Hess Midstream LP
Q4 2019 Earnings Call Transcript

Published: 29 Jan 2020

[Operator:]

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2019 Hess Midstream Partners Conference Call. My name is Dillon, and I'll 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. 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, Dillon. 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 2019 conference call. Today, I'll review our operating performance and highlights as we continue to execute our strategy, provide additional details regarding our 2020 plans and discuss Hess Corporation's latest results and outlook for the Bakken. Jonathan will then review our financial results. 2019 was a year of strong performance and strategic execution for Hess Midstream. We delivered year-on-year double-digit percentage increases in volumes across all of our systems, realized significant EBITDA growth and completed the acquisition of Hess Infrastructure Partners, eliminating IDR payments and converting to an Up-C corporate structure as part of the transaction. We enter 2020 as a large-scale, full service midstream company, well positioned for visible adjusted EBITDA growth and increasing free cash flow generation with a platform that provides opportunity for broad investor participation. Also in 2019, we made substantial investments to further expand our strategically positioned infrastructure, including significantly increasing our total gas processing capacity, acquiring Hess' water business and completing a series of key Hess Midstream-led gathering and compression projects, which were all delivered on time and on budget. In partnership with Targa Resources, we started up the Little Missouri 4 gas plant in mid-year, expanding our base and processing footprint, complementing our full fractionation capability at the Tioga Gas Plant. LM4 increased our total nameplate processing capacity by 100 million cubic feet per day, or an increase of 40% to 350 million cubic feet per day. And our capacity is continuing to grow with the in-progress expansion of TGP, taking Hess Midstream's total Bakken processing capacity to 500 million cubic foot per day.

[Jonathan Stein:]

Thanks, John, and good afternoon, everyone. As John described, we are proud with the progress we've made in 2019 on executing our strategy. The closing of the HIP acquisition and associated debt transactions in mid-December were significant milestones for us and we enter 2020 well positioned for significant adjusted EBITDA growth and increasing free cash flow generation, while maintaining conservative leverage without the need for funding from the equity capital market to deliver our current plan. With the midpoint of our 2020 guidance representing expected increases relative to our 2019 results of 40% in net income, 32% in adjusted EBITDA and 88% in free cash flow defined as adjusted EBITDA less capital expenditures, we truly have differentiated financial metrics.

[Operator:]

Your first question comes from the line of Phil Stuart from Scotiabank. Please proceed.

[Phil Stuart:]

Good morning, guys. Appreciate the commentary and the update on the 2020 MVCs. I wonder if we could start off with kind of the $120 million in ongoing or sustaining CapEx that you all identified kind of in the 2020 budget. As you look out to 2021 and 2022, as Hess starts to ramp down activity and kind of get into that maintenance mode, how do you see that bucket of CapEx trending kind of in the outer years? Does it decline materially, or does it kind of sustain in that kind of $120 million range?

[Jonathan Stein:]

Yes. So, I think the way to think about our run rate in terms of expansion capital going forward is that as we look forward, we'll be ramping up the compression expansion projects and TGP expansion primarily completed in 2020 and into 2021. So then based on that, we'll be able to achieve our growth targets based on lower ongoing capital, which is basically the, I think of that $120 million, which is Hess and third-party interconnects representing our ongoing capital. Together with, if you look at this year maintenance capital of $15 million, that gets you to total ongoing capital of about $135 million. So without giving a specific number, certainly, if you look historically, our ongoing capital has been together with maintenance in that kind of range. For comparison, our annual depreciation has been approximately $150 million. So that's also consistent with that level of ongoing CapEx. So, you can kind of think of that level of where we are, kind of going forward looking at that bucket, plus maintenance and then certainly comparing it to our depreciation gives you some feel of what we expect going forward.

[Phil Stuart:]

Great, I appreciate the commentary there. And then on TGP, do you have an estimate of how much CapEx is that project will include for 2021, understanding there is still a lot of moving pieces there? But just kind of curious if you can identify how much CapEx there is associated with that project kind of currently planned for 2021?

[John Gatling:]

Yes. So, we're not providing any real direction on 2021 CapEx for the expansion, but a significant portion of the facility construction work will be completed this year with some activities continuing into 2021. I would say the material amount of spend for the project will be primarily in 2020, but there will be some residual spend in 2021 as we kind of wrap up activities.

[Phil Stuart:]

Okay, great. That makes sense. And then, I wonder if we could maybe step back a bit and talk about kind of the distribution policy. Post-2021, obviously, you all have laid out a good plan of 15% kind of annual growth through 2021. But just kind of thinking 2022 and beyond, assuming no major third-party acquisitions, how should we think about what the governors are to distribution growth kind of beyond 2021? I'm thinking about it in terms of obviously understanding that you guys probably want to maintain 1.2 times distribution coverage -- at least 1.2 times. But also in terms of leverage, I guess, as I look at it, it seems like net debt to EBITDA is going to be improving kind of throughout 2021, kind of maybe getting close to that 2.5 times range. Is that 2.5 times range kind of a comfortable spot for you all longer term, as we think about potential governors to distribution growth? I know you've set the 3 times target but just kind of curious how you guys are thinking about things longer term?

[Jonathan Stein:]

Sure. So as we look at how we've always set our distribution growth, it's been a level that we can deliver consistently and with the transaction on new platform, that isn't changing. So, our 2022 TDS growth will be at a level that's consistent with both our organic growth and also our financial targets and metrics, including the ones you mentioned. So starting on the organic growth side, if you look at our MVCs, they provide some transparency to our organic growth there with the gas volumes, which represent 70% of our revenues growing approximately 15% from 2021 to 2022. But we'll also be consistent, as you said, with our financial metrics, including, yes, the 1.2 times coverage and our targeted 3 times leverage target, even though we will be naturally delevering absent additional opportunities, certainly that provides us the flexibility to do additional investments as we've talked about. So with our assets being extremely cash flow generative and the ability to -- we expect to really be able, as I mentioned, to fund our CapEx and distributions with these by 2021, we'll have significant financial flexibility. But we're also going to remain disciplined to set our distribution growth relative to organic growth and also to our financial targets. And that's the approach we've taken historically and that's what you should expect certainly going forward. As we get closer to 2022, obviously, we'll provide more details. But in terms of our framework of thinking about how we are thinking about it, we will be using that financial flexibility but also remain disciplined to our organic growth and our financial metrics.

[Phil Stuart:]

Okay, great. And then, I guess, one last quick one for me. Obviously, with the turnaround in 3Q of this year, when we think about 4Q kind of gas gathering and processing volumes, will those kind of be able to ramp back up to similar levels to maybe 2Q '20? Or will there be kind of a slower ramp process, I guess in 4Q, coming off of the turnaround in 3Q?

[John Gatling:]

No, I would say there will definitely be a ramp up. I think it's just a natural process to bring in the system back up and kind of working through all of that, but the available gas is already there. So, we would expect to see the volume to come into the system fairly quickly. But again, we want to be a bit cautious here and make sure that we do it the right way. It's a big project for us to actually do the turnaround and then also to tie in some critical aspects of the overall expansion. So, I would say that we will definitely see a ramp post debottlenecking and turnaround, but that ramp will really be kind of primarily done in the third quarter, but there could be a little bit of impact in fourth. So, I think we'll just -- we'll cautiously look at it and as we get closer to the actual turnaround time, we'll provide a little bit more transparency to that.

[Phil Stuart:]

All right, great. Thanks, guys. That's it for me.

[Operator:]

Thank you. Our next question comes from Jeremy Tonet from J.P. Morgan. Please go ahead.

[Unidentified Analyst:]

Good afternoon, guys. This is Rahul on for Jeremy. I just have one quick question here. Is there a way to break out the 25% Y-o-Y EBITDA growth between the volumes and the fee uplift, unlike some more granularity on the rate recalculation and what the drivers you have for the growth, would be appreciated? Thank you.

[Jonathan Stein:]

And just to be clear, you're asking for full year, going from '19 to '20, right?

[Unidentified Analyst:]

Yes.

[Jonathan Stein:]

Okay, yes. So that increase is about 32% year-on-year to the midpoint. Primarily two-thirds of that is actually volume growth. That's coming from organic gas line growth in gas processing as we have now LM4 online. It continue to backfill TGP. We also have organic oil growth as Hess continues to ramp up production towards the 200,000 BOE per day. We also have higher MVCs, which have increased as the development plan has shifted and particularly with the turnaround, providing some MVC revenue there as well. The rest of the increase is really increased tariff rates, as you mentioned, offset by higher annual costs. The increased tariff rates are really driven by revenue recovery for more volumes and return on the incremental capital that we spent in 2019 from the delay in LM4 and therefore, the rate went up as part of that rate redetermination process at the end of the year. There is also the annual inflation escalators, which has an impact on increased rates and then that's offset by higher OpEx, which particularly, primarily is driven by just the turnaround costs that we expect during the year.

[Unidentified Analyst:]

Understood. That's helpful color. Thanks, guys.

[Operator:]

Thank you. Our next question comes from Spiro Dounis from Credit Suisse. Please go ahead.

[Douglas Irwin:]

This is Doug Irwin on for Spiro. Thanks for the question. Just real quick on the 2022 MVCs. I guess, kind of on its face, the crude numbers imply a decline and I appreciate it's based on a different percent of the nomination versus 2021. But can you maybe just help us think about it on an apples-to-apples basis and kind of what that means for crude growth longer term?

[Jonathan Stein:]

So, yes -- so let's talk about how the MVCs -- again, as I mentioned in the script, MVCs provide a line of sight to continued growth. So, I'll give you the mechanics and then John can talk about kind of broad volume growth and some of the drivers. So in general, the 2021 MVCs, as we mentioned in our press release, approximately 25% or higher is of the contract mechanics that MVCs is higher but they can go lower. So particularly with the oil gathering MVCs, that's the sum of multiple subsystems. So with the 2021 MVC above 85% compared to the 2022 MVC, we'd see that oil gathering volumes will be approximately flat year-on-year. On the other side on gas processing and gathering MVCs; for 2022 MVCs would imply continued growth as we complete the TGP expansion. Again, as I mentioned, the gas volume growth, which is 70% of our revenues, from 2021 to 2022 is about 15%. So, all of our businesses, really we will be looking, as we look forward, the MVCs really imply that growth that we talked about all support us, of course , by the free cash flow positive and free cash flow generation that we've talked about and the ability to completely fund our CapEx and distribution. So relative to those metrics and really -- and the MVCs provide visibility to this, really in a very differentiated position in terms of our long-term outlook and unique platform that we have.

[John Gatling:]

Yes. And I would just build on Jonathan's point there. I think just one thing to look at gas versus oil. Gas, you have to get it in pipe. I mean there's flaring constraints in the basin. And so you've got to get it in pipe and so that's been a priority for producers in the basin and also other midstream companies providing services to producers. So that's had us, allowed us to capture more third-party volumes and we'll actually be the things that will help us fill TGP going long-term. On the oil side and on the gas, just a reminder that approximately 30% of our gas system is third parties. On the oil side, third parties represent about 50% of our total crude oil system. So, there is definitely some run room there on the third-party side to capture additional oil opportunities. There is still a focus on getting more barrels off-trucks and into the gathering system. And then, obviously, with our flexible export options, we've got the terminal north of the river, we got the rail terminal and then we got the terminal south of the river. We essentially can access all markets from a crude perspective and so we see that as a differentiator for us in the basin; that will definitely attract more crude volumes, third-party crude volumes into our gathering and terminaling system. So while right now, we're saying that the number is kind of at that 15%, we see some potential growth opportunities there for us.

[Douglas Irwin:]

Got it. Great, that's all for me. Thanks.

[John Gatling:]

Thank you.

[Operator:]

Thank you. Thank you, ladies and gentlemen for attending. This concludes the Q&A portion in today's conference. Thank you for participation. You may now disconnect. Have a great day.