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spk15: Good day, ladies and gentlemen, and welcome to the first quarter 2021 HESS Midstream conference call. My name is Andrew, and I will be your operator for today. At this time, all participants are in a listen-only mode. Later, we'll conduct a question and answer session, and if at any time you require operator assistance, please press star followed by zero, and we'll be happy to assist you. 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.
spk01: Thank you, Andrew. 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. 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 factor section of HES Midstream's filing of 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 compliance with social distancing protocols as a result of COVID-19, we are conducting the call remotely, so please bear with us. In case there are audio issues, we will be posting transcripts of each speaker's prepared remarks on www.hessmidstream.com following their presentations. I'll now turn the call over to John Gatling.
spk11: Thanks, Jennifer. Good afternoon, everyone, and welcome to HESS Midstream's first quarter 2021 conference call. Today, I'll review our operating performance and highlights as we continue to deliver our strategy and discuss HESS Corporation's latest results and outlook for the Bakken. Jonathan will then review our financial results. We're pleased with the progress we're making on executing our strategy, and we're excited about the stable and visible earnings growth ahead of us. Over the past 24 months, Hess Midstream has undertaken a strategic effort to increase our gas capture capability by expanding our gas compression and processing capacity. This year, we expect to progress construction of two new greenfield compressor stations, which went online in 2022, will meaningfully expand our gas compression capacity by another 20 percent. In addition, the final tie-ins of the Tioga gas plant expansion will increase our processing capacity and solidly position us to capture incremental volumes as we support HESS and third-party customers meet North Dakota's tightening flare reduction targets. Our contract complements our strategic asset base and provides resilience and stability to our financial performance. as demonstrated by the strong financial results we delivered in the first quarter, despite the challenges of the last year. And further supports are 2021 EBITDA guidance, which is underpinned by 95% revenue protection. Now turning to HES Midstream's first quarter 2021 performance. Throughputs and operating results in the first quarter were in line with expectations, though adverse weather did impact operations in February. some planned maintenance activities pushing into the second quarter. First quarter gas processing volumes averaged 302 million cubic foot per day, crude terminaling volumes were 125,000 barrels of oil per day, and water gathering volumes averaged 70,000 barrels of water per day. Third parties contributed approximately 10% of our gas and 15% of our oil volumes in the first quarter, consistent with the fourth quarter and in line with our guidance. Now turning to HESS upstream highlights. Earlier today, HESS reported first quarter production results in the Bakken production average 158,000 barrels of oil equivalent per day. As previously announced, HESS added a second operated drilling rig to the Bakken in February. For four year 2021, HESS forecast Bakken net production to average between 155 and 160,000 barrels of oil equivalent per day. reduced from previous guidance of 170,000 barrels of oil equipment per day, primarily driven by lower NGL volumes received by HESS under Percentage of Proceeds Contracts, or POP, and the previously announced sale of non-strategic Bakken acreage. POP volumes relate to the recovery of non-operated processing fees directly received by HESS and does not impact HESS Midstream's throughputs. Furthermore, the acreage Hess agreed to sell is not being or planned to be gathered by Hess Midstream. Hess expects Bakken net production to build in the second half of 2021 and exit the year between 170 and 175,000 barrels of oil equipment per day. Turning to Hess Midstream guidance, we're reaffirming our full year financial and operational guidance, which was included in this morning's earnings release and is available on our website. For full year 2021, we expect gas processing volumes to average between 270 and 280 million cubic foot per day. Our processing guidance incorporates the previously announced 45-day maintenance turnaround at the Tioga gas plant, which is planned to commence in the third quarter, reducing our annual gas gathering and processing volumes by approximately 30 million cubic foot per day. Turning to our crude oil assets, For full year 2021, we expect crude terminaling volumes to average between 120 and 130,000 barrels of oil per day. Our full year guidance continues to anticipate that third parties will contribute approximately 10% of our gas volumes and 15% of our crude oil volumes, consistent with levels we achieved in the first quarter of 2021. As physical volumes on most of our systems are at or below MVC levels, our revenue forecast is approximately 95% protected and expected to deliver adjusted EBITDA guidance in the range of $860 to $890 million, an increase of approximately 17% at the midpoint compared to full year 2020. We expect second quarter gas, oil, and water volumes to each be modestly lower compared to first quarter as increasing wells online and recovery from winter weather is offset by production declines and planned maintenance activities. Turning to HES Midstream's 2021 capital program. We're making excellent progress on executing our 2021 capital program with activities primarily focused on strengthening our gas capture and water gathering and disposal capacity. For full year 2021, capital expenditures are expected to total $160 million, approximately 35% lower than full year 2020, reflecting lower ongoing capital needs following the completion of expansion construction activities at the Tioga gas plant. We continue to forecast expansion capital of approximately $140 million and maintenance capital of approximately $20 million. In summary, we continue to advance our strategy as we build out our infrastructure and prepare for future organic growth. With 95% revenue protection through 2022, we are uniquely positioned and expect to deliver sustainable and growing adjusted EBITDA, adjusted free cash flow, and distributions with low leverage and contract protection. I'll now turn the call over to Jonathan to review our financial results and guidance.
spk04: Thanks, John, and good afternoon, everyone. As John described, we continue to make good progress in executing our strategy and are pleased to have delivered another strong quarter to start 2021 that demonstrates how both our contract structure and financial strength... Thanks John, and good afternoon everyone. As John described, we continue to make good progress in executing our strategy, and are pleased to have delivered another strong quarter to start 2021 that demonstrates how both our contract structure and financial strength differentiate our business model. For the first quarter of 2021, net income was $160 million compared to $132 million for the fourth quarter of 2020. Adjusted EBITDA for the first quarter of 2021 was $227 million compared to $199 million for the fourth quarter of 2020. The change in adjusted EBITDA relative to the fourth quarter of 2020 was primarily attributable to the following. Total revenues increased by $26 million, primarily driven by higher tariff rates resulting from our annual rate redetermination process, partially offset by lower throughput volume, resulting in segment revenue changes as follows. An increase in gathering revenues of approximately $13 million. an increase in processing revenues of approximately $8 million, and an increase in terminaling revenues of approximately $5 million. Total operating expenses, including G&A, but excluding depreciation and amortization and pass-through costs, were lower, increasing adjusted EBITDA by approximately $2 million, including lower seasonal maintenance activity in our processing segment of approximately $3 million, partially offset by higher G&A expenses of approximately $1 million, primarily related to our equity offering. Resulting in adjusted EBITDA for the first quarter of 2021 of $227 million, modestly above our guidance.
spk20: Did you know I got cut off?
spk04: Sorry, thanks, John. Okay, sorry about that. We had technical difficulties. Resulting in adjusted EBITDA for the first quarter of 2021 of $227 million, modestly above our guidance, primarily due to lower operating costs as adverse weather conditions resulted in certain planned maintenance activities being deferred to the second quarter, as John described. First quarter 2021 maintenance capital expenditures were approximately $1 million, and net interest excluding amortization of deferred finance costs was approximately $21 million. The result was that distributable cash flow was approximately $205 million for the first quarter of 2021, covering our distribution by approximately 1.6 times. On April 23rd, we announced our first quarter distribution that increased 5% on an annualized basis, representing our 15th consecutive quarterly distribution increase since our IPO. Expansion capital expenditures in the first quarter were $22 million. At quarter end, that was approximately $1.9 billion, representing leverage of approximately 2.5 times adjusted EBITDA on a trailing 12-month basis and below our conservative three times adjusted EBITDA target. Turning to guidance. For the second quarter of 2021, we expect net income to be approximately $145 to $155 million and adjusted EBITDA to be approximately $210 to $220 million, modestly lower at the midpoint relative to the first quarter of 2021, primarily driven by higher operating costs from seasonal maintenance and activity deferrals due to winter weather in the first quarter. As physical volumes on our systems remain generally below MVC levels, we expect second quarter revenues to be relatively stable compared to the first quarter. Second quarter maintenance capital expenditures and net interest, excluding amortization of deferred finance costs, expected to be approximately $25 million, resulting in expected distributable cash flow of approximately $185 to $195 million, with distribution coverage at the midpoint of the range of approximately 1.5 times. For the third quarter, we anticipate commencing a maintenance turnaround at TGP. As John described, we expect to incur additional operating expenses of approximately $15 million and maintenance capital of approximately $15 million related specifically to the turnaround. As a reminder, HES Midstream will receive MVC payments during the turnaround. As a result, With operating costs, including the turnaround, expected to be higher than the second quarter and relatively stable MVC-supported revenues, we expect lower net income, adjusted EBITDA, and distribution coverage in the third quarter relative to the second quarter. In addition, we are reaffirming all full-year 2021 financial guidance, including at the midpoint full-year 2021 net income of $605 million and adjusted EBITDA of $875 million. This adjusted EBITDA guidance represents annual growth of approximately 17% from full year 2020, primarily from our annual rate redetermination and increasing 2021 MVCs, which provide approximately 95% protection to our revenues. With no change to our full year financial guidance and lower expected net income and adjusted EBITDA in the second and third quarters relative to the first quarter, we expect increased financial results in the fourth quarter supported by MVC-protected revenues and lower operating costs with the completion of the TGB turnaround and lower seasonal activity. Highlighting our financial strength, we expect adjusted free cash flow to be in excess of distributions by approximately $100 million in 2021.
spk18: With this positive adjusted free cash flow after distribution,
spk04: Together with expected leverage of approximately two times adjusted EBITDA on a full-year basis that is below our conservative three times adjusted EBITDA target, we maintain significant financial flexibility for accretive capital allocation, including potential return of capital to shareholders. Our revenues continue to be 95% protected by generally increasing MVCs in 2022, and we expect continued higher revenues in 2023 as physical volumes are expected to be above MVCs. With this increasing expected revenue and lower ongoing capital spending, we have visibility to continued growth in adjusted EBITDA and adjusted free cash flow. In summary, with our strategic asset base, visible financial metrics, and unique contract structure, we have a differentiated value proposition across the midstream sector. This concludes my remarks. We will be happy to answer any questions. I will now turn the call over to the operator.
spk15: Thank you. Ladies and gentlemen, if you have a question, please press star followed by one on your phone. If your question has been answered or you would like to withdraw your question, press pound. Questions will be taken in the order received. Please press star one to begin. And our first question comes from the line of Brian Reynolds with UBS.
spk17: Hi. Good morning, everyone. Just to start off on capital allocation comments around, you know, return of capital to shareholders. Can you just provide a little bit more color on how we should think about return of cash just given the 5% distribution growth target and leverage below, you know, the stated target of three-point times? Are there any other uses of cash that we should be thinking about over the next, you know, near medium term? Thanks.
spk04: Sure. So in terms of we're in a fortunate position where we have significant financial flexibility, which, as I mentioned in my comments, could include the opportunity for creative opportunities like return of capital, We have multiple options available to us, including potential buybacks from our sponsors and increased dividends of some form. Each of these options certainly have their strengths. We're just at the point now we're turning free cash flow positive after distribution. This is our first quarter, actually, that we're free cash flow positive after distribution since our IPO, so a real inflection point. And we're just starting to have declining leverage relative to our conservative three times even a leverage target. So as we continue to build our flexibility, we'll continue to evaluate these options, and that will provide opportunities for potential return on capital. And in that, we'll continue to be disciplined in terms of our financial strategy and protecting our balance sheet.
spk17: Great. Appreciate the feedback. Second question here is a little bit more operational focused as it relates to the Bakken. Are you seeing higher GPM on your footprints today and going forward? And if so, could you provide color on whether it's more from reduced flaring or whether the wells are just getting gassier in nature?
spk11: Thanks. Yeah, so Brian, I'll take that question. This is John. So yeah, we're definitely seeing higher gas rates. It's primarily a function of gas capture. We're not really seeing the GOR substantially changing at the well. The wells are very stable, really stable. strong producing wells both on the oil and gas side, and it's really just more of a function of continuing to capture more gas. We've installed a lot of compression and processing capacity over the last several years, and that's really kind of opened it up to help us reduce flaring and get the gas into pipe.
spk17: Great. Thanks. And just as a quick follow-up on northern border, should we expect any incremental ethane recovery on your footprint due to high BTU content concerns? And just any commentary around how the HESS-HESM relationship looks to solve the issue long term? Thanks.
spk11: Yeah, sure. So, obviously, the HESS and HESM relationship is outstanding. I mean, we work very close together with our upstream partner. We're pretty much in any and all development decision-making processes and participating in that, and the system is fully integrated. To your point on ethane, you know, again, one of kind of our unique strategic advantages is our gas plant at Tioga. It has full ethane extraction capability, and we actually deliver that ethane to Canada up through the Vantage pipeline to NOVA. Overall, that capacity has really been great for us, and it's provided an outlet for our ethane through the Tioga gas plant. So from our perspective, we really don't see any constraints going into the northern border. In fact, with our BTU content of our residue gas going in, northern border is able to use our lower BTU content gas to blend in some of the higher BTU content gas they've got in the basin. So overall, we're actually very well positioned to support HEVS.
spk17: Super helpful. Thank you, everyone. Have a great day.
spk11: You too, Brian.
spk13: Thanks.
spk15: Thank you. And our next question comes from the line of Jeremy Onet with J.P. Morgan.
spk16: Hi, guys. This is Vinay on for Jeremy. I just wanted to clarify a bit on health policy, but on the point that you talked about first week data and the latest share about fourth quarter and potentially next week and also fourth week, just trying Yeah, sorry to interrupt you here, but you're breaking up really bad. I could not understand your question at all. Do you mind repeating the question again, please? Sorry, I just thought to ask if HES adding new rig activity would help any upside in 2022?
spk11: Sure. Yeah, I think I understand your question. So you're asking about HES bringing on the second rig and potentially adding additional rigs and upside into 2022. So just a reminder, you know, for 2021 and a good portion of 2022, we're at our MVC levels. So So from that perspective, it's very predictable. As we roll into 2023 and as HESS continues to evaluate the opportunity to bring additional rigs on, just as a reminder, HESS brought on the second rig in February, so we're going to start to see additional wells coming out of that rig line later this year. And as Greg mentioned in the earnings call earlier, they're expecting the exit rate to be between 170,000 and 175,000 barrels of oil per day. And then there was some discussion, depending on oil price, the potential to add a third rig in the fourth quarter and then potentially add additional rigs later on depending on oil price. And again, the way Hess is focusing on the Bakken is really kind of leveraging it as a cash engine to generate cash for the company. So from our perspective, we're well positioned to support Hess's growth. That's part of the reason why we're making the further investment in gas capture and water gathering and disposal systems. to help HESS as it looks forward to growing. So we're well positioned to support the growth. We see some increased activity coming on from the second rig, and hopefully prices stabilize and continue up, and we'll continue to see additional opportunity to bring a third and potentially a fourth rig on. But again, we're fully integrated with the upstream and working with them on the development activity.
spk16: Thank you. Just one side here. Have they gained any third-party business in this insurance to DAPL shutdown?
spk11: Sorry, I heard... Yeah, I heard you say something about third-party and DAPL. Can you repeat the question again?
spk16: Sorry, my question is given the... So I just want to understand if there is any incremental activity around the rail community.
spk11: Okay. I'm still having trouble hearing you, but I think you were asking about third-party activity, and I'll just make a general comment about third parties, that similar to HESA's perspective, we are seeing some additional activities from third parties. And again, as we've talked about previously, we're piped up to support those third-party activities. As we built our forecast and as we saw the first quarter of 2021, we're expecting gas to be at about 10% of total throughput volumes and oil to be approximately 15%. Now, again, there's opportunity for upside there as we continue to evaluate and look at growth from third parties, but that's what our long-term forecast is based on. And then I think you asked a question about DAPL. I'll just make another general comment on DAPL for everybody on the call. Overall, HESS has long-term contracts in place and will have no problem operating even in an environment where DAPL is constrained or shut down. And then just a reminder, we have our rail terminal as well that's continued to operate throughout the duration of the downturn. It's both a crude oil terminal but also an NGL terminal for us as well. And we're well-positioned to support HESS on whatever it needs. We can get HESS access to pipe, but we can also get HESS and third parties access to our REL terminal as well.
spk16: Okay, thank you.
spk15: Thank you. And our next question comes from the line of Spiro Dunis with Credit Suisse.
spk05: Doug Irwin on First Bureau.
spk06: Thanks for the question.
spk05: Just one for me. I wanted to ask about the recent secondary from the sponsors. Just curious if there's been any indication that that could be part of a broader strategy moving forward where maybe we see some additional offerings adding some liquidity to the Class A shares. And then you mentioned the potential for buybacks directly from the sponsors. Just curious if that was something that was discussed when this offering was announced.
spk04: Sure. Yeah, I mean, Hess and JIP have been very disciplined. This was the first secondary offering of any kind since the IPO in 2017. As you know, the proceeds relative to Hess and JIP were relatively small for them, but the objective was to increase the public float Certainly we did that by increasing the public vote by about 40%. Really beyond that, I would say in terms of offering HES and GIP remain disciplined investors and really see the long-term value of HES midstream. In terms of buybacks, I would say similar in that sense, of course, buyback from the sponsors only, which is what we would do in that that we've talked about. That would, again, be based on HES and GIP seeing a value proposition for that.
spk05: Okay, got it. That's all for me. Thanks for the time.
spk12: Okay, thank you.
spk15: Thank you very much. This concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day. Thank you. you Thank you. Thank you. Thank you. music music Good day, ladies and gentlemen, and welcome to the first quarter 2021 HES midstream conference call. My name is Andrew, and I will be your operator for today. At this time, all participants are in a listen-only mode. Later, we'll conduct a question and answer session, and if at any time you require operator assistance, please press star followed by zero, and we'll be happy to assist you. 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.
spk01: Thank you, Andrew. 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. 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 factor section of HES Midstream's filing of 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 compliance with social distancing protocols as a result of COVID-19, we are conducting the call remotely, so please bear with us. In case there are audio issues, we will be posting transcripts of each speaker's prepared remarks on www.hessmidstream.com following their presentations. I'll now turn the call over to John Gatling.
spk11: Thanks, Jennifer. Good afternoon, everyone, and welcome to HESS Midstream's first quarter 2021 conference call. Today, I'll review our operating performance and highlights as we continue to deliver our strategy and discuss HESS Corporation's latest results and outlook for the Bakken. Jonathan will then review our financial results. We're pleased with the progress we're making on executing our strategy, and we're excited about the stable and visible earnings growth ahead of us. Over the past 24 months, Hess Midstream has undertaken a strategic effort to increase our gas capture capability by expanding our gas compression and processing capacity. This year, we expect to progress construction of two new greenfield compressor stations, which went online in 2022, will meaningfully expand our gas compression capacity by another 20 percent. In addition, the final tie-ins of the Tioga gas plant expansion will increase our processing capacity and solidly position us to capture incremental volumes as we support HESS and third-party customers meet North Dakota's tightening flare reduction targets. Our contract complements our strategic asset base and provides resilience and stability to our financial performance. as demonstrated by the strong financial results we delivered in the first quarter, despite the challenges of the last year. And further supports are 2021 EBITDA guidance, which is underpinned by 95% revenue protection. Now turning to HES Midstream's first quarter 2021 performance. Throughputs and operating results in the first quarter were in line with expectations, though adverse weather did impact operations in February. some planned maintenance activities pushing into the second quarter. First quarter gas processing volumes averaged 302 million cubic foot per day, crude terminaling volumes were 125,000 barrels of oil per day, and water gathering volumes averaged 70,000 barrels of water per day. Third parties contributed approximately 10% of our gas and 15% of our oil volumes in the first quarter, consistent with the fourth quarter and in line with our guidance. Now turning to HESS upstream highlights. Earlier today, HESS reported first quarter production results in the Bakken production average 158,000 barrels of oil equivalent per day. As previously announced, HESS added a second operated drilling rig to the Bakken in February. For four year 2021, HESS forecast Bakken net production to average between 155 and 160,000 barrels of oil equivalent per day. reduced from previous guidance of 170,000 barrels of oil equipment per day, primarily driven by lower NGL volumes received by HESS under Percentage of Proceeds Contracts, or POP, and the previously announced sale of non-strategic Bakken acreage. POP volumes relate to the recovery of non-operated processing fees directly received by HESS and does not impact HESS Midstream's throughputs. Furthermore, the acreage Hess agreed to sell is not being or planned to be gathered by Hess Midstream. Hess expects Bakken net production to build in the second half of 2021 and exit the year between 170 and 175,000 barrels of oil equipment per day. Turning to Hess Midstream guidance, we're reaffirming our full year financial and operational guidance, which was included in this morning's earnings release and is available on our website. For full year 2021, we expect gas processing volumes to average between 270 and 280 million cubic foot per day. Our processing guidance incorporates the previously announced 45-day maintenance turnaround at the Tioga gas plant, which is planned to commence in the third quarter, reducing our annual gas gathering and processing volumes by approximately 30 million cubic foot per day. Turning to our crude oil assets. For full year 2021, we expect crude terminaling volumes to average between 120 and 130,000 barrels of oil per day. Our full year guidance continues to anticipate that third parties will contribute approximately 10% of our gas volumes and 15% of our crude oil volumes, consistent with levels we achieved in the first quarter of 2021. As physical volumes on most of our systems are at or below MVC levels, our revenue forecast is approximately 95% protected and expected to deliver adjusted EBITDA guidance in the range of $860 to $890 million, an increase of approximately 17% at the midpoint compared to full year 2020. We expect second quarter gas, oil, and water volumes to each be modestly lower compared to first quarter as increasing wells online and recovery from winter weather is offset by production declines and planned maintenance activities. Turning to HES Midstream's 2021 capital program, we're making excellent progress on executing our 2021 capital program with activities primarily focused on strengthening our gas capture and water gathering and disposal capacity. For full year 2021, capital expenditures are expected to total $160 million, approximately 35% lower than full year 2020, reflecting lower ongoing capital needs following the completion of expansion construction activities at the Tioga gas plant. We continue to forecast expansion capital of approximately $140 million and maintenance capital of approximately $20 million. In summary, we continue to advance our strategy as we build out our infrastructure and prepare for future organic growth. With 95% revenue protection through 2022, we are uniquely positioned and expect to deliver sustainable and growing adjusted EBITDA, adjusted free cash flow, and distributions with low leverage and contract protection. I'll now turn the call over to Jonathan to review our financial results and guidance.
spk04: Thanks, John, and good afternoon, everyone. As John described, we continue to make good progress in executing our strategy and are pleased to have delivered another strong quarter to start 2021 that demonstrates how both our contract structure and financial strength... Thanks John, and good afternoon everyone. As John described, we continue to make good progress in executing our strategy, and are pleased to have delivered another strong quarter to start 2021 that demonstrates how both our contract structure and financial strength differentiate our business model. For the first quarter of 2021, net income was $160 million compared to $132 million for the fourth quarter of 2020. Adjusted EBITDA for the first quarter of 2021 was $227 million compared to $199 million for the fourth quarter of 2020. The change in adjusted EBITDA relative to the fourth quarter of 2020 was primarily attributable to the following. Total revenues increased by $26 million, primarily driven by higher tariff rates resulting from our annual rate redetermination process, partially offset by lower throughput volume, resulting in segment revenue changes as follows. An increase in gathering revenues of approximately $13 million. an increase in processing revenues of approximately $8 million, and an increase in terminaling revenues of approximately $5 million. Total operating expenses, including G&A, but excluding depreciation and amortization and pass-through costs, were lower, increasing adjusted EBITDA by approximately $2 million, including lower seasonal maintenance activity in our processing segment of approximately $3 million, partially offset by higher G&A expenses of approximately $1 million, primarily related to our equity offering. Resulting in adjusted EBITDA for the first quarter of 2021 of $227 million, modestly above our guidance.
spk20: Do you know I got cut off?
spk04: Sorry, thanks, John. Okay, sorry about that. We had technical difficulties. Resulting in adjusted EBITDA for the first quarter of 2021 of $227 million, modestly above our guidance, primarily due to lower operating costs as adverse weather conditions resulted in certain planned maintenance activities being deferred to the second quarter as John described. First quarter 2021 maintenance capital expenditures were approximately $1 million and net interest excluding amortization of deferred finance costs was approximately $21 million. The result was that distributable cash flow was approximately $205 million for the first quarter of 2021 covering our distribution by approximately 1.6 times. On April 23rd, we announced our first quarter distribution that increased 5% on an annualized basis, representing our 15th consecutive quarterly distribution increase since our IPO. Expansion capital expenditures in the first quarter were $22 million. At quarter end, that was approximately $1.9 billion, representing leverage of approximately $2.5 times adjusted EBITDA on a trailing 12-month basis and below our conservative three times adjusted EBITDA target. Turning to guidance. For the second quarter of 2021, we expect net income to be approximately $145 to $155 million and adjusted EBITDA to be approximately $210 to $220 million, modestly lower at the midpoint relative to the first quarter of 2021, primarily driven by higher operating costs from seasonal maintenance and activity deferrals due to winter weather in the first quarter. As physical volumes on our systems remain generally below MVC levels, we expect second quarter revenues to be relatively stable compared to the first quarter. Second quarter maintenance capital expenditures and net interest, excluding amortization of deferred finance costs, expected to be approximately $25 million. resulting in expected distributable cash flow of approximately $185 to $195 million, with distribution coverage at the midpoint of the range of approximately 1.5 times. For the third quarter, we anticipate commencing a maintenance turnaround at TGP. As John described, we expect to incur additional operating expenses of approximately $15 million and maintenance capital of approximately $15 million, related specifically to the turnaround. As a reminder, HESS Midstream will receive MVC payments during the turnaround. As a result, with operating costs, including the turnaround, expected to be higher than the second quarter and relatively stable MVC support revenues, we expect lower net income, adjusted EBITDA, and distribution coverage in the third quarter relative to the second quarter. In addition, we are reaffirming all full-year 2021 financial guidance, including at the midpoint full-year 2021 net income of $605 million and adjusted EBITDA of $875 million. This adjusted EBITDA guidance represents annual growth of approximately 17% for full-year 2020, primarily from our annual rate redetermination and increasing 2021 MVCs which provide approximately 95% protection to our revenues. With no change to our full-year financial guidance and lower expected net income and adjusted EBITDA in the second and third quarters relative to the first quarter, we expect increased financial results in the fourth quarter, supported by FVC-protected revenues and lower operating costs with the completion of the TGB turnaround and lower seasonal activity. Highlighting our financial strengths, we expect adjusted free cash flow to be in excess of distributions by approximately $100 million in 2021. With this positive adjusted free cash flow after distribution, together with expected leverage of approximately two times adjusted EBITDA on a full-year basis that is below our conservative three times adjusted EBITDA target, we maintain significant financial flexibility for accretive capital allocation, including potential return of capital to shareholders. Our revenues continue to be 95% protected by generally increasing MVCs in 2022, and we expect continued higher revenues in 2023 as physical volumes are expected to be above MVCs. With this increasing expected revenue and lower ongoing capital spending, we have visibility to continued growth, adjusted EBITDA, and adjusted free cash flow. In summary, with our strategic asset base, visible financial metrics, and unique contract structure, We have a differentiated value proposition across the midstream sector. This concludes my remarks. We will be happy to answer any questions. I will now turn the call over to the operator.
spk15: Thank you. Ladies and gentlemen, if you have a question, please press star followed by one on your phone. If your question has been answered or you would like to withdraw your question, press pound. Questions will be taken in the order received. Please press star one to begin. And our first question comes from the line of Brian Reynolds with UBS.
spk17: Hi, good morning, everyone. Just to start off on capital allocation comments around, you know, return of capital to shareholders, could you just provide a little bit more color on how we should think about return of cash just given the 5% distribution growth target and leverage below, you know, the stated target of three-point times? Are there any other uses of cash that we should be thinking about over the next, you know, near medium term? Thanks. Sure.
spk04: So in terms of we're in a fortunate position where we have significant financial flexibility, which, as I mentioned in my comments, could include the opportunity for creative opportunities like return of capital. We have multiple options available to us, including potential buybacks from our sponsors and increased dividends of some form. Each of these options certainly have their strengths. We're just at the point now where we're turning free cash flow positive after distribution. This is our first quarter, actually, that we're free cash flow positive after distribution since our IPO, so a real inflection point. And we're just starting to have declining leverage relative to our conservative three times even a leverage target. So as we continue to build our flexibility, we'll continue to evaluate these options, and that will provide opportunities for potential return on capital. And in that, we'll continue to be disciplined in terms of our financial strategy and protecting our balance sheets.
spk17: Great. I appreciate the feedback. Second question here is a little bit more operational focused as it relates to the Bakken. Are you seeing higher GPM on your footprint today and going forward? And if so, could you provide color on whether it's more from reduced flaring or whether the wells are just getting gassier in nature?
spk11: Thanks. Yeah. So, Brian, I'll take that question. This is John. So, yeah, we're definitely seeing higher gas rates. It's primarily a function of gas capture. We're not really seeing the GOR substantially changing at the well. The wells are very stable, really strong-producing wells, both on the oil and gas side, and it's really just more of a function of continuing to capture more gas. We've installed a lot of compression and processing capacity over the last several years, and that's really kind of opened it up to help us reduce flaring and get the gas into pipe.
spk17: Great. Thanks. And just as a quick follow-up on Northern Border, should we expect any incremental ethane recovery on your footprint due to high BTU content concerns? And just any commentary around how the HESS-HESM relationship looks to solve the issue long-term? Thanks.
spk11: Yeah, sure. So obviously the HESS and HESM relationship is outstanding. I mean, we work very close together with our upstream partner, We're pretty much in any and all development decision-making processes and participating in that, and the system is fully integrated. To your point on ethane, you know, again, one of kind of our unique strategic advantages is our gas plant at Tioga. It has full ethane extraction capability, and we actually deliver that ethane to Canada up through the Vantage pipeline to NOVA. Overall, that... capacity has really been great for us, and it's provided an outlet for our ethane through the Tioga gas plant. So from our perspective, we really don't see any constraints going into the northern border. In fact, with our BTU content of our residue gas going in, northern border is able to use our lower BTU content gas to blend in some of the higher BTU content gas they've got in the basin. So overall, we're actually very well positioned to support HIFS.
spk17: Super helpful. Thank you, everyone. Have a great day. You too, Brian. Thanks.
spk15: Thank you. Our next question comes from the line of Jeremy Onet with J.P. Morgan.
spk16: Hi, guys. This is Vinay Onet with J.P. Morgan. I just wanted to clarify a bit on health policy, but on the point that you talked about project data and the latest share about fourth quarter and potentially Yeah, sorry to interrupt you here, but you're breaking up really bad. I could not understand your question at all. Do you mind repeating the question again, please? Sorry, I just thought to ask if HES adding new rig activity would help any upside in 2022?
spk11: Sure. Yeah, I think I understand your question. So you're asking about HES bringing on the second rig and potentially adding additional rigs and upside into 2022. So just a reminder, you know, for 2021 and a good portion of 2022, we're kind of, we're at our MVC levels. So So from that perspective, it's very predictable. As we roll into 2023 and as HESS continues to evaluate the opportunity to bring additional rigs on, just as a reminder, HESS brought on the second rig in February, so we're going to start to see additional wells coming out of that rig line later this year. And as Greg mentioned in the earnings call earlier, they're expecting the exit rate to be between 170,000 and 175,000 barrels of oil per day. And then there was some discussion, depending on oil price, the potential to add a third rig in the fourth quarter and then potentially add additional rigs later on depending on oil price. And again, the way Hess is focusing on the Bakken is really kind of leveraging it as a cash engine to generate cash for the company. So from our perspective, we're well positioned to support Hess's growth. That's part of the reason why we're making the further investment in gas capture and water gathering and disposal systems. to help HESS as it looks forward to growing. So we're well positioned to support the growth. We see some increased activity coming on from the second rig, and hopefully prices stabilize and continue up, and we'll continue to see additional opportunity to bring a third and potentially a fourth rig on. But again, we're fully integrated with the upstream and working with them on the development activity.
spk16: Thank you. Just one side here. Have they gained any third-party business insurance to DAPL shutdown?
spk11: Sorry, I heard you say something about third-party and DAPL. Can you repeat the question again?
spk16: Sorry, my question is given the shutdown, So I just want to understand if there is any incremental activity around the rail community.
spk11: Okay. I'm still having trouble hearing you, but I think you were asking about third-party activity. And I'll just make a general comment about third parties, that similar to HESA's perspective, we are seeing some additional activities from third parties. And again, as we've talked about previously, we're piped up to support those third-party activities. As we built our forecast and as we saw the first quarter of 2021, we're expecting gas to be at about 10% of total throughput volumes and oil to be approximately 15%. Now, again, there's opportunity for upside there as we continue to evaluate and look at growth from third parties, but that's what our long-term forecast is based on. And then I think you asked a question about DAPL. I'll just make another general comment on DAPL for everybody on the call. Overall, HESS has long-term contracts in place and will have no problem operating even in an environment where DAPL is constrained or shut down. And then just a reminder, we have our rail terminal as well that's continued to operate throughout the duration of the downturn. It's both a crude oil terminal but also an NGL terminal for us as well. And we're well-positioned to support HESS on whatever it needs. We can get HESS access to pipe, but we can also get HESS and third parties access to our REL terminal as well.
spk13: Okay, thank you.
spk15: Thank you. And our next question comes from the line of Spiro Dumas with Credit Suisse.
spk05: Doug Irwin on First Bureau.
spk06: Thanks for the question.
spk05: Just one for me. I wanted to ask about the recent secondary from the sponsors. Just curious if there's been any indication that that could be part of a broader strategy moving forward where maybe we see some additional offerings adding some liquidity to the Class A shares. And then you mentioned the potential for buybacks directly from the sponsors. Just curious if that was something that was discussed when this offering was announced.
spk04: Sure. Yeah, I mean, Hess and JIP have been very disciplined. This was the first secondary offering of any kind since the IPO in 2017. As you know, the proceeds relative to Hess and JIP were relatively small for them, but the objective was to increase the public float Certainly we did that by increasing the public vote by about 40%. Really beyond that, I would say in terms of offering, HES and GIP remain disciplined investors and really see the long-term value of HES midstream. In terms of buybacks, I would say similar in that sense, of course, buyback from the sponsors only, which is what we would do in that that we've talked about. That would, again, be based on HES and GIP seeing a value proposition for that.
spk05: Okay, got it. That's all for me. Thanks for the time.
spk12: Okay, thank you.
spk15: Thank you very much. This concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.
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