Hess Midstream Q3 2024 Earnings Call Transcript

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October 30, 2024

There are 9 speakers on the call.

Operator

Good day, ladies and gentlemen, and welcome to the Third Quarter 2024 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 session. Call.

Operator

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. Please proceed.

Speaker 1

Thank you, Gigi. Good afternoon, everyone, and thank you for participating in our Q3 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 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 Q3 2024 conference call. Today, I'll discuss our 3rd quarter performance and review Hess Corporation's results and outlook for the Bakken. Jonathan will then review our financial results and guidance. In the Q3, Hess Midstream continued to deliver strong operating and financial performance with throughput volumes averaging 419,000,000 cubic foot per day for gas processing, 122,000 barrels of oil per day for group terminalling and 128,000 barrels of water per day for water gathering.

Speaker 2

As guided, throughputs remained relatively stable compared to the 2nd quarter, primarily due to planned maintenance activity at the Little Missouri 4 gas plant, which was successfully completed in the 3rd quarter. Aside from the planned maintenance, our system availability remained high and gas capture continued to be strong in the quarter. Now turning to Hess upstream highlights. Earlier today, Hess reported 3rd quarter net production for the Bakken averaged 206 1,000 barrels of oil equivalent per day, which was above the high end of their guidance range of 200,000 to 205,000 barrels of oil equivalent per day. Excluding percentage of proceeds volumes, as expected Hess production was relatively flat in the Q3 compared to the Q2.

Speaker 2

Hess anticipates Bakken net production to be in the range of 200,000 to 205,000 barrels of oil equivalent per day in the 4th quarter, primarily reflecting lower expected volumes received under percentage of proceeds contracts and the impact of wildfires in North Dakota. Hess reiterated its plans to continue to run a 4 rig program in the Bakken. Turning to Hess Midstream guidance. We're reaffirming our previously announced 2024 throughput guidance. For full year 2024, we're forecasting gas processing volumes to average between 405,000,000 415,000,000 cubic foot per day, crude terminalling volumes to average between 130,000 and 1,200 and 30,000 barrels of oil per day and water gathering volumes to average between 115,000 and 125,000 barrels of water per day.

Speaker 2

We expect to grow throughputs by approximately 10% across our oil and gas systems in 2024 compared to 2023, in line with guidance. Our growth continues to be driven by Hess' development activity and a continued focus on gas capture, partially offset by the 4th quarter in the 4th quarter by the October wildfires. Now turning to Hess Midstream's 2024 Capital Program. We continue to make excellent progress on our 2024 capital plans and are focused on supporting Hess and third party development in the Bakken. As guided, capital expenditures increased in the 3rd quarter as construction activities continued on our multi year projects to build 2 new compressor stations and associated gathering pipelines.

Speaker 2

Engineering and planning continued for our 125,000,000 cubic foot per day greenfield gas processing plant. Construction of the gas plant is planned to start in 2025 and is expected to be online in 2027. We expect capital expenditures for the full year of 2024 to be approximately $270,000,000 reflecting faster Hess drilling and the continued execution of our multiyear projects in support of Hess' expected production growth. 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 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 prioritizes return of capital to shareholders with a demonstrated track record of differentiated shareholder returns. Since the beginning of 2021, we have returned $1,850,000,000 to shareholders through accretive repurchases. In addition to the combination of our 5% targeted annual distribution growth and 9 distribution level increases following each repurchase, we have increased our distribution per Class A share by over 50% since 2021 and by over 10% in 2024 year to date on an annualized basis. As a result, our total shareholder return yield is one of the highest of our midstream peers.

Speaker 3

Furthermore, our leverage of approximately 3.2 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. In January, we announced that we expect to generate greater than $1,250,000,000 of financial flexibility through 2026 for incremental shareholder returns, including potential unit repurchases. Utilizing this capacity, year to date in 2024, we have completed $300,000,000 of unit repurchases, including our recent repurchase in September of $100,000,000 that was accretive on both adjusted free cash flow per Class A share basis and an earnings per Class A share basis. As we have done in the past, our 3rd quarter distribution increase included our targeted 5% annual growth per Class A share and an additional increase utilizing the excess adjusted free cash flow available for distributions following the repurchase. As a result, on an annualized basis, our 2024 distribution per Class A share growth of over 10% is significantly above our targeted 5% annual growth through 2026.

Speaker 3

Following the unit repurchase, we expect to continue to have more than $1,250,000,000 of financial flexibility through 2026 that can be used for continued execution of return of capital framework, including potential ongoing unit repurchases. Turning to our results. For the 3rd quarter, net income was $165,000,000 compared to $160,000,000 for the 2nd quarter. Adjusted EBITDA for the Q3 was $287,000,000 compared to $276,000,000 for the 2nd quarter. The increase in adjusted EBITDA relative to the 2nd quarter was primarily attributable to the following.

Speaker 3

Excluding pass through revenues and the one time $8,000,000 reduction that was included in 2nd quarter results, total revenues increased by approximately $3,000,000 primarily driven by higher throughput volumes resulting in segment revenue changes as follows. Gathering revenues increased by approximately $3,000,000 processing revenues increased by approximately $1,000,000 and totaling revenues decreased by approximately $1,000,000 Total costs and expenses excluding depreciation and amortization, pass through costs and net of our proportional share of LM4 earnings were flat relative to the prior quarter, resulting in adjusted EBITDA for the Q3 of $287,000,000 Our gross adjusted EBITDA margin for the Q3 was maintained at approximately 80%, above our 75% target, highlighting our continued strong operating leverage. 3rd quarter capital expenditures were approximately $97,000,000 and net interest excluding amortization of deferred finance costs was approximately $49,000,000 resulting in adjusted free cash flow of approximately $141,000,000 We had a drawn balance of $30,000,000 on a revolving credit facility at quarter end. Turning to guidance. For the Q4, we expect net income to be approximately $170,000,000 to $185,000,000 and adjusted EBITDA to be approximately $295,000,000 to $310,000,000 This represents an approximate 5% increase in adjusted EBITDA at the midpoint compared with the Q3 of 2024, supported by growing throughput volumes, partially offset by volume impacts from power losses due to the October 2024 wildfires as well as higher operating and G and A expenses from expectations of a continued active maintenance program and higher anticipated allocations under omnibus and succumbing agreements.

Speaker 3

Looking ahead through 2026, we continue to expect approximately 10% annualized growth in oil and gas volumes, supporting a greater than 10% growth per year in adjusted EBITDA from 2024. 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. That together with capacity as our leverage falls below 2.5 times EBITDA supports greater than $1,250,000,000 of financial flexibility that can be utilized for shareholder returns, including potential continued unit repurchases. And as a reminder, in January, we will be setting our 2027 MVCs and providing guidance through 2027. 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 underpin our unique and differentiated financial strategy with a focus on consistent and ongoing return of capital to our shareholders.

Speaker 3

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

Operator

Thank you. Our first question comes from the line of Naomi Marfascia from UBS.

Speaker 4

Hi, good afternoon. Appreciate the prepared remarks. My first question is on sponsorship appetite. A few weeks ago, Hessam announced the final secondary of the year. Well, I know it's early to probably assume what those sponsors may or may not do.

Speaker 4

Curious on your thoughts on the sponsorship appetite given that GRP now owns 15% of Hessam and Hess owns 38% with the pending merger. Do you see an opportunity set to buyback from sponsors going forward? Or if we should be thinking about anything outside as it relates to your financial flexibility goals?

Speaker 3

Okay. Hi, thanks for the question. So yes, in terms of I mean, I think first of all, in terms of secondaries, they continue to be demand driven from investors and then GIP will evaluate that demand relative to their disciplined view on value of Hess Midstream. There's no preset pace to that. There's no change in strategy relative to that.

Speaker 3

And I would also highlight that the 90 day lockup period that was in the recent transaction would take us just about to the end of 2024. In terms of our return on capital program, that's really not a mechanism for our sponsors to change ownership levels. It's really part of our return of capital program. The repurchases are part of that and really leveraging the financial flexibility that we have, the greater than $1,250,000,000 that we talked about and we expect to continue to execute that program. In the past, as you're looking forward, we haven't included the public in our repurchases because we have been simultaneously working on the goal of raising liquidity in Hessam and that has really helped many investors have taken advantage of the secondaries to establish positions in the stock.

Speaker 3

And the way that this is they've been set up, that's also generally more accretive to the public as their ownership slightly increases, very small, but slightly increases as a result of each repurchase. But certainly going forward, as we look forward, certainly we'll continue to evaluate, including the public. But again, the repurchases are really part of our return to capital program, not really separate from secondaries, which are really more a mechanism for ownership changes for the sponsors, again, demand driven. But really in terms of return on capital program, we'll continue to execute that leveraging the $1,250,000,000 of capacity that we have.

Speaker 4

Great. Thanks. And then maybe just a follow-up on kind of the long term outlook in Bakken. We've seen a lot of activities recently in the basin. How should we think about 3rd party volume mix going forward?

Speaker 4

Can you talk about how Hessam is thinking about anything strategically different than it did in the past?

Speaker 2

Yes. Thank you for the follow-up question. Overall, our forecast of approximately 10% third party volume still remains kind of our long term outlook. We do continue to see opportunities to capture additional 3rd party volumes. I think as we look at our strategic footprint, we're always looking for ways to get the maximum utilization out of that infrastructure that's in the ground.

Speaker 2

We have a very good footprint that sits on top of really good rock. So from our perspective, we're definitely well positioned to capture additional third party volumes. I would say we would continue to maintain the same strategy we've had, which is capture it when we can and when that opportunity is there. But our primary objective is to make sure that we're supporting Hess' production growth going into the future. And then just looking for those incremental third party opportunities that are out there that we continue to capture.

Speaker 4

Great. Thanks. Have a great rest of your afternoon.

Speaker 2

Thank you. You too.

Operator

Thank you. One moment for our next question. Our next question comes from the line of Jackie Kouletos from Goldman Sachs.

Speaker 5

Hi, thanks for the questions. Just wanted to start on the wildfires. So how much of that was an impact to or assuming an impact to cost versus volumes in the Q4? And on volumes, is that hitting one segment more than the other? Or does this headwind more so flow through the entire footprint, perhaps?

Speaker 2

Yes. Thanks for the question. The impact is going to primarily be on the volume side. There is some cost, but

Speaker 6

I would say

Speaker 2

it's relatively small in the grand scheme of things. The volume impact, there was about a week long impact associated with power outages related to the fires, particularly in the northwestern portion of the state. I think the response from the community and the firefighters in the area was just phenomenal. I think everybody just rallied together and responded really well. In addition, the co ops that provide the power to us also responded really well as well.

Speaker 2

And we're able to get power back up in the area. But it's primarily going to be a bit of a constraint on electricity to well pads, electricity to compressor stations that are impacting the volumes that came through the system. And to your question around how far does this go through the entire system? So when the wells are down, obviously, you're not getting any oil or gas. Again, it was impact was several days and then there's a recovery period coming back from the several day of power disruptions.

Speaker 2

So overall, it would flow through the system. It would impact oil, gas and ultimately water volumes coming through our system. But again, I think the recovery has been really strong and we're feeling like the remainder of the Q4 should be strong.

Speaker 5

Great. Thank you so much for the color. And just as a quick follow-up, excluding that impact, you noticed you did lower the midpoint of guidance for 2024. Could you walk through the rest of the puts and takes of what could get you to the bottom and the top of that range? And if you were to outperform the updated guidance, what if any could be that tailwind for the Q4 EBITDA?

Speaker 3

Okay, sure. So let me start by just emphasizing the growth that we have certainly this year. If you just look Q1 to Q4, 10% increase in EBITDA, full year basis 2023 versus 2024, EBITDA up 12% approximately. And then even with the wildfires and all the what John described, we're still talking about 5% growth in EBITDA just in Q4 alone relative to Q3. So really that impact of the wildfires, as John said, it's a volume impact, but it's really reducing our volume growth and so more limiting it, but we're still having volume growth going forward.

Speaker 3

The other things we talked about on the call is continue our active maintenance program. And then second would be the allocations on the active on the maintenance program there. Historically, if you look back a number of years, probably seasonally Q4 was a bit lower on maintenance. The team has really worked to optimize to be able to do more maintenance in Q4. That really helps us mitigate against potential severe winter weather conditions that we typically see in Q1.

Speaker 3

So that's a good thing. And then allocations are typically really we could have variability in allocations due to year end accruals or benefits and bonuses. But the important thing is that in terms of Q4 really continued growth 5%. In terms of the range, as you highlighted, we do have a range there. And really that leads to what is the range or what are the drivers and it really falls on that.

Speaker 3

First, it's weather contingencies, even though we are trying to get more maintenance done in the Q4. Obviously, the Q4 can have some weather impacts in North Dakota. We'll see how that plays out. As I mentioned, the maintenance program, a lot to do. So we'll see the progress is through the year end.

Speaker 3

We'll have final allocations on, as I mentioned, on the final benefits and bonus accruals. And then of course, just normal volume variability based on third party volumes and number of Hess wells online and performance. So those are kind of the range of the impacts that we'll see in each demand on each of those come out will depend on where we end up in the range. But again, really emphasizing 5% increase in Q4 and then no change to our long term guidance moving into as we look forward to 2026 2025 next year and then 2026, continued volume growth, approximately 10% annualized growth through 2026 and EBITDA growing 10% per year through 2026. So a lot of volume growth ahead of us and growth in EBITDA ahead of us in this quarter and then continuing forward.

Speaker 5

Great. Thank you so much. Appreciate it.

Operator

Thank you. One moment for our next question. Our next question comes from the line of Doug Irwin from Citi.

Speaker 7

Maybe just a follow-up on some of the growth in 2025 and 2026. I think Hat has talked about an accelerated drilling activity and CapEx upstream. I'm just curious what that means for Hess Midstream in 2025, if you're maybe pulling forward some growth into 2025 relative to the initial expectations when you first laid out that 10% a year growth outlook?

Speaker 2

Yes. So I think overall from a drilling and completions perspective, Hess is absolutely drilling and completing wells a bit faster than anticipated, which is a good story. I'd say that's definitely a tailwind from a volume growth perspective. I would say, we increased our MVCs going into January. We've had some volumes increases through the year as we've guided higher in that trajectory.

Speaker 2

From our perspective, we feel like that the pace that Hess is drilling at supports our 10% volume approximate 10% volume growth through 2026 and just sets us up to have more certainty in the volume delivery going into 2025. So again, we think the combination of the Hess performance from a drilling perspective, but also the infrastructure build that we've got to support that growth, we feel like that that's positioning us really well as we roll into 2025 with that continued approximate 10% volume growth through 2026.

Speaker 7

Great. That's helpful. And then maybe on Hess and CapEx. I know in the past you've talked about that $250,000,000 to $275,000,000 being a good range going forward. But it sounds like for 2024, you've maybe pulled a little bit of that CapEx forward into 2024.

Speaker 7

So just curious initial directional messaging on 2025 CapEx, should we expect to step down next year? Or are you maybe still kind of accelerating some spending next year as well?

Speaker 2

Yes. No, I think our previous guidance remains the same. I think our longer term outlook for well connects and infrastructure build remains consistent. I think you've got a little bit of a timing thing here with these multiyear projects shifting between 2025 or 2024 and 2025. And then also just making sure that the infrastructure is in place for the drilling program as Hess continues to drill its wells out, just making sure that infrastructure is in place.

Speaker 2

So I would say there's no additional cost to this. It's really more of a timing thing shifting between the 2 years. I don't know, Jonathan, if there's anything else you wanted to add, any additional color?

Speaker 3

No, I think that was in terms of really think about these as multiyear projects. 2 years, we've talked about the gas plant potentially, John mentioned that in his prepared remarks, potentially starting next year again. That would obviously be a multiyear project. So really kind of look at 24, 25, 26 as then it will give 27 even kind of guidance in terms of kind of pace at least in January. So look at those as kind of multiyear projects.

Speaker 3

So there can be some give and takes, if you will, as John said, between the years, across those 3 years. And certainly once you have the gas plant, that takes your rent to 27%. But on a total capital basis, as John said, across that period of time, really the same, just a shifting of a little bit more, maybe 1 year, a little bit less than later. It may not be 1 year to the next, maybe 2 years and then 1 year, but just among those, I'll call it 3 years, at least in 2026, certainly, you'll have some movement just as the projects themselves, the execution changes.

Speaker 7

Got it. That's helpful. That's all for me. Thanks guys.

Speaker 2

Thank you.

Operator

Thank you. One moment for our next question. Our next question comes from the line of Noah Katz from JPMorgan Chase.

Speaker 8

Hey, thanks for the question. First, I wanted to touch on the trends you're seeing in the Bakken at large currently. And what is your expectation for future basin growth across all the value streams in the long term? Thanks.

Speaker 2

Sure. I think consistent with what the North Dakota Pipeline Authority has talked about the Department of Mineral Resources and the North Dakota Industrial Commission. I think oil is trending flattish is where we see kind of the volumes going from an oil perspective. As expected, gas and GORs will continue to increase over time. That's just kind of a natural occurring thing that's expected to happen.

Speaker 2

So we do expect gas volumes to continue to increase. I think Justin Krynstedt has shown some gas growth from the range of about 3.5 Bcf up to approximately 5 Bcf of gas. So we would continue to anticipate the basin kind of showing that trajectory of growth. From the Hess perspective, we continue to see growth across all of our systems, oil, gas and water systems. Gas is definitely the area that's growing a little bit faster than the oil, but overall the systems are growing in that kind of 10% range that we've talked about through 2026.

Speaker 8

Thanks for that. And as a follow-up, beyond the 26 MVCs, can you frame how we should think about the 20 27 MVCs with the processing plant coming online? Anything there would be helpful. Thanks.

Speaker 3

Well, I think we'll give our MVCs in January. So really nothing really to say at this point. What I would say is if just looking at the 2026 MVC, obviously that puts us right about if it implies kind of gross it up, that implies that will be approximately 500,000,000 cubic feet per day. So as we move into 2027, we expect to continue to see some growth there. Although really think of the gas plant as really 125,000,000 cubic feet per day as we've talked about really supporting growth through really the rest of the decade.

Speaker 3

So it may not be in 1 year, it's going to really kind of give us the ability to continue to grow really, just continuously through the rest of the decade, which is quite amazing. But I will give more in January, nothing to really say at this point.

Speaker 8

Thank you.

Operator

Thank you. One moment for our next question. Our next question comes from the line of Praneeth Satish from Wells Fargo.

Speaker 6

Thanks. Good afternoon, everyone. I guess just maybe going back to the growth outlook, volume growth outlook for 2025. I mean, I think you quoted some of Justin's numbers. I guess I'm trying to compare that against the 10% volume growth outlook that you provided.

Speaker 6

Obviously, Hess is drilling. But on the 3rd party side of things, if we see kind of flat oil volumes and maybe a little bit a positive number on the gas side, Does that impact at all that 10% guidance that you put out there for 2025? And also as we think about the volume cadence, would you expect it to be kind of 10% in 2025 and 2026 or kind of more lumpy?

Speaker 2

Yes. I think overall, again, I think it's where you are in the basin. And from our perspective, the rock that we're drilling, it creates that opportunity for that growth trajectory that we've been talking about, so the approximate 10% through 2026. I would say that the 3rd party volumes are really kind of those add on opportunities that we've got out there. I mean, we've obviously had about 10% third parties.

Speaker 2

We expect to continue to have about 10% third parties. Hess is going to grow at a faster pace than the basin average. And I would say the rock that we're drilling in that the Hess Midstream infrastructure sitting on top of creates an opportunity for a growth trajectory that's higher than the basin average. I would say that on the 3rd party side, we still see a lot of opportunity to capture those volumes. There's still a lot of drilling activity out there.

Speaker 2

And I think we're always looking to bring in that incremental volume into our system and just maximize the utilization of that. So I think we've kind of indicated that we're planning to build the gas plant that's showing a longer term bullish look towards volume growth. I think there's also a 3rd party component to that as well that gets us a chance to actually go and provide services to 2 other 3rd parties in addition to providing the support to Hess on its very attractive growth trajectory over the next several years.

Speaker 6

Got you. No, that's helpful.

Speaker 3

Hey, Priti, just one thing, just from a modeling point of view. We did update most of our MVCs last year. So to your question on kind of the lumpiness, if you will, the trajectory. So most of those are set now at 80% of expected volumes. So if you look at that, you can see that on the gas side, it's pretty much approximately 10% per year, while on the oil side, it's a bit more growth in 2025 and a little bit less than 26%.

Speaker 6

Got you. Okay. And then I guess I just wanted to check-in on M and A, where that stands? Obviously, you're kind of in somewhat of an autopilot here in terms of the consistency of the capital return. But yes, I guess just where does M and A fall in your financial flexibility stack that you have out there?

Speaker 2

So maybe I'll talk about the opportunity first and then Jonathan can talk a little bit about the financial side of it. So from the opportunity perspective, our strategy really remains the same. We continue to look and we're always looking for those strategic bolt ons that strengthen our position in the basin. I think we're constantly on the lookout for that and we're not distracted from that. So those opportunities continue to present themselves.

Speaker 2

We continue to evaluate them and see how they incrementally add value to our system. And we'll continue to go down that path. From the standpoint of it's a little bit back to the earlier question around capturing the volumes. Obviously, Hess as our anchor and our primary customer, we're obviously very focused on providing support to Hess, but we're also trying to provide support to other third party producers in the basin as well. So from our perspective, it's really not there's not anything restricting us from looking at other than the strategic nature of the opportunity and kind of where it fits in the portfolio and how it supports both Hess and our third party customers.

Speaker 2

So I don't know, Jonathan, if there's anything you wanted to add on the financial flexibility side?

Speaker 3

No, that was really great. I mean, obviously, we have the $1,250,000,000 of financial flexibility that we've talked about. Part of that is from leverage relative to our conservative three times target and part of that is just excess free cash flow after distribution. So as John said, we'll continue to look at bolt ons. We're not we said in the past, not looking at any corporate M and A.

Speaker 3

But to the extent that there's bolt on opportunities available, then we'll evaluate those, but the bar is high relative to the growth that we have. And absent any opportunities, we'll continue to execute our and prioritize our return to capital program.

Speaker 6

Got it. Thank you all.

Speaker 2

Thank you.

Operator

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

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