Hess Midstream Q1 2023 Earnings Call Transcript

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April 26, 2023

There are 5 speakers on the call.

Operator

Good day, ladies and gentlemen, and welcome to the First Quarter 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 speakers' presentation, there will be a question and answer Please be advised that today's conference is being recorded for replay purposes. I would now like to turn the conference over to Jennifer Gordon, Vice President of Investor Relations.

Operator

Please proceed.

Speaker 1

Thank you, Gigi. Good afternoon, everyone, and thank you for participating in our Q1 earnings conference call. Our earnings release was issued this morning and appears on our website, www.hessmidstream.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.

Speaker 1

These risks include those set forth in the Risk Factors section of Hess Midstream's 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 Officer and Jonathan Stein, Chief Financial Officer. I'll now turn the call over to John Gatling.

Speaker 2

Thanks, Jennifer. Good afternoon, everyone, and welcome to Hess Midstream's Q1 2023 Conference Call. Today, I'll discuss our Q1 performance, which demonstrates a continued focus on the safe execution of our operational strategy, while simultaneously advancing our financial priorities. I will also review Hess Corporation's results And outlook for the Bakken. Jonathan will then review our financial results and guidance.

Speaker 2

In the Q1, we successfully advanced 2 key priorities. 1st, to organically grow our business in a safe, efficient and cost effective manner and second, to return available capital to our shareholders. Our focused gas capture investments continue to drive increasing volumes through our systems, while supporting Hess' commitment to achieving 0 routines learning By the end of 2025. Additionally, in the Q1, 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.

Speaker 2

Now turning to Hess Midstream operations. In the Q1, throughput volumes averaged 338000000 cubic foot per day for gas processing, 104,000 barrels of oil per day for crude terminalling And 79,000 barrels of water per day for water gathering. Gas processing throughputs increased by approximately 8% from the 4th 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 163,000 barrels of oil equivalent per day, Which was above their guidance range of 155,000 to 160,000 barrels of oil equivalent per day, reflecting high up time and recovery from challenging weather conditions during the Q4.

Speaker 2

Hess anticipates Bakken net production will increase to between 165,000 170,000 barrels of oil equivalent per day in the second quarter. Hess continues to operate a 4 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 20 24 and average approximately 200,000 barrels of oil equivalent 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 200,000 barrels of oil equivalent 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.

Speaker 2

Now focusing on the Q2. We expect volume growth from the Q1 across all our systems, mainly driven by Hess' planned production growth And continued focus on gas capture. For full year 2023, we're forecasting gas processing volumes to average between 350,000,000 360,000,000 cubic foot per day. Additionally, we expect crude terminaling volumes to average between 105,000,115,000 barrels of oil per day And water gathering volumes to average between 8,500,000 and 95,000 barrels of water per day. Our 2023 planned volume growth continues to support Adjusted EBITDA in the range of $990,000,000 to $1,030,000,000 Now turning to Hess Midstream's 2023 Capital Program.

Speaker 2

We continue to make excellent progress on our 2023 capital plans And are focused on supporting Hess' development in the basin. Construction is progressing on schedule for 2 new compressor stations and associated infrastructure, And when brought online is expected to increase gas gathering capacity by 100,000,000 cubic foot per day. The planned expansion of our gas gathering system is expected to increase gas Throughputs by more than 30% in 2025 relative to 2022, driven by Hess' planned development activity And goal of achieving 0 routine flaring by the end of 2025. Full year 2023 capital expenditures remain unchanged and are expected to total $225,000,000 which is comprised of $210,000,000 of expansion activity and $15,000,000 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.

Speaker 2

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.

Speaker 3

Thanks, John, and good afternoon, everyone. We continue to execute a financial strategy That includes return of capital to shareholders as a priority and a demonstrated track record of differentiated shareholder returns. Since the beginning of 2021, we have returned $1,250,000,000 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 3 distribution level increases following each repurchase. We have increased our distribution per Class A share by approximately 30% over this period.

Speaker 3

As a result, our total shareholder return yield is one of the highest of our midstream peers. Furthermore, Our leverage of approximately 3 times adjusted EBITDA is one of the lowest among our peers, highlighting our differentiated ability to deliver significant shareholder returns, while also maintaining balance sheet strength. With our recently completed unit repurchase and distribution level increase, we continue our track record of shareholder return Through our return of capital framework. In January, we announced that we expect to generate greater than $1,000,000,000 of financial flexibility through 2025 For capital allocation, including potential ongoing unit repurchases. Utilizing this capacity, our recent repurchase transaction of $100,000,000 Is approximately 1.5% 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%.

Speaker 3

Supported by the repurchase, we recently announced a further return of capital to our shareholders Through an immediate 1.5% 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 following the repurchase, this distribution level increase is fully funded by the associated From 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 1.4 times. Following the unit repurchase, we expect to continue to have more than $1,000,000,000 Financial flexibility through 2025 that can be used to continue execution of our return on capital framework, including potential ongoing unit repurchases. Turning to our results. For the Q1 of 2023, net income was $142,000,000 Compared to $150,000,000 for the Q4 of 2022.

Speaker 3

Adjusted EBITDA for the Q1 of 2023 With $239,000,000 compared to $245,000,000 for the Q4 of 2022. The change in adjusted EBITDA relative to the Q4 of 2022 was primarily attributable to the following. During the Q1 of 2023, our tariff rates and physical throughput volumes were higher, including an approximate 7% increase in gas processing volume. As we transition from higher MVC levels in 2022 to growing physical throughput volumes in 2023 that are at or above MVCs, Total revenues, excluding pass through revenues, decreased by approximately $10,000,000 resulting in segment revenue changes as follows: Processing revenues decreased by approximately $5,000,000 terminal revenues decreased by approximately $3,000,000 and gathering revenues decreased by approximately $2,000,000 With physical volumes growing as more wells come online, we expect continued growth in revenues through the rest of 2023. Total costs and expenses excluding depreciation, amortization, past due costs and net of a proportional share of LM4 earnings Decreased by approximately $4,000,000 primarily due to lower maintenance costs and operating G and A in our Gathering segment, resulting in adjusted EBITDA for the Q1 of 2023 of $239,000,000 at the high end of our guidance.

Speaker 3

Our gross adjusted EBITDA margin for the quarter was maintained at approximately 80%, highlighting our continued strong operating leverage. 1st quarter maintenance capital expenditures were approximately $3,000,000 and net interest excluding amortization of deferred finance costs Approximately $39,000,000 The result was that distributable cash flow was approximately $197,000,000 for the Q1, Covering our distribution by 1.4 times. Expansion capital expenditures in the Q1 were approximately $54,000,000 Resulting in adjusted free cash flow of approximately $142,000,000 We had a drawn balance of $121,000,000 On a revolving credit facility at quarter end, which includes funding our recent $100,000,000 unit repurchase transaction. Turning to guidance. For the Q2 of 2023, we expect net income to be approximately $140,000,000 to $150,000,000 And adjusted EBITDA to be approximately $240,000,000 to $250,000,000 reflecting higher volumes offset by seasonally higher operating costs.

Speaker 3

2nd quarter maintenance capital expenditures and net interest, excluding amortization of deferred finance costs, expected to be approximately $45,000,000 Resulting in expected distributable cash flow of approximately $195,000,000 to $205,000,000 Delivering distribution coverage of approximately 1.4 times. For the full year 2023, we are reaffirming all previously announced guidance And expect net income of $600,000,000 to $640,000,000 and adjusted EBITDA of $990,000,000 to $1,030,000,000 With total expected capital expenditures of $225,000,000 we expect at the midpoint to generate adjusted free cash flow Of approximately $625,000,000 with distributions per Class A share targeted 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 in each quarter through 2023 across oil, gas and water systems With seasonally higher operating costs in the 2nd 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 in our operational financial metrics that underpins our unique and differentiated financial strategy with a focus on consistent and ongoing return of capital.

Speaker 3

This concludes my remarks. We will be happy to answer any questions. I will now turn the call over to the operator.

Operator

Thank Please standby while we compile the Q and A roster. Our first question comes from the line Doug Irwin from Citi.

Speaker 4

Hey, everyone. Thanks for the question. Just wanted to start with EBITDA margin. I think you've guided to 75% margins for 2023. And if you look at 1Q margins, I think it came in at 83% and it's been well above 75% for the last few quarters as well.

Speaker 4

I'm just curious what's driving this outperformance and if that's something that's sustainable moving forward?

Speaker 3

Sure. So really, I mean, in terms of our EBITDA margin and just at the level that we said targeting 75%, really that's 1st 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 and revenue and comparatively lower variable operating expenses, we have a robust EBITDA margin. We've said target 75%, but as you know, we look to continue. Historically, we have exceeded that.

Speaker 3

So if you look back really over the years, we 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 should look at that as sort of a target, but something that we look to Continue as we've done in the past to continue to meet or exceed that. So expect to be continue in that direction.

Speaker 4

Got it. That's helpful. And then I was just hoping you could provide a little more context just around how you landed on The size and the timing of this first buyback this year, and maybe how you're thinking about potential buybacks throughout the remainder of the year. I guess, is this going to be kind of a quarterly decision you're looking at? Or is it maybe a little more opportunistic than that?

Speaker 3

Sure. So first, just a reminder, our return on capital framework has really 2 elements. First is the 5% annual distribution growth Through 2025 at least. And then of course the repurchases, which are an incremental return of capital Utilizing our available financial flexibility. If you look back, how we've done this historically in 2021 2022, we really did 1 large buyback Transaction per year.

Speaker 3

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 $1,000,000,000 of financial flexibility that we've talked about and really the $100,000,000 buyback was really the start of this approach. So what we expect is, again, we would see multiple opportunities each year starting this year and starting with the 100 and 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 lower share count. As a result of repurchase, we have the opportunity to utilize that additional capacity to just bring us back to the same distributed cash flow and increase our distribution level. But overall, really the change is rather than doing this 1 per year, really in this multiple per year. And through that, we think there will be significant ongoing accretion as we significantly continue to reduce our share count over the period.

Speaker 4

Got it. That's all for me. Thank you.

Operator

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

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