Hess Midstream LP — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Financial statements are unaudited. Hess Midstream owns and operates fee-based gathering, processing and storage, and terminaling and export assets, primarily in North Dakota’s Bakken. Comparatives for 2019 were retrospectively adjusted for the acquisition of Hess Infrastructure Partners.
Financial results and key metrics
Amounts are in millions of dollars except per-share, distribution and volume data.
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $269.8 | $190.3 | $560.6 | $379.9 |
| Operating income | $131.8 | $91.2 | $284.6 | $187.0 |
| Net income | $107.8 | $74.4 | $236.8 | $155.2 |
| Net income attributable to Hess Midstream LP | $5.3 | $16.8 | $11.8 | $34.9 |
| Adjusted EBITDA | $172.8 | $126.6 | $368.1 | $256.0 |
| Distributable cash flow | $150.0 | Not clearly provided | $320.3 | Not clearly provided |
| Free cash flow | $94.0 | $41.4 | $232.3 | $136.4 |
| Net cash from operating activities | $177.4 | $149.2 | $317.6 | $251.0 |
- Q2 operating and maintenance expense was $95.0 million (up from $57.9 million); depreciation was $38.9 million (up from $35.4 million). Q2 income from operations was about 48.8% of revenue, compared with 47.9% in the prior-year quarter.
- For the six months, capital expenditures were $135.8 million, including $133.1 million of expansion and $2.7 million of maintenance spending. Cash additions to property, plant and equipment were $147.1 million.
- At June 30, cash was $2.5 million; current assets were $87.9 million and current liabilities $157.8 million. Total assets were $3,323.6 million and total liabilities $1,996.4 million.
- Total debt carrying value was $1,827.7 million. Debt included $800 million of 5.625% notes due 2026, $550 million of 5.125% notes due 2028, a fully drawn $400 million Term Loan A, and $104 million drawn on the $1 billion revolver. The revolver therefore had $896 million of stated capacity not drawn. The company reported compliance with debt covenants.
Material changes versus comparable periods
- Q2 revenue increased $79.5 million year over year. The company attributed growth to increased throughput and tariffs, water services, and pass-through charges. Six-month revenue rose $180.7 million.
- Q2 Adjusted EBITDA increased $46.2 million and operating cash flow increased $28.2 million year over year. Six-month Adjusted EBITDA increased $112.1 million and operating cash flow increased $66.6 million.
- Higher activity and new infrastructure contributed to growth: Q2 gas processing volumes rose 21% and crude oil terminaling volumes rose 17%. Q2 average gas gathering was 307 MMcf/d versus 258; crude oil gathering was 141 Mbbl/d versus 109; gas processing was 289 MMcf/d versus 238; and crude oil terminaling was 144 Mbbl/d versus 123.
- Despite higher consolidated net income, net income attributable to Hess Midstream LP fell to $5.3 million in Q2 from $16.8 million. The filing’s Up-C structure and substantial noncontrolling interest mean consolidated earnings are not the same as earnings attributable to public Class A shareholders.
- Interest expense rose $6.5 million in Q2 and $16.3 million for the six-month period, primarily reflecting the $550 million notes issued in connection with the 2019 restructuring and higher credit-facility borrowings.
Outlook, management commentary and risks
- COVID-19 and lower oil prices sharply reduced drilling activity: Hess cut its Bakken rig count from six to one in Q2, while third-party producers also curtailed activity. Management said minimum-volume commitments and annual fee recalculation mechanisms were expected to cushion volume-related effects, but volumes above contractual minimums could decline.
- Management reduced the 2020 expansion-capital program by 20% and the 2021 program by 55%, citing lower expected well connections and deferred or cancelled compression work. It reduced its targeted annualized distribution growth rate from 15% to 5% and extended that target through 2022.
- The Tioga Gas Plant expansion is expected to add 150 MMcf/d, taking capacity to 400 MMcf/d. Construction was expected to finish by year-end 2020; incremental capacity was expected in 2021. The planned maintenance turnaround was deferred from Q3 2020 to 2021.
- On July 27, 2020, the board declared a Q2 distribution of $0.4363 per Class A share, payable August 14, 2020. This was a 1.2% increase from the preceding quarter and represented 5% annualized growth.
- Revenue and receivables were approximately 100% attributable to Hess, creating significant customer concentration. The company has limited direct commodity-price exposure but remains indirectly exposed through Hess’s production, drilling and development decisions.
- Other stated risks include pandemic-related operating and workforce disruption, lower energy demand and prices, project execution and permitting, environmental and safety obligations, cyber risk, access to capital, and compliance with debt covenants. Environmental remediation reserves totaled $2.8 million; no material legal-contingency accruals were reported, and management considered known matters unlikely to materially affect results.
Important facts for investors to verify
- Whether Hess’s activity, production and volumes remain adequate to support revenues above minimum commitments, and how much cash flow is protected by those commitments.
- Actual spending, timing, cost and commissioning of the Tioga expansion and deferred turnaround, as well as subsequent changes to capital plans.
- Distribution coverage and the assumptions behind non-GAAP distributable cash flow, including the effects of noncontrolling interests and working capital.
- Debt balances, revolver availability, covenant headroom, interest costs and refinancing requirements; reported covenant compliance is as of June 30, 2020.
- Reliance on Hess as the near-total customer and counterparty, and any changes in Hess’s ability to meet its contractual obligations.