Good day, ladies and gentlemen, and welcome to the Third Quarter 2021 Hess Midstream Conference Call. My name is Michelle, and I will be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [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, Vice President of Investor Relations. Please proceed.

Thank you, Michelle. 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 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. In case, there are audio issues, we will be posting transcripts of each speaker's prepared remarks on www.hessmidstream.com following their presentation. I'll now turn the call over to John Gatling.

Thanks, Jennifer. Good afternoon, everyone, and welcome to Hess Midstream's third quarter 2021 conference call. Today, I’ll review our operating performance and highlights as we continue to execute our strategy, and discuss Hess Corporation’s latest results and outlook for the Bakken. Jonathan will then review our financial results. We continue to deliver strong operational performance in the third quarter, anchored by the safe and successful execution of the Tioga gas plant turnaround. Extensive COVID-19 protocols were implemented to keep the workforce of more than 650 people safe. We're proud of our team for their outstanding execution under challenging conditions. Following the safe and quick ramp up of TGP, the team has turned their attention to the commissioning of the 150 million cubic foot per day expansion, which is underway and progressing well. The additional capacity is expected to be available at year-end, concurrent with the completion of the WBI residue export tie-in. Focusing on our third quarter performance, gas throughputs exceeded expectations as processing volumes ramped more quickly than anticipated following the turnaround. Third quarter gas processing volume averaged 285 million cubic foot per day, and as expected remained below MVC levels. Third quarter crude terminaling volumes averaged 111,000 barrels of oil per day, and water gathering volumes averaged 75,000 barrels of water per day. Now turning to Hess Upstream highlights, earlier today Hess reported third quarter production results with the Bakken net production averaging 148,000 barrels of oil equivalent per day, versus a guidance of 145,000 barrels of oil equivalent per day, primarily driven by the strong execution of the TGP turnaround. Hess confirmed that the third drilling rig commenced operations in September, allowing Hess to accelerate the development of their inventory of high return well locations. A three rig program allows Hess to grow production and leverage our…

Thanks, John, and good afternoon, everyone. During the third quarter, we continue to execute on our financial strategy that optimizes our capital structure and utilizes cash flow generation to provide increased capital to our shareholders. On October 13, we paid our second quarter distribution, including a 10% increase in the distribution level, compared to the first quarter of 2021, in addition to a quarterly increase consistent with Hess Midstream’s targeted 5% growth in annual distributions per Class A share. During August, we also completed a $750 million repurchase of units from our sponsors, optimizing our capital structure, and bringing our leverage to approximately 3 times adjusted EBITDA on a full year 2021 basis. Together, these actions delivered immediate, accretive and meaningful return of capital to Hess Midstream shareholders. Hess Midstream continues to target annual distribution per Class A share growth of at least 5% through 2023, with distribution coverage of at least 1.4 times. In addition, we maintained significant financial flexibility, including expected ongoing free cash flow after distribution and leverage declining below are 3 times adjusted EBITDA target in 2022, align for potential future accretive opportunities, including incremental return of capital to shareholders. Turning to our results, for the third quarter net income was $131 million, compared to $162 million for the second quarter. Adjusted EBITDA for the third quarter was $205 million, compared to $230 million for the second quarter. The change in adjusted EBITDA relative to the second quarter was primarily attributable to the following. Gas processing revenue, excluding pass through revenue was lower by $1 million, as our throughputs were generally below MVC levels in the third quarter, driven by the planned turnaround at the Tioga gas plant. Total operating expenses, including G&A, but excluding depreciation and amortization and pass through costs were higher, decreasing adjusted…

[Operator Instructions] And our first question comes from the line of Brian Reynolds with UBS. Your line is open. Please go ahead.

Hi, good afternoon, everyone. To start off, on capital allocation you talked about in your prepared remarks about an incremental return of capital opportunities going forward. Given 2021 solid distribution step up, a buyback and a secondary offering and given that 2022 has similar free cash flow profile, can we potentially have an all the above scenario again and with terms of return of capital as we look ahead into 2022? Thanks.

Thanks. Yeah, so I mean, our financial strategy includes maintaining our optimized capital structure with targeted leverage at our 3 times EBITDA. As you mentioned, this year we did both, the $750 million share repurchase and the 10% distribution increase at the distribution level increase that accomplish that financial strategy by bringing our leverage back to 3 times EBITDA on a 2020 basis and utilizing our free cash flow. So as we look forward, as I mentioned, we're going to continue to be free cash flow positive after distribution. And our leverage will decline below that 3 times adjusted EBITDA target in 2022. So therefore, from a capital allocation point, you can certainly expect that part of our capital allocation strategy will be to continue buybacks and increase dividends to utilize that financial flexibility.

Great, thanks for the color. That was super helpful. As a follow-up, Hess talked about on its call about increased CapEx spend in the U.S., Gulf of Mexico to spend on tie backs and on money on an exploration well. From a Hess M perspective, what does Hess M need to see from upstream activity for those conversations to restart around the Gulf of Mexico long cycle assets? Could this be a 2023 event, if the results come back positive and Hess continues to spend capital on the Gulf of Mexico? Thanks.

Thanks for the question, Brian. Overall, the Gulf transaction isn't an immediate priority for us for the Midstream or for Hess. We're continued focus on our strategy around building out the business in the Bakken. The work that we did for the Gulf of Mexico remains active. We're continuing looking at the asset, looking at the future opportunity. I mean it's definitely something that's available to us in the future. It just kind of depends on when the timing is right for that. So at this point, there's nothing immediate on the horizon. But, again, we're continuing to look at the development opportunity that's going on in the Gulf of Mexico. And it remains definitely an asset that we're interested in, in the long-term, but there isn't anything on our plans right now.

Great. That's all you have for me today. Have a good day. Bye.

Thanks, Brian.

Thank you. And our next question comes from the line of Jeremy Tonet with JP Morgan. Your line is open. Please go ahead.

Hi, good afternoon. I just wanted to follow-up on the earlier discussion here on the capital allocation priority. We did see some pickup in Midstream consolidation, especially in the Permian and Bakken. Can you share any thoughts on how Hess is currently evaluating buybacks versus M&A opportunities? Any thoughts, what you can share on how the market is right now?

Maybe I'll take the last part of your question first, and just talk about kind of our overall strategy. And then Jonathan can talk a little bit about the financial side of it. So, we're continuing to look at assets in the Bakken as it relates to bolt-on opportunities, things that will strengthen our footprint and our strategic infrastructure position in the Bakken, in particular, as it relates to supporting Hess and our currently connected third parties. So that's really our primary focus right now, is just executing the Bakken plan. And just as a reminder, all of those things are incremental to our current plan to the activities and the guidance that we've already provided. So again, those all represent upside opportunities, but we're always looking for quality assets that strategically fit in with our infrastructure. So that's our focus from an M&A perspective. So I'll hand it over to Jonathan, for the first part of the question.

Yeah, I think John said it well, with our focus really not on active M&A, and really just looking at potential bolt-on opportunities. That really means that our flexibility and financial flexibility that we have really, primarily today bolt-ons would be utilized for return on capital. Like I mentioned, again, as we move into 2022, we will be below our three times EBITDA target, and can be free cash flow positive. So, that really allows for the capital allocation, that we talked before in terms of return on capital, in terms of buybacks or dividends increases as appropriate. But really, we will continue to execute our financial strategy. We have a very clean story with visible growth. And so we'll continue to focus on that, as John described.

Got it. Maybe just picking up on the buybacks comment there. So we did see -- you guys did announce a strong -- sponsored buyback executed few months back, and then there was another sale early this year. So increase in public float is a positive. But just want to understand, if you could share any thoughts on what discussions are going on with sponsors? I mean Midstream assets are very well integrated into Hess, but do they have any planned exit over the next few years, maybe with respect to GIP or Hess itself?

Okay. It's a little hard to understand, but I think you're asking in terms of sponsor plans, and relative to the secondary and the buyback that we did earlier. So, look, I think if you look at the two types of transactions we did this past year, they each had different objectives. The secondaries were really focused on technical obstacles ownership, a feedback that we've gotten from investors that they see that relative to the floating liquidity. So those offerings were really targeted at addressing that issue. Since our March transaction, our average daily trading volume has more than doubled. So in terms of focus on that objective, and certainly been focused on achieving that [technical difficulty], value accretion, since that transaction in March, it was offered in ‘21. And still early days on our recent transaction, but again, it's targeted towards that focus of increasing our liquidity and increasing the float. Going forward, again, there's no specific plan with regard to secondaries. Hess and GIP recognized that there's continued demand for additional float liquidity, but they're also very disciplined investors who see the long-term value in Hess Midstream. The buybacks are really a different objective. Those are really geared at -- as I said before, our financial strategy in terms of maintaining our optimized capital structure, in terms of our targeted leverage, particularly at 3 times EBITDA. So there, we've certainly got a lot of positive feedback from investors relative to the transactions we did earlier this year in terms of the buyback, in particular. And as I talked about, we continue that financial flexibility and certainly, that will continue to be part of our strategy going forward to optimize our capital structure through buybacks and increase dividends as appropriate. So really, two different objectives, really geared towards Hess Midstream, that all geared towards the sponsors. I mean, in terms of the secondary, certainly those are relatively small amounts, relative to Hess and GIP. So really, the focus has been on how do we improve liquidity and float and how do we continue to execute our financial strategy in terms of having an optimized capital structure, and using that financial flexibility for returning capital to shareholders.

Got it. That's helpful. That was for me. Thanks.

Thank you. And our next question comes from the line up Doug Irwin with Credit Suisse. Your line is open. Please go ahead.

Hey, everyone, thanks for the question. Maybe just one on the expansion CapEx. I was wondering if you could help frame and what we should expect in 2022 now that the TGP turnaround is complete. From the prepared remarks, it sounds like we should expect another $95 million spend on compression next year and then some well connect CapEx on top of that. Just kind of curious year-over-year how we should be thinking about that there?

Yeah, I think what we've said is we're planning to be at or below 2020 levels. We do expect capital to increase slightly and trying to give some indication of directionally where that's heading. It's definitely a well contained spend and it's primarily in the focus of supporting Hess’ development plan over the next couple years as we’ve ramped up to three rigs and then potentially ramping up to four rigs. But as you say, I mean, as with the expansion capital behind us, it really is more focused on the compression activity to support the development, and then well connects. So that's primarily our focus over the next year or so.

And I’d just add with John, just add some context. And just a reminder, as we said, we do expect EBITDA to continue to grow in 2022 and 2023. That's based as we've talked about based on MVCs provide line of sight to that both in terms of increasing MVCs in 2022, and the continued physical volume growth for 2023. So with that driving our EBITDA up and even with the higher CapEx that John just mentioned in terms of 2022, will continue to be free cash flow positive after distributions, and as I've talked about continue to delever below our 3 times target.

Okay, got it. That's helpful. Thank you. Then maybe just on more of a macro level in the Bakken. Obviously, Hess just added a rig, but just curious out how the conversations with third parties have been going here recently with the run up in crude prices? Have you seen an increased appetite from third party producers, or is everyone still staying pretty disciplined from how your conversations have gone?

Yeah, I mean, I think the overall tone in the basin is fairly consistent with what Hess’ plans are. I mean, Hess has increased some activity and as you're probably aware, and then there's definitely been rig increases in the basin. So we are seeing activity increases. But I think that overall the producers are trying to stay disciplined, trying to maintain that position of free cash flow and making smart investments. So, we are seeing some increased activity, both obviously from Hess as you as you heard from Hess’ call, and also in our prepared remarks, but also seeing an increased activity in third parties. As I mentioned in my prepared remarks, we see gas kind of at the 10% level and crude at the 15% level. But that does represent -- there is some potential upside in both of those as well, as the basin continues to recover from with the higher oil prices.

Got it. Thanks. That's all for me. Thank you.

Okay. Thank you.

Thank you. And our next question comes from the line of Robert Kad with Morgan Stanley. Your line is open. Please go ahead.

Thanks so much. Maybe more of a macro question here. I was wondering if I could ask for some high level thoughts in your outlook for ethane recovery in the Bakken. Certainly, we've been seen processing margins increase a bit recently. So just curious for your thoughts on how you see that trending into ‘22? And really, what sorts of margins you think might be necessary to incentivize more meaningful ethane recovery across the basin? Thank you.

Yeah, I mean, I think it's difficult for me to comment on what other processes are going to do in the basin. But, we're very fortunate that we have a high quality asset in the Tioga gas plant that has full fractionation capability up to 250 million cubic foot per day, with full ethane extraction, and we have a reliable export mark to send that ethane. As I mentioned in my prepared remarks, we also expanded the gas plant by an additional 150 million cubic foot, which will be available at the end of this year once we have residue exports. We feel like we've met the needs from an ethane perspective and overall frack availability. So we feel like we've got a nice mix of both full fractionated products and also y-grade export from a liquids perspective. So overall, we feel like we're very well positioned to take advantage of any prices across the different products, and our ability to flex on that and optimize for Hess ultimately providing the best netbacks to Hess and our third-party customers.

Great. Thank you.

Thank you.

Thank you. And our next question comes from the line of Michael Lipsitz with Goldman Sachs. Your line is open. Please go ahead.

Hey, guys, thank you for taking my question. And congrats on an exciting last couple of months. A little bit of macro questions and then one micro. On the macro side, just curious when you look at the basin, when do you think the basing -- and I know you just expanded TGP so I may be premature here. But when do you think given your outlook for the basin, there'll be a need for even more processing capacity? That's my first question. My second is my second two are a little more micro. I want to just make sure I understand on the growth CapEx for 2022. You expect growth CapEx to be roughly in line-ish with ‘21 or up slightly? And then finally, are you pointing when you give guidance in January, at the end of January, to also give an update on capital allocation at the same time?

Yeah, sure. So let me just talk about the basin processing first, and then I'll address the ‘22 CapEx. And then I'll hand it over to Jonathan to mop up anything I miss on the guidance question, and then also kind of moving into the capital allocation piece. So on the processing side, it really depends. We have very good visibility into what Hess’ plans are. And obviously, our development and our infrastructure is anchored by Hess, and also our third parties. I think we're uniquely positioned that we really have a strong understanding of the subsurface with our relationship with Hess and other producers that we're currently contracted and connected with. So from our perspective, we feel like Hess Midstream is uniquely positioned to take advantage of the expansion we've already done. That's part of the reason why we're going to be investing in more compression in 2022. So we feel like we're well positioned to meet the needs of our customers. If you look at some of the broader forecasts coming out for the basin, there definitely is an upward trend that looks like it continues towards the end of the decade. So I mean, depending on where you are in the basin, there may be additional need for processing. I mean, I've seen some curves that have exceeded the cumulative processing available in the basin. So I definitely think there's more opportunity for further buildout. And I would say that for us, we are looking at that long-term horizon as we think about our processing needs as well, and what Hess and our third-party customers need. So that's continues to be a focus for us. To your first micro question, and again, I'll let Jonathan kind of mop up anything I miss here and then talk about the capital allocation piece. We do expect capital to increase going into 2022 as a comparison ‘21. However, we do expect the long-term and as we look back at, say 2020, we expect to be at or below that level. So we're trying to kind of put a range on what we're talking about as we move into ’22. The increase is really driven by the development pace that we're seeing from Hess and from third-party. So, that's really kind of what we're focused on and that's why we gave a little bit of indication of where we are from a compression perspective. And then, as Jonathan mentioned in one of the prior answers, we are focused on EBITDA, we still continue to see substantial EBITDA growth, we still continue to see substantial organic volume growth. So the investments that we're talking about, we're talking about the things that are going to ultimately support that EBITDA and physical volume growth as we transition from MVC levels in 2022, to above MVCs, expected above MVCs in 2023. So, with that, I'll hand it over Jonathan, for any cleanup.

I have nothing to add on that. Just on your last question on capital allocation, I mean, certainly, as we move into 2022 and we give our guidance, in terms of our financial strategy, that will continue to be as I said, no change there, which will be to utilize our financial flexibility, primarily and certainly for capital allocation, including buybacks and increased dividends. We will have in 2022, and we give our guidance will be, obviously, you'll see what our free cash flow will be after distributions based on our guidance, you have a better feel for, based on that we have a specific number on CapEx, you can also get a feel in terms of with being free cash flow positive after distributions, what that will mean in terms of our leverage progression through the year which will certainly move below our 3 times target. So, more specific information in terms of that, but certainly no change to our financial strategy, which continues to maintain optimized capital structure and to utilize return of capital to shareholders as part of that.

Got it. Thank you guys. Much appreciated.

Thank you.

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