Business context and reporting period
Hess Midstream LP’s unaudited Form 10-Q covers the quarter and nine months ended September 30, 2023. The partnership owns and operates Bakken-focused gathering, processing, storage, terminaling, export and water-handling assets. It earns substantially all revenue under long-term fee-based agreements with Hess Corporation; Hess represented approximately 100% of revenue and receivables.
Financial performance and liquidity
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total revenue | $363.1 million | $334.8 million | $992.1 million | $960.6 million |
| Operating income | $220.0 million | $204.0 million | $606.8 million | $594.8 million |
| Consolidated net income | $164.8 million | $159.4 million | $454.9 million | $470.8 million |
| Net income attributable to Hess Midstream LP | $35.3 million | $23.2 million | $81.1 million | $62.1 million |
| Adjusted EBITDA | $271.0 million | $253.6 million | $758.1 million | $737.8 million |
| Distributable cash flow | $224.1 million | $214.8 million | $623.3 million | $632.6 million |
| Cash from operating activities | $215.5 million | $234.7 million | $618.8 million | $638.5 million |
Q3 operating margin was approximately 60.6% and Adjusted EBITDA margin approximately 74.6% (calculated from reported figures). Q3 basic and diluted earnings per Class A share were $0.57, versus $0.53 a year earlier. Nine-month basic EPS was $1.56 versus $1.54.
At September 30, cash was $3.3 million, current assets $137.7 million and current liabilities $173.8 million. Total debt carrying value was $3,148.3 million, versus $2,885.6 million at December 31, 2022; its disclosed fair value was approximately $2,954.5 million. Debt included $2.5 billion of senior notes, a $400 million Term Loan A and $276 million drawn on a $1 billion revolver. The facilities mature in July 2027. The partnership reported covenant compliance.
Nine-month capital expenditures were $173.9 million, including $164.1 million expansion and $9.8 million maintenance capex. Cash capex was $160.0 million. The declared Q3 distribution was $0.6175 per Class A share, up approximately 2.7% from Q2; it was payable November 14, 2023.
Material changes versus comparable periods
- Q3 revenue rose 8.5% year over year, mainly from higher physical volumes and tariff rates. Adjusted EBITDA increased 6.9%; consolidated net income rose 3.4%, while LP-attributable net income increased to $35.3 million.
- Q3 gas gathering and processing volumes rose 9%; crude gathering rose 4%, crude terminaling 17%, and water gathering 19%. Higher volumes, including third-party volumes, supported results.
- Q3 operating and maintenance costs rose to $89.4 million from $79.6 million, reflecting maintenance and pass-through costs. Interest expense rose to $45.8 million from $39.9 million, primarily due to higher rates and revolving borrowings.
- For the first nine months, revenue and EBITDA increased modestly, but consolidated net income, distributable cash flow and operating cash flow declined year over year. Higher interest costs and expenses contributed; DCF fell to $623.3 million from $632.6 million.
- Three $100 million Class B unit repurchases were completed in 2023 and funded with revolver borrowings. Sponsor secondary share offerings generated no proceeds for the partnership. Public ownership rose from approximately 18% at year-end 2022 to 29.4% at September 30, 2023.
Outlook, risks and unusual items
- Management expected full-year 2023 volumes to be approximately at or above minimum volume commitment (MVC) levels, with volumes above then-current MVCs expected to grow in 2024 and 2025. The company planned to set MVCs and rates based on Hess’s then-current four-rig Bakken program and release them in January 2024; these were expectations, not guaranteed results.
- Expansion spending was focused on two compressor stations and associated pipelines, expected to add a combined 100 MMcf/d of compression capacity when placed in service.
- Fee-based contracts and MVCs limit direct commodity-price exposure, but prolonged low oil and gas prices could affect Hess’s drilling, production and the partnership’s volumes. Future growth also depends on attracting third-party throughput.
- Hess agreed to be acquired by Chevron; closing was expected in the first half of 2024, subject to approvals and other conditions. Chevron would acquire Hess’s 37.8% partnership ownership and its rights relating to board appointments. The filing highlights completion, delay, business-disruption and potential governance-conflict risks. Management stated the existing contract structure remained in place.
- A 2022 produced-water release in North Dakota was estimated at approximately 34,000 barrels; remediation and monitoring continued. Reserves were $1.3 million current and $6.1 million noncurrent at quarter-end. The state had issued a Notice of Violation but had not taken formal enforcement action; potential fines were not clear, and the company said a material adverse outcome was remote.
- The partnership agreement requires distribution of available cash. Management believed expected liquidity sources would be sufficient for operating needs, planned short-term capex, debt service and distributions. Actual results remain subject to operating, market, regulatory, financing and transaction risks.
Investor verification points
- Confirm Hess’s production plans, the 2024 MVCs and fee rates, and actual performance against MVCs—particularly given the customer concentration.
- Track Chevron merger approvals, timing, contract implications and any resulting governance or related-party conflicts.
- Review debt balances, variable-rate exposure, borrowing capacity, covenant headroom and interest expense as rates and revolver usage change.
- Assess whether operating cash flow and distributable cash flow support distributions and planned capital spending; reconcile non-GAAP measures with GAAP cash flows.
- Monitor completion and utilization of the compressor projects, and the cost and outcome of produced-water remediation and any enforcement action.