Hess Midstream LP Q1 2023 Earnings Call

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Good day, ladies and gentlemen, and welcome to the first quarter of 2023 Hess Midstream Conference call. My name is Gigi and I'll be your operator for today at this time all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session.

Ask a question during the session you will need to press star one one on your telephone you will then hear an automated message advising your hand is raised to withdraw your question. Please press star one one again please be advised that today's conference is being recorded for replay purposes.

I'd now like to turn the conference over to Jennifer Gordon Vice President of Investor Relations. Please proceed.

Thank you Gigi 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 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.

Sure and Jonathan Stein, Chief Financial Officer, I'll, now turn the call over to John Gatling.

Thanks, Jennifer and good afternoon, everyone and welcome to Hess Midstream first quarter 2023 conference call.

I'll discuss our first quarter performance, which demonstrates a continued focus on the safe execution of our operational strategy, while simultaneously advancing our financial priorities.

He will also review Heska Corporation's results and outlook for the Bakken.

Jonathan will then review our financial results and guidance.

In the first quarter, we successfully advanced two key priorities first to organically grow our business in a safe efficient and cost effective manner and second to return available capital to our shareholders.

Our focus gas capture investments continue to drive increasing volumes through our systems, while supporting houses commitment to achieving zero routine flaring by the end of 2025 <unk>.

Additionally, in the first quarter, we executed an accretive buyback and increased our distribution.

Leveraging our strong financial position.

We remain focused on executing our operational and financial priorities and are well positioned for growth as reflected in our guidance through 2025.

Now turning to Hess midstream operations.

In the first quarter throughput volumes averaged 338 million cubic foot per day for gas processing.

104000 barrels of oil per day for crude terminalling.

And 79000 barrels of water per day for water gathering.

Gas processing throughput increased by approximately 8% from the fourth quarter, mainly driven by strong weather recovery and increased gas capture.

Now turning to Hess upstream highlights.

Earlier today Hess reported strong first quarter results with Bakken net production, averaging 163000 barrels of oil equivalent per day, which was above their guidance range of 155 to 160000 barrels of oil equivalent per day, reflecting high uptime and recovery from challenging weather conditions during the fourth quarter.

Hess anticipates Bakken net production will increase to between 165 and 170000 barrels of oil per day in the second quarter.

Hess continues to operate a four rig program in the Bakken and plans to bring online approximately 110 wells in 2023.

Furthermore, Hess forecast Bakken net production to grow over the course of 2023, and 2024 and average approximately 200000 barrels of oil per day in 2025, which implies approximately 10% annualized throughput growth rate across all Hess midstream systems from 2023 to 2025.

Additionally, Hess expects to hold production at approximately 200000 barrels of oil per day for nearly a decade.

Turning to Hess midstream guidance, which was included in our earnings release.

We're reaffirming our previously announced throughput guidance for full year 2023.

Now focusing on the second quarter, we expect volume growth from the first quarter across all our systems, mainly driven by Hess as planned production growth and continued focus on gas capture.

For full year 2023, we're forecasting gas processing volumes to average between 350 and 360 million cubic foot per day.

Additionally, we expect crude terminalling volumes to average between 105, and 115000 barrels of oil per day and water gathering volumes to average between 85 and 95000 barrels of water per day.

Our 2023 planned volume growth continues to support adjusted EBITDA in the range of $990 million to $1 billion $30 million.

Now turning to Hess Midstream is 2023 capital program.

We continue to make excellent progress on our 2023 capital plans and are focused on supporting Hesse's development in the basin.

Construction is progressing on schedule for two new compressor stations and associated infrastructure and when brought online as expected increased gas gathering capacity by 100 million cubic foot per day.

The planned expansion of our gas gathering system is expected to increase gas throughput by more than 30% and 2025 relative to 2022, driven by Hess as planned development activity and goal of achieving zero routine flaring by the end of 2025.

Full year 2023 capital expenditures remain unchanged and are expected to total $225 million, which is comprised of $210 million of expansion activity and $15 million of maintenance activity.

In summary, we remain focused on safe reliable and efficient operating performance and project delivery, which will continue to drive strong financial results.

The year is off to a strong start and we're well positioned for substantial growth through at least 2025, which is expected to result in sustainable excess cash flow generation and the potential to return additional 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.

We continue to execute our financial strategy that includes a return of capital to shareholders is a priority.

They demonstrated track record of differentiated shareholder retired.

Since the beginning of 2021 wherever we tried one point to $5 billion to shareholders through accretive repurchases that have reduced our total unit count by 17%.

In addition to the combination of our 5% targeted annual distribution growth and three distribution level increases following each repurchase we have increased the distribution per class a share by approximately 30% over this period.

As a result, our total shareholder return yield is one of the highest of our midstream peers. Furthermore, our leverage of approximately three times adjusted EBITDA as one of the lowest among our peers.

Our differentiated ability to deliver significant shareholder returns, while also maintaining balance sheet strength with our recently completed unit repurchase at distribution level increase we continue our track record of shareholder returns through our return of capital framework.

In January we announced that we expect to generate greater than $1 billion of financial flexibility through 2025 for capital allocation, including potential outgoing here that repurchases you.

This capacity our recent repurchase transaction of $100 million is approximately one 5% accretive on a distributable cash flow per class a share basis with public ownership of Hess midstream on a consolidated basis, increasing to approximately 18, 3%.

Supported by the repurchase we recently announced a further return of capital to our shareholders. During the immediate one 5% increase in our quarterly distribution level beyond our targeted 5% annual distribution per class a share growth.

As we have done in the past with the reduced share count father repurchase. This distribution level increase is fully funded by the associated reduced distributed cash flow.

This new higher level, we will continue to target at least 5% annual distribution growth per class a share through 2025 with expected annual distribution coverage of at least one four times.

Father, you didn't repurchase we expect to continue to have more than $1 billion of financial flexibility through 'twenty to 'twenty five that can be used to continued execution of our return on capital framework, including potential ongoing repurchases.

Turning to our results.

For the first quarter of 2023, net income was $142 million compared to $150 million for the fourth quarter of 'twenty to 'twenty two.

<unk> EBITDA for the first quarter of 2023 with $239 million compared to $245 million for the fourth quarter of 2022.

The change in adjusted EBITDA relative to the fourth quarter of 2022 was primarily attributable to the following.

To the first quarter of 2023, our tariff rates and physical throughput volumes were higher including an approximate 7% increase in gas processing volumes as we transition from higher MVC levels in 2020 two to growing physical throughput volume to 'twenty to 'twenty three that are at or above N V. C's total revenue.

Excluding pass through revenues decreased by approximately $10 million, resulting in segment revenue changes as follows processing revenues decreased by approximately $5 million terminal revenues decreased by approximately $3 billion and gathering revenues decreased by approximately $2 million.

With physical volumes growing as more wells come online, we expect continued growth in revenue through the rest of 2023.

Total costs and expenses, excluding depreciation and amortization and pass through costs and that of our proportional share of L. A M. Four earnings decreased by approximately $4 million, primarily due to lower maintenance costs and operating and G&A in our gathering segment.

Resulting in adjusted EBITDA for the first quarter of 2023 of $239 million at the high end of our guidance.

Adjusted EBITDA margin for the quarter was maintained at approximately 80% highlighting our continued strong operating leverage.

First quarter maintenance capital expenditures were approximately $3 million and net interest excluding amortization of deferred finance costs were approximately $39 million. The result was that distributable cash flow was approximately $197 million for the first quarter covering our distribution by 1.4 times.

Expansion capital expenditures in the first quarter were approximately $54 million.

And adjusted free cash flow of approximately $142 billion, we had a drawn balance of $121 million on our revolving credit facility at quarter end, which includes funding our recent $100 million unit repurchase transaction.

The guidance.

For the second quarter of 2023, we expect net income to be approximately $140 million to $150 million and adjusted EBITDA to be approximately $240 million to $250 million, reflecting higher volumes offset by seasonally higher operating costs.

Second quarter maintenance capital expenditures and net interest excluding amortization of deferred finance costs are expected to be approximately $45 million, resulting in expected distributable cash flow of approximately $195 million to $205 million delivering distribution coverage of approximately one four times.

For the full year 2023, we are reaffirming all previously announced guidance and expect net income of $600 million to $640 million and adjusted EBITDA of $990 million to $1 billion $30 billion with total expected capital expenditures of $225 million we.

Expect at the midpoint to generate adjusted free cash flow of approximately $625 million with distributions per class a share target to grow at least 5% annually from the new higher distribution level, we expect to be free cash flow positive after fully funding distributions for 2023.

We expect increasing volumes and revenues each quarter through 2023 across oil gas and water systems with these really high operating costs in the second and third quarters of the year, resulting in expected growing adjusted EBITDA each quarter through the rest of the year.

As implied in our guidance, we anticipate adjusted EBITDA in the second half of the year to be greater than 5% higher relative to the first half.

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 we will be.

Happy to answer any questions I will now turn the call over to the operator.

Thank you, ladies and gentlemen, as a reminder to ask a question. Please press star one one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one one again please.

Please standby, while we compile the Q&A roster.

Our first question comes from the line of Doug Irwin from Citi.

Hey, everyone. Thanks for the question.

It's hard to start with EBITDA margin I think you've guided to 75% margin for 2023.

If you look at <unk> margins I think it came in at 83% and it's been well above 75% in the last few quarters as well I'm just curious what's driving this outperformance and if that's something that's sustainable moving forward.

Sure.

So really I mean in terms of our EBITDA margin and just you know at the level that we said targeting a 75% really that's first driven by our lean philosophy, which enables us to drive our operating costs lower and really a material proportion of our cost base is relatively fixed so therefore with growing volumes in revenue and <unk>.

Prior to the lower variable operating expenses, we have a robust EBITDA margin.

With that target, 75%, but as you know we look to continue at historically, we have exceeded that so if you look back really over the years, we've really have been just historically above that including this year's this quarter's EBITDA margin, which is just above 80%. So really I think we usually look at that as sort of.

A target, but something that we look to continue as we've done the past to continue to meet or exceed that so I expect to be continuing in that direction.

Yeah.

Got it that's helpful. And then I was just hoping you could provide a little more context.

And how you landed on the size and the timing of this first buyback this year and maybe how youre thinking about potential buybacks throughout the remainder of the year. I guess is this is gonna be kind of a quarterly decision you're you're looking at or is it maybe a little more opportunistic than that.

Sure.

So firstly just to remind there are our return on capital framework has really two elements. The first is the 5% annual distribution growth through.

Through 2025 at least and then of course, the repurchases, which.

Which are all right and then go back to the return of capital utilizing our available financial flexibility. If you look back how we've done this historically in 'twenty, one and 'twenty two we really did one large buyback transaction per year.

What's really changed now as we go forward, we tend to do multiple buybacks per year on an ongoing basis through 2025.

Using the more than $1 billion of financial flexibility that we've talked about and really the one.

Third billion dollar buyback was really the start of this approach. So what we expect is again, we would see multiple opportunities each year, starting this year with the 100.

Again multiple opportunities for the rest of this year.

Together with potentially related distribution level increases like we did here following the repurchase when we have the lowest share count as a result, the repurchase we have the opportunity to utilize that additional capacity. If you just take us back to the same distributed cash flow and it creates that distribution level, but overall really the changes rather enjoyed this one per year that's <unk>.

<unk> per year and through that we think there'll be significant ongoing accretion as we said we have continued to reduce our share count over the period.

Got it that's all for me thank you.

Thank you.

This concludes today's conference call. Thank you for participating you may now disconnect.

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