Hess Midstream LP — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023; unaudited. Hess Midstream owns and operates fee-based gathering, processing, storage, terminaling and water infrastructure, primarily in North Dakota’s Bakken. Nearly all revenue and accounts receivable are tied to Hess Corporation, its sponsor and customer.
Financial performance and condition
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | $324.0 million | $313.4 million | $629.0 million | $625.8 million |
| Operating income | $198.1 million | $195.3 million | $386.8 million | $390.8 million |
| Consolidated net income | $147.9 million | $151.8 million | $290.1 million | $311.4 million |
| Net income attributable to Hess Midstream LP | $25.1 million | $22.0 million | $45.8 million | $38.9 million |
| Basic earnings per Class A share | $0.50 | $0.51 | $0.97 | $1.01 |
| Adjusted EBITDA | $248.1 million | $242.6 million | $487.1 million | $484.2 million |
| Distributable cash flow | $202.6 million | $206.2 million | $399.2 million | $417.8 million |
| Net cash from operating activities | $204.6 million | $213.2 million | $403.3 million | $403.8 million |
Q2 operating margin was approximately 61% of revenue; Adjusted EBITDA margin was approximately 77%. Operating and maintenance expense was $73.1 million and depreciation was $47.0 million in the quarter.
At June 30, 2023, cash was $3.0 million, current assets $114.1 million (including $110.3 million of affiliate receivables), and current liabilities $148.8 million. Debt carrying value was $3.069 billion. The debt fair value was approximately $2.924 billion. The Partnership had $2.5 billion principal amount of senior notes, a $400 million Term Loan A, and $198 million drawn on its $1.0 billion revolving facility. It reported compliance with debt covenants.
Material changes versus comparable periods
- Q2 revenue increased $10.6 million year over year, mainly from higher tariffs; lower minimum-volume-commitment (MVC) shortfall fees partly offset the increase. Consolidated net income declined $3.9 million, while Adjusted EBITDA rose $5.5 million.
- Interest expense increased $6.4 million in Q2 and $16.7 million for the first half, primarily from higher rates on floating-rate facilities and, for the first half, the 2022 senior-note issuance. Operating expenses and depreciation also increased.
- Q2 throughput rose year over year: gas processing 23%, gas gathering 19%, water gathering 34%, crude oil terminaling 16%, and crude oil gathering 7%. Management cited higher production, third-party volumes, improved gas capture and recovery from severe weather in Q2 2022.
- First-half distributable cash flow fell to $399.2 million from $417.8 million despite nearly flat operating cash flow. First-half expansion and maintenance capital expenditures totaled $109.4 million, versus $108.8 million.
Outlook, management commentary and risks
- Management expects full-year 2023 volumes to be approximately at or above MVC levels, followed by growing volumes above current MVC levels in 2024 and 2025. These are expectations, not guaranteed results.
- Two compressor stations and related pipeline infrastructure are under construction and expected to enter service later in 2023, adding approximately 100 MMcf/d of gas compression capacity. The six-month capital program primarily supported compression and gas-capture capacity.
- The board declared a Q2 distribution of $0.6011 per Class A share, payable August 14, 2023. This is a 2.7% sequential increase; management described the distribution policy as targeting at least 5% annual growth, alongside additional increases supported by excess free cash flow.
- Long-term fee-based contracts and MVCs limit direct commodity-price exposure, but production, volumes and growth remain indirectly exposed to commodity prices and Hess’s drilling and development plans. The fee structure in contract secondary terms may provide less downside protection.
- Hess accounted for approximately 100% of revenue and receivables. This concentration creates customer and counterparty dependence despite contractual protections.
- An estimated 34,000 barrels of produced water were released from an underground pipeline in North Dakota in August 2022. Remediation and monitoring continue. North Dakota issued a Notice of Violation, but had not taken formal enforcement action as of the filing; potential fines or penalties were not clear. Recorded environmental remediation reserves were $4.4 million in total at June 30, 2023. The Company stated that a material adverse outcome was remote based on information then available.
- The Partnership repurchased $200 million of Class B units from the sponsors during the first half, funded with revolving-credit borrowings. Sponsors also sold Class A shares for net proceeds of approximately $333.4 million; the Company received no proceeds. Ownership transactions led to recognition of a $91.5 million deferred tax asset in the first half.
Investor verification priorities
- Track Hess’s production plans, actual throughput versus MVCs, and the extent to which third-party volumes diversify the customer base.
- Verify 2023 volume and compressor-project progress, including timing, costs and realized incremental throughput.
- Monitor floating-rate debt exposure, interest expense, leverage and remaining revolver capacity; management reported covenant compliance at quarter-end.
- Assess whether operating cash flow and distributable cash flow support distributions, debt service, capital spending and further unit repurchases.
- Follow remediation progress and any formal enforcement action, penalties or changes to environmental reserves related to the produced-water release.