Hess Midstream - Q3 2024

Transcript

Operator (participant)

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 speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. 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.

Jennifer Gordon (VP of Investor Relations)

Thank you, Gigi. Good afternoon, everyone, and thank you for participating in our third 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 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.

John Gatling (President and COO)

Thanks, Jennifer. Good afternoon, everyone, and welcome to Hess Midstream's third quarter 2024 conference call. Today, I'll discuss our third quarter performance and review Hess Corporation's results and outlook for the Bakken. Jonathan will then review our financial results and guidance. In the third quarter, Hess Midstream continued to deliver strong operating and financial performance, with throughput volumes averaging 419 million cubic feet per day for gas processing, 122,000 barrels of oil per day for crude terminaling, and 128,000 barrels of water per day for water gathering. As guided, throughputs remained relatively stable compared to the second quarter, primarily due to planned maintenance activity at the Little Missouri 4 gas plant, which was successfully completed in the third 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 third quarter net production for the Bakken averaged 206,000 barrels of oil equivalent per day, which was above the high end of their guidance range of 200,000-205,000 barrels of oil equivalent per day. Excluding percentage of proceeds volumes, as expected, Hess production was relatively flat in the third quarter compared to the second quarter. Hess anticipates Bakken net production to be in the range of 200,000-205,000 barrels of oil equivalent per day in the fourth 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 four-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 and 415,000 million cubic feet per day, crude terminaling volumes to average between 120,000 and 130,000 barrels of oil per day, and water gathering volumes to average between 115,000 and 125,000 barrels of water per day. 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's development activity and a continued focus on gas capture, partially offset in the fourth 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 third quarter as construction activities continued on our multi-year projects to build two new compressor stations and associated gathering pipelines. Engineering and planning continued for our 125 million cubic feet 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 million, reflecting faster Hess drilling and the continued execution of our multi-year projects in support of Hess's 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.

Jonathan Stein (CFO)

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 $1.85 billion to shareholders through accretive repurchases. In addition, through the combination of our 5% targeted annual distribution growth and nine 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. 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 $1.25 billion 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 million of unit repurchases, including our recent repurchase in September of $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. As we have done in the past, our third 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.

Following the unit repurchase, we expect to continue to have more than $1.25 billion 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 third quarter, Net Income was $165 million compared to $160 million for the second quarter. Adjusted EBITDA for the third quarter was $287 million compared to $276 million for the second quarter. The increase in Adjusted EBITDA relative to the second quarter was primarily attributable to the following. Excluding pass-through revenues and the one-time $8 million reduction that was included in second quarter results, total revenues increased by approximately $3 million, primarily driven by higher throughput volumes, resulting in segment revenue changes as follows. Gathering revenues increased by approximately $3 million. Processing revenues increased by approximately $1 million, and terminaling revenues decreased by approximately $1 million.

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 third quarter of $287 million. Our gross adjusted EBITDA margin for the third quarter was maintained at approximately 80%, above our 75% target, highlighting our continued strong operating leverage. Third quarter capital expenditures were approximately $97 million, and net interest, excluding amortization of deferred finance costs, was approximately $49 million, resulting in Adjusted Free Cash Flow of approximately $141 million. We had a drawn balance of $30 million on a revolving credit facility at quarter end. Turning to guidance, for the fourth quarter, we expect net income to be approximately $170-$185 million, and adjusted EBITDA to be approximately $295-$310 million.

This represents an approximate 5% increase in adjusted EBITDA at the midpoint compared with the third quarter 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&A expenses from expectations of a continued active maintenance program and higher anticipated allocations under omnibus and secondment agreements. 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's together with capacity, as our leverage falls below 2.5 times EBITDA, supports greater than $1.25 billion 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. This concludes my remarks. We'll be happy to answer any questions. I will now turn the call over to the operator.

Operator (participant)

Thank you. As a reminder to ask a question, please press star 11 on your touchtone telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Naomi Morfaccia from UBS.

Naomi Marfatia (Analyst)

Hi, good afternoon. I appreciate the prepared remarks. My first question is on sponsorship appetite. A few weeks ago, Hess announced the final second year of the year. While I know it's early to probably assume what those sponsors may or may not do, curious on your thought on the sponsorship appetite, given that GIP now owns 15% of Hess and Hess owns 38% with the pending merger. Do you see an opportunity set to buy back from sponsors going forward, or if we should be thinking about anything outside as it relates to your financial flexibility goals?

Jonathan Stein (CFO)

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. 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 of capital program, that's really not a mechanism for sponsors to change ownership levels. It's really part of our return of capital program. The repurchases are part of that, and it really leveraging the financial flexibility that we have, the greater than $1.25 billion 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 Hess, and that has really helped. Many investors have taken advantage of the secondaries to establish positions in the stock, 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, you know, the repurchases are really part of our return of 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 of capital program, we'll continue to execute that, leveraging the $1.25 billion of capacity that we have.

Naomi Marfatia (Analyst)

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 third-party volume mix going forward? Can you talk about how Hess is thinking about anything strategically different than it did in the past?

John Gatling (President and COO)

Yeah, 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 third-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. You know, 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's 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.

Naomi Marfatia (Analyst)

Great, thanks. Have a great rest of your afternoon.

John Gatling (President and COO)

Thank you, you too.

Operator (participant)

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

Jackie Coletta (Analyst)

Hi, thanks for the questions. Just want to start on the wildfires. How much of that was an impact to, or assuming an impact to cost versus volumes in the fourth quarter? And on volumes, is that hitting one segment more than the other, or does this headwind more so flow through the entire footprint for Hess?

John Gatling (President and COO)

Yeah, thanks for the question. The impact is going to primarily be on the volume side. There is some cost, but I would say 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 and were 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.

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, you know, impact was several days, and then there's a recovery period coming back from the several days of power disruptions. 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 you know, we're feeling like the remainder of the fourth quarter should be strong.

Jackie Coletta (Analyst)

Great, thank you so much for the color. And just as a quick follow-up, excluding that impact, you know, notice 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, you know, what, if any, could be that tailwind for the fourth quarter EBITDA?

Jonathan Stein (CFO)

Okay, sure. So let me start by just emphasizing the growth that we have. Certainly this year, if you just look Q1 to Q4, you know, 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. The other things we talked about on the call is, you know, continue our active maintenance program, and then the second would be the allocations.

On the activity on the maintenance program there, you know, 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, so that's a good thing, and then allocations are typically, you know, really we can have variability in allocations due to year-end accruals for benefits and bonuses, but the important thing is that in terms of, you know, Q4, really continue growth 5%. In terms of the range, as you highlighted, we do have a range there, and really that leads to, you know, what is the range or what are the drivers, and it really falls from that.

You know, first, it's, you know, weather contingencies, even though we are trying to get more maintenance done in the fourth quarter. Obviously, the fourth quarter 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 progresses through the year-end. 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, depending on each of those come out, will depend on where we end up in the range.

But again, you know, really emphasizing 5% increase in Q4, and then no change for our long-term guidance, you know, moving into, as we look forward to 2025 next year, and then 2026, you know, continued volume growth, approximately 10% annualized growth through 2026, and then 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.

Jackie Coletta (Analyst)

Great, thank you so much. Appreciate it.

Operator (participant)

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

Douglas Irwin (Analyst)

Hey, thanks for the question. Maybe just to follow up on some of the growth in 2025 and 2026. I think Hess talked about some 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.

John Gatling (President and COO)

Yeah, 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 would say that's definitely a tailwind from a volume growth perspective. I would say, you know, we increased our MVCs going into January. We've had some volumes increases through the year as we've guided higher in that trajectory. 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's positioning us really well as we roll into 2025 with that continued approximate 10% volume growth through 2026.

Douglas Irwin (Analyst)

Great, that's helpful. And then maybe on Hess and CapEx, I know in the past you've talked about that $250 million-$275 million 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. 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?

John Gatling (President and COO)

Yeah, 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 multi-year projects shifting between 2025 and 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. So I would say there's, you know, no additional cost to this. It's really more of a timing thing, shifting between the two years. I don't know, Jonathan, if there's anything else you wanted to add, any additional color?

Jonathan Stein (CFO)

No, I think that was, you know, what I said in terms of, you know, really think about these as multi-year projects. Two years, you know, 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 multi-year project. So really kind of look at 2024, 2025, 2026, and then we'll give 2027 even kind of guidance in terms of kind of pace at least in January. So look at those as kind of multi-year projects. So there can be some give and takes, if you will, as John said, between the years across those three years. And certainly once we have the gas plant, you know, that takes us to 2027.

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 one year, a little bit less than a later year. May not be one year to the next, maybe two years and then one year, but just among those, call it three years at least through 2026. Certainly you'll have some movement just as the projects themselves, the execution changes.

Douglas Irwin (Analyst)

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

John Gatling (President and COO)

Thank you.

Operator (participant)

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

Noah Katz (Analyst)

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 base and growth across all the value streams in the long term? Thanks.

John Gatling (President and COO)

Sure. I, you know, 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 flat-ish is where we see kind of the volumes going from an oil perspective. You know, 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. So we do expect gas volumes to continue to increase. I think Justin Kringstad's shown some gas growth from the range of about three and a half BCF up to approximately five BCF of gas. So we would continue to anticipate the basin kind of showing that trajectory of growth. From the Hess perspective, you know, we continue to see growth across all of our systems, oil, gas, and water systems.

You know, 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.

Noah Katz (Analyst)

Thanks for that. And as a follow-up, you know, beyond the 2026 MVCs, can you frame how we should think about the 2027 MVCs with the processing plant coming online? Anything there would be helpful. Thanks.

Jonathan Stein (CFO)

I think we'll give our MVCs in January, so really, you know, nothing really to say at this point. What I would say is, if just looking at the 2026 MVC, you know, obviously that puts us right about if it implies kind of gross it up, that implies that we'll be, you know, approximately 500 million cubic feet per day. As we move into 2027, you know, we expect to continue to see some growth there, although really think of the gas plant as really 125 million cubic feet per day, as we've talked about, really supporting growth through really the rest of the decade. It may not all be in one year.

It's going to really kind of, you know, give us the ability to continue to grow really, really just continuously through the rest of the decade, which is, you know, quite amazing. But we'll get more in January. Nothing to really say at this point.

Noah Katz (Analyst)

Thank you.

Operator (participant)

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

Praneeth Satish (Analyst)

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

John Gatling (President and COO)

Yeah, I think overall, you know, 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 third-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. We expect to continue to have about 10% third parties. You know, Hess is going to grow at a faster pace than the basin average. And I would say the rock that, you know, 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 third-party side, you know, we still see a lot of opportunity to capture those volumes. There's still a lot of drilling activity out there, and I think, you know, we're always looking to bring in that incremental volume into our system and just maximize the utilization of that, so I think, you know, 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 third-party component to that as well that gets us a chance to actually go and, you know, provide services to other third parties in addition to providing the support to Hess on its, you know, very attractive growth trajectory over the next several years.

Praneeth Satish (Analyst)

Gotcha. No, that's helpful.

Jonathan Stein (CFO)

Hey, Praneeth, just one thing. Just from a modeling point of view, you know, we did update most of our MVCs last year. So to your question on kind of the lumpiness, if you will, of 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, you know, 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 in 2026.

Praneeth Satish (Analyst)

Gotcha. Okay. And then I guess I just wanted to check in on M&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 yeah, I guess just where does M&A fall in your financial flexibility stack that you have out there?

John Gatling (President and COO)

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. You know, I think we're constantly on the lookout for that, and we're not distracted from that. So those opportunities continue to present themselves. We continue to evaluate them and see how they incrementally add value to our system. And we'll continue to go down that path. You know, from the standpoint of, you know, it's a little bit back to the earlier question around, you know, 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. So I don't know, Jonathan, if there's anything you wanted to add on the financial flexibility side.

Jonathan Stein (CFO)

No, that was, you know, really great. I mean, obviously, we have the $1.25 billion of financial flexibility that we've talked about. Part of that is from leverage relative to our covenant of three times target, and part of that is just excess free cash flow after distribution. So as John said, you know, we continue to look at bolt-ons. We're not, we've said in the past, not looking at any corporate M&A, but to the extent that there's bolt-on opportunities available, then, you know, we'll evaluate those, but the bar is high relative to the growth that we have, and to, you know, absent any opportunities, we'll continue to execute on and prioritize our return of capital program.

Praneeth Satish (Analyst)

Got it. Thank you all.

John Gatling (President and COO)

Thank you.

Operator (participant)

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