of the severe weather conditions that John described together with higher expected higher seasonal operating costs.

Second quarter maintenance capital expenditures and net interest excluding amortization of deferred finance costs.

<unk> to be approximately $40 million, resulting in an expected distributable cash flow of approximately $195 million.

Delivered distribution coverage of approximately one five times.

For the full year 2022, we are reaffirming previously announced guidance for throughput volumes adjusted EBITDA and capital expenditures.

And updating that income DCF and adjusted free cash flow guidance, primarily to include the impact of incremental interest expense.

$400 million.

Aggregate principal amount of five 5%.

Unsecured notes due 2030 issued in April to repay borrowings under our revolving credit facility used to fund the accretive repurchase transaction.

For the full year 2022, we expect net income.

$10 million to $640 million.

Adjusted EBITDA of $970 million to $1 billion.

With total expected capital expenditures of $235 million, we expect at the midpoint to generate adjusted free cash flow of $615 million.

As implied in our guidance, we anticipate adjusted EBITDA in the second half of the year to be approximately 6% higher relative to the first half supported by Mvc's generally increasing through the year, we expect third quarter adjusted EBITDA to be higher relative to the second quarter guidance.

MVC with continued adjusted EBITDA growth in Q4.

As expected lower seasonal opex.

In summary, we are very pleased to have delivered additional incremental return of capital to Hess midstream shareholders 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. This concludes my remarks.

We will be 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 the star followed by the one key on your Touchtone telephone. If your question has been answered or you would like to withdraw your question press. The pound key question will be taken in Oregon, We cede Please press star one to begin.

Our first question coming from the line of Doug <unk> with Credit Suisse. Your line is now open.

Hey, guys. Thanks for the question.

Great to hear the assets potentially adding a fourth rig later this year a little earlier than expected.

I'm just I'm just curious if you had similar conversations with third party producers.

Given similar commentary around potentially ramping up activity.

Later this year and then just as we look at volume guidance is 10% to 15% still kind of the right third party next to think about this year.

Yes, Doug Thanks for the question. So again, we're focused on Hess is our priority and we're well positioned to support Hess if it decides to accelerate a rig for which based on the earnings call sounds sounds pretty.

It sounds like a good good outcome for us.

As far as third party goes we are seeing rigs increasing in the basin.

And so we're again, we're focused on <unk>, but we're also working towards supporting third party producers as well so as we've been we're connected to third parties, we have the capability and capacity to support them as their production grows and we'll continue we'll continue.

To do that.

So that's kind of that's kind of our focus.

From a rig development perspective, and then sorry, what was your second question.

Just around third party volume mix, I think you've pointed to 10% to 15% in the past is that still kind of the right way to think about it this year and looking forward.

Yes, and from a third party perspective, yet 10% is kind of what we've built into our plan and it's kind of our long term view for both both oil and gas, but again, we see that as as upside potential for US again, we're connected to those third parties and so as Hess and other producers ramp production in the basin.

Well positioned to support them.

Okay. That's helpful and then if I could sneak in one more on Capex.

You mentioned that the compressor station that just came online with a bit under budget just.

I'm just curious if you see the potential for some savings and on the second compressor that could come in under budget and then if you could just talk a little bit about the cadence of the remaining capex for the year and kind of how much of that is driven by well connects versus compression projects.

Sure.

So yes. The first station did it came in under budget and ahead of schedule and where we're continuing to focus on that and try and continue to deliver on that we do see some inflationary pressure out there. So we have made the decision to <unk>.

Pre buy some equipment to make sure that we minimize any risk associated with that so I think from an execution perspective, we would continue to see an opportunity to drive costs down from a from an execution cycle time perspective, but there is some some offset to that related to inflation that we'll continue to monitor and manage.

We don't see it being significant but it is something that we're going to continue to monitor and focus on and then as you asked about the cadence of compression. We've got the basically the three stations lined up that I mentioned in my.

In my opening remarks.

We've got the station that just came on and we've got another one that will come on in third quarter and then we're starting a third station.

Later this year that will come on in 2023.

So.

That represents a.

A large portion of the two.

Total of the $235 million that we're spending this year.

When you think about the well connects and kind of the base spend we're somewhere in that 75 to 120 $25 million range depending.

Depending on the activity and again, it really kind of depends on the rig activity and how many wells are coming on a on a given basis.

We are going to continue to see some infrastructure spend on that but overall, we would we would definitely see spend kind of going down as we as we continue to.

To focus more on the on the well connects into the into the longer longer term for capital spend.

Got it. Thanks, that's all for me thanks for the time.

Thank you.

And our next question coming from the line of Michael <unk> with Goldman Sachs. Your line is open.

Thank you for taking my question congrats to a good start of the year, despite the challenging weather.

Just curious I wanted to follow up on that capital spending question I know, it's a little bit early it's only late April but as you're starting to think about it about four or five months from now that Youll go dramatically ramp up the budgeting process as you start thinking about 2023 capital spend just directionally given the fact youre doing the two compressors.

This year and even part of the third this year.

The growth capital.

Do you see growth capital kind of coming down in 2003 versus 20 to work because the level of increased well connects plus inflation in the overall market kind of help offset the pack you might be doing a little bit fewer compressors year over year.

Yes. Thanks for the thanks for the question, Michael We do definitely see an opportunity to reduce capital spend into 2023 and beyond.

We are going to continue as I mentioned, we're going to continue to develop some infrastructure in that but.

But the pace of that is going to slow and so we would definitely see.

A reduction in capital going forward I would say 'twenty three is still one of those bridge year. So there still is going to be infrastructure in that third compressor station I mentioned is the bulk of the spend of that.

That station will be in 2023, so that will still represent a.

A material component of our overall program and then as you mentioned when we when we look out beyond 2003, and we're really focused on well connects it will really it'll really depend on the activity.

Got it and when Youre looking at year end 2022 leverage metrics. So kind of trailing 12 months that you could get to the end of this year based on the guidance you provided and the debt outstanding including after the new issuance.

Do you think to get below kind of your leverage metrics, meaning have leverage metrics at or better than target before the end of 'twenty, two where do you think thats really at 'twenty, three and beyond and I guess, where I'm hinting at is do you think there are other potential capital allocation opportunities in 2020.

Right. So the current plan has us.

I said.

Meets that three times target.

At the end of the year and then as we move into next year with continued growth in EBITDA.

Free cash flow positive in terms of fully funding our capital and distributions.

That we would continue to de lever going into 2023. So that's the working assumption no real change to that at this point, we continue to be free cash flow positive after distributions.

Even after the recent step up in our distribution of 5% level.

So we'll continue to be free cash flow positive there, but in terms of leverage we really see that happening next year and that really emphasizes. This is also a follow up on the first question.

Thinking about the financial strength of the business going forward with capital, we still have as John talked about compression going forward, but then moving it really just well connects.

And then maintenance capital with growing EBITDA continue to be free cash flow positive plus declining leverage naturally I mean it could.

Come to think of the financial flexibility that we have and the ability to continue to do these ongoing return of capital both in terms of the repurchases that we've done but also in terms of the step up in the level of our distributions on a on a go forward basis on really just the ongoing basis really you can see the the visibility we have financial flexibility and financial strength.

And capability to do this ongoing return of capital.

Got it. Thank you guys much appreciate it.

Thank you.

And our next question coming from the line of Dan Wong with Jpmorgan. Your line is open.

Hi, good morning, everyone.

A quick Big picture question for you and kind of following up on Michael's last question.

On January .

You guys about the broader financial framework.

Your relationship I guess with the parent what you could do there.

But on the whole.

You bought back.

You did the $400 million I'm just curious if there's anything maybe in light of the Guyana update opportunity set ups drones, and what you guys could do.

To I guess increase the public stake.

Right so.

If you really look at.

What we've really been.

We're working on in the journey, we've been on I'll say.

He said it's back to the simplification in 2019, it's really had two objectives.

One has been to remove technical obstacles to ownership, but let me start with that simplification continued through last year with the and into this year with the secondary offering.

And those have really been focused on moving technical obstacles to ownership in terms of increasing our average daily trading volume providing incremental investors. These offerings as an entry point and then increasing indexation and we feel good about the progress we've made on all fronts and all of those objectives in terms of.

Going forward.

No specific plan.

<unk> targeted a float in terms of secondaries.

J P I still own 82% of Hess midstream.

Certainly our disciplined long term investors focus on the long term value, but at the same time. They recognize that there is continued demand for additional float and so.

The balance of those two things will dictate.

It'll opportunities if the secondary at the same time. The second objective we have been pursuing is this ongoing return of capital utilizing our financial flexibility.

That in terms of we did that last year with the $750 million repurchase we're able to combine that with a 10% distribution increase and then again, we did as you mentioned the $400 million of 5% distribution increase this year. So that's something that we do see the opportunity to continue to go forward, but we will be disciplined just in terms of relative to our three times target.

As well as our free cash flow after distributions so.

There's nothing specific I would say.

In terms of the rest of this year.

But in terms of you know we will continue to pursue those both of those objectives. Both in terms of moving technical obstacles to increasing the float and then and then ongoing return of capital.

Got it alright, thanks, John that's very helpful. I appreciate it.

Thank you ladies and gentlemen. This concludes today's conference. Thank you for your participation you may now disconnect have a great day.

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Good day, ladies and gentlemen, and welcome to the first quarter 2022 Hess Midstream conference call. My name is Livia 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. If at 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.

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 filings with the SEC.