Hess Midstream LP — Q1 2024 Form 10-Q
Business context and reporting period
Unaudited results cover the three months ended March 31, 2024, compared with Q1 2023. Hess Midstream owns and operates fee-based gathering, processing, storage, terminaling and export assets, primarily in North Dakota’s Bakken. Most revenue is generated under long-term agreements with Hess Corporation.
Financial and operating performance
| Metric | Q1 2024 | Q1 2023 |
|---|---|---|
| Total revenue | $355.6 million | $305.0 million |
| Operating income | $222.0 million | $188.7 million |
| Consolidated net income | $161.9 million | $142.2 million |
| Net income attributable to Hess Midstream LP | $44.6 million | $20.7 million |
| Basic / diluted earnings per Class A share | $0.60 / $0.59 | $0.47 / $0.47 |
| Adjusted EBITDA | $275.8 million | $239.0 million |
| Cash from operating activities | $185.3 million | $198.7 million |
| Capital expenditures on accrual basis | $35.2 million | $57.3 million |
Revenue rose 16.6%, while operating income increased 17.6% and Adjusted EBITDA increased 15.4%. Operating margin was approximately 62.4%, versus 61.9% in Q1 2023. Operating and maintenance expense increased to $78.1 million from $62.5 million; depreciation was $49.8 million versus $47.4 million; and net interest expense rose to $48.5 million from $41.6 million. Income tax expense was $14.3 million, compared with $6.5 million.
Throughput increased year over year: gas gathering and processing each rose 16%, crude oil gathering 14%, crude oil terminaling 13%, and water gathering 47%. Management attributed growth primarily to higher production, third-party volumes and gas capture.
Balance sheet, debt and liquidity
At March 31, 2024, cash was $4.2 million; current assets were $139.3 million and current liabilities $157.2 million. Total debt carrying value was $3,325.4 million, compared with $3,211.4 million at December 31, 2023; debt fair value was approximately $3,249.1 million. The Partnership had $455 million drawn on its $1.0 billion revolving facility and $395 million outstanding under its $400 million Term Loan A facility. The credit facilities mature in July 2027. The Partnership reported compliance with its debt covenants.
Operating cash flow declined $13.4 million, mainly due to working-capital movements and higher expenses, partially offset by increased revenue. Cash used in investing was $54.8 million, all for property, plant and equipment. Financing used $131.7 million, including $100 million for Class B unit repurchases and distributions of $50.7 million to shareholders and $92.9 million to noncontrolling interests.
Material changes, outlook and risks
- Higher physical volumes drove revenue growth; MVC shortfall fees fell to $0.1 million from $4.3 million as volumes were generally at or above commitments. Approximately 98% of Q1 2024 revenue and customer receivables were attributable to Hess and its affiliates, versus 100% in Q1 2023.
- Most commercial agreements entered their secondary terms effective January 1, 2024, generally through December 31, 2033. For applicable agreements, fee recalculation mechanisms are replaced by inflation-based adjustments capped at 3% annually; minimum volume commitments continue.
- Management expects volumes to be above established minimum volume commitments in 2024, 2025 and 2026. No specific full-year financial guidance is stated in the provided filing text. Capital spending in 2024 is focused on two compressor stations and related pipeline infrastructure expected to enter service in 2025.
- The board declared a Q1 2024 distribution of $0.6516 per Class A share, payable May 14, 2024. This is approximately 2.7% above Q4 2023 and reflects management’s target of at least 5% annual distribution growth.
- GIP’s February share offering raised approximately $377.5 million for GIP; Hess Midstream received no proceeds. The Partnership separately repurchased approximately $100 million of Class B units, funded with revolver borrowings. Public ownership rose from approximately 29.8% to 35.3% on a consolidated basis.
- Risks include dependence on Hess, production and commodity-market conditions, third-party volume growth, interest rates, access to capital, operational disruptions and regulation. Management notes that the secondary-term fee structure may provide less downside protection than the initial-term structure. Hess’s proposed merger with Chevron is cited as a source of uncertainty.
- A produced-water release in North Dakota is undergoing remediation and monitoring. Estimated remediation reserves were $2.2 million current and $3.8 million noncurrent. North Dakota proposed a consent agreement with a $0.4 million penalty and additional pipeline monitoring; the company was evaluating it. Management said known matters were not expected to materially adversely affect the company.
Most important facts for investors to verify
- How Hess production, third-party volumes and minimum volume commitments support throughput and revenue, given the high customer concentration.
- Debt levels, borrowing costs and covenant headroom, particularly as the revolver funded the unit repurchase and interest expense increased.
- Operating cash flow and working-capital trends relative to distributions, capital spending and the partnership’s obligation to distribute available cash.
- Whether the secondary-term fee escalators and minimum volume commitments sustain cash flows if throughput or market conditions weaken.
- Final terms and costs of the proposed North Dakota consent agreement and any changes in remediation reserves.
- Progress, timing and potential operational effects of the Chevron-Hess merger process and related uncertainties.