Hess Midstream Partners LP (HESM) Q1 2022 Earnings Call Transcript

Hess Midstream Partners LP (HESM 0.32%)
Q1 2022 Earnings Call
Apr 27, 2022, 12:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen. And welcome to the first quarter 2022 Hess Midstream conference call. My name is Olivia, and I will be your operator for today. [Operator instructions].

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.

Jennifer Gordon -- Vice President of Investor Relations

Thank you, Olivia. 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.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. 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. In case there are audio issues, we will be posting transcripts of each speaker's prepared remarks on www.hessmidstream.com following their presentation. I'll now turn the call over to John Gatling.

John Gatling -- President and Chief Operating Officer

Thanks, Jennifer. Good afternoon, everyone, and welcome to Hess Midstream's first quarter 2022 conference call. Today, Jonathan and I will review the highlights from our recent transactions, as we continue to execute our financial strategy to return additional capital to shareholders. I will also discuss our operating performance, progress of our capital program, and review Hess Corporation's results and outlook for the Bakken.

Jonathan will then review our financial results and guidance. We recently delivered several positive announcements for Hess Midstream. In early April, we completed a $400 million unit repurchase from our sponsors. The repurchase provided significant and immediate accretion to our shareholders while optimizing our capital structure to a conservative three times adjusted EBITDA leverage target on a full year 2022 basis.

In addition, earlier this week, we announced a 5% increase in our distribution per share level relative to the previous target using our financial flexibility to return free cash flow to shareholders on an ongoing basis, while maintaining a conservative distribution coverage ratio of at least 1.5 times in 2022. With the announcements, we again demonstrate our financial strength and commitment to consistent and ongoing return of capital to our shareholders. Now turning to Hess Midstream operations. In the first quarter, throughput volumes averaged 316 million cubic foot per day for gas processing, 108,000 barrels of oil per day for crude terminaling, and 72,000 barrels of water per day for water gathering, reflecting impacts from severe winter weather.

As physical volumes were expected to be at or below MVC levels, there was no material impact to our first quarter financial results. Now turning to Hess upstream highlights. Earlier today, Hess reported first quarter results with Bakken net production averaging 152,000 barrels of oil equivalent per day, reflecting impacts of severe winter weather. Poor weather conditions, which continued into April, are transitory and Hess expects to recover and resume normal operations over the balance of the second quarter.

Reflecting weather impacts, Hess forecasts Bakken net production will average between 140,000 and 145,000 barrels of oil equivalent per day in the second quarter, and they expect to come in near the low end of their full year 2022 guidance range of 160,000 to 165,000 barrels of oil equivalent per day. Hess' well results remain strong with IP 180s and EURs largely in line or better than expected, and Hess anticipates production to build in the second half of the year, reaching an average of between 175,000 and 180,000 barrels of oil equivalent per day in the fourth quarter. Hess is currently operating a three-rig program in the Bakken and is giving strong consideration to adding a fourth rig later this year. A four-rig program would accelerate Hess' production ramp to approximately 200,000 barrels of oil equivalent per day and drive material growth through Hess Midstream infrastructure.

Turning to Hess Midstream guidance, which was included in this morning's earnings release and is available on our website. We're reaffirming our previously announced throughput guidance for full year 2022, despite the severe weather that impacted basin operations over the last two weeks. We expect second quarter gas, oil, and water volumes to be approximately 5% lower compared to first quarter. In the second half of 2022, we anticipate significant organic volume growth on our systems as Hess plans to bring 54 new wells online, compared to 31 wells in the first half.

For full year 2022, we expect gas processing volumes to average between 330 million and 345 million cubic foot per day. Additionally, we expect crude terminaling volumes to average between 110,000 and 115,000 barrels of oil per day, and water gathering volumes to average between 70,000 and 75,000 barrels of water per day. We expect physical volumes to remain at or below MVC levels in 2022, providing approximately 95% revenue protection to our forecast, giving a high degree of confidence to our financial guidance, which continues to project adjusted EBITDA in the range of $970 million to $1 billion. Looking beyond 2022, we expect physical volumes to rise above MVCs in 2023 and continue to grow into 2024.

Turning to Hess Midstream's 2022 capital program. We're making excellent progress on executing our capital plans with activities primarily focused on expanding our gas capture capacity and supporting Hess' development in the basin. In the first quarter, we brought online the first of two new compressor stations planned this year. The project was completed ahead of schedule and below budget.

Construction is progressing well on the second station, which we expect to bring online in the third quarter. In aggregate, the new stations are expected to provide an additional 85 million cubic foot per day of installed capacity in 2022 and can be 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 2022, which is expected to provide an additional 65 million cubic foot per day of installed capacity in 2023, further enhancing our gas capture capability and supporting Hess' pace of development. Full year 2022 capital expenditures remain unchanged and are expected to total $235 million, comprised of $225 million of expansion activity and $10 million of maintenance activity.

Leveraging our unique integrated development planning process with Hess and phased infrastructure execution approach, we are well-positioned to accommodate an acceleration of Hess' development activity. The infrastructure is already considered in our plan and supports the volume projections implied in our 2024 MVCs. And finally, we're proud to have achieved a significant milestone in the first quarter with the publication of our inaugural 2020 sustainability report, detailing our environmental, social, and governance strategy and performance. Sustainable and responsible operations are the foundation of our business and creates value for the benefit of all stakeholders, shareholders, business partners, and the communities where we operate.

Hess Midstream is aligned and supports Hess Corporation's aim to help the world's growing energy needs while reducing emissions. We support Hess' greenhouse gas emissions reduction efforts by providing the infrastructure to move natural gas to market and reduce total flaring, and equally important, take action to reduce Hess Midstream's GHG emissions, which are included in Hess' overall emissions footprint. In summary, we continue to execute our strategy, making focused, low-risk infrastructure investments to meet basin demands, delivering safe and reliable operating performance and strong financial results, which enables us to take advantage of future accretive growth opportunities, including potential incremental return of capital to our shareholders. I'll now turn the call over to Jonathan to review our financial results and guidance.

Jonathan Stein -- Chief Financial Officer

Thanks, John, and good afternoon, everyone. As John described, we have continued to execute our financial strategy that includes delivering consistent and ongoing return of capital to our shareholders as a priority. First, we completed an accretive $400 million repurchase of units from our sponsors, utilizing our financial flexibility that brings our leverage to three times adjusted EBITDA on a full year 2022 basis. The purchase price per Class B unit of $29.50 was the same Class A share paid by the public in a simultaneous approximately $300 million underwritten secondary public offering by the sponsors that supports continued increasing liquidity in our shares.

Highlighting the opportunity for increased indexation from this high liquidity, Hess Midstream was recently included in the Alerian MLP Index. The repurchase transaction reduced the consolidated number of outstanding shares as an approximately 4% accretive on a distributable cash flow per Class A share basis. The terms of the repurchase transaction were unanimously approved by the board, based on the approval and recommendation of its conflicts committee, composed solely of its independent directors. The unit repurchase closed on April 4th, and together with the secondary offering, public ownership of Hess Midstream, on a consolidated basis, has now increased to approximately 18%.

In addition, supported by the repurchase, we recently announced a further return of capital to our shareholders, through an immediate 5% increase in our quarterly distribution levels, utilizing our excess adjusted free cash flow beyond our growing distributions. Hess Midstream continues to target 5% annual distribution growth per Class A share through at least 2024 from this new higher level with expected annual distribution coverage greater than 1.4 times, including distribution coverage greater than 1.5 times in 2022. Our recently announced distribution increase of 6.3% includes the new 5% increase in the distribution level as well as a targeted 5% annual growth in distributions per Class A share. The quarterly distribution will be payable on May 13th to Class A shareholders of record as of the close of business on May 5th.

As we execute our plan, we will continue to pursue our financial strategy that includes consistent and ongoing return of capital as a primary objective. We expect to continue to have financial flexibility, including expected ongoing adjusted free cash flow after distribution and leverage declining below our three times debt-to-adjusted EBITDA target as early as 2023, allowing for potential further return of capital to shareholders. Turning to our results. For the first quarter of 2022, net income was $160 million, compared to $165 million for the fourth quarter of 2021.

Adjusted EBITDA for the first quarter of 2022 was $242 million, compared to $247 million for the fourth quarter of 2021. The change in adjusted EBITDA relative to the fourth quarter of 2021 was primarily attributable to the following: Total revenues, excluding pass-through revenues, were down by approximately $6 million, primarily driven by lower volumes impacted by severe winter weather and lower MVC levels, resulting in segment revenue changes as follows: a decrease in terminaling revenues by approximately $4 million, and a decrease in processing revenue of approximately $2 million. Total cost and expenses, excluding depreciation and amortization, pass-through costs, and net of our proportional share of LM4 earnings, decreased by $1 million as follows: lower maintenance activity at the Tioga Gas Plant of approximately $3 million, partially offset by higher operating G&A, property taxes and other costs of approximately $2 million, resulting in adjusted EBITDA for the first quarter of 2022 of $242 million. First quarter maintenance capital expenditures were approximately $1 million.

And net interest, excluding amortization of deferred finance costs, was approximately $29 million. The result was that distributable cash flow was approximately $212 million for the first quarter, covering our distribution by 1.6 times. Expansion capital expenditures in the first quarter were approximately $37 million, resulting in adjusted free cash flow of approximately $175 million. At quarter end, prior to the completion of the unit repurchase, debt was approximately $2.6 billion, representing leverage of approximately 2.8 times adjusted EBITDA on a trailing 12-month basis.

Turning to guidance. For the second quarter of 2022, we expect net income to be approximately $145 million and adjusted EBITDA to be approximately $235 million, reflecting the impact of the severe weather conditions that John described, together with higher -- expected higher seasonal operating costs. Second quarter maintenance capital expenditures and net interest, excluding amortization and deferred finance costs, are expected to be approximately $40 million, resulting in expected distributable cash flow of approximately $195 million, delivering distribution coverage of approximately 1.5 times. For the full year 2022, we are reaffirming previously announced guidance for throughput volumes, adjusted EBITDA, and capital expenditures, and updating net income, DCF, and adjusted free cash flow guidance, primarily to include the impact of incremental interest expense on the $400 million in aggregate principal amount, a 5.5% senior unsecured notes due 2030 issued in April, to repay borrowings under our revolving credit facility used to fund the accretive unit repurchase transaction.

For the full year 2022, 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 million, we expect at the midpoint to generate adjusted free cash flow of $615 million. As implied in our guidance, we anticipate adjusted EBITDA in the second half of the year to be approximately 6% higher relative to the first half, supported by MVCs that are generally increasing through the year. We expect third quarter adjusted EBITDA to be higher relative to second quarter guidance on increasing MVCs with continued adjusted EBITDA growth in Q4 on higher MVCs and expected lower seasonal opex.

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 and financial metrics that underpins our unique and differentiated financial strategy with a focus on consistent and ongoing return of capital. This concludes my remarks. We'll be happy to answer any questions. I will now turn the call over to the operator.

Questions & Answers:

Operator

Thank you. [Operator instructions] Our first question coming from the line of Doug Irwin with Credit Suisse. Your line is now open.

Doug Irwin -- Credit Suisse -- Analyst

Hey, guys. Thanks for the question. Great to hear that Hess is potentially adding a fourth rig later this year, a little earlier than expected. I'm just curious if you've had similar conversations with third-party producers and if they've been given similar commentary around potentially ramping up activity later this year.

And then just as we look at volume guidance, is 10% to 15% still kind of the right third-party mix to think about this year?

John Gatling -- President and Chief Operating Officer

Yes, Doug. Thanks for the question. So again, we're focused on Hess as our priority, and we're well-positioned to support Hess, if it decides to accelerate rig four, which based on the earnings call, sounds pretty -- it sounds like a good outcome for us. As far as third-party goes, we are seeing rigs increasing in the basin.

And so we're -- again, we're focused on Hess, but we're also working toward supporting third-party producers as well. So as we've been, we're connected to third parties. We have the capability and capacity to support them as their production grows, and we'll continue to do that. So that's kind of our focus from a rig development perspective.

And then sorry, what was your second question?

Doug Irwin -- Credit Suisse -- Analyst

Just around third-party volume mix. I think you've kind of pointed to 10% to 15% in the past. Is that still kind of the right way to think about it this year and moving forward?

John Gatling -- President and Chief Operating Officer

Yes. And from a third-party perspective, yes, 10% is kind of what we've built into our plan, and it's kind of our long-term view for both oil and gas, but again, we see that as upside potential for us. Again, we're connected to those third parties. And so as Hess and other producers ramp production in the basin, we're well-positioned to support them.

Doug Irwin -- Credit Suisse -- Analyst

OK. That's helpful. And if I could sneak in one more on capex. You mentioned that the compressor station that just came online was a bit under budget.

Just curious if you see the potential for some savings on the second compressor if that could come in under budget? And then if you could just talk a little bit about the cadence of the remaining capex for the year and kind of how much of that is driven by well connects versus compression projects.

John Gatling -- President and Chief Operating Officer

Sure. So yes, the first station did, it came in under budget and ahead of schedule, and we're continuing to focus on that and try and continue to deliver on that. We do see some inflationary pressure out there. So we have made the decision to pre-buy some equipment to make sure that we minimize any risk associated with that.

So I think from an execution perspective, we would continue to see an opportunity to drive cost down from an execution cycle time perspective, but there is some offset to that related to inflation that we'll continue to monitor and manage. We don't see it being significant, but it is something that we're going to continue to monitor and focus on. And then as you asked about the cadence of compression, we've got basically the three stations lined up that I mentioned in my opening remarks. We've got the station that just came on.

We've got another one that will come on in third quarter. And then we're starting a third station later this year that will come on in 2023. So that represents a large portion of the total of the $235 million that we're spending this year. When you think about the well connects and kind of the base spend, we're somewhere in that $75 million to $120 million, $125 million range, depending on the activity.

And again, it really kind of depends on the rig activity and how many wells are coming on, on a given basis. We are going to continue to see some infrastructure spend on that. But overall, we would definitely see spend kind of going down as we continue to focus more on the well connects into the longer term for capital spend.

Doug Irwin -- Credit Suisse -- Analyst

Got it. Thanks. That's all for me and thanks for the time.

John Gatling -- President and Chief Operating Officer

Thank you.

Operator

And our next question coming from the line of Michael Lapides with Goldman Sachs. Your line is open.

Michael Lapides -- Goldman Sachs -- Analyst

Hey, guys. Thank you for taking my question. Congrats to a good start of the year despite the challenging weather. Just curious, I'm going to follow up on that capital spend question.

I know it's a little bit early, it's only late April. But as you're starting to think about in about four or five months from now, you'll dramatically ramp up the budgeting process. As you start thinking about 2023 capital spend just directionally, given the fact you're doing the two compressors this year and even part of the third this year, do you see growth capital -- do you see growth capital kind of coming down in '23 versus '22? Or does the level of increased well connects plus inflation in the overall market kind of help offset the fact you might be doing a little bit fewer compressors year over year?

John Gatling -- President and Chief Operating Officer

Yeah. Thanks for the question, Michael. We do definitely see an opportunity to reduce capital spend into 2023 and beyond. We are going to continue -- as I mentioned, we are going to continue to develop some infrastructure in that, but the pace of that is going to slow.

And so we would definitely see a reduction in capital going forward. I would say '23 is still one of those bridge years. So there still is going to be infrastructure in that third compressor station, I mentioned, is the bulk of the spend of that station will be in 2023. So that will still represent a material component of our overall program.

And then as you mentioned, when we look out beyond '23, and we're really focused on well connects, it will really depend on the activity.

Michael Lapides -- Goldman Sachs -- Analyst

Got it. And when you're looking at year-end 2022 leverage metrics, so kind of trailing 12 months as you get to the end of the year based on the guidance you provided in the debt outstanding, including after the new issuance, do you think you get below kind of your leverage metrics, meaning you have leverage metrics that are better than target before the end of '22? Or do you think that's really a '23 and beyond? And I guess where I'm hinting at is, do you think there are other potential capital allocation opportunities in 2022?

Jonathan Stein -- Chief Financial Officer

Right. So the current plan has, as I said, meets that three times target by the end of the year, and then as we move into next year with continued growth in EBITDA and being free cash flow positive in terms of fully funding our capital and distributions. So that we would continue to delever going into 2023. So that's the working assumption.

We'll change to that at this point. We continue to be free cash flow positive after distribution, even after the recent step-up in our distribution of 5% level growing. So we'll continue to be free cash flow positive there. But in terms of leverage, we really see that happening next year.

And that really emphasizes just also as a follow-up on the first question. As you think about the financial strength of the business going forward, with capital, we still have, as John talked about compression going forward, but then moving into really just well connects and then maintenance capital with growing EBITDA, continuing to be free cash flow positive plus declining leverage naturally. I mean you could really come to think of the financial flexibility that we have, and the ability to continue to do these ongoing return on capital, both in terms of the repurchases that we've done, but also in terms of the step-up in the level of our distributions on a go-forward basis on really just an ongoing basis, really, you can see the visibility we have to our financial flexibility and financial strength and capability to do this ongoing return of capital.

Michael Lapides -- Goldman Sachs -- Analyst

Got it. Thank you guys much. Appreciate it. Thank you.

Jonathan Stein -- Chief Financial Officer

Thank you.

Operator

Now our next question coming from the line of Dan Walk with J.P. Morgan. Your line is open.

Dan Walk -- J.P. Morgan -- Analyst

Hi. Good morning, everyone. Just a quick big picture question for you and kind of following up on Michael's last question. In January, I asked you guys about the broader financial framework and your relationship, I guess, with the parent and what you could do there.

And lo and behold, you bought back or you did the $400 million. I'm just curious if there's anything maybe in light of the Guyana update and the opportunity setupstream that you guys could do to, I guess, increase the public stake.

Jonathan Stein -- Chief Financial Officer

Right. So if you really look at what we've really been really working on and the journey we've been on, I'll say, really since back to the simplification in 2019, it's really had two objectives. One has been to remove technical obstacles to ownership, really started with that simplification continue to last year with the -- and into this year with the secondary offering. And those have really been focused on moving technical obstacles to ownership, in terms of increasing our average daily trading volume, providing incremental investors, these offerings as an entry point, and then increasing indexation.

And we feel good about the progress we've made on all fronts and all of those objectives. In terms of going forward, there's no specific plan or set targeted float in terms of secondaries. Hess & JP still own 82% of Hess Midstream. They certainly are disciplined long-term investors focused on the long-term value, but at the same time, they recognize that there is continued demand for additional float.

And so the balance of those two things will dictate additional opportunities in terms of secondary. And at the same time, the second objective we've been pursuing is this ongoing return of capital, utilizing our financial flexibility. That in terms of -- we did that last year with the $750 million repurchase, we're able to combine that with a 10% distribution increase. And then again, we did, as you mentioned, the $400 million, the 5% distribution increase this year.

So that's something that we do see the opportunity to continue to go forward, but we'll be disciplined just in terms of relative to our three times target, but -- as well as our free cash flow after distribution. So there's nothing specific, I'd say in terms of the rest of this year. But in terms of -- we'll continue to pursue those -- both of those objectives, both in terms of removing technical obstacles, through increasing the float and then ongoing return on capital.

Dan Walk -- J.P. Morgan -- Analyst

Got it. All right. Thanks, Jonathan. That's very helpful.

Appreciate it.

Operator

[Operator signoff]

Duration: 37 minutes

Call participants:

Jennifer Gordon -- Vice President of Investor Relations

John Gatling -- President and Chief Operating Officer

Jonathan Stein -- Chief Financial Officer

Doug Irwin -- Credit Suisse -- Analyst

Michael Lapides -- Goldman Sachs -- Analyst

Dan Walk -- J.P. Morgan -- Analyst

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