Hess Midstream LP — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Unless otherwise noted, financial figures are in millions of dollars. The interim statements are unaudited.
Business context
Hess Midstream owns and operates fee-based gathering, processing and storage, and terminaling and export assets, primarily in North Dakota’s Bakken. Substantially all revenue is generated under long-term agreements with Hess Corporation; Hess represented approximately 100% of revenue and accounts receivable. The contracts include minimum volume commitments (MVCs), which help support cash flows when throughput falls below committed levels.
Key financial and operating metrics
| Metric | Q2 2022 | Q2 2021 | Change |
|---|---|---|---|
| Total revenue | $313.4 | $294.8 | +6.3% |
| Operating income | $195.3 | $185.6 | +5.2% |
| Operating margin | 62.3% | 63.0% | Down 0.7 percentage points |
| Net income | $151.8 | $162.0 | −6.3% |
| Net income attributable to Hess Midstream LP | $22.0 | $11.0 | +100% |
| Basic / diluted earnings per Class A share | $0.51 / $0.50 | $0.44 / $0.44 | Higher |
| Adjusted EBITDA | $242.6 | $230.2 | +5.4% |
| Distributable cash flow | $206.2 | $207.5 | −0.6% |
| Operating cash flow | $213.2 | $224.6 | −5.1% |
Q2 Adjusted EBITDA margin was 77.4%, compared with 78.1% a year earlier. Distributable cash flow and Adjusted EBITDA are non-GAAP measures as defined by the company.
| Six-month measure | 2022 | 2021 | Change |
|---|---|---|---|
| Total revenue | $625.8 | $583.6 | +7.2% |
| Net income | $311.4 | $321.6 | −3.2% |
| Adjusted EBITDA | $484.2 | $456.9 | +6.0% |
| Distributable cash flow | $417.8 | $412.1 | +1.4% |
| Operating cash flow | $403.8 | $390.0 | +3.5% |
| Cash additions to property, plant and equipment | $110.7 | $52.7 | Higher |
Balance sheet and debt at June 30: Cash was $2.4; current assets were $158.4 and current liabilities $152.5. Long-term debt was $2,937.4, with no current maturities shown on the balance sheet. Debt fair value was approximately $2,691.7. The company reported compliance with debt covenants. The $1.0 billion revolving facility had $91.0 outstanding, alongside $380.0 outstanding under the Term Loan A facility.
Distribution: The board declared a Q2 distribution of $0.5559 per Class A share, payable August 12, 2022, approximately 1.2% above Q1. The partnership also planned an equal per-unit distribution to Sponsors.
Material changes and drivers
- Revenue increased mainly from higher MVC levels and tariff rates. MVC shortfall fees were $57.7 in Q2, versus $18.7 a year earlier, partly offsetting lower physical throughput.
- Severe-weather-related power outages caused unplanned production shut-ins in April and May. Q2 volumes fell year over year: crude oil gathering 21%, terminaling 20%, water gathering 12%, gas gathering 5%, and gas processing 4%.
- Operating costs and depreciation rose with expanding gathering infrastructure and assets placed in service. Q2 interest expense increased $14.5 to $37.4, mainly reflecting debt issued in 2021 and 2022; higher interest and taxes contributed to lower consolidated net income even as Adjusted EBITDA rose.
- Six-month expansion capital expenditures were $106.9, versus $67.3 a year earlier; maintenance capital expenditures were $1.9. Cash financing included $400.0 of new senior notes and a $400.0 Class B unit repurchase from the Sponsors. The Sponsors’ separate April share offering generated no proceeds for the company.
- A deferred tax asset of $86.4 was recognized in connection with ownership changes from the equity offering and unit repurchase transactions.
Outlook, risks and contingencies
- One of two planned greenfield compressor stations entered service in March; the second was under commissioning and expected online in Q3 2022. Together, the stations were expected to add 85 MMcf/d of capacity in 2022, expandable to 130 MMcf/d.
- Hess announced a fourth operated Bakken drilling rig in July 2022. Management expected volumes to exceed MVC levels in 2023 and 2024, while noting that volumes above MVCs could decline to contractual minimums if market conditions weaken.
- On July 14, 2022, the credit facilities were amended: maturity extended from December 2024 to July 2027, the benchmark changed from LIBOR to SOFR, and the accordion feature increased to as much as $750.0 subject to lender commitment. The existing $380.0 Term Loan A was retired and replaced with a fully drawn $400.0 facility; the partnership received $20.0 cash at closing.
- Management said available liquidity sources should cover operating needs, planned near-term capital spending, debt service, distributions and growth projects. This outlook depends on operating cash generation and continued access to financing.
- Direct commodity-price exposure is described as minimal because the company generally does not own the commodities it handles. Commodity prices can still affect Hess’s drilling, production and delivered volumes. The company also cited weather, customer performance, capital execution, regulation, environmental and safety obligations, cyber or operational disruptions, and capital-market access as risks.
- Environmental remediation reserves totaled $5.1 at June 30, 2022. The company reported no material accrued legal-contingency liabilities and said known matters were not expected to materially affect its financial condition, results or cash flows.
Most important facts for investors to verify
- Whether Bakken throughput recovers after the severe-weather shut-ins, and how future volumes compare with MVCs and management’s 2023–2024 expectations.
- Hess concentration: approximately 100% of revenue and receivables depend on one affiliate customer, including its ability to meet nominations and obligations.
- Debt, interest costs and liquidity following the April notes issuance and July credit-facility refinancing; also monitor covenant compliance and facility availability.
- Whether expansion spending and new compressor capacity deliver planned volumes and returns without materially increasing operating costs.
- Distribution coverage: Q2 distributable cash flow was $206.2 against approximately $131.8 of declared Class A and Class B distributions for the quarter; confirm subsequent cash generation and capital needs.
- Potential change in downside protection during the commercial agreements’ secondary terms, when specified fees shift to inflation-based adjustments capped at 3% annual increases.