Hess Midstream LP — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; financial statements are unaudited. Dollar amounts are in millions unless noted. Hess Midstream owns and operates fee-based gathering, processing, storage, terminaling and water-handling assets, primarily in North Dakota’s Bakken. Nearly all revenue is generated under long-term agreements with Hess Corporation.
Financial and operating performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Total revenue | $305.0 | $312.4 | Down 2.4% |
| Operating income | $188.7 | $195.5 | Down 3.5% |
| Operating margin | 61.9% | 62.6% | Down 0.7 percentage points |
| Consolidated net income | $142.2 | $159.6 | Down 10.9% |
| Net income attributable to Hess Midstream LP | $20.7 | $16.9 | Up 22.5% |
| Basic and diluted EPS | $0.47 | $0.50 basic; $0.49 diluted | Down year over year |
| Adjusted EBITDA | $239.0 | $241.6 | Down 1.1% |
| Distributable cash flow | $196.6 | $211.6 | Down 7.1% |
| Cash from operating activities | $198.7 | $190.6 | Up $8.1 |
| Capital expenditures (accrual basis) | $57.3 | $37.1 | Up $20.2 |
Adjusted EBITDA margin was 78.4%, compared with 77.3% in Q1 2022. Operating and maintenance expense was $62.5, depreciation $47.4, and net interest expense $41.6. Interest expense increased $10.3, mainly due to $400 million of 5.50% notes issued in April 2022 and higher Term Loan A rates.
At March 31, 2023, total assets were $3,578.5, total liabilities $3,140.0, and cash $3.6. Debt had a carrying value of $2,990.1 (fair value $2,884.3). Debt comprised $2.5 billion of senior notes, $400 million Term Loan A and $121 million drawn on the $1.0 billion revolving facility. Nominal revolving capacity remaining was $879 million before any letters of credit or other limitations. The company reported compliance with debt covenants.
Operating cash flow exceeded cash capital spending; financing included a $100 million Class B unit repurchase and distributions of $136.7. Expansion capital expenditures were $54.4 and maintenance capital expenditures $2.9.
Material changes and management commentary
- Revenue declined $7.4, largely because 2023 minimum volume commitment (MVC) levels were lower than 2022 levels while actual throughput was at or above MVCs for several services. Lower terminaling volumes and rail pass-through revenue also contributed. Total operating costs were broadly flat.
- Gas gathering throughput rose 6% to 347 MMcf/d, gas processing rose 7% to 338 MMcf/d, and water gathering rose 10% to 79 MBbl/d. Crude oil gathering fell 8% to 93 MBbl/d; crude oil terminaling fell 4% to 104 MBbl/d.
- Management expects 2023 full-year volumes to be approximately at or above MVCs, followed by growth above current MVC levels in 2024 and 2025. Two compressor stations and related pipelines are under construction, expected to enter service later in 2023 and add 100 MMcf/d of compression capacity in total.
- The quarterly Class A distribution declared for Q1 was $0.5851 per share, payable May 12, 2023. It represents an approximate 2.7% increase from Q4 2022; management cited a target of at least 5% annual distribution growth per share.
- The Partnership repurchased and cancelled 3,619,254 Class B units from its sponsors for approximately $100 million, funded with revolving-credit borrowings. The transaction reduced the sponsors’ noncontrolling interest.
Risks, contingencies and other items
- Customer concentration is substantial: Hess represented approximately 100% of revenue and accounts receivable in both comparative quarters. Fee-based agreements and MVCs mitigate direct commodity-price exposure, but Hess’s production, drilling plans and ability to meet commitments remain important risks.
- A produced-water release from an underground pipeline near Ray, North Dakota, was estimated at approximately 34,000 barrels. The company recorded remediation reserves of $1.1 current and $3.7 noncurrent at March 31, 2023. North Dakota issued a Notice of Violation; no formal enforcement action had been taken, and potential fines or penalties were not clear. Management said a material adverse impact from known matters was remote.
- In the agreements’ secondary terms, certain fees shift to inflation-based adjustments capped at 3% annually, which management notes may provide less downside protection than the initial-term fee recalculation mechanisms.
- The company had no interest-rate hedges at quarter-end. A 15% rate increase or decrease was estimated to change the fair value of fixed-rate debt by approximately $95.2 million or $100.3 million, respectively; fixed-rate cash interest and principal are not affected by rate changes absent early repurchase.
- Management stated that available liquidity sources are expected to cover operations, planned near-term capital spending, debt service, distributions and growth projects. Forward-looking results remain subject to volume, commodity-market, regulatory, environmental, financing and execution risks.
Important facts for investors to verify
- Whether Hess’s production plans and throughput support the company’s 2023 MVC expectations and projected 2024–2025 growth.
- The pace and cost of the two compressor-station projects and whether the planned 100 MMcf/d capacity enters service on schedule.
- Debt levels, floating-rate borrowing costs, remaining revolver availability and covenant headroom after the unit repurchase and distributions.
- Progress on remediation and any formal enforcement action, fines or additional liabilities related to the produced-water release.
- The sustainability of distribution growth and the relationship between distributable cash flow, capital spending and distributions.