Q3 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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Good day, ladies and gentlemen, and welcome to the third quarter 2022, Hess Midstream conference call.
My name is Shannon 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.
As a reminder, this conference is being recorded for replay purposes.
I would now like to turn the conference over to Jennifer Borden, Vice President of Investor Relations. Please proceed.
Yeah.
Thank you Shannon and good afternoon, everyone and thank you for participating in our third quarter earnings Conference call. Our earnings release was issued this morning and appears on our website Www Dot Hess midstream Dot com.
Today's conference call contains projections and other forward looking statements within the meaning of the federal Securities laws.
These statements are subject to known and unknown risks and uncertainties that may cause actual results to differ from those expressed or implied in such statements. These risks include those set forth in the risk factors 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 with the 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 their audio issues, we will be posting transcripts of each speaker's prepared remarks on www Dot Hess midstream dot com following their presentation I'll now turn the call over to John Gatling.
Thanks, Jennifer and good afternoon, everyone and welcome to Hess Midstream third quarter 2022 conference call today I'll 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 upstream results today Hess reported third quarter Bakken net production of 166000 barrels of oil equivalent per day, which was above the guidance range of 155 to 160000 barrels of oil equivalent per day, reflecting strong execution and recovery following challenging weather conditions in the first half of the.
A year.
Hess anticipates fourth quarter Bakken net production to be in the range of 165 to 170000 barrels oil per day.
And full year 2022, Bakken net production to average approximately 155000 barrels of oil per day, which is at the high end up versus previous guidance range of 150 to 155000 barrels oil per day.
This fourth Bakken drilling rig commenced operations in July supporting Hess as planned production ramp to approximately 200000 barrels of oil per day in 2024, which drives long term volume growth for Hess midstream.
Looking ahead, we expect all our systems to be above MVC levels in 2023, and 2024, primarily driven by Hess as planned production growth and its goal of achieving zero routine flaring by the end of 2025.
Turning to Hess midstream results.
Our third quarter throughput volumes recovered strongly growing approximately 20% on average from the second quarter.
Third quarter volumes averaged 110000 barrels of oil per day for crude Terminalling and 80 383000 barrels of water per day for water gathering.
Reflecting strong gas capture third quarter gas processing volumes exceeded MVC levels, averaging 354 million cubic foot per day contributing to third quarter, adjusted EBITDA of $254 million, which was above the top end of our guidance range.
We anticipate fourth quarter gas oil and water volumes to be relatively flat compared to third quarter, driven by planned maintenance activities deferred from the third quarter.
Now moving to Hess midstream guidance, which was included in our earnings release and is available on our website.
We've updated our volume guidance to reflect third quarter performance and now expect full year 2022 gas processing volumes to average approximately 330 million cubic foot per day crude.
Crude terminalling volumes to average approximately 105000 barrels of oil per day.
And water gathering volumes to average approximately 75000 barrels of water per day.
We continue to make excellent progress on our 2022 capital program with activities, primarily focused on flare reduction due to the continued expansion of our gas gathering infrastructure.
In September we brought online the second of two new compressor stations planned this year.
In aggregate the two stations provide an additional 85 million cubic cubic foot per day of capacity and can be expanded up to 130 million cubic foot per day in the future.
Additionally, the stations were safely completed several months ahead of schedule and below budget.
Demonstrating the benefits of our lean approach to standardized compression design.
We're proud of our team for outstanding execution amid a challenging inflationary cost environment.
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 capacity in 2023.
To further support Hess and third party production growth.
We expect full year 2022 capital expenditures to total approximately $235 million comprised of $120 million and compression expansion.
Approximately $105 million in gathering system, well connects and $10 million of maintenance activity.
In closing, we continue to execute our strategy focused on safe and efficient operations.
Preserving cost discipline through our lean driven standard design and build philosophy, allowing us to efficiently grow throughput sustainable sustained Italy sustainably to generate cash flow and returned capital to our shareholders I'll now 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 and we are excited support houses development in the Bakken, while continuing to deliver on our strategy of consistent and ongoing return of capital to our shareholders.
Beginning with our results for the third quarter net income was $159 million compared to $152 million for the second quarter adjusted EBITDA for the third quarter was $254 million compared to $243 million for the second quarter.
The change in adjusted EBITDA relative to the second quarter was primarily attributable to the following <unk>.
Total revenues excluding pass through revenues increased by approximately $19 million, primarily driven by a combination of higher M. A c's and throughput volumes that exceed our N V sees in gas processing and one of our gas gathering sub systems.
And segment revenue changes as follows.
The increase in processing revenue of approximately $5 billion and an increase in gathering revenue of approximately $14 million.
Total costs and expenses, excluding depreciation and amortization pass through costs and net of our proportional share of Alan for earnings increased by $8 billion as follows.
Remediation expenses for produced water release of approximately $6 billion.
Ziv about actual costs incurred to date and estimated total future expenses.
Higher operating and maintenance activity of approximately $2 billion in our gathering segment that was seasonally higher compared to the second quarter, but lower than anticipated as a result of the deferral of some maintenance activities until the fourth quarter.
Resulting in adjusted EBITDA for the third quarter of $254 million above the top end of our guidance range.
Our gross adjusted EBITDA margin for the third quarter was maintained at approximately 80% highlighting our continued strong operating leverage.
Third quarter maintenance capital expenditures were approximately $1 million that interest excluding amortization of deferred finance costs were approximately $38 million. The result was that distributable cash flow was approximately $215 million for the third quarter covered our.
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Expansion capital expenditures in the third quarter were approximately $59 million, resulting in adjusted free cash flow of approximately $156 billion.
At quarter end debt was approximately $2 $9 billion.
Including a drawn balance of $43 million on our revolving credit facility representing leverage of approximately three times adjusted EBITDA on a trailing 12 month basis, we expect to decline below this target in 2020 three with increasing adjusted EBITDA, providing flexibility for incremental return of capital.
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Consistent with our return of capital framework earlier this week, we announced our third quarter distribution that increased 5% on an annualized basis and represents a 10% increase compared to the third quarter of 2021, including our distribution level increase earlier this year.
Turning to guidance.
Anticipate fourth quarter net income and adjusted EBITDA to be approximately flat compared to a higher third quarter results.
Reflecting the combination of the following state.
Stable revenues for the majority of our systems with throughput below MVC levels.
Downtime from planned maintenance activity that was deferred from the third quarter driving expected lower throughput volumes and revenues at our gas gathering system operating above every sees.
And lower total opex in the fourth quarter with a produced water remediation expenses in the third quarter.
Reflecting these fourth quarter expectations and have strong third quarter results, we have updated and raised our full year financial guidance relative to the midpoint of our prior guidance.
We now expect net income to be approximately $630 million and adjusted EBITDA of approximately $991 million, representing 9% growth compared to full year 2020 one results.
Maintenance capital and cash interest are projected to total approximately $150 million for the full year 2022.
And distributable cash flow is expected to be approximately $840 million, resulting in an expected distribution coverage of greater than one five times.
We expect to end the year with leverage at a conservative three times adjusted EBITDA leverage target.
Looking forward in January we will release, our 2023 operational and financial guidance, including 2025 N V six weeks.
We expect to continue to execute our financial strategy over coming years, as we have clear visibility to expected revenue and adjusted EBITDA growth supported by organic growth above N V. Six in 2023 and 2024.
Emphasizing this visibility to continued growth in adjusted EBITDA.
N V sees a 'twenty 'twenty, three and 'twenty 'twenty four if I continued organic growth and gas processing and gathering throughput driving increasing gas revenues that excluding pass through revenues comprised approximately 75% of total affiliate revenues.
As a result, we anticipate continued growing adjusted EBITDA and stable Capex and expect growing adjusted free cash flow sufficient to support our growing distributions and incremental financial flexibility, allowing for continued return of capital to shareholders consistent with our financial strategy.
In 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 at all going to be tied to a capital. This concludes my remarks, we'll be happy to answer any questions.
I will now turn the call over to the operator.
Ladies and gentlemen, if you have a question. Please press star followed by one one on your phone.
Questions will be taken in the order received please press star one one to begin.
Your first question comes from the line.
Of Michael Lapidus with Goldman Sachs. Your line is now open.
Hi, Thanks, everyone. Thanks, Jonathan Jonathan for taking my questions actually I have a few one kind of more near term one a lot longer term on the near term Jonathan you used the word stable when referring to capex going forward.
Does that imply that future capex or growth Capex for expansion Capex looks a lot like 2022 levels or should we be thinking given the amount of new compression you added in 2022 that future capex needs to be a little bit lower than this year's.
Alright.
I'll just start and give kind of the overview, maybe just a general talk on where we think <unk>.
<unk> going on guys without a drug Gallic and give a little bit more detail.
EBITDA that you can see visibly through our current N V. C's of course, we'll update those services, including our 2025 MVC that we expect to show and demonstrate the visibility of our continued growth, but remember with that stable capital that we'll have next year and then growing EBITDA that means we'll also have a significant financial flexibility in terms of law.
Average as I mentioned, we're at our three times target.
And so as we move into next year with growing EBITDA, we expect that to decline and I also mentioned it our revolvers just that $43 million now so as we move into next year, it will be generating excess free cash flow above our growing distributions, giving us incremental financial flexibility if our return of capital program as well. So that's kind of the broad contours will give more.
More information in January including a 2025 every say as I said, but that's generally kind of the broad direction of where we think things are headed and we just sort of a John if he wants to give any more light on the capex.
Sure. Thanks, Jonathan.
We've been working towards hesse's production growth to 200000 barrels oil equivalent per day in 2024. So we've been we've been kind of targeting that from a from a capex perspective and compression.
And gathering we've been continuing to focus on compression I would say that the spend as Jonathan mentioned the spend in 2023 is going to be at or below the 2022 level.
But from from the growth perspective, and you can see it in the in the implied volumes from our 2023 and 2020 for Nbc's now that we are expecting growth and we are going to continue to focus on well connects and compression.
But again, we have 500 million a day of total processing capacity and we'll continue to grow towards towards that capacity as SaaS grows its production in the basin.
Got it and then one kind of longer term question several years out.
It has really achieved six zero flaring goal.
Outside of the kind of production growth volume, how should we think about what that incremental like getting from current flaring zero flaring needs for Ya.
Yeah, I mean, we see we definitely see the zero teen flaring a commitment from Hess as a as a positive it's definitely a catalyst for the midstream Hess is doing actually very very well I mean, they're they're well above 95% gas capture currently they made the commitment to <unk> routine flaring by the end of 2025.
We're on track to support Hess as a growth towards your routine flaring by the end of 2025, I think you know as Hess has demonstrated its a sustainability report it's committed to continuing to improve emissions reduction activities in the basin.
Where I think we're well positioned to help support and grow that so from a from a plan perspective and N. B season, as I mentioned that the implied 'twenty three 'twenty four volumes and we'll we'll give twenty-five NBC guidance in January .
That that the gas capture component of that and the Z routine flaring commitment is built into those forecasts. So we feel good about it again it it it's it's underpinning our growth.
And we're here to support Hess is hesse's objectives from a climate and emissions reduction perspective.
Got it and then one last one.
And this may be one for Jonathan how should we think about the move in interest rates.
And what that means for financing cost for you, including doing things like using the revolver.
But be kind of thinking more two to three years.
Using incremental debt issuance as a mechanism or a tool in kind of the broader return of capital to shareholders process.
Okay.
Sure. So great question, let's just start in terms of currently where we sit right now are really only our bank facilities, which we just recently renewed through 2020, sorry that are exposed to floating interest rates. The rest of our debt is fixed so that leaves us with just 15% of our debt is floating as I mentioned on our.
Revolver of $1 billion revolver, we only have $43 million drawn.
With the exception of the bank facilities, we really have no debt maturities until 2026 at this point so.
So we have a with that being significant flexibility.
To execute our repurchase program for a leverage point of view as we talked about it as we go into next year in terms of Delevering, but also we're also going to be generating excess free cash flow beyond that growing distributions.
Really without any ongoing balance on the revolver to pay down and stuff just working capital so that creates additional cash flow to fund our capital program.
On an overall basis, our weighted average cost of debt.
Looking at the fixed at about 5% very very good there. So we're really in a great spot. We don't have any pressures in terms of short term maturities or any pressures that we have a lot of flexibility in terms of using our revolver to be able to optimize as necessary and we have a cash flow that will support the leverage as well if RV purchases.
So we're really in a good spot we don't see any.
That is going to you know in terms of the interest rate environment, we don't see that as an obstacle in terms of the rest of being able to continue to execute our return of capital program.
Got it thanks, guys and sorry to hog up at the beginning of the call much appreciate it.
Thanks, Michael.
Thank you. Your next question comes from the line of Stephen Mcgee with J P. Morgan. Your line is now open.
Hi, Good afternoon, I guess, just starting out with the volume increase there does this kind of flow through into 2020. Three for you guys and then with that do you see all systems above Nbc's next year with this and then is that for all four quarters or is that more of a on average.
Yeah, why don't I I'll hit the the volume question and then I can hand, the M. D. C question over to Jonathan So so on the volumes.
From <unk> perspective, and the volume growing to 200000 barrels oil per day by by 'twenty 'twenty four.
We've built that into our forecast again, we'll update guidance going into January as far as the 2025 M. B CS. So I'll give you an indication of where volumes are heading.
But from our perspective and looking at the implied 2023 and 2020 for volumes from the MVC based on the implied nomination from Hess, we definitely see growth going into into 2023, and 2024 and from a MVC perspective, we're definitely going to be in good shape, but I'll I'll hand, it over to Jonathan for <unk>.
A little bit more detail.
Yeah.
Yes, so I think in terms of MVC. It's just you know just as a reminder, MVC is is that three years in advance. So 2022 it's really caught the last MVC from prior to the downturn what has reduced the number of rigs and so as we move into 'twenty three and 'twenty four we're really going to be these are everyday use which are set based on I'll call. It the more current plant as.
The result.
Expect to be above every CS, which are set at 80% of the current plan in 'twenty three 'twenty four what I think is.
It gives us confidence in that growth as John said with half continuing to be a moving towards the 200000.
That production goes towards 1000 Boe per day as well as he talked about the routine flaring gull all of that as John said, it really underpins our.
Our growth that we see there and then as we said, we'll give a new and we see the 2025 that will essentially you know we expect to show continued growth as well and then in terms of how we think you know volumes the way to think about this is to say look were at N. B C level. So the majority of our systems. This year as I just said, we're gonna be above MVC. So those embassies.
Sat at 80% of expected throughput so think of the growth for this year to next year as being from MVC level. This year to physical growth into physical volume level next year and then in 'twenty three 'twenty four we will continue to be on a sustained basis now above N V. C's and then therefore, what will really be as going from physical volumes.
Three I get to physical volume growth again in 'twenty four and so on.
95, so this year, it's really as we go into next year. It really this year's MVC levels to next year's physical levels. That's the way to think about our growth as we go into next year.
Got it thank you for that and then.
If once has hits their 200 barrel of oil equivalent per day, how do you gauge third party interest you.
You know how do you determine that on your system in and what is the interest level there from a <unk> perspective.
Yeah, I mean, obviously hess is going to be our primary customer and that's where we're going to focus most of our efforts, but as we've always done and have been successful at doing.
We continue to be focused on capturing any third party volumes, we can in the area to fill any OLED that we have in our system. So any available capacity, we're looking to fill it by third parties.
Again. This is a very good problem to have which has us sitting on top of great rock, we're on top of that acreage position.
There's other third parties that that kind of surround that as well where a natural aggregator for those volumes and we're continuing to look at that.
From our perspective, you know, where we've we've assumed approximately 10% oil and gas.
Third parties will continue we're continuing to kind of forecast that but again, we look for opportunities to capture more volumes as it becomes available and again, we think our system is strategically positioned.
To attract to attract additional volumes as we have capacity available on our system.
Understood and then one more if I could.
Just wanted to see what Youre seeing in the basin right now as far as ethane recovery rejection.
And then how you kind of see that progressing I guess going forward.
Sure I mean, I think ethane is a bit split them you've got some processors that are actually recovering ethane and taken it to market.
Some are rejecting the ethane and including and the residue stream coming out of the basin I think it's really going to depend on market and kind of what the value of ethane is it's also gonna. It's also going to depend on.
Export capacities for both ethane residue and Ngls ultimately.
So I think from our perspective from <unk> perspective, we're extremely fortunate that we've got full fractionation capability up to 250 million cubic foot per day at the tailgate gas plant plus another 150 million a day of Y grade capacity at.
At the gas plant, we've got reliable takeaway for both for all three streams residue ethane and Ngls, both both fully fractionated Ngls, but also Y grade. So I think from our perspective, we've got the export solved a we're going to continue to work on how do you optimize.
Between ethane recovery and and other Ngls and even reject into into the residue stream at the end of the day becomes a real it becomes an economic and ultimately an export capacity question.
Got it appreciate it thanks guys. Thank.
Thank you.
Thank you very much. This concludes today's conference. Thank you for your participation you may now disconnect and have a great day.
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