Hess Midstream LP (NYSE:HESM) Q1 2024 Earnings Call Transcript

Hess Midstream LP (NYSE:HESM) Q1 2024 Earnings Call Transcript April 25, 2024

Hess Midstream LP misses on earnings expectations. Reported EPS is $0.59 EPS, expectations were $0.63. Hess Midstream LP isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, ladies and gentlemen. And welcome to the First 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. [Operator Instructions]. 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: Thank you, Gigi. 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. I’ll now turn the call over to, John Gatling.

John Gatling: Thanks, Jennifer. Good afternoon, everyone, and welcome to Hess Midstream’s first quarter, 2024 conference call. Today, I’ll discuss our first quarter performance, which demonstrates a continued focus on the safe delivery of our strategy. I’ll also review Hess Corporation’s results and outlook for the Bakken. Jonathan will then review our financial results and guidance. In the first quarter, we continued to progress our 2024 business objectives in a safe and efficient manner. Throughput volumes averaged 393 million cubic foot per day for gas processing, 117,000 barrels of oil per day for crude terminaling and 116,000 barrels of water per day for water gathering. In line with our guidance, overall volumes were broadly flat compared to the fourth quarter, reflecting severe winter weather experienced in January, resulting in slightly lower oil volumes offset by strong gas capture performance.

We continue to support Hess’ commitment to achieving zero routine flaring by the end 2025. Now turning to Hess’ Upstream highlights. Earlier today, Hess reported Bakken net production for the first quarter averaged 190,000 barrels of oil equivalent per day, which included 19,000 barrels per day of volumes received from percent of proceeds contracts, which do not impact Hess Midstream’s throughputs. First quarter net production was broadly flat, compared to the fourth quarter 2023, again reflecting the severe winter weather experienced in January, followed by a strong recovery in February and March. Hess also reiterated their plans to continue running a four-rig drilling program in 2024 and expects Bakken net production to average between 195,000 and 200,000 barrels oil equivalent per day in the second quarter.

Turning to Hess Midstream guidance. We’re reaffirming our previously announced 2024 throughput guidance, which was included in our earnings release. For full year 2024, we’re forecasting gas processing volumes to average between 395 million and 405 million cubic foot per day. Crude terminalling volumes to average between 120,000 and 130,000 barrels of oil per day, and water gathering volumes to average between 105,000 and 115,000 barrels of water per day. This represents an approximate 10% increase across our oil and gas systems compared to 2023, primarily driven by Hess’ development activity. Now focusing on the second quarter. We expect volume growth from the first quarter across our oil and gas systems, mainly driven by Hess’ planned production growth and continued focus on gas capture.

In the second quarter, we’re planning to conduct routine maintenance at the Tioga gas plant, which is in addition to our normally higher seasonal maintenance activity. 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 basin. The multiyear projects we announced in January are progressing to schedule. They include the construction of greenfield, high-pressure gas gathering pipelines and two compressor stations, which are expected to initially provide in aggregate an additional 85 million cubic foot per day of gas compression capacity when brought online in 2025 and are expandable to 140 million cubic foot per day.

Full year 2024 capital expenditures remain unchanged and are expected to total between $250 million and $275 million. 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 our shareholders. I’ll now turn the call over to Jonathan to review our financial results and guidance.

Jennifer Gordon: Thanks, John. Good afternoon, everyone. We continue to execute our 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 $1.65 billion to shareholders through accretive repurchases that have reduced our total unit count by over 20%. In addition to the combination of our 5% targeted annual distribution growth and seven distribution level increases following each repurchase, we have increased our distribution per Class A share by approximately 45% over this period. As a result, our total shareholder return yield is one of the highest of our midstream peers. Furthermore, our leverage of approximately 3.2x 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 in March, we completed our first repurchase transaction in 2024 of $100 million that was accretive on both a distributable cash flow per Class A share basis and an earnings per Class A share basis. Supported by this repurchase, we have recently announced a further return of capital to our shareholders through an immediate 1.5% increase in our quarterly distribution level in addition to our targeted 5% annual distribution per Class A share increase. As we have done in the past, with the reduced share count following the repurchase, this distribution level increase maintains our distributed cash flow at approximately the same amount as before the repurchase.

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 a return of capital framework, including potential ongoing unit repurchases. Turning to our results. For the first quarter of 2024, net income was $162 million compared to $153 million for the fourth quarter of 2023. Adjusted EBITDA for the first quarter of 2024 was $276 million, compared to $264 million for the fourth quarter of 2023. Adjusted EBITDA for the first quarter increased relative to the fourth quarter of 2023, primarily driven by a significant reduction in operating costs as follows. Total revenues excluding pass through revenues decreased by approximately $3 million, primarily driven by slightly lower oil volumes due to the severe winter weather in January, offset by continued strength in gas capture as well as slightly higher tariff rates that were reset in January, as we had described at the time.

As a result, segment revenue changes were as follows: gathering revenues decreased by approximately $8 million, terminaling revenues decreased by approximately $3 million and processing revenues increased by approximately $8 million. With physical volumes growing as more wells come online, we expect continued growth in revenues for the rest of 2024. Total costs and expenses, excluding depreciation and amortization, pass through costs and net of our proportional share of LM4 earnings decreased by approximately $15 million, primarily due to lower operating and maintenance expenses compared with the fourth quarter, where we had accelerated maintenance activity due to unseasonably favorable weather as well as lower general and administrative expenses due to seasonally high allocations in the fourth quarter, resulting in adjusted EBITDA for the first quarter of 2024 of $276 million, above the $270 million high end of our guidance range.

Our gross adjusted EBITDA margin for the first quarter was maintained at approximately 80%, highlighting our continued strong operating leverage. First quarter capital expenditures was approximately $35 million and net interest excluding amortization of deferred finance costs was approximately $47 million, resulting in adjusted free cash flow of approximately $194 million. We had a drawn balance of $455 million on quarter end, which includes fundings of our recent $100 million unit repurchase transaction. Turning to guidance. For the second quarter of 2024, we expect net income to be approximately $155 million to $165 million and adjusted EBITDA to be approximately $270 million to $280 million, reflecting higher volumes and revenues offset by seasonally higher operating costs.

This includes higher OpEx from the planned maintenance work scheduled in Q2, including routine maintenance at the Tioga gas plant, as John mentioned. We also expect CapEx to increase in the second and third quarters, consistent with seasonally higher activity levels. For the full year 2024, we are reaffirming all previously announced guidance and expect net income of $670 million to $720 million and adjusted EBITDA of $1.125 billion to $1.175 billion. With total expected capital expenditures of $250 million to $275 million, we expect to generate adjusted free cash flow of $685 million to $735 million. With distributions per Class A share targeted to grow at least 5% annually from the new higher distribution level, we expect excess adjusted free cash flow of approximately $115 million after fully funding our targeted growing distribution.

We expect increasing volumes and revenues in each quarter through 2024 across oil, gas and water systems with seasonally higher operating costs in the second and third quarters of the year, resulting in expected growing adjusted EBITDA through the rest of the year. As implied by the midpoints in our guidance, we anticipate adjusted EBITDA in the second half of the year to be approximately 9% higher relative to the first half. In summary, we are very pleased to have delivered additional incremental return of capital to Hess Midstream shareholders and look forward to a visible trajectory of growth in our operational 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.

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Q&A Session

Operator: [Operator Instructions]. Our first question comes from the line of Doug Irwin from Citi.

Doug Irwin: Thanks for the question. Just trying to start with the second half growth expectations. You just talked about kind of the 9% relative to the first half of the year. Just wondering if you can talk about some of the main drivers there to kind of bridge that growth into the second half of the year. I’m just wondering how much of that is driven just by the absence of some of the onetime turnarounds and weather impacts versus kind of organic growth on top of that? And then maybe if you could just talk about some of the puts and takes that could drive the high end versus the low end of the range here for the rest of the year.

John Gatling: Sure. Maybe I’ll take the volume, then I’ll hand it over to Jonathan to talk a little bit about the financial side. On the volumes, obviously, we had the challenging weather in January. But I would say that, the recovery from the January weather was very strong in February and March, as I mentioned in my in my script. As we grow into the into Q2, Q3 and through the end of the year, we do expect the volumes to have a strong trajectory. When you when you look at the growth that we had from our guidance, from ’23 to ’24, we are expecting some strong growth there. We would anticipate that growth to be relatively stable through the rest of the year. From our perspective, we feel like there’s a lot of opportunity to continue to support the growth.

Hess’ performance has been very good, as you probably saw on the release earlier this morning from them as well. Again, we’re just translating that into higher throughput volumes. As far as kind of puts and the takes, weather is always unpredictable. We’re coming out of the the winter weather now. We’ve had a very good winter; with the exception of that very cold snap we had in January. I would say that, we’re seeing overall delivery and throughputs remaining very strong. I don’t know, Jonathan, if there’s anything else you wanted to add.

Jonathan Stein: Yes. I think that was good. And let me just kind of walk through the trend, that we expect for the rest of the year. As we look into Q2, as John said, we continue to expect continued volume growth, so that will drive revenue growth. As we go into Q2, we have seasonally higher OpEx and then on top of that, we expect some incremental costs associated with routine maintenance at the Tioga gas plant as we discussed. That’s, if you will, baked into our EBITDA guidance for Q2. Then as we move into Q3, we expect again continued volume growth and therefore revenue growth. OpEx would already be at a higher level. Really, we expect growth in EBITDA in Q3, primarily driven by volumes. And then as we move into Q4, we expect accelerated EBITDA growth again.

There again, we’ll have volume growth continuing, but we’ll also have the benefit of seasonally lower OpEx that we typically have in Q4. That really gives you the trend. We have continuing revenues growing each quarter through the year and then Q2 and Q3 higher OpEx and then expecting lower OpEx again in Q4.

Doug Irwin: That’s really helpful. Just trying to touch on the contract structure here, just given that, it’s the first quarter kind of under the new fee mechanism. Could you maybe just help to quantify or even just directionally kind of frame up what kind of impact the rate reset had this quarter relative to last quarter? And then, as we think about just the rest of the year, are those rates stable for the rest of the year now or do some of those inflation escalators kind of maybe phased in throughout the year?

John Gatling: Sure. Just as a reminder, the way we got to the fixed fee for this year was that, we took the average 2021 through 2023, that was inflated, those rates were inflated to a 2023 basis and then inflated again to get you to a 2024 rate. That design was designed to create a smooth transition from our cost-of-service period. And therefore, as we moved into this period, we’re comparing the 2023 rate to the average. You can have a little bit of noise as you do that comparison. But overall, as we described, rates were up across all of our systems on average. Particularly, as we mentioned in gas, you saw that rates were higher there and you can see that in the results. Now going forward with the rate now set, 85% of our fees are on a fixed fee basis.

Therefore, they will really just be set each year increasing with inflation based on CPI at the end of the year. And then that will therefore create a steadily increasing fee structure as we go all the way through 2033 really supporting continued growth in EBITDA over that period.

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

Unidentified Analyst: Hi, good morning. Thank you for taking my question. You mentioned that, costs are lower this quarter after that higher fourth quarter levels and there is some seasonality there throughout the year. But should we think that this level can kind of hold here or how should we think about it? Should we think about continued change in the business going forward?

John Gatling: Yes. Maybe I’ll take the first shot at this and then hand it over to Jonathan. As Jonathan mentioned and we talked a little bit about, fourth quarter was higher from a favorable weather perspective. We were able to get more maintenance done in the fourth quarter. January was a difficult month and it caused us as we normally expect in the first quarter to see seasonally lower spend on the OpEx side. And then as I mentioned in my script and Jonathan reiterated, we are planning to do some additional maintenance activities in Q2 beyond our normal, seasonal increase in maintenance activities in Q2 and Q3. We do expect to see OpEx, higher in Q2 and then also relative to our normal seasonal impact in Q2 and Q3. I don’t know, Jonathan, if there’s anything you wanted to add to that.

Jonathan Stein: Yes. The only thing I would add is, we talked about the seasonality, Q2 and Q3. They are being higher than typically Q1 and Q4 are lower. I think it’s important to highlight, if you look at our operating costs and admin G&A, excluding path through costs for this year, for 2024, really they are forecast to be flat relative to 2023. And I think that really highlights the operating leverage that we have as our ability to keep operating costs stable, while our expanding system footprint continues to grow. We continue to target our 75% EBITDA margin target for 2024. Already in the first quarter, we’ve already exceeded that, but certainly given the seasonality, we certainly continue to expect to meet or exceed that. So really in a good spot in terms of that. Obviously, I think the ability to be able to have flat OpEx costs year-on-year really highlights again that operating leverage.

Operator: Thank you. This concludes today’s conference call. Thank you for participating. You may now disconnect.