Hess Midstream LP - Q2 2024 10-Q Summary
Business Context and Reporting Period
This summary covers the unaudited financial results for Hess Midstream LP for the quarter and six months ended June 30, 2024. The Company is a fee-based, growth-oriented limited partnership owning and operating midstream assets primarily in the Bakken and Three Forks shale plays in North Dakota. Operations are organized into three segments: Gathering, Processing and Storage, and Terminaling and Export. The Company generates substantially all revenues through long-term fee-based commercial agreements with Hess Corporation, featuring minimum volume commitments.
Key Financial Metrics
| Metric (in millions) | Q2 2024 | Q2 2023 | YTD 2024 | YTD 2023 |
|---|---|---|---|---|
| Total Revenues | $365.5 | $324.0 | $721.1 | $629.0 |
| Net Income (Consolidated) | $160.3 | $147.9 | $322.2 | $290.1 |
| Net Income Attributable to Hess Midstream LP | $49.5 | $25.1 | $94.1 | $45.8 |
| Adjusted EBITDA | $276.5 | $246.8 | $551.0 | $484.5 |
| Net Cash Provided by Operating Activities | $271.6 | $204.6 | $456.9 | $403.3 |
| Capital Expenditures (Cash Basis) | $69.5 (Q2) | $52.1 (Q2) | $118.7 (YTD) | $107.3 (YTD) |
| Long-Term Debt | $3,442.8 | $3,198.9 | $3,442.8 | $3,198.9 |
| Cash and Cash Equivalents | $99.6 | $3.0 | $99.6 | $3.0 |
Note: Adjusted EBITDA is a non-GAAP measure. Net income attributable to Hess Midstream LP excludes noncontrolling interest.
Material Changes vs. Prior Period
- Revenue Growth: Q2 2024 revenues increased $41.5 million (12.8%) compared to Q2 2023, driven primarily by higher physical volumes across all segments. Gas gathering volumes increased 19%, crude oil gathering 23%, and water gathering 43%. This growth was partially offset by a one-time $8.0 million revenue reduction related to setting 2024 tariff rates.
- Profitability: Net income attributable to Hess Midstream LP more than doubled to $49.5 million from $25.1 million in the prior year quarter. This increase is largely due to higher operating income and a change in ownership structure (increased public ownership) which reduced the noncontrolling interest allocation.
- Expenses: Operating costs increased due to higher maintenance expenses, pass-through costs, and depreciation from new assets. Interest expense rose $5.9 million, primarily due to the issuance of $600 million in new senior notes in May 2024 and higher interest rates on credit facilities.
- Balance Sheet: Cash and cash equivalents increased significantly to $99.6 million from $5.4 million at year-end 2023, supported by strong operating cash flows and the issuance of new debt. Total debt increased to $3.46 billion.
Outlook, Management Commentary, and Risks
- Distribution Increase: On July 29, 2024, the Board declared a quarterly cash distribution of $0.6677 per Class A Share, an increase of $0.0161 from the first quarter. Management targets at least 5% growth in annual distributions through 2026.
- Equity Transactions: During the period, Sponsors sold Class A shares in two public offerings (February and May 2024), increasing public ownership from ~29.8% to ~41.0%. The Company also repurchased Class B units from Sponsors totaling $200 million in the first half of 2024.
- Capital Projects: Capital expenditures are focused on expanding compression capacity and gas capture infrastructure, including two new compressor stations expected to be in service in 2025.
- Risks and Contingencies:
- Concentration Risk: 98% of revenues are derived from Hess Corporation. While contracts include minimum volume commitments, volumes above these commitments are subject to market volatility and Hess's production levels.
- Environmental: Ongoing remediation for a produced water release in North Dakota; reserves for remediation liabilities were $5.5 million as of June 30, 2024.
- M&A Risk: The Company highlights risks associated with the proposed merger between Hess Corporation and Chevron Corporation, including regulatory approvals, integration challenges, and potential disruption to operations.
Key Facts for Investor Verification
- Revenue Concentration: Verify the stability of the 98% revenue reliance on Hess Corporation and the impact of the transition to the "Secondary Term" fee structure (inflation-based) on future cash flow stability.
- Debt Service Capacity: Assess the impact of the new $600 million 6.5% senior notes and higher interest rates on future leverage ratios and distribution coverage, given the Company's requirement to distribute all available cash.
- Volume Growth Sustainability: Confirm whether the significant year-over-year volume increases (e.g., 43% in water gathering) are sustainable or driven by temporary catch-up production.
- Noncontrolling Interest Dynamics: Monitor the trend of the noncontrolling interest deficit and the impact of future Class B unit repurchases on the net income attributable to public Class A shareholders.
- Chevron Merger Impact: Evaluate the potential operational and strategic changes resulting from the pending Hess-Chevron merger, specifically regarding capital allocation and contract renewals.