Q2 2024 Hess Midstream LP Earnings Call
Okay.
G. G.: Good day, ladies and gentlemen, and welcome to the second quarter 2020 for Hess Midstream Conference call. My name is G. G. Now I'll be your operator for today.
G. G.: This time, all participants are in a listen only mode. After the speaker's presentation. There will be a question answer session to 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 one again.
Please be advised that today's conference is being recorded for replay purposes.
G. G.: I'd now like to turn the conference over to Jennifer Gordon Vice President of Investor Relations. Please proceed.
Jennifer Gordon: Thank you Gigi 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 dotcom.
Speaker Change: 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.
Speaker Change: And the risk factors section of Hess midstream filings with the SEC.
G. G.: 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.
Speaker Change: With me today are John Gatling, President and Chief operating Officer, and Jonathan Stein, Chief Financial Officer, I'll now turn the call over to John Gatling.
John A. Gatling: Thanks, Jennifer and good afternoon, everyone and welcome to Hess Midstream second quarter 2024 conference call today, I'll discuss our second quarter performance and review Hess Corporation's results and outlook for the Bakken Jonathan.
Jonathan C. Stein: Jonathan will then review our financial results and guidance.
Jonathan C. Stein: In the second quarter throughput volumes averaged 419 million cubic foot per day for gas processing.
Jonathan C. Stein: 126000 barrels of oil per day for crew Terminalling mm 124000 barrels of water per day for water gathering.
Speaker Change: Throughput increased across all segments of our business with gas processing and oil terminalling volumes, increasing by approximately 7%.
Speaker Change: And 8% respectively from the first quarter, primarily driven by strong <unk> performance.
Speaker Change: System availability remained high across our midstream assets and gas capture was particularly strong in the second quarter.
Speaker Change: Now turning to Hess upstream highlights earlier today <unk> reported second quarter net production for the Bakken averaged 212000 barrels of oil equivalent per day.
Speaker Change: Which was above the high end of their guidance range of 195 to 200000 barrels of oil equivalent per day.
Speaker Change: Approximately one third of the increase is from volumes received under percentage of proceeds contracts, which do not impact Hess midstream throughput or revenues.
Speaker Change: That's anticipates Bakken net production will be in the range of 200 to 205000 barrels of oil equivalent per day in the third quarter.
Speaker Change: Reflecting lower anticipated volumes under percentage of proceeds contracts and planned maintenance at the little Missouri four gas plant.
Speaker Change: As reiterated its plans to run a four rig program in the Bakken in 2024.
Speaker Change: Turning to Hess midstream guidance, which was included in our earnings release this morning with.
Speaker Change: With Hess has continued strong Bakken production and our focus on gas capture we are raising our gas gathering and processing throughput volume guidance for full year 2024 to average between 425, and 435 million cubic foot per day and between 405 and 415 million cubic foot per day, respectively.
Speaker Change: Actively.
Speaker Change: This implies approximately 3% growth at the midpoint for the second half of the year and includes our expectations for roughly flat volumes in the third quarter, which incorporates hess upstream guidance and lower midstream throughput due to a planned weeklong maintenance outage at the little Missouri four gas plant.
Speaker Change: Consistent with prior guidance, we continue to make excellent progress on our 2024 capital plans and are focused on supporting Hess and third party development in the Bakken.
Speaker Change: The progress of our multiyear projects to build two compressor stations and associated gathering pipelines continue as planned.
Speaker Change: We expect to spend more in the second half of the year as we continue construction activities.
Speaker Change: In summary, we remain focused on executing our operational priorities and safely delivering our growth strategy, which will continue to drive sustainable cash flow generation and the potential to return additional capital to our shareholders.
Speaker Change: I'll now turn the call over to Jonathan to review, our financial results and guidance.
Jonathan: Thanks, John and good afternoon, everyone.
Jonathan: We continue to execute a financial strategy that prioritizes return of capital to shareholders with a demonstrated track record of differentiated shareholder returns.
Jonathan: Since the beginning of 2021 we have returned $1 $75 billion to shareholders through accretive repurchases that have reduced our total unit count by nearly 25%.
Jonathan: In addition to the combination of our 5% targeted annual distribution growth and eight distribution level increases falling each be purchased we have increased our distribution per class a share by approximately 48% over this period.
Jonathan: Over 10% in 2024 year to date on an annualized basis.
Jonathan: As a result, our total shareholder return yield is one of the highest of our midstream Paris. Furthermore.
Jonathan: Leverage of approximately 3.2 times adjusted EBITDA is one of the lowest among our peers holiday our differentiated ability to deliver significant shareholder returns, while also maintaining balance sheet strength.
Jonathan: In January we announced that we expect to generate greater than one point to $5 billion, our financial flexibility through 2026 for incremental shareholder returns, including potential unit repurchases.
Jonathan: Utilizing this capacity in June we completed our second repurchase transaction in 2024.
Jonathan: $100 million that was accretive on both an adjusted free cash flow per class a share basis, and an earnings per class a share basis.
Jonathan: As we have done in the past our quarterly distribution increase included our targeted 5% annual growth per class a share.
Jonathan: The additional increase utilizing the excess adjusted free cash flow available for distribution following the repurchase.
Jonathan: As a result on an annualized basis, our distributions for a class eight she had growth of over 10% is significantly above our targeted 5% annual growth through 2026.
Jonathan: Finally unit repurchase we expect to continue to have more than one point to $5 billion of financial flexibility through 2026 that can be used for continued execution of our return of capital framework, including potential ongoing unit repurchases.
Jonathan: Turning to our results for the second quarter net income was $160 million compared to $162 million for the first quarter adjusted EBITDA for the second quarter with $276 million compared to $275 million for the first quarter.
Jonathan: The increase in adjusted EBITDA relative to the first quarter was primarily attributable to the following.
Jonathan: Total revenues, excluding pass through revenues and a one time $8 million reduction in second quarter revenues related to the setting the 'twenty 'twenty four tariff rates for certain sub systems increased by approximately $26 million, primarily driven by higher throughput volumes, resulting in segment revenue change is as follows.
Jonathan: Revenues increased by approximately $15 million processing revenues increased by approximately $9 million and Terminalling revenues increased by approximately $2 million.
Jonathan: Total cost and expenses, excluding depreciation amortization pass through costs and net of our proportional share of Alan for earnings increased by approximately $9 million, primarily due to higher seasonal operating and maintenance activity.
Jonathan: Resulting in adjusted EBITDA for the second quarter of $276 million at the midpoint of our guidance range.
Jonathan: Our gross adjusted EBITDA margin for the second quarter was maintained at approximately 80%.
Jonathan: Above our 75% target highlighting our continued strong operating leverage.
Jonathan: Second quarter capital expenditures were approximately $73 million.
Jonathan: Net interest excluding amortization of deferred finance costs was approximately $47 million, resulting in adjusted free cash flow of approximately $156 million.
Jonathan: In May we issued $600 million of six 5% senior unsecured notes due 2029 and a private offering.
Jonathan: The proceeds from the offering to repay the borrowings on our revolving credit facility and therefore, we had no drawn balance on our revolving credit facility at quarter end.
Jonathan: Turning to guidance.
Jonathan: The third quarter, we expect net income to be approximately $160 million to $170 million and adjusted EBITDA to be approximately $280 million to $290 million.
Jonathan: Compared to the second quarter. This reflects relatively flat volumes net of the 8 million cubic feet per day impact from the maintenance at the little Missouri, four gas plant as well as stable operating costs with continued seasonally higher maintenance activity in the third quarter.
Jonathan: We also expect Capex to increase in the third quarter consistent with seasonally higher activity.
Jonathan: In the fourth quarter, we expect increasing revenues and growing volumes and seasonally lower maintenance activity, resulting in higher EBITDA compared with the third quarter.
Jonathan: For the full year 2024, we are updating net income and adjusted free cash flow guidance to include the impact of an incremental $15 million of interest expense, resulting from the 600 million dollar notes issued in the quarter, partially offset by lower interest on the revolving credit facility.
Jonathan: The updated net income guidance also includes the impact of an incremental $10 million of income tax expense, resulting from ownership changes following the secondary equity offerings and class B unit repurchase transaction completed this year.
Jonathan: As a result, we now expect net income of $650 million to $700 million. We're also maintaining our adjusted EBITDA guidance range of $1.125 billion to $1 billion $175 million implying.
Jonathan: Implying growth of approximately 9% and adjusted EBITDA at the midpoint in the second half of the year.
Jonathan: Total expected capital expenditures of $250 million to $75 million, we expect to generate adjusted free cash flow of approximately $675 million to $725 million.
Jonathan: With distributions for our class eight share targeted to grow at least 5%, Italy from the new higher distribution level, we expect to be free cash flow positive after fully funding distributions by 2024.
Jonathan: Looking ahead to 2026, we continue to expect approximately 10% annualized growth in gas and oil volumes.
Jonathan: A greater than 10% growth per year in adjusted EBITDA.
Jonathan: With stable Capex through 2026, we expect adjusted free cash flow to grow greater than 10% per year in excess of our 5% targeted distribution per class a share growth.
Jonathan: Together with capacity as our leverage falls below two five times adjusted EBITDA.
Jonathan: It's greater than one point to $5 billion and financial flexibility that can be utilized for continued repurchases.
Jonathan: In summary, we are very pleased to have delivered additional incremental return of capital to have 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 to our shareholders.
Speaker Change: Concluding my remarks, we'll be happy to answer any questions I will now turn the call over to the operator.
Speaker Change: 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 towards draw. Your question. Please press star one one again please.
Speaker Change: Please standby, while we compile the Q&A roster.
Speaker Change: Our first question comes from the line of Doug Irwin from Citi.
Speaker Change: Alright, thanks for the question.
Douglas Baker Irwin: I just wanted to start with the growth outlook beyond 2024.
Speaker Change: I just look at the updated volume guidance.
Speaker Change: About 10% growth a year for gas beyond 'twenty four.
Speaker Change: You start to get pretty close to your processing capacity by end of 2006, if not above it.
Speaker Change: Trying to get your thoughts around.
Speaker Change: Leather processing might become a constraint more quickly than anticipated just given some of the gas capture you've seen.
Speaker Change: And if so what options you might have some additional processing capacity and 27.
Speaker Change: Yeah. Thanks, Thanks for the question, Doug Yeah from our perspective, we feel like we have sufficient capacity.
Speaker Change: We've been working on the process and expansion activities for for some time now we've got a really strong partnership with the upstream and we're planning the infrastructure and the well plans along the needs for processing so from our perspective.
Speaker Change: The gas processing capacity will be available when when the upstream needs. It. So again, it's it's kind of that that symbiotic relationship. We've got between the upstream and midstream that that kind of drives that integrated development planning activity that gives us some confidence that we've got the right infrastructure plans for the upstream development.
Speaker Change: Great. Thanks, and then my follow up is kind of along similar lines, but more just around the basin as a whole.
Speaker Change: There are several kind of long haul NGL expansions underway in the Bakken just curious to get your take on what that means just in terms of the incremental gathering and processing capacity that might be required around the basin to supply the volumes for these projects.
Speaker Change: Then kind of start means any potential opportunities for <unk> beyond the current backlog.
Speaker Change: Yeah. It's a great question I think you know as you can probably tell from the North Dakota Petroleum our counsels are.
Speaker Change: Pipeline authority forecast gas production is growing from about three and a half bcf towards the five to six Bcf range. So they will absolutely need to be additional processing for for that additional gas forecast and again, it's all going to be activity driven on what what the actual materializes from them from a gas production perspective.
Speaker Change: I think having additional export capacity out of the basin. It helps everybody I think it makes to theirs they get.
Speaker Change: It allows us to have more flexibility before for takeaway options and my guess is you know like we are going to be expanding processing in 2007 that there will be other providers that will also be expanding the the other thing that we continue to look at is opportunities to smartly capture additional third party volumes into our system.
Speaker Change: And you know we have the flexibility to add additional capacity over the long term.
Speaker Change: If the gas becomes available and it's it's something that we felt like that we can we can provide that support. So we do anticipate the basin to continue to grow from a gas perspective, and we expect that the capacity will be there and I think again, having the export capacity out of the Bakken is going to be critical to making sure that that that that.
Speaker Change: But that works and that we're able to actually support the producers as the volume comes online.
Speaker Change: Great I appreciate all the detail I will leave it there okay. Thank you.
Speaker Change: Thank you one moment for next question.
Speaker Change: Our next question comes from the line of John Mackay from Goldman Sachs and company.
John Ross Mackay: Hey, Thanks for the time, maybe I'll pick up on that last one a little bit I mean, if we're thinking about.
John Ross Mackay: Kind of a shift in the competitive environment in the Bakken I guess I would just be curious your thoughts on what that can mean for your third party business. I mean is it is it good because you can offer more outlets and don't have to depend as much on one other party.
Speaker Change: Or do you think you actually have a handful of other companies up there kind of trying to step it up on the commercial front now.
Speaker Change: Yeah, I mean I can do.
Speaker Change: Don't think I can really speak to some of the other companies, but I definitely think that as the basin continues to grow in other parts of the field.
Speaker Change: There will be providers that will that will offer capacity to them I think from our perspective, the third party opportunities become those operators that are around and near our our strategic footprint and where we can actually extend our footprint to provide support to those to those other operators as far as the export goes.
Speaker Change: Again, I think the more flexibility there is to get out of the basin I think just commercially it's going to it's going to create more competition for those volumes from our perspective flow assurance has always been really critical making sure that we have flow assurance all the way from the well pad to export and ultimately to end customers.
Speaker Change: That's a priority for house and I think from our perspective, we've looked at that to make sure that we actually have capacity for that flow assurance, but again is as as export options open up it gives us a chance to look at.
Speaker Change: Current commercial opportunities as well so again I think it's a net positive for the base and I think it's a net positive for Hess midstream has and other operators and midstream companies in North Dakota.
Speaker Change: I appreciate that that's that's helpful. Maybe just shifting to the capital return story you guys have been extremely consistent on the repurchase side I guess I'd just be curious is there room for that to start moving up a little higher on an annual basis given.
Speaker Change: The size of the EBITDA base now the growing free cash flow et cetera.
Speaker Change: Yeah, So right now our leverage as I said is 3.2 times EBITDA, our target Leverages three times.
Speaker Change: We have been willing to continue to do.
Speaker Change: The repurchases as being slightly above our target when we have visibility as we do now as we've talked about through 2026 growth more than 10% growth per year in EBITDA. So that gives us confidence to continue so for this year.
Speaker Change: We feel as.
Speaker Change: As if oh, we're going to be limited to stick to that target, which we as you know is a big focus for us in terms of balancing Shelly trends, but also our balance sheet strength, but as we go forward. It certainly will continue we have one point to $5 billion of capacity still available will continue to calibrate that relative to our growth.
Speaker Change: But certainly for this year will focus on things.
Speaker Change: Staying slightly above by the end of the year, we expect to be just at three times and then as you go certainly into next year, well certainly as we've talked about de lever well below three times less than two and a half times, where they ended 2025 and then also we have of course, our free cash flow after distributions. So building that cash balance as well that can also.
Speaker Change: Fund additional return of capital to shareholders.
Ms. Claire: Ms. Claire I appreciate the time thank you.
Speaker Change: Thank you one moment far next question.
Speaker Change: Our next question comes from the line of Naomi more Fatima <unk> from UBS.
Speaker Change: Hey, good morning, maybe.
Speaker Change: Maybe you can touch on the guidance a bit curious if you could help us understand the moving pieces around the discrepancy between what on EBITDA guidance.
Speaker Change: I know you guys mentioned about test linemen, Dan and Tom.
Speaker Change: Is there any other noise around it that you'd like to buy.
Speaker Change: Yeah.
Speaker Change: Yeah, So I'll start with the mechanics, and then I'll, let John talk about maybe the underlying drivers.
Speaker Change: If you look at our EBITDA guidance for the year. It's you know we've maintained our EBITDA guidance, that's a 9% increase in EBITDA in the second half and the driver of that is primarily volume growth across our gas and oil systems.
Speaker Change: We had a really strong volume growth in the second quarter I mentioned on my in my remarks, you know $26 million in additional revenue just in the quarter on volumes alone and that allowed US also is consistent with increasing our gas guidance, just slightly but by 10 million cubic feet per day on a full year basis.
Speaker Change: As we go into Q3.
Speaker Change: We expect flat volumes with Q2, but that includes as I mentioned that 8 million cubic feet per day impact from the planned maintenance at Allen for the gas plant. So really what that means is that where that implies that we see a continued growth.
John: And outside of the maintenance in the quarter and then as we go into Q4, we're really expecting higher revenues on growing volumes and then of course lower seasonally opex as we usually have in the fourth quarter and that will support accelerating even into the fourth quarter. So that's really how it kind of all fits mechanically let me just sort of a John you can talk about whats happening behind that in terms of the business.
John: Driving all of that.
John: Yes, thanks, Jonathan.
John: It's a really good question I think at the end of the day Hess has been performing exceptionally well I think the they're D&C function and bringing wells online has been has been outstanding.
Speaker Change: The overall deferred production the availability of the system has been extremely high.
Speaker Change: <unk> partnered with the midstream our system availability has been very high as well and then from a just well planning and infrastructure planning perspective, there really marrying up really nicely from the standpoint of when the wells come on the gas infrastructure is there to take that away and that's what has enabled us to bump up our gas.
John: Guidance slightly as a result of just that that gas capture I mean in the second quarter, we were above 97% get total gas capture across the entire field. When you look at it on a routine flaring basis, we're getting very very low from us for routine flaring. So basically as the wells are coming online the infrastructure is in place to capture that gas.
Speaker Change: Say, the second quarter, both from our upstream delivery side, but also midstream availability and ability to have the infrastructure in place right. When it was needed was a was it was exceptionally strong in the second quarter, we expect to conduct to continue into the third quarter, but it was Jonathan mentioned there is some planned maintenance activities routine planned maintenance activity at <unk>.
Jonathan C. Stein: <unk>, which is going to keep volumes relatively flat from Q2 into Q3.
Speaker Change: Thank you that's helpful.
Speaker Change: Maybe as a follow up it seems like your water volumes are growing fast.
Speaker Change: That you'd like to call out.
Speaker Change: Yeah water has been and I think we've talked about this previously but water has been a very strong story.
Speaker Change: As we've talked about on prior earnings calls the water infrastructure has been an underinvested area and this is something that we've been over the last several years have been aggressively investing in and the water capture as far as getting trucks off the road and getting it captured in the pipe into our gathering system has been has been really good the operational teams.
Speaker Change: And the infrastructure team is building the infrastructure and operating has been just doing a phenomenal job and it's a very very high system utilization, we would expect to start to see water trend closer to oil. So I would say that the really aggressive growth and being able to capture the water is is materially behind us and now.
Speaker Change: The growth that's going to continue into the into the future is going to look a lot more like the oil growth as you bring on new wells. The total fluids, both from an oil and water perspective will be will be now captured on pad and that'll go into our system. So we do expect to continue to see growth. We just won't be we won't expect to see the growth rate we've seen over the last several years.
Speaker Change: Okay. Thank you I'll leave it there okay. Thank you so much.
Speaker Change: Thank you one moment for our next question.
Preneed cities: Our next question comes from the line of Preneed cities from Wells Fargo.
Preneed cities: Thanks.
Preneed cities: Good morning, all maybe just on on Hess has as Bakken production. So it's now running at 212000 barrels per day.
Speaker Change: Higher than kind of the long term target.
Speaker Change: Of around 200000 barrels per day.
Speaker Change: I know you mentioned I guess I'm, just trying to translate this into the impact for Hess midstream.
Speaker Change: I know you mentioned some of that outperformance is related to pop but.
Speaker Change: How sustainable do you think this is and does that provide any kind of tailwind to your.
Speaker Change:
Speaker Change: Volume projections into.
Speaker Change: Q3, Q4, and maybe 25%.
Speaker Change: Yeah, No I mean, I think it's a good question Q2 again I mentioned this before both from the upstream and the midstream side was just phenomenal I think the overall performance on well delivery.
Speaker Change: And infrastructure availability was was exceptionally high in the second quarter, which was which was great I mean gas capture about 97% almost zero routine flaring essentially.
Speaker Change: Is just is just phenomenal.
Speaker Change: As you mentioned, a big piece of the second quarter about a third of that total volume beat was related to pop and that really doesn't translate to additional throughput of revenues for us.
Speaker Change: As we've been looking at the uncertainty of wells and as they come on in the in the future. We expect the performance to continue to be very high.
Speaker Change: But we're comfortable with where our guidance ranges are we've set our long term NB CS and I think we see.
Speaker Change: 10%.
Speaker Change: Growth rates going into the future I think we feel very comfortable with where with where that is again that that relationship between our upstream and midstream and that flow assurance focus that we've got is really important to us. So as we're doing well planning we're doing infrastructure planning at the same time and if there's opportunity to capture upside we will absolutely do that.
Speaker Change: And look for the wells to perform better then we'll we'll make sure that the infrastructure is sized to accommodate it but again I wouldn't say, it's it's going to be a material.
Speaker Change: Cereal change anything we've seen and it's something that we're going to we're going to continue to partner with the upstream on and we just feel really good about Hess has long term growth trajectory there theyre going to run four rigs through 24, and we expect to continue to see that growth trajectory. That's that's translated into our into our <unk> and the implied vol.
Speaker Change: <unk> gross gross gross volumes that go into the M. P. CS.
Speaker Change: Got it thanks and maybe this question is for is for Jonathan.
Speaker Change: Historically, you've run the business at around a three times leverage ratio.
Jonathan C. Stein: Doing buybacks to keep that leverage ratio at three times as EBITDA grows.
Speaker Change: But the business has become at least a little bit more incrementally risky.
Speaker Change: With the expiration of the cost of service contracts or do you think three times is still the right leverage target kind of over the next few years or.
Speaker Change: Could you looked at trend that down overtime.
Speaker Change: Yes, so I think we feel very comfortable at three times, we felt three times leverage is conservative, but its not constraining to our strategy in any way so like on a relative basis.
Speaker Change: You look at three times EBITDA, it's one of the lowest leverages in the sector and certainly consistent with our objective of stable castle and distributions.
Speaker Change: I think at the same time, though if you look it doesn't constrain our strategy. So we've demonstrated our ability to utilize that capacity and together increasingly more so as we go forward with free cash flow after distributions building, but still leveraging that capacity to really as I talked about more than 1.75 billion.
Speaker Change: And buybacks since 2021, really just amazing and really that highlights.
Speaker Change: I said in my comments, which is we have our total shareholder return yield is one of the highest of any in the midstream sector. At the same time, our leverage is one of the lowest and so really we think that balance is correct and really highlights.
Speaker Change: <unk> to really deliver differentiated shareholder returns, but also maintain our balance sheet strength.
Speaker Change: Got it thank you.
Speaker Change: Thank you. This concludes today's conference call. Thank you for participating you may now disconnect.
Speaker Change: Okay.
Speaker Change: [music].
Speaker Change: Okay.
Speaker Change: [music].