Q2 2022 Hess Midstream LP Earnings Call
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
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Yes.
Good day, ladies and gentlemen, and welcome to the second quarter of 2022 Hess Midstream Conference call. My name is Victor and I'll be your operator for today.
At this time.
<unk> are in listen only mode. Later, we will conduct a question and answer session. 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 Victor good afternoon, everyone and thank you for participating in our second quarter earnings Conference call. Our earnings release was issued this morning and appears on our website Www Dot Hess midstream Dot com.
Today's conference call contains projections and other 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.
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, and our transcript of todays prepared remarks.
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.
I'll turn the call over to John Gatling.
Thanks, Jennifer and good afternoon, everyone and welcome to Hess Midstream second quarter 2022 conference call.
Today I will review the progress, we're making on executing our strategy discuss our operating performance and capital program and review Hess Corporation's results and outlook for the Bakken.
Jonathan will then review our financial results and guidance.
Beginning with Hess is upstream results today has reported second quarter Bakken net production averaged 140000 barrels of oil equivalent per day, reflecting the impact of severe weather in April and May.
Hess is production is recovering well results continue to meet or exceed expectations and Hess anticipates production to build in the second half of the year as they bring approximately 50 wells online compared to 32 wells in the first half of 2022.
Bakken net production for the third quarter is expected to increase to between 155 and 160000 barrels of oil per day and further grow to between 160 and 165000 barrels of oil per day in the fourth quarter.
For full year 2022, Hess forecast Bakken net production to average between 150 and 155000 barrels of oil equivalent per day.
Furthermore.
<unk> announced a fourth drilling rig commenced operations in the Bakken during July supporting Hesse's planned production ramp to approximately 200000 barrels of oil per day by 2024.
With Hess midstream focus gathering infrastructure expansion, we're ready to meet Hess has accelerated development pace, which is expected to drive volume growth through our system, allowing us to reaffirm our expected throughput growth above <unk> in 2022, and 2020 for 2023 and 2024.
Turning to Hess midstream results, our second quarter throughput volumes averaged 292 million cubic foot per day for gas processing 93000 barrels of oil per day for crude terminalling and 65000 barrels of water per day for water gathering a physical volumes are already expected to be at or below MVC levels that was no.
<unk> impact to our second quarter financial results relative to our guidance.
The weather related deferral of planned maintenance activity to the second half of the year drove lower than anticipated operating costs for the second quarter, resulting in adjusted EBITDA of $243 million.
Compared to our guidance of approximately $235 million.
Turning to Hess midstream guidance, which was included in our earnings release and is available on our website.
We're reaffirming our previously announced full year 2022 financial guidance and updating our throughput guidance to reflect the impact of severe weather experienced in the second quarter.
For full year 2022, we now expect gas processing volumes to average between 315, and 330 million cubic foot per day and crude terminalling volumes to average between 103 and 108000 barrels of oil per day.
Selecting strong growth and operating performance, we continue to expect water gathering volumes to average between 70 and 75000 barrels of water per day for full year 2022.
As a reminder, with physical volumes on our systems expected to be at or below <unk>. In 2022 are 95% revenue protection gives us a high degree of confidence in our financial guidance.
Turning to Hess Midstream is 2022 capital program, we continue to make excellent progress on our 2022 capital program with activities, primarily focused on flare reduction through the continued expansion of our gas capture infrastructure.
We recently completed construction and commenced commissioning of the second of two new compressor station startups planned to this year.
We expect to bring the stations online in the third quarter completing the project below budget and several months ahead of schedule.
In aggregate, our two new compressor stations provide an additional 85 million cubic foot per day of installed capacity in 2022 and can be efficiently 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 the fourth quarter, which would provide an additional 65 million cubic foot per day of installed capacity in 2023.
Further growing our capacity and supporting Hess has accelerated development.
In addition.
Our close integration with Hess and lean focused standard design philosophy has enabled us to largely mitigate near term inflation and maintained full year capital guidance two.
<unk> 2022 capital expenditures are expected to total approximately $235 million comprised of $225 million of expansion and $10 million of maintenance activity, we expect to invest approximately $120 million and compression expansion and reflecting increasing drilling activity by Hess.
Proximately $105 million in gathering system well connects.
In closing, we continue to execute our strategy, making efficient and low risk infrastructure investments to meet basin growth demands delivering safe and reliable operating performance and strong financial results, enabling us to grow our business and return capital to our shareholders.
Now I'll turn the call over to Jonathan to review our financial results.
Thanks, John and good afternoon, everyone.
As John described we are making good progress in executing our strategy.
Excited to support Hess has accelerated development in the Bakken, while continuing to deliver on our strategy of consistent and ongoing return of capital to our shareholders.
Over the past 12 months, we have executed in excess of $1 billion in accretive share buybacks.
Two separate distribution level increases.
<unk> continued our track record of growing our distribution per share every quarter since our IPO in 2017.
We recently announced our second quarter 2022 distribution growing one 2% quarterly consistent with our targeted 5% annual distribution growth for class eight share to at least 2024 with expected annual distribution coverage greater than one four times, including distribution coverage greater than one five times.
In 2022.
We expect to continue to execute our financial strategy over coming years, as we have clear visibility to expected revenue and adjusted EBITDA growth.
Wanted by increasing <unk> in the second half of 2022, followed by organic growth above <unk> in 2023, and 2024 underpinned by Hess as recent addition of a fourth operating rig.
On a 2024 Mvc's set as part of his nomination at the end of 2021 at 80% of our expected 2020 for gas gathering and processing throughput.
Our volumes are expected to grow by approximately 20% relative to 2022 MVC.
Cost of revenues, excluding pass through revenues comprise approximately 75% of total affiliate revenues.
<unk> the visibility we have to continued growth in adjusted EBITDA.
Looking forward annual capital expenditures to deliver this growth plan through 2024 are expected to remain stable relative to 2022 with activity tightly focus of phase build out of compression well connects and system optimization aligned with has the development plan.
As a result with growing adjusted EBITDA and stable Capex, we expect growing adjusted free cash flow is sufficient to support our growing distributions and incremental financial flexibility, allowing for continued return of capital to shareholders consistent with our financial strategy.
Turning to our results for the second quarter net income was $152 million compared.
Compared to $160 million for the first quarter.
Adjusted EBITDA for the second quarter with $243 million compared to $242 million for the first quarter.
The change in adjusted EBITDA relative to the first quarter was primarily attributable to the following.
Total revenues excluding pass through revenues increased by approximately $4 million, primarily driven by higher MVC levels, resulting in segment revenue.
Followers.
An increase in processing revenue of approximately $3 million and an increase in gathering revenue of approximately $1 billion.
Total cost and expenses, excluding depreciation and amortization pass through costs and net of our proportional share of <unk> earnings.
<unk> by $3 million as follows.
Higher operating and maintenance activity on our expanding gathering infrastructure of approximately $4 million.
Partially offset by lower G&A of approximately $1 million.
Resulting in adjusted EBITDA for the second quarter of $243 million above our guidance of approximately $235 million, primarily due to deferral of certain maintenance.
This activity to the third quarter.
Our growth adjusted EBITDA margin for the second quarter is greater than 80% highlighting our continued strong operating leverage.
Second quarter maintenance capital expenditures were approximately $1 million.
And that interest excluding amortization of deferred finance cost was approximately $35 million.
The result was that distributable cash flow was approximately $206 million for the second quarter covering our distribution by one five times.
Expansion capital expenditures in the second quarter were approximately $70 million.
Resulting in adjusted free cash flow of approximately 136 billion.
At quarter end and following the completion of our recent repurchase debt was approximately $3 billion.
Representing leverage of approximately three two times adjusted EBITDA on a trailing 12 month basis by year end, we expect leverage to return to our three times adjusted EBIT target and the cloud below this target in 2023, providing flexibility for incremental return of capital to shareholders.
Turning to guidance, we are reaffirming our previously announced guidance for full year 2022 fluids, we expect net income of $610 million to $640 million and adjusted EBITDA of $970 million to $1 billion.
With total expected capital expenditures of 235 billion.
We expect at the midpoint to generate adjusted free cash flow of $658 million.
As implied in our guidance, we anticipate adjusted EBITDA in the second half of the year to be higher relative to the first half supported by Mvc's generally increasing through the year with.
We expect third quarter adjusted EBITDA to be approximately flat relative to second quarter results as increasing revenues driven by higher <unk> offset by higher seasonal operating cost.
Maintenance activities that were deferred from the second quarter.
For the third quarter of 2022, we expect net income to be approximately $150 million to $160 million.
And adjusted EBIT to be approximately $240 million to $250 million.
Third quarter maintenance activity maintenance capital expenditures and net interest excluding amortization of deferred finance costs expected to be approximately $40 million.
Resulting in expected distributable cash flow of approximately $200 million to $210 million.
Distribution coverage at the midpoint of the range of approximately one five times.
In the fourth quarter, we expect continued adjusted EBITDA growth relative to the third quarter are the higher mvc's expected lower seasonal opex.
At closing we are very pleased with the progress we are making in our business 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 by remarks, we'll be happy to answer any questions I will now.
I'll turn the call over to the operator.
Ladies and gentlemen, if you have a question. Please press star followed by one one on your phone.
Questions will be taken in the order received please press star one one to begin.
When we move to questions.
Our first question comes from the line of Stephen Magee from Jpmorgan. Your line is open.
Hi, Thanks for taking my question.
Turning to volume guide do you expect most of that to be made up in 2023 through the fourth rig come online with expectations or did that pull forward any growth and then finally would this provide any opportunity to raise the 2023 MVC level.
Sure Let me let me hit the 2022 question first so the rig came on in July .
We would expect to see some wells coming out towards the end of the year, but we don't expect any real material volumes.
From the from the fourth rig we do still continue to expect to see growth into the second half of the year and into the fourth quarter with the add of the third rig and then obviously with the fourth rig coming on.
As far as looking at 2023 volumes, we are expecting to be above <unk> in 2023, and 2024 and as we look further forward with the fourth rig will make.
We will make adjustments to our to our guidance as we as we go into 2023 at the beginning of the year.
And this is Jonathan just.
On the MVC is just for clarity.
Just as a reminder of how that works is we set the MVC is three years in advance once this that they can only be increase and that reduced so as an example at the end of 2021, where it has dominated updates domination.
<unk> set a new MVC.
For 2024, but then also went back and looked at our <unk> and in that case. The 2023 Mvps will actually all went up as a result.
As John said, we have growth going into next year, we will set a new efficacy at the end of this year for 2025, and then we'll look at the volumes for 2023, and 224 I think that that.
The volumes are higher than what's in our current nomination then the emphasis with would go up at that point.
As a reminder, the emphasis again can only go up they can't go down so when we evaluate that it only beef up otherwise emphasis that we have will stay in place.
Got it and then with so with your expectations to be above MVC in the next few years is it fair to assume that.
There could be an increasingly macy's.
I mean, I think we will update that at at the end of this year when we come out with the new.
With our new.
Obviously for 2025, and then we'll look back and I think the important point, which is what John highlighted is that with the fourth rig now in place obviously as well as our continued focus on gas capture in the zero team flaring goal by the end of 2025 all of that really supports visible growth for us it underpins.
The growth that's already in our.
Implied by our MVC as I talked about the 20% growth from this year's WCS to the 2024.
Implied throughput and that's going to include both next year as we move obviously is the physical volumes and then continued growth in 2024, as we grow I expect to grow both gas oil and water volumes across really all of our systems supported by that so but with that increase in revenue.
As I talked about a consistent EBITDA margin, that's going to add stable capex that I also John and I, both talked about that's going to translate into continued growing free cash flow after distributions and continued deleveraging, which gives us the opportunity for continued return of capital.
Got it thank you Super helpful.
Thank you.
Thank you and one moment for questions.
Our next question comes from the line of Doug <unk> from Credit Suisse. Your line is open.
Hey, guys. Thanks for the question.
Maybe just a broader one kind of on the Bakken.
Adding a fourth rig and I think we've kind of seen from others.
Start to come back.
Kind of the summer.
If you see any capacity constraints developing in the basin kind of over the next few years.
And I guess specific to FM systems, you mentioned the ability to kind of further expands the recent compressor compressors that came online.
A decision that might be needed kind of over the next couple of quarters or is that more of a longer term opportunity.
Yeah.
Yeah sure. So maybe I'll just take the the export question first I think overall just speaking for Hess Hess is in good shape, we have sufficient capacity.
To stay within flaring regulations process and export oil Ngls and natural gas so from our perspective.
We're in very good shape to support Hess and third party volumes.
And then as we as we think about expanding our system I mean, we've over the years, we've built our system with with maximum flexibility as efficiently as we possibly can.
Our kind of design once build many approach our lean our lean focused approach.
This has enabled us to expand as the basin growth dictates and that includes hesse's growth. So as Hess look to add the third and ultimately the fourth rig.
We're well positioned to be able to expand our infrastructure to support that growth that will continue to be our philosophy as we develop the basin and support Hess and third parties.
And we will continue to look at infrastructure that can that can be expanded through that so from an overall infrastructure perspective, we're in good shape. We've got has covered.
<unk> growth will continue to look at infrastructure needs and demands and we'll manage it from that perspective, and then you know.
As third parties potentially grow as well, we will look at opportunities to support them on they're on their way to reducing flaring in hesse's objective of zero to flaring by the end of 2025.
Okay. That's helpful. Thank you.
And maybe one on capital allocation is kind of in light of the <unk>.
Purchase that took place during the quarter.
I think it's been a pretty balanced approach in the past between buyback and distribution growth.
Curious, how you're weighing those options moving forward from here.
Here with maybe a certain level of public float youre looking to achieve.
I think theres a yield that youre targeting just kind of curious how you got that.
Sure.
So look I think first of all we got a lot of positive feedback on the recent combination of the buyback.
Secondary offering.
Always.
They'll play out to do those always together.
Worked out while we're happy that the transaction went well, but really as I said in the past they are really geared towards.
Two different objectives with the buyback.
Part of our continuing and ongoing return of capital program and then our secondaries really part of removing technical obstacles to ownership.
In terms of the secondaries as we've said there's really no specific plan there.
Our targeted float.
As I said, we've talked a lot for those we feel good about the progress we've made there.
Liquidity measured by our increase of the average daily trading volume as well as the increased index Asia, We've got not being added to the layering of the MSCI Smallcap index.
So no specific plan into the secondaries.
There is no target float, it's really a combination of demand that we get from investors, who are looking to increase their position and want to remove obstacles and balanced with JP being disciplined investors, who see the long term value it has to midstream.
In terms of the first part of your question in terms of the balance between buybacks and distribution increases.
As we've done those.
Really together I think those have worked out well and certainly as part of architecture program.
Two parts to our to our ongoing return of capital, it's 5% per share growth that will come to at least 12 to 24, and we'll update more on that at the end of the year when we gave our guidance.
For next year, and obviously for 2025, but then the incremental return of capital, including share repurchases and we've been able to combine those really with distribution increases that really maintaining the same level of distributed cash flow, but at a lower share count. So that has allowed for a really ongoing enemies.
An immediate return of capital both in terms of the buyback combined with the.
With a dividend increase so those are certainly parts of our program that will continue and then secondary will be really when you see that balance between demand for faster than <unk>.
Long term value perspective relative to their own disciplined to hold it.
Alright that is all for me thanks.
Thanks for the time.
Thank you.
Unknown for questions.
Our next question comes from the line of <unk> Satish from Wells Fargo. Your line is open.
Thanks.
Good afternoon, I think based on your MVC cadence it sounds like it.
It appear like you start to hit 90% of your processing capacity in the 2025 timeframe. So I guess if that assessment is correct.
Would you consider expanding processing capacity at that point or is it kind of dependent on weather has moved past its 200000 barrel per day target.
Yeah. Thanks, So we haven't actually given 2025.
Nbc's yet so.
It sounds like you are maybe kind of forecasting that growth out beyond 2024 were obviously expect them to be.
Above nbc's in 'twenty, three and 'twenty four.
We feel like we have sufficient capacity to cover hesse's plans will continue to evaluate the needs in the basin. Our focus right. Now is just on on gas capture and adding the compression necessary from a processing perspective 500 million cubic foot per day capacity covers covers our current plan, but we'll continue to look at that.
We'll look at Hesse's plans with its fourth rig and the performance that it expects to see there. We'll also look at third parties to understand what the what the demand is and what kind of take it based on based on that.
From our perspective from an execution perspective, we're prepared to plan and engineer whatever infrastructure, we need to support the basin, but again, we want that to be right sized fit for purpose and make sure that we've got.
We've got good volumes accounted for going into into this any system that we that we built.
Got it.
And then maybe if you could just comment on kind of the puts and takes of where you think rates could go in 'twenty three.
I know you've got some inflation tailwind, but then.
You've got weather related disruptions in but then you've got better volumes in 'twenty three because of the fourth rig potentially so I guess just net net.
Just directionally would that support higher rates in 'twenty three are kind of flattish.
I'll, let it.
Go ahead, John Sorry go ahead okay.
Okay. Thanks, So I think that.
Look I think as you said there are puts and takes to this.
I think our plan, we did have a big increase in rates in 2021, and then as we've kind of set the plan here, which includes growth, we've really been saying about the fourth rig.
Is it really underpins the growth in the existing plan.
We do have capital that has been.
And two with the plan to add additional compression and the like so I think look our expectation is generally that rates will.
Obviously, we have an inflation escalator, but net net of that we expect rates to be relatively flat, maybe slightly increasing with inflation escalator, but besides that we're not expecting a big move in rates, that's really the big driver.
Really into 2023 will be as we continue that growth underpinned by the fourth rig gas capture.
That really will continue to drive up our EBITDA.
Revenue as I described.
Got it thanks.
Thank you. Thank you.
Our next question.
Okay.
Sorry.
Our next question comes from the line of Mike will appear from Goldman Sachs. Your line. Your line is open.
Hey, guys. Thanks for taking my question, one or two easy ones I, just want to make sure I heard correctly two.
<unk> 2023 expansion capital or are you, saying, it's going to be roughly flat to the 2022 level and can you just given the number of compressors youre doing this year.
And the third one you are planning on starting kind of in the year beginning of next year can you just talk about the components of that.
Sure. So maybe I'll just start with the compression in question and then I'll hand, the first part of your question over to Jonathan.
It really comes down to phasing when the compressors started so the compressors that were bringing online. This year some of that spend actually happened last year. Some of it is happening. This year, we're going to be kicking off that third compressor station. This year and the bulk of the spend for that activity will actually be will actually be next year. So.
From an overall compression perspective, we're going to expect to see thats been relatively flat and that holds for the for the broader program as well generally looking at 'twenty.
22 into 2023, so I don't know Jonathan if theres anything else you wanted to add to that.
No I think that really.
Saint Lukes stable Capex.
Through next year.
Describe that but with that complemented by growing EBITDA.
By that growing revenues as we've described so obviously, therefore growing free cash flow after distributions and continued delevering, but on the Capex side Youre right that were saying stable based on that John described.
Got it and then a little bit of a quirky question on what happens with the tariffs once you.
Once you get in the second 10 year process, just curious current volumes where were tough this quarter due to the weather in late April early may, but because of the NBC that implies a higher tariff.
I remember correctly.
When the next tranche occurs.
It takes the average of the prior three year tear ups and then grows by an inflation adjuster just curious.
What happened in this quarter actually a potential positive if I think out two or three years.
Well I think the way.
As you described we will have a rate reset at the end of this year.
The average rates for 'twenty, one 'twenty two 'twenty three.
Become the set rate plus inflation escalator for 2020 for the extent that volumes on a total basis. After the year are lower than expected.
Yes that would have a positive impact on rates as I said, though as they may be able to before I think our expectation maybe even with this.
The trend that we've had just in the first half we do expect growth does that could have as we still expect rates generally to be stable going into next year.
So that will really I think.
Really just what I expected that to have a big impact really the big impact I'd say on rates that we've had.
In 2021.
As rates went up relative to.
Relative to <unk>.
Relative to where they were in 2020 of that really fed into therefore average going forward this year.
So.
Your volumes are really kind of at <unk> and so therefore once you're at the bottom MVC you can't lower volumes, but obviously don't impact rates going forward. So really got it expect it to kind of stable rates going into next year and that really that will roll into 2024 right.
Got it. Thank you guys much appreciate it.
Absolutely. Thank you.
Thank you.
Thank you very much. This concludes today's conference call. Thank you for your participation you may now disconnect everyone have a great day.
To raise your hand during Q&A you can dial one one.
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