Business context and reporting period
Hess Midstream LP filed this Form 10-K for the fiscal year ended December 31, 2023. It owns and operates fee-based gathering, processing, storage, terminaling and export assets, primarily in North Dakota’s Bakken, and generates substantially all revenue from Hess Corporation under long-term commercial agreements. The filing reports full-year results, not standalone fourth-quarter financial results.
Financial and operating results
| Metric | FY 2023 | FY 2022 |
|---|---|---|
| Revenue and other income | $1,348.6 million | $1,275.2 million |
| Operating income | $816.9 million | $791.2 million |
| Consolidated net income | $607.7 million | $620.6 million |
| Net income attributable to Hess Midstream LP | $118.6 million; $2.11 basic EPS | $83.9 million; $2.03 basic EPS |
| Adjusted EBITDA | $1,022.2 million | $982.9 million |
| Cash from operating activities | $866.4 million | $861.1 million |
| Capital expenditures | $245.7 million | $231.8 million |
Revenue increased 5.8%; Adjusted EBITDA, a non-GAAP measure, increased 4.0%. Consolidated net income declined 2.1%, while income attributable to Hess Midstream LP rose from $83.9 million to $118.6 million, reflecting ownership changes as well as operating performance. Operating margin was approximately 60.6% of revenue; Adjusted EBITDA margin was approximately 75.8%. Operating cash flow less cash additions to property, plant and equipment was approximately $642.9 million.
Throughput grew year over year: gas gathering 14% to 381 MMcf/d, gas processing 15% to 367 MMcf/d, crude oil gathering 4% to 100 MBbl/d, crude oil terminaling 12% to 115 MBbl/d, and water gathering 28% to 95 MBbl/d. Management attributed growth mainly to Hess drilling, higher gas capture and third-party volumes. Crude oil gathering and terminal volumes nonetheless remained below prior-year MVC levels.
Debt, liquidity and distributions
At year-end, total debt carrying value was $3,211.4 million, versus $2,885.6 million a year earlier; cash was $5.4 million. Debt comprised $2.5 billion of fixed-rate senior notes, $397.5 million under the Term Loan A facility and $340.0 million drawn on the $1.0 billion revolver. Approximately $660 million of revolver capacity remained available, subject to facility terms. The term loan and revolver mature in July 2027; senior notes mature from 2026 through 2030. The company reported compliance with debt covenants. A 100-basis-point change in variable rates would affect annual interest expense by approximately $7.4 million at year-end debt levels.
Net interest expense increased to $179.0 million from $149.3 million, primarily due to higher rates and revolving borrowings. Current assets of $136.8 million were below current liabilities of $210.2 million; liquidity therefore depends substantially on operating cash flow and access to financing. The company paid $127.5 million in distributions to Class A shareholders in 2023 and $429.5 million to noncontrolling interests. The fourth-quarter distribution of $0.6343 per Class A share was paid in February 2024; management reported it was 11.4% above the year-earlier fourth-quarter rate.
Material changes, outlook and risks
- Higher tariff rates contributed $86.7 million to the year-over-year revenue increase, while lower crude oil physical volumes versus prior-year MVC levels were a partial offset. Operating and maintenance costs rose $33.4 million, including maintenance, railcar inspection and allocated Hess costs; depreciation rose $11.2 million.
- The company repurchased 13.64 million Partnership Class B units from the Sponsors for $400 million during 2023, financed with revolver borrowings. Sponsors also sold shares in secondary offerings and received approximately $662.2 million in net proceeds; the company received no proceeds from those offerings.
- Selected commercial agreements were renewed for a secondary term from January 1, 2024 through December 31, 2033. For most renewed systems, fee recalculation gives way to inflation-based adjustments capped at 3% annually; MVCs continue. Certain terminaling and water gathering rates remain subject to annual rate redetermination. Management notes the secondary-term fee structure may provide less downside protection.
- 2024–2026 MVCs are specified in the filing, and management expects volumes across systems to exceed established MVCs in those years. Nominations and MVCs were based on Hess’s current four-rig Bakken program. Completed and planned compressor projects are intended to increase capacity and gas capture; a station expected online in early 2024 adds about 30 MMcf/d, while two further stations are planned for 2025 with a combined expected 85 MMcf/d.
- Hess’s proposed merger with Chevron, announced October 2023, remained subject to shareholder, regulatory and other closing conditions. Chevron would acquire Hess’s 37.8% interest in the company and associated board appointment rights; the filing says the commercial contract structure would remain in place. Merger delays, failure to close, integration and governance conflicts are identified risks.
- A 2022 produced-water pipeline release was estimated at approximately 34,000 barrels and remediation and monitoring continued. At December 31, 2023, recorded environmental remediation reserves totaled $7.0 million. In January 2024, North Dakota DEQ proposed an administrative consent agreement including a $445,000 penalty and further pipeline monitoring; the company was evaluating it. Management said known matters were not expected to have a material adverse effect.
- Other material exposures include dependence on Hess for approximately 99% of 2023 revenue, Bakken concentration, Hess production and commodity-price effects on volumes, operating incidents and severe weather, cyber risk, environmental and methane regulation, permits, and refinancing or interest-rate risk. No material cybersecurity incident was identified for 2023. The auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether Hess’s four-rig plan and forecast production support throughput above MVCs, particularly given the gap between 2023 physical volumes and prior-year MVC levels in some systems.
- Remaining revolver availability, covenant headroom, debt maturities and the sensitivity of cash available for distributions to higher interest costs.
- The realized economics of secondary-term fee resets, inflation caps and MVC shortfall credits, and the status of rate redeterminations for terminaling and water systems.
- The resolution and ultimate cost of the produced-water release, DEQ’s proposed consent agreement and any additional remediation or monitoring obligations.
- The status and effects of the Chevron-Hess merger, including approvals, timing, and any changes to customer, governance or capital-allocation arrangements.
- The company’s ability to diversify revenue: direct third-party services were only $8.0 million in 2023, while Hess-related revenue remained approximately 99% of total revenue.