Hess Midstream LP — Q3 2020 Form 10-Q
Business context and reporting period. The filing covers the three and nine months ended September 30, 2020. Hess Midstream owns and operates fee-based gathering, processing and storage, and terminaling and export assets, primarily in North Dakota’s Bakken. The 2019 comparative figures were retrospectively adjusted for the December 2019 acquisition of Hess Infrastructure Partners and restructuring.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Change |
|---|---|---|---|
| Total revenue | $264.8 million | $214.9 million | +23% |
| Operating income | $137.2 million | $99.3 million | +38% |
| Net income | $115.8 million | $87.4 million | +33% |
| Net income attributable to Hess Midstream LP | $5.6 million; $0.31 per Class A share | $19.1 million | Lower, primarily reflecting the post-restructuring ownership structure |
| Adjusted EBITDA | $181.6 million | $136.3 million | +33% |
| Distributable cash flow | $156.2 million | Not directly comparable | 2019 measure reflected the prior ownership structure |
| Free cash flow | $115.2 million | $14.0 million | Higher |
For the nine months ended September 30, revenue was $825.4 million versus $594.8 million, net income was $352.6 million versus $242.6 million, Adjusted EBITDA was $549.7 million versus $392.3 million, and operating cash flow was $467.2 million versus $334.4 million. Nine-month capital expenditures were $202.2 million, including $195.7 million of expansion spending and $6.5 million of maintenance spending.
- Q3 volumes: Gas gathering averaged 316 MMcf/d, crude oil gathering 138 MBbl/d, gas processing 296 MMcf/d, crude oil terminaling 141 MBbl/d, NGL loading 12 MBbl/d and water gathering 78 MBbl/d. Compared with Q3 2019, management reported gas processing up 14% and crude oil terminaling up 8%.
- Balance sheet at September 30: Cash was $3.0 million; total debt carrying value was $1.903 billion, including $7.5 million current maturities. Total assets were $3.372 billion and total liabilities $2.053 billion. Current assets of $103.7 million were below current liabilities of $132.3 million.
- Debt and liquidity: Debt included $800 million of 5.625% senior notes due 2026, $550 million of 5.125% notes due 2028, a fully drawn $400 million Term Loan A, and $178 million drawn on a $1 billion revolving facility. The company reported compliance with debt covenants. Its total debt fair value was approximately $1.939 billion.
- Cash distributions: Q3 distribution declared was $0.4417 per Class A share, payable November 13, 2020; this was a 1.2% increase from the prior quarter.
Material changes versus the prior comparable period
- Q3 revenue growth reflected higher gathering and processing volumes, higher tariff rates, and water services revenue. Gathering revenue rose $37.0 million and processing and storage revenue rose $16.2 million; terminaling and export revenue declined $3.3 million, largely because rail transportation pass-through revenue was lower.
- Q3 operating and maintenance expense increased $12.0 million to $83.9 million, while depreciation increased $3.5 million to $39.5 million. Interest expense rose $10.8 million to $23.2 million, primarily due to senior notes issued in connection with the restructuring and higher credit-facility borrowings.
- Q3 revenue was nearly all attributable to Hess-related commercial agreements. Hess accounted for approximately 100% of revenue and accounts receivable in the periods reported.
- Cash and cash equivalents decreased from $3.3 million at December 31, 2019 to $3.0 million at September 30, 2020. Long-term debt increased from $1.754 billion to $1.896 billion, with $7.5 million of current maturities also reported at quarter-end.
Outlook, management commentary and risks
- Management said COVID-19 and lower oil prices had reduced activity in the Bakken; Hess cut its rig count from six to one in Q2 2020, and third-party producers also curtailed activity. Minimum-volume commitments and annual fee recalculation mechanisms are expected to cushion volume-related effects, but volumes above contractual minimums may decline.
- The company reduced its 2020 expansion-capital program by 20% and its 2021 program by 55%, and lowered its targeted annualized distribution growth rate from 15% to 5% through 2022.
- The Tioga Gas Plant expansion, planned to add 150 MMcf/d for expected capital expenditures of approximately $150 million, was expected to be substantially constructed by year-end 2020. Incremental capacity was expected in 2021 after a deferred maintenance turnaround and pipeline tie-ins.
- Management stated that available cash, operating cash flow, the revolver and potential debt or equity issuance were expected to fund operations, planned near-term capital spending, debt service, distributions and potential growth investments. No specific revenue or earnings guidance was provided in the filing text.
- Key risks include Hess’s dominant customer concentration and ability to meet drilling and development plans, oil and gas price-driven changes in production, COVID-19 effects, project execution and permitting, environmental and safety obligations, access to capital, and compliance with debt covenants. The company had no interest-rate derivatives outstanding at quarter-end.
- Environmental remediation reserves were $4.3 million in total at September 30, 2020. The company reported no material accrued legal-contingency liabilities and said known matters were not expected to have a material adverse effect based on available information.
Important facts for investors to verify
- How Hess production, rig activity and contractual minimum-volume commitments affect actual throughput and cash generation.
- Whether the Tioga expansion and deferred turnaround meet the stated timing and cost expectations, and how the 2020–2021 capital reductions affect growth.
- Debt balances, borrowing availability, covenant headroom, interest expense and capacity to fund distributions alongside capital spending.
- The sustainability of distributions and the reduced 5% annualized distribution-growth target through 2022.
- Comparability of 2019 figures: results were recast for the HIP acquisition, and distributable cash flow reflects changed ownership and distribution arrangements after restructuring.
- Exposure to Hess as the source of approximately all revenue and receivables, and developments in environmental reserves or legal proceedings.