Good day, ladies and gentlemen, and welcome to the Second Quarter 2022 Hess Midstream Conference Call. My name is Victor, and I'll 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, Vice President of Investor Relations. Please proceed.

Thank you, Victor. Good afternoon, everyone, and thank you for participating in our second 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 and our transcript of today's prepared remarks. 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 Second Quarter 2022 Conference Call. Today, I will review the progress we're making on executing our strategy, discuss our operating performance and capital program and review Hess Corporation's results and outlook for the Bakken. Jonathan will then review our financial results and guidance. Beginning with Hess' upstream results. Today, Hess reported second quarter Bakken net production averaged 140,000 barrels of oil equivalent per day, reflecting the impact of severe weather in April and May. Hess' production is recovering. Well results continue to meet or exceed expectations, and Hess anticipates production to build in the second half of the year as they bring approximately 50 wells online compared to 32 wells in the first half of 2022. Bakken net production for the third quarter is expected to increase to between 155,000 and 160,000 barrels of oil equipment per day and further grow to between 160,000 and 165,000 barrels of oil equivalent per day in the fourth quarter. For full year 2022, Hess forecasts Bakken net production to average between 150,000 and 155,000 barrels of oil equivalent per day. Furthermore, Hess announced a fourth drilling rig commenced operations in the Bakken during July, supporting Hess' planned production ramp to approximately 200,000 barrels of oil equivalent per day by 2024. With Hess Midstream's focused gathering infrastructure expansion, we're ready to meet Hess' accelerated development pace, which is expected to drive volume growth through our system, allowing us to reaffirm our expected throughput growth above MVCs in 2022 and 2024 -- 2023 and 2024. Turning to Hess Midstream's results. Our second quarter throughput volumes averaged 292 million cubic foot per day for gas processing, 93,000 barrels of oil per day for crude terminaling and 65,000 barrels of water per day for water gathering. As…

Thanks, John, and good afternoon, everyone. As John described, we are making good progress in executing our strategy, and we are excited to support Hess' accelerated development in the Bakken while continuing to deliver on our strategy of consistent and ongoing return of capital to our shareholders. Over the past 12 months, we have executed in excess of $1 billion in accretive share buyback, announced 2 separate distribution level increases and continued our track record of growing our distribution per share every quarter since our IPO in 2017. We recently announced our second quarter 2022 distribution growing 1.2% quarterly, consistent with our targeted 5% annual distribution growth to Class A share through at least 2024, with expected annual distribution coverage greater than 1.4x, including distribution coverage greater than 1.5x in 2022. We expect to continue to execute our financial strategy over the coming years as we have clear visibility to expected revenue and adjusted EBITDA growth, supported by increasing MVCs in the second half of 2022, followed by organic growth above MVCs in 2023 and 2024, underpinned by Hess' recent addition of a fourth operating rig. Based on our 2024 MVCs set as part of Hess' nomination at the end of 2021 at 80% of our expected 2024 gas gathering and processing throughput, our volumes are expected to grow by approximately 20% relative to our 2022 MVCs. Gas revenues, excluding pass-through revenues comprise approximately 75% of total affiliate revenues, emphasizing the visibility we have to continued growth in adjusted EBITDA. Looking forward, annual capital expenditures to deliver this growth plan through 2024 are expected to remain stable relative to 2022, with activity tightly focused on phase build-out of compression, well connects and system optimization, aligned with Hess' development plan. As a result, with growing adjusted EBITDA and stable CapEx, we…

[Operator Instructions]. Our first question will come from the line of Stephen McGee from JPMorgan.

For the 2022 volume guide, do you expect most of that to be made up in 2023? Did the fourth rig come online with expectations? Or did that pull forward any growth? And then finally, would this provide any opportunity to raise the 2023 MVC level?

Sure. Let me hit the 2022 question first. So the rig came on in July. We would expect to see some wells coming out towards the end of the year, but we don't expect any real material volumes from the fourth rig. We do still continue to expect to see growth into the second half of the year and into the fourth quarter with the add of the third rig and then obviously with the fourth rig coming on. As far as looking at 2023 volumes, we are expecting to be above MVCs in 2023 and 2024. And as we look further forward with the fourth rig, we'll make adjustments to our guidance as we go into 2023 at the beginning of the year.

Yes. And this is Jonathan. Just on the MVCs, just for clarity, just as a reminder of how that works is, we set the MVCs, 3 years in advance. Once they're set, they can only be increased and not reduced. So as an example, at the end of 2021, when it has nominated -- updated its nomination, we set a new MVC for 2024. We then also went back and looked at our MVCs. And in that case, the 2023 MVCs were actually all went up as a result. As John said, we have growth going into next year. We'll set a new MVC at the end of this year for 2025. And then we'll look at the volumes for 2023 and 2024 to the extent that the volumes are higher than what's in our current nomination than the MVCs would go up at that point. And as a reminder, the MVCs, again, can only go up, they can't go down. So when we evaluate them, it'd only be for up. Otherwise, MVCs that we have will stay in place.

Got it. And then with -- so with your expectations to be above MVCs in the next few years, is it fair to assume that there could be an increase in MVCs?

I mean I think we'll update that at the end of this year when we come up with new -- with our new MVC for 2025 and then we'll look back. But I think the important point, which is what John highlighted, is that with the fourth rig now in place, obviously, as well as our continued focus on gas capture and the Zero Routine Flaring goal by the end of 2025, all that really supports visible growth for us. It underpins the growth that's already in our -- implied by our MVCs. I talked about the 20% growth from this year's MVCs to the 2024, its implied throughput, and that's going to include growth next year as we move from MVCs to physical volumes and then continued growth in 2024 as we grow and expect to grow both gas oil and water volumes across really all of our systems supported by that. So remember, with that increasing revenue and our -- as I talked about a consistent EBITDA margin, that's going to add stable CapEx that I also -- John and I both talked about, that's going to translate into continued growing free cash flow after distribution and continued deleveraging, which gives us the opportunity for continued return on capital.

[Operator Instructions]. Our next question will come from the line of Doug Irwin from Credit Suisse.

Maybe just a broader one kind of on the Bakken with Hess adding a fourth rig, and I think we've kind of seen some other rigs start to come back kind of this summer. Just kind of curious if you see any capacity constraints developing in the basin kind of over the next few years? And I guess specific to Hess system, you mentioned the ability to kind of further expand the recent compressors that came online, is that a decision that might be needed kind of over the next couple of quarters? Or is that more of a longer-term opportunity that you're thinking about?

Yes, sure. So maybe I'll just take the export question first. I think, overall, just speaking for Hess, Hess is in good shape. We have sufficient capacity to stay within flaring regulations, process and export oil, NGLs and natural gas. So from our perspective, we're in very good shape to support Hess and third-party volumes. And then as we think about expanding our system, I mean, we've -- over the years, we've built our system with maximum flexibility as efficiently as we possibly can. And our kind of design once build mini approach, our lean focused approach has enabled us to expand as the basin growth dictates. And that includes Hess' growth. So as Hess looked to add the third and ultimately the fourth rig, we were well positioned to be able to expand our infrastructure to support that growth. That will continue to be our philosophy as we develop the basin and support Hess and other third parties. And we'll continue to look at infrastructure that can be expanded through that. So from an overall infrastructure perspective, we're in good shape. We've got Hess covered. As Hess grows, we'll continue to look at infrastructure needs and demands, and we'll manage it from that perspective. And then as third parties potentially grow as well, we'll look at opportunities to support them on their way to reducing flaring and Hess' objective of Zero Routine Flaring by the end of 2025.

Okay. That's helpful. And maybe one on capital allocation, just kind of in light of both the repurchases that took place during the quarter, I think it's been a pretty balanced approach in the past between buybacks and distribution growth. Just kind of curious how you're weighing those options moving forward from here if there was maybe a certain level of public flow you're looking to achieve, maybe there's a yield that you're targeting? Just kind of curious how you're you thinking about that.

So look, I think, first of all, we got a lot of positive feedback on the recent combination of the buyback and the secondary offering. We won't always plan to do those always together. It certainly worked out while we're happy that the transaction went well. But really, as I said in the past, they really geared towards two different objectives with the buyback part of our continuing and ongoing return of capital program and then our secondary is really part of removing technical obstacles to ownership. In terms of the secondaries, as we said, there's really no specific plan there. Our targeted flow, it's really, as I said, we've technical obstacles. We feel good about the progress we've made there in terms of liquidity measured by our increase in the average daily trading volume as well as the increased indexation we've got by being added to the layering and the MSCI small-cap index. So no specific plan in terms of secondaries. There's no target float. It's really a combination of demand that we get from investors who are looking to increase their position and want to remove technical obstacles and balance with Hess and JP being disciplined investors who see the long-term value in Hess Midstream. In terms of the first part of your question, in terms of the balance between buybacks and distribution increases, as we've done those really together, I think those have worked out well and certainly as part of our continuing program, as you know, 2 parts to our ongoing return on capital. it's a 5% per share growth. That will continue to at least 2024, and we'll update more on that at the end of the year when we give our guidance for the next year on our MVC for 2025, but then the incremental return on capital, including the share repurchases, and we've been able to combine those really with distribution increases that really maintain the same level of distributed cash flow but on a lower share count. So that has allowed for really ongoing and immediate return on capital, both in terms of buyback combined with the dividend increase. So those are certainly parts of our program that will continue. And then secondary will be really when you see that balance between demand from investors and Hess and JP's long-term value perspective relative to their own disciplined holdings.

Our next question comes from the line of Praneeth Satish from Wells Fargo.

I think based on your MVC cadence, it sounds like -- or it appears like you'd start to hit 90% of your processing capacity in the 2025 time frame. So I guess if that assessment is correct, would you consider expanding processing capacity at that point? Or is it kind of dependent on whether Hess moves past its 200,000 barrel per day target?

Yes. So we haven't actually given 2025 MVCs yet. So it sounds like you're maybe kind of forecasting that growth out beyond 2024. We're obviously expecting to be above MVCs in '23 and '24. We feel like we have sufficient capacity to cover Hess' plans. We'll continue to evaluate the needs in the basin. Our focus right now is just on gas capture and adding the compression necessary from a processing perspective. 500 million cubic foot per day capacity covers our current plan, but we'll continue to look at that. We'll look at Hess' plans with its fourth rig and the performance that it expects to see there. We'll also look at third parties to understand what the demand is and we'll kind of take it based on that. I mean, from our perspective -- from an execution perspective, we're prepared to plan and engineer whatever infrastructure we need to support the basin. But again, we want that to be rightsized, fit for purpose and make sure that we've got good volumes accounted for going into this -- any system that we built.

Got it. And then maybe if you could just comment on kind of the puts and takes of where you think rates could go in '23. I mean, I know you've got some inflation tailwinds, but then you've had weather-related disruptions, but then you've got better volumes in '23 because of the fourth rig potentially. So I guess just net-net, just directionally, would that support higher rates in '23 or kind of flattish?

Go ahead, Jonathan.

So no, I think that -- look, I think as you said, there are puts and takes to this. I think in our plan, we did have a big increase in rates in 2021. And then as we've kind of set the plan here, which includes growth, we've really been saying about the fourth rig, it really underpins the growth that's in the existing plan. We do have capital that has been to -- with the plan to add additional compression and the like. So I think, look, our expectation is generally that rates will -- obviously, we have an inflation escalator. But net-net of that, we expect the rates to be relatively flat, maybe slightly increasing with the inflation escalator. But besides that, we're not expecting a big move in rates. That's really the big driver really into 2023 will be as we continue that growth underpinned by the fourth rig continued gas capture, and that really will continue to drive up our EBITDA and our revenue, as I've described.

Our next question comes from the line of Michael Lapides from Goldman Sachs.

One or two easy ones. I just want to make sure I heard correctly. 2023 expansion capital, are you saying it's going to be roughly flat to the 2022 level? And can you just give the number of compressors you're doing this year? And the third one you're planning on starting kind of in the year beginning of next year, can you just talk about the components of that?

Sure. So maybe I'll just start with the compression question, and I'll hand the first part of your question over to Jonathan. It really comes down to phasing when the compressor started. So the compressors that we're bringing online this year, some of that spend actually happened last year. Some of it's happening this year. We're going to be kicking off that third compressor station this year, and the bulk of the spend for that activity will actually be next year. So from an overall compression perspective, we're going to expect to see that spend relatively flat and that holds for the broader program as well, generally looking at 2022 into 2023. So I don't know, Jonathan, if there's anything else you wanted to add to that?

No. No, I think that -- we're really saying, look, we've stable CapEx through next year, as John described, but with that complemented by growing EBITDA, supported by the growing revenues, as we've described. So obviously, therefore, growing free cash flow after distributions and continued delevering. But on the CapEx side, right now, we're staying stable based on as John described.

Got it. And then a little bit of a quirky question on what happens with the tariffs once you get into the second 10-year process? Just curious, volumes were tough this quarter due to the weather in late April or early May. But because of the MVCs, that implies a higher tariff. And if I remember correctly, when the next tranche occurs, it takes the average of the prior 3-year tariffs and then grows by an inflation adjustor. Just curious, what happened in this quarter, actually a potential positive, if I think of 2 or 3 years?

Well, I think the way -- as you described, we'll have a rate reset at the end of this year. The average rates for '21, '22 and '23 become the set rate plus the inflation escalator for 2024. To the extent that volumes on a total basis for the year are lower than expected, then yes, that would have a positive impact on rates. As I said, though, as [indiscernible] before, I think our expectation, maybe even with this trend that we've had just in the first half, we do expect growth in the second half. And we still expect rates generally to be stable going into next year. So that will really -- I think really just -- we're not expecting that to have a big impact. Really, the big impact, I'd say, on rates that we've had occurred in 2021 as rates went up relative to where they were in 2020, and that really fed into therefore average going forward. But this year, volumes are really kind of at MVCs. And so therefore, once you're at the bottom MVC, you can't -- lower volumes [indiscernible] MVCs don't impact rates going forward. So really, again, expect kind of stable rates going into next year. And then really, that will roll into our 2024 rates.

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