Hess Midstream LP
Q4 2020 Earnings Call Transcript

Published: 27 Jan 2021

[Operator:]

Good day, ladies and gentlemen. And welcome to the Fourth Quarter 2020 Hess Midstream Conference Call. My name is Sarah, and I’ll be your operator today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. 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.

[Jennifer Gordon:]

Thank you, Kevin. Good afternoon, everyone. And thank you for participating in our fourth quarter earnings conference call. Our earnings release was issued this morning and appears on our website www.hessmidstream.com.

[John Gatling:]

Thanks, Jennifer. Good afternoon, everyone. And welcome to Hess Midstream’s fourth quarter 2020 conference call. Today I’ll review our operating performance and highlights, as we continue to execute our strategy, provide details regarding our 2021 plans and discuss Hess Corporation’s latest results and outlook for the Bakken. Jonathan will then review our financial results. 2020 was another year of strong performance and strategic execution for Hess Midstream in an exceptionally challenging macro-environment. First, we are most proud of maintaining safe and reliable operations throughout this unprecedented pandemic. Hess and Hess Midstream implemented comprehensive COVID-19 health and safety measures including health screenings, extended work schedules for rotational employees and social distancing initiatives, based on government and public health agencies recommendations. The safety of our workforce and the communities where we operate is and will continue to be our top priority. Despite the macro-headwinds throughout 2020, Hess Midstream delivered very strong operational performance, achieving year-on-year double-digit percentage increases in volumes across all of our systems, resulting in annual adjusted EBITDA growth of 36% compared to full year 2019. Hess Midstream also completed the investment phase for a series of strategically important projects during 2020, further enhancing our gas capture capability and providing the platform for future growth.

[Jonathan Stein:]

Thanks, John, and good afternoon, everyone. As John described, we are proud in 2020 on executing our strategy, continuing our track record of delivering strong results and demonstrating how both our contract structure and financial strength differentiate our business model.

[Operator:]

Thank you. Your first question comes from the line of Brian Reynolds with UBS. Your line is now open.

[Brian Reynolds:]

Hi. Good afternoon, everyone. This is Brian Reynolds on for Shneur. I have a two part question around capital allocation and your thoughts around M&A. Given recent comments and about an administration around a permanent pause on federal lands, how should we think about potential acquisition of GOMM assets from Hess in ‘21 given limited expected activity? Does this pause your prior discussions? Thank you.

[John Gatling:]

Yeah. Sure. Thanks, Brian, for the question. So we continue to evaluate. As we mentioned previously, we’re continue to evaluate Gulf of Mexico has very attractive assets and we’re definitely interested in continuing the partnership with Hess. But we’re obviously very aware of the political climate and we’re continuing to monitor that. And that’ll be part of the evaluation process that we’re in the process of working through. So, again, we still think the assets are of high quality, and as John Hess and Greg Hill mentioned, in their earnings call, energy is still going to play a big role in the future. So, from our perspective, it’s still attractive, but again, we’re continuing to monitor the political environment and any impacts that the Biden administration may place on the industry.

[Brian Reynolds:]

Great. Thank you. And that’s -- just kind of a quick follow up on capital allocation, just given your free cash flow profile for 2021. Are you guys considering different growth opportunities for Hess outside of the Gulf of Mexico assets? If not, should we expect to return of capital to unitholders through a form of buybacks from sponsors or would Hess Midstream consider a special distribution? Thanks.

[John Gatling:]

Yeah. Sure. Thanks, Brian. And again, I’ll kind of kick off the question and hand it over to Jonathan. That -- we’re not really interested in any kind of corporate acquisition at this time. We’re continuing to look at the natural acquisitions where there are strategic bolt-ons to our focus areas. I mean, obviously, the Bakken is a natural place where we’re looking for those high value opportunities to bolt-on some assets. Again, because of our structure and how we’re set up, the growth ahead of us, we’re really not having to chase growth. So we can be very disciplined at how we kind of attack those opportunities. And as I mentioned, we’ll continue to evaluate the Gulf of Mexico and make a determination of how that fits into the broader portfolio. Again, just a reminder, our cost of service structure, which we very much favor that contract structure, if we were to do any acquisitions, or in particular, if we were to acquire the Gulf of Mexico assets, we would expect a very similar structure. So, downside protection is a key component to those asset acquisition evaluations. As far as the capital structure question, I’ll hand it over to Jonathan to speak to some of that.

[Jonathan Stein:]

Thanks, John. I’ll just add, I think, in terms of our financial strategy will continue to be very disciplined as we’ve been in the past. Certainly, we’re in a position with being free cash flow positive, asset dividend is really going forward at this point, as well as decreasing leverage relative to our already conservative 3 times EBITDA leverage target. That gives a significant financial flexibility for accretive opportunities like John described, but also returning capital to shareholders. Along that lines within that return of capital, there is multiple options. As you mentioned, both in terms of distribution, along those lines or potentially buybacks from the sponsors, we certainly are looking at both of them. They each have different criteria in terms of execution and timing. But we are really in a unique and differentiated position with the flexibility that we have and we’ll continue to make disciplined choices in terms of how we use that flexibility in terms of our choices and how we do return of capital to shareholders.

[Brian Reynolds:]

Great. Thank you for that and have a great rest of your day everyone.

[John Gatling:]

Thanks. You too Brian.

[Operator:]

Thank you. Your next question comes from the line of Jeremy Tonet with JPMorgan. Your line is now open.

[Vinay Chitteti:]

Hi, guys. This is Vinay on for Jeremy. Just wanted to quickly follow up on the bolt-on transactions, which you talked about interested in the Bakken. Again, there is regulatory uncertainty with the DAPL and we did discuss previously how it’s not going to impact Hess Midstream. But just want to understand, given the DAPL uncertainty and the federal land risk, how -- have you guys are positioned well to take any opportunities in the Bakken and also kind of give any thoughts on how the third-party activity is going on South versus North of the River right now?

[John Gatling:]

Sure. So, maybe let me just address the DAPL question first, because I know it’s been -- there’s been some recent developments there. Just from our perspective -- from Hess Midstream perspective, it doesn’t really impact us all directly all that much. I mean, if you think about how our structure is from a terminalling perspective, whether we export via pipe or export via rail, it really is the -- it’s the same for us. We kind of have that postage stamp approach to how we handle the terminalling. So if oil is delivered to the pipe terminal, it gets the same fee as it does when it hits the rail terminal. And then just as a reminder, we’ve had a continuing operation at the rail terminal throughout the duration of Hess Midstream, even in the -- even when oil prices were much lower and activity was lower. Our rail terminal maintained operation -- consistent operation through the duration of that. So we feel like we’re in a very, very strong position to provide Hess and our other customers export optionality and flexibility. And as you mentioned, we have terminaling capabilities at both North of the Missouri River and South of Missouri River, and the ability to move product North and South. So, again, I think, our strategic infrastructure is really provides a lot of support for Hess and our customers. And then as far as the third-party question comes back, I mean, we’re continuing to see -- as oil prices strengthen we’re continuing to see additional activity in the basin. Hess is adding a rig and there’s also been some other producers that have talked about increasing activity in the basin as well. And again, I think, because of our strategic infrastructure, physical location and how we are -- where we span both North and South of the River, we can just add tremendous flexibility to all of our customers, and in particular, Hess is in a very strong position from the standpoint of we can -- we have the capability of exporting all of Hess’ hydrocarbons and also meet some third-party capacities as well.

[Jonathan Stein:]

This is Jonathan. Just one thing I just add, I think, just the highlight, similar not last year, obviously, we -- despite what happened in the external environment, we still deliver a 36% increase in EBITDA and this year we have the 17% increase that we have talked about. And so despite -- there’s certainly some uncertainty to DAPL and things like that, and as John described, we are -- because of the contract structure really protected from most of that. And if you really look at our line of sight to what’s going to occur, we really have clear line of sight to revenue growth, whether it through, as I talked about on the script in terms of increasing MVCs and then expected higher volumes in 2023, that are implied by those MVCs, and of course, even if volumes come in lower in 2023, then we have the rate reset at that point. Together with the fact that, as John described, our capital costs are lower levels going forward. So the ability now to have the visibility that we have to being free cash flow positive after distributions on a going forward basis, supported by growing free cash flow and growing EBITDA is really unique position and allows us to navigate even if there are uncertainties that are out there as we’ve done in the past.

[John Gatling:]

Yeah. And maybe one thing that I did forget to mention as well and John Hess and Greg Hill mentioned in the -- in their earnings call earlier today. There’s still very limited impact in the Bakken on federal lands. There’s only about 2% of the Bakken production within Hess’ portfolio that’s exposed. So from that perspective we feel like, again, that has and even other producers in the in the basin have a favorable position from that perspective.

[Vinay Chitteti:]

Got it. Thanks. Just wanted to quickly follow up on the gas capture opportunity here, I mean, you guys did add quite a bit of compression capacity this year and are projecting more additions going forward in 2021 as well. Any guidance you could give and how much is the opportunity set is available right now and has acreage or is it more from the third-party assets or what -- just want to understand that?

[John Gatling:]

Sure. Yeah. And I would say that, that has been a huge win for us in 2020 and we’re very proud and excited of what we delivered last year and see a lot of opportunity in the future. The team just did an amazing job from an infrastructure operational perspective, that just really integrated all of that additional capacity in. A combination of the Midstream team along with Hess upstream just did a great job gathering as much of the gas as we possibly could. When we build infrastructure, we build infrastructure with a line of sight to growth. It’s not just speculative, it is focused and very disciplined approach to how we build infrastructure. So, I’ve kind of highlighted some of the increases in capacity that we’re expecting -- that we’ve realized, but we’re also expecting to see rolling into 2021 and 2022. And as you can see from the MVC profile that we’ve got in 2023, that -- we are continuing to expect to see growth as a result of Hess adding a rig. And then as Greg mentioned earlier today on the earnings call, depending on oil price, there’s definitely an interest from Hess to get up to four rigs. There’s 1,800 well locations remaining that are economic at current prices and Hess is definitely interested in developing those. So our infrastructure plan is really linked to Hess’ developed a plan along with our other third-party customers. So, again, I think, I’ve given a little bit of indication of where that’s heading and then I think our MVCs gives a little bit of visibility into that growth profile that we’re expecting. If Hess or other producers decides to increase further, we’ll obviously be looking at opportunities to continue to grow our infrastructure to support that as well. But again, we really like to stay focused on line of sight around that growth and that’s been our history over the last several years and we’ll be into the future.

[Vinay Chitteti:]

Got it. That’s very helpful. That’s all for me. Thanks for taking my question.

[John Gatling:]

Sure. Absolutely. Thank you.

[Operator:]

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

[Doug Irwin:]

Hey. This is Doug on for Spiro. Maybe just a follow up real quick on Bakken activity and you just touched on this a little bit. But I know Hess has talked about adding a second rig and basically keeping production flat this year. And do you see inventories high in the basin overall, but just in general rigs don’t seem to be coming back terribly quickly. Just curious at what point kind of over the next year or two do we need to see rigs start coming back in order to being able to maintain or even grow volumes?

[John Gatling:]

Yeah. I mean, I think, that you’re kind of bringing up a more of a macro basin question. I think we’ve got -- as I mentioned, we’ve got a lot of line of sight to what Hess’ plans are and our third-party customers and we’re very well-positioned to support that growth trajectory. Hess has already announced adding a rig back, and as Greg mentioned, again, just to highlight that around the interest to add even more rigs back to the basin. I mean, I think, it’s pretty exciting stuff when you hear the President and Chief Operating Officer of Hess talking about getting back potentially to

[Operator:]

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