Hess Midstream LP

NYSE:HESM

Earnings Call Transcript 2019-Q1

[Operator]

Good day, ladies and gentlemen, and welcome to the First Quarter 2019 Hess Midstream Partners Conference Call. My name is Latif, 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, Director of Investor Relations. Please proceed.

[Jennifer Gordon, Director of Investor Relations]

Thank you, Latif. 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 Factor 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, Chief Operating Officer; and Jonathan Stein, Chief Financial Officer.

I'll now turn the call over to John Gatling.

[John Gatling, Chief Operating Officer]

Thanks, Jennifer. Good afternoon, everyone, and welcome to Hess Midstream's First Quarter 2019 Conference Call. Today, I'll review our operating performance and recent highlights as we continue to execute our strategy.

I'll also discuss Hess Corporation's latest results and long-term outlook for the Bakken, where they plan to grow production to approximately 200,000 barrels of oil equivalent per day by 2021, which represents a 20% compound annual growth rate. Jonathan will then review our financial results. Beginning my remarks, I'd like to reflect on an exciting start to 2019 where we continue to advance on accretive opportunities to create optionality and growth throughout our system.

First, we completed the acquisition of Summit Midstream's Tioga oil and gas gathering assets; second, we received a right of first offer for Hess and Summit Midstream's water management assets that Hess Infrastructure Partners purchased earlier this year; and third, earlier today, we announced a 150 million cubic foot per day expansion of our Tioga Gas Plant, further strengthening our strategic position in the basin.

Once the Tioga expansion is completed and with the additional 100 million cubic foot per day of net capacity from the Little Missouri 4 plant, Hess Midstream will have processing capacity of 500 million cubic foot per day in the Williston Basin, double what we had at our IPO 2 years ago. Organic growth is foundational to the Hess Midstream's story and we continue to deliver this value accretive growth to our unit holders.

Now turning to our first quarter results. During the first quarter, severe weather, including freezing temperatures and heavy snowfall impacted producers across the Bakken resulting in lower than anticipated volumes being delivered by Hess and third parties through our processing and terminaling assets.

As a result, first quarter throughputs were approximately flat with fourth quarter of 2018, gas processing volumes were 237 million cubic foot per day and crude terminaling volumes were 122,000 barrels of oil per day.

First quarter weather also impacted progress at the LM4 gas plant. Although plant construction is well advanced, the operator, Targa Resources, now expects LM4 to be online in the third quarter.

Despite weather impacts, we anticipate increasing gas processing volumes after the start-up of LM4, delivering forecasted throughput growth over the balance of 2019 as Hess and third parties continue to grow production.

Given this outlook, we're reaffirming our previously announced expectations for both throughput growth and financial guidance for the full year 2019.

Now turning to Hess upstream highlights. Earlier today, Hess reported first quarter 2019 production from the Bakken of 130,000 barrels of oil equivalent per day, which represents an increase of more than 17% over the year ago quarter despite severe weather conditions. Hess' strong first quarter results demonstrates the quality of its position in the basin and the success of the new plug-and-perf completion design.

For full year 2019, Hess continues to forecast the Bakken production will average between 135,000 and 145,000 barrels of oil equivalent per day, approximately 20% above 2018 levels.

As previously announced, Hess plans to maintain a 6-rig program through 2020 and grow production to approximately 200,000 barrels of oil equivalent per day by 2021, representing a 20% compound annual growth rate. This production trajectory is a key driver to sustained throughput growth through our managed infrastructure position.

Now turning to Hess Midstream's capital program. We continue to make targeted investments in our strategically located infrastructure, expanding our asset footprint and capacities to support Hess' development program and anticipated growth from third parties.

Our capital program focuses on continued expansion of gas compression capacity, completion and commissioning of the LM4 gas plant and associated infrastructure and engineering and procurement for the planned TGP expansion.

Unchanged from our December guidance release, 2019 consolidated capital expenditures, including equity investments from our JV gas plant with Targa and excluding acquisition capital, are expected to be between $275 million and $300 million. Approximately $265 million to $285 million of the 2019 spend is allocated to expansion activities and an estimated $10 million to $15 million is allocated to maintenance expenditures.

In the first quarter, we made excellent progress on execution of our program and achieved a number of important milestones. Beginning with compression, in the first quarter, we completed and brought online the first phase of the Blue Buttes Compressor Station, providing additional 40 million cubic foot per day of capacity in the southern portion of the field. Blue Buttes was executed safely, ahead of schedule and below budget, adding to our track record of strong project execution.

Earlier this week, we commissioned the second phase of the Blue Buttes Compressor Station, which brings our total compression capacity at the facility to 52 million cubic foot per day, representing an important operational readiness milestone in advance of the start-up of LM4.

In addition, earlier this month, we completed a 13 million cubic foot per day expansion of our Willard compressor station in the northwestern portion of the field ahead of schedule and below budget, further enhancing capability to gather Hess and third-party gas.

Activities for the rest of 2019 include construction and commissioning of additional new compression facilities and associated infrastructure and early engineering for further expansion opportunities.

Now turning to our planned gas processing capacity expansion. As I stated earlier, we're proceeding with engineering and procurement for a 150 million cubic foot per day expansion of the Tioga Gas Plant expected to start-up in mid-2021 at a cost of approximately $150 million. Expanding the Tioga Gas Plant processing capacity to 400 million cubic foot per day positions us to capture additional production from Hess and third parties.

Through 2019, we expect to progress engineering and procurement activities ahead of commencing major construction in 2020. The expansion investment will be integrated into our best-in-class contract structure, earning a competitive return.

And finally, Hess and third-party well connects to our integrated gathering system rounds out our expansion capital program. These investments, Hess' long-term production growth outlook enabling the delivery of increasing volumes into our facilities and also enhancing our ability to attract additional third-party business to our growing infrastructure.

Turning to Hess Midstream guidance for 2019. For full year 2019, gas gathering volumes are forecast to be between 280 million and 290 million cubic foot per day and gas processing volumes are anticipated to be between 265 million and 275 million cubic foot per day. As I stated in our January earnings call, prior to the start-up of LM4, we anticipate processing volumes to remain relatively flat compared to current levels as TGP operates near nameplate capacity.

Also unchanged from prior guidance, full year 2019 crude gathering volumes are forecast to be between 105,000 and 115,000 barrels of oil per day, and crude terminaling volumes are anticipated to be between 120,000 and 130,000 barrels of oil per day.

In summary, 2019 is off to an excellent start, and we remain focused on executing our strategy and capitalizing our portfolio growth opportunities. Our continued system expansion, which is supported by substantial growth from Hess and third parties, means that Hess Midstream is well positioned for continued throughput growth in the second half of 2019 and the longer term.

I'll now turn the call over to Jonathan to review our financial results.

[Jonathan Stein, Chief Financial Officer]

Thanks, John, and good afternoon, everyone. As you heard from John, we continue to execute our plan. And in the first quarter, we again delivered our targeted distribution per unit growth of 15% on an annualized basis, including a DCF coverage ratio of 1.13 times.

Three key drivers continue to underpin our ability to consistently deliver our targeted distribution growth. First, strategically located and integrated infrastructure that allows us to capture highly visible organic growth for both Hess and third parties.

Second, an advantaged contract structure that supports stable growth with downside protection and an annual rate reset mechanism based on a targeted return on capital that generates incremental revenue for every dollar invested. And finally, a flexible financial strategy that includes primarily self-funding our growth without the need for the equity markets for the foreseeable future.

Turning to the first quarter results. I will compare results from the first quarter of 2019 to the fourth quarter of 2018. For the first quarter 2019, consolidated net income was $95 million compared to $92 million for the fourth quarter of 2018.

Consolidated adjusted EBITDA for the first quarter was $128 million compared to $124 million for the fourth quarter. The change in consolidated adjusted EBITDA relative to the first -- fourth quarter was primarily attributable to the following: total operating expenses including G&A, but excluding depreciation and amortization and rail transportation pass-through cost were lower, increasing EBITDA by approximately $4 million, including lower seasonal overhead expenses of approximately $3 million and a decrease in operating expenses of approximately $1 million, primarily due to lower maintenance activity during the period.

Total revenues excluding rail transportation pass-through revenues remained relatively flat compared to the fourth quarter of 2018. First quarter 2019 EBITDA attributable to Hess Midstream was $25 million. Maintenance capital expenditures attributable to Hess Midstream were $0.1 million and cash interest was $0.2 million. The result was that distributable cash flow was $24.7 million for the first quarter 2019, covering our distribution by 1.3 times.

On April 23, we announced that the Board of Directors of our general partner approved our first quarter distribution that increased 3.6% quarter-on-quarter and 15% year-on-year. Hess Midstream had expansion capital expenditures of $33 million gross or $6 million attributable to Hess Midstream in the first quarter, excluding acquisition capital of $16 million growth, a $14 million attributable to Hess Midstream for the acquisition of the Tioga Gathering System from Summit, a transaction which closed in the first quarter.

Highlighting our ability to grow by primarily self-funding both our distribution and expansion capital program, we finished the quarter with our $300 million credit facility remaining substantially undrawn with the leverage of 0.1 times EBITDA.

Turning to guidance. As John described, we anticipate relatively flat gas processing and gas gathering volumes until the start-up of LM4, which the operator now expects in Q3. And as TGP operates close its nameplate capacity of 250 million cubic feet per day.

As we mentioned on our previous earnings call, we expect our coverage of approximately 1.1 times until the start-up of LM4 in the third quarter and then expect to return to higher coverage in the fourth quarter with the expected ramp in processing volumes and revenues.

In the first quarter, we achieved our guidance with the coverage ratio of approximately 1.13 times despite severe winter weather impacting system throughput. In the second quarter, operating cost are expected to increase seasonally, and reimbursements for maintenance capital under our agreement with HIP are substantially complete.

As a result, for the second quarter, we expect net income attributable to Hess Midstream to be approximately $18 million, adjusted EBITDA attributable to Hess Midstream to be approximately $25 million and DCF to be approximately $24 million based on the expected Hess Midstream share of depreciation and amortization and interest expense of $7 million and expected maintenance capital and cash interest expense of $1 million.

Highlighting our expected strong growth on an annual basis, we expect to deliver 15% growth with at least 1.1x coverage with revenue that are 85% protected by MVCs and a competitive EBITDA margin consistent with our historical margin of greater than 75%.

As a result, we are reaffirming our previous full year 2019 guidance including net income guidance of $415 million to $440 million; consolidated adjusted EBITDA of $550 million to $575 million; and adjusted EBITDA attributable to Hess Midstream in the range of $108 million to $113 million for 2019.

With maintenance capital and cash interest attributable to Hess Midstream projected to be total approximately $5 million for the full year, our distributable cash flow guidance for 2019 also remains unchanged as expected to be in the range of $103 million to $108 million. We anticipate expansion capital attributable to Hess Midstream for 2019, including equity investments related to the LM4 gas plant and excluding acquisition capital to be approximately $53 million to $57 million.

As John mentioned, the newly announced expansion of TGP will be integrated into our contract structure, providing an contractually targeted return on our invested capital. Our ability to integrate new investments, including LM4, the recent Summit acquisition and the TGP expansion into our unique contract structure, allows us to provide stable growth and downside protection for our incremental investments.

As we look forward to the annual nomination process, updates to these investments will be integrated into our updated rates in MVCs, providing continued visibility to our growth through 2022. Our reaffirmed guidance for 2019 highlights the strength of our business and financial strategy.

Critically, we expect to achieve our growth and financial targets, while primarily self funding both our growing distribution and robust expansion capital program with low leverage of approximately 0.5x EBITDA or less and no need for the equity markets, supported by continued organic growth through 2021 and beyond.

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

[Operator]

[Operator Instructions] Your first question comes from the line of Jeremy Tonet of JPMorgan.

[Jeremy Tonet, JPMorgan]

Hi, good afternoon. Just wanted to touch base with the decision to expand by 150 million cubic feet a day versus kind of prior discussions seem to like it might have been a $50 million expansion. Just wondering if you could provide more color on what some of the drivers were there and what do you see, I guess, from upstairs and third parties as well as far as the activity is concerned.

[John Gatling, Chief Operating Officer]

Sure. The expansion of TGP has always been part of our infrastructure build up plan to support longer term growth in the Bakken both from Hess and third-party producers. Through our current nomination process, there's good visibility toward volume demand. And in particular, in 2021, you can see the MVC implies gas throughputs of about 360 million cubic foot per day, which is already above our plan, our pre-expansion capacity we have available to us.

As we look at other opportunities in the basin and as the basin continues to grow and develop, we see a lot of upside in the longer term. So we've got a lot of visibility through 2021, we wanted to have the expansion available to us at that time frame and then also have plenty of room for growth opportunities for capturing additional third parties beyond that period of time. So it's really positioned us well for future growth through 2021 and beyond.

[Jeremy Tonet, JPMorgan]

Got you. Thanks for that. Wanted to also touch on kind of your guidance here, and good to see glad to see reaffirming, but with LM4 slipping to 3Q 2019, just wondering if we should be thinking kind of more the lower end of the guide at this point, or are there any other kind of gives and takes that you guys see driving HESM to the upside or downside of guide.

[John Gatling, Chief Operating Officer]

Thanks, Jeremy. Another good question. And obvious one to ask here. So we've always planned for a gradual ramp in volumes as LM4 came on. And some of that was Hess' infrastructure build out, but also some of the takeaway capacity that was available post LM4 start-up.

So as I mentioned in my script, we've gone through and we've essentially completed all the infrastructure necessary to deliver gas to LM4 once it becomes available. In addition, there is a lot more line of sight to export coming out of the Watford City area, in particular, the Elk Creek line coming on from Oneok.

So we see a bit more certainty around the ramp-up of volumes in the second half of the year. So again, because we had a more gradual ramp, we didn't really see that big of an impact on us from a throughput perspective. So again, we anticipate the ramp to go well. We are ready to deliver gas down to LM4 as soon as the plant is available.

[Jonathan Stein, Chief Financial Officer]

And Jeremy, I'd say from a financial, which is our guidance relative to the full year guidance that we gave, it's really going to be consistent with message we've been giving, which is until LM4 starts up, we'll start coverage to be approximately that 1.1 times, there could be some -- phasing between quarters depending on where revenues and cost come out in each individual quarter.

But then, as John described, with that ramp-up that we have in really in Q4, primarily really taking us up. Our full year guidance, therefore, implies coverage higher than the 1.1 times. So on a full year basis, we're very confident with the guidance that we gave, and that's why we're able to reaffirm that today.

[Jeremy Tonet, JPMorgan]

That's helpful. And one last one, if I could. Just wanted to touch base with the water infrastructure development, HIP. Post the Summit transaction here, I'm wondering what color you could provide for us as far as how you see that development going and when the asset could make sense, be mature enough to be drop down into HESM granted you guys have plenty of organic growth in front of you right now to cover your target distribution growth. But just kind of wondering longer term how you see that evolving.

[John Gatling, Chief Operating Officer]

Yes. Let me address the second part of your question first, which is, again, our growth is baked in. The water assets and other assets that we make available to HESM at some point in the future from HIP, that's all upside to our existing growth plan. So from our perspective, it was just building more inventory, making more assets available to kind of extend that growth profile even longer, further out into the future.

To address your first part of your specific question, which is how is the water business going. From a development and a growth perspective, it's a tremendous asset for us. It starts relatively low, but has a very nice growth profile to it over the next several years into the long term.

And so there's not anything slowing down from a build perspective. HESM structure partners is continuing to put gathering systems in, continuing to develop and drill disposal wells to provide that service to its customer Hess. It's going to be a very attractive business segment that will be made available to Hess Midstream Partners.

[Operator]

Thank you. Our next question comes from the line of Spiro Dounis of Credit Suisse. Your line is open.

[Unidentified Analyst]

It's John Mackay on for Spiro. Another quick one on the Tioga expansion. So we saw the headlines for the OKE expansion over to reach around you guys. Just wondering if we should see any impact on really the NGL loading volumes going forward.

[John Gatling, Chief Operating Officer]

When you say NGL loading volumes, you mean rail loading volumes? Are you –

[Unidentified Analyst]

Yes, I guess, NGL's coming out of the tailgate of Tioga.

[John Gatling, Chief Operating Officer]

Yes. I mean, obviously, the NGLs will be proportionate with the amount of gas coming into the plant. So I think having the Oneok announcement in the Bakken line lateral being built out, it definitely supports the expansion of the plant.

Our anticipation would be as volumes come into the plant, they'll obviously first go to our fractionation, and just as a reminder, our 250 million cubic foot per day plant full fractionation, ethane extraction, all is hitting very, very positive markets. As far as further NGL export, we've met most of the demand in the basin from a fractionated product perspective. So anything excess of that would go out as Y-grade as part of that lateral system.

[Unidentified Analyst]

All right. Thanks. That's helpful. And then I guess just on that theme, are you guys still kind of more proudly exploring opportunities to participate on the equity side and either kind of a crude or NGL takeaway out in the basin?

[John Gatling, Chief Operating Officer]

Sure. Good question. We're always looking at those investments. Again, it needs to be a strategic link to our footprint. It needs to add to our infrastructure. It needs to make sense from our Hess Midstream perspective. But absolutely, we're always looking at opportunities and discussing that with our partners.

[Unidentified Analyst]

Great, thanks guys.

[Operator]

Thank you. Our next question comes from the line of Mirek Zak of Citigroup. Your line is open.

[Mirek Zak, Citigroup]

Hi, good morning. Around your upcoming processing plant expansions, can you give some more clarity under -- around the underlying volumes there? Is it mostly organic Hess production still roughly 30% third-party volumes? Are there assumptions around higher gas capture rates in there?

And secondly, and kind of around going with this is more of a basin-like question around production growth and volume certainty. We've seen quite a few plant capacity announcements recently, and it raises the question if Bakken production can support all the capacity coming online.

So I understand your contract structure helps alleviate a lot of those concerns. But do you think we could see potentially lower plant utilizations across the basin or increased competition to capture those third-party volumes? Or any thoughts you can provide there on kind of how you're looking that would be helpful.

[John Gatling, Chief Operating Officer]

Sure. Of course. And a great question there. And there is quite a bit built into that as well. As far as meeting Hess demand, we have capacity to meet Hess' demand as it grows 200,000 barrels of oil equivalent per day by 2021. What the expansion gives us, it gives us more headroom beyond the '21 period.

I mean, as you can see from the MVC, if you look at the implied calculation of the MVC in 2021, we get into that 360 million, 363 million cubic foot per day number out in 2021. So this just creates more headroom for us to actually offer some very high quality processing capability north of river. And I would say that that's maybe one differentiator that kind of points to the question you were asking.

Let me just start in the south because most of the processing expansion that's been announced, in fact, all of it that's been announced has been south of the Missouri River. We also participated in a plant expansion south of Missouri River with Targa Resources, LM4, and we're going to have 100 million a day of firm capacity for Hess, with the opportunity as there's excess capacity available in that plant to process even more gas, whether it'd be third party or Hess volumes coming from the south of river area. So we have dedicated volumes, we have a strong line of sight to filling our capacity south of river.

So now moving back to the north. There really isn't any expansions going on in the north. From the standpoint of the Tioga Gas Plant, it is a strategic asset for us, it is the largest plant north of the river, and it meets a lot of demand for both Hess and third parties. It's a natural expansion point, rather than taking gas it gives gathered in the north portion of the field, move it all the way down south, which is somewhere between 60 and 100 miles to actually move that gas to then be processed, we can do all of that processing north of river.

So yes, there has been a tremendous amount of processing capacity that's been announced and added to the system and will be added in the future, but our expansion in the Tioga area, in particular, north of the river, north of Missouri River, is a critical, strategic expansion, I think, for the basin. And then kind of to your underlying question around the quality of the basin and growth in the basin.

As we see from Hess, and I think we are also seeing some of our growth profile from third parties, there is tremendous opportunity in the basin, and I think there is a lot of opportunity for additional processing. There's still a fair bit of gas flaring that's actually happening, in particular south of river where there's been a lot of processing announcements made, but there's also flaring in the north of river.

So as gas capture targets go lower and lower, which is the right thing, we're positioned to actually capture that gas. And if they want to take those targets even lower, again, we're going to create the capacity that we could actually capture that gas as it's needed. So we feel very positive about the investments we made, both at LM4 and at the Tioga Gas Plant.

[Mirek Zak, Citigroup]

Okay, great. Thank you. That's all for me.

[John Gatling, Chief Operating Officer]

Okay. Thank you.

[Operator]

Thank you very much. This concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.