Hess Midstream LP (HESM) Q1 2019 Earnings Report, Transcript and Summary

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. 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.

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.

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.

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.

Your first question comes from the line of Jeremy Tonet of 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.

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.

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.

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.

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.

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.

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.

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

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.

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

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

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.

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?

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.

Great, thanks guys.

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

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.

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.

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

Okay. Thank you.

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