Hess Midstream LP (HESM) is a fee-based, growth-oriented midstream company that has established itself as a leader in the Bakken and Three Forks shale plays of North Dakota. The company owns, operates, develops, and acquires a diverse set of midstream assets, providing critical services to both Hess Corporation and third-party customers.
Company Background
Hess Midstream's origins date back to 2014 when it was formed as a fee-based, growth-oriented midstream company. The company's initial assets included gas gathering, processing, and fractionation facilities, as well as crude oil and water gathering systems. From the beginning, Hess Midstream entered into long-term, fee-based commercial agreements with its parent company, Hess Corporation, to provide gas gathering, crude oil gathering, gas processing and fractionation, storage, terminaling, export and water handling services. These agreements included minimum volume commitments from Hess and inflation escalators, providing Hess Midstream with cash flow stability and growth. Over the years, Hess Midstream has strategically expanded its footprint through organic growth projects and selective bolt-on acquisitions, solidifying its position as a key infrastructure provider in the Bakken.
In 2019, the company further strengthened its relationship with Hess Corporation by entering into 14-year water services agreements. This expansion of services has allowed Hess Midstream to diversify its revenue streams and enhance its overall service offerings. Additionally, the company has pursued strategic relationships with third-party producers and other midstream companies to maximize utilization of its assets, capturing incremental throughput volumes.
Challenges
Despite its overall success, Hess Midstream faced a significant challenge in 2023 when it became aware of a produced water release from an underground pipeline, impacting soils, crops, and groundwater. The company responded promptly by putting remediation infrastructure in place and has been working on ongoing remediation and monitoring efforts. This incident highlights the operational risks inherent in the midstream industry and underscores the importance of robust environmental management practices.
Financials
In terms of financials, Hess Midstream has demonstrated a track record of consistent performance. For the fiscal year 2023, the company reported annual revenue of $1.35 billion, net income of $118.6 million, operating cash flow of $866.4 million, and free cash flow of $642.9 million. In the most recent quarter (Q3 2024), Hess Midstream delivered solid results with revenue of $376.98 million, net income of $165 million, operating cash flow of $224.9 million, and free cash flow of $141.4 million. Notably, Q3 2024 revenue grew by 3.0% year-over-year, primarily driven by higher throughput volumes across HESM's gathering, processing, and terminaling segments, partially offset by lower tariff rates.
Business Model and Strategy
Hess Midstream's business model is designed to provide stability and growth, leveraging long-term, fee-based commercial agreements with Hess Corporation and third-party customers. These agreements include minimum volume commitments, inflation escalators, and fee recalculation mechanisms, which help to minimize the company's exposure to commodity price fluctuations. As a result, Hess Midstream has maintained a robust financial profile, with a debt-to-EBITDA ratio of approximately 3.2x as of the latest quarter.
Operational Excellence
One of the key drivers of Hess Midstream's success has been its focus on operational excellence. The company has consistently maintained high system availability and gas capture rates, ensuring the reliable delivery of services to its customers. Additionally, Hess Midstream has strategically invested in expansion projects to support the growing production needs of Hess Corporation and third-party producers in the Bakken.
Recent Performance and Guidance
In the third quarter of 2024, Hess Midstream reported gas processing volumes of 419 million cubic feet per day, crude oil terminaling volumes of 122,000 barrels per day, and water gathering volumes of 128,000 barrels per day. These figures were in line with the company's previous guidance. For the full year 2024, Hess Midstream is projecting gas processing volumes between 405-415 million cubic feet per day, crude oil terminaling volumes between 120,000-130,000 barrels per day, and water gathering volumes between 115,000-125,000 barrels per day. This represents approximately 10% growth in oil and gas volumes compared to 2023.
Looking ahead to Q4 2024, the company expects net income to be $170-$185 million and adjusted EBITDA to be $295-$310 million, representing approximately 5% growth in adjusted EBITDA compared to Q3 2024. Capital expenditures for the full year 2024 are expected to be approximately $270 million.
Growth Strategy
Hess Midstream's growth strategy is underpinned by its strong relationship with Hess Corporation, its anchor customer, as well as its ongoing efforts to capture incremental third-party volumes. The company has been successful in diversifying its customer base, with third-party volumes currently accounting for approximately 10% of its total throughput. Looking ahead, Hess Midstream continues to expect approximately 10% annualized growth in oil and gas volumes and greater than 10% growth per year in adjusted EBITDA from 2024 through 2026. With stable capital expenditures through 2026, the company anticipates adjusted free cash flow to grow greater than 10% per year in excess of their 5% targeted distribution per Class A share growth.
Risks
However, Hess Midstream is not without its risks. The company's operations are primarily concentrated in the Bakken region, exposing it to the potential volatility in oil and gas production levels, as well as regulatory and environmental challenges. Additionally, the company's reliance on Hess Corporation as its primary customer presents a risk should there be any significant changes in Hess' exploration and production activities.
Management and Performance
Despite these risks, Hess Midstream has demonstrated its ability to navigate the challenges of the industry. The company has a proven management team, a solid balance sheet, and a diversified set of midstream assets that have enabled it to deliver consistent financial and operational performance.
Segment Performance
Hess Midstream operates in three reportable segments:
1. Gathering Segment: This segment includes gas gathering, crude oil gathering, and water gathering and disposal services. In Q2 2024, the segment's revenues and other income increased by $21 million compared to the prior year period, primarily driven by higher gas gathering, crude oil gathering, and water gathering volumes.
2. Processing and Storage Segment: This segment includes gas processing and fractionation, and storage services. In Q2 2024, the segment's revenues and other income increased by $16.7 million compared to the prior year period, primarily due to higher gas processing volumes and higher tariff rates.
3. Terminaling and Export Segment: This segment includes crude oil terminaling and export services. In Q2 2024, the segment's revenues and other income increased by $3.8 million compared to the prior year period, primarily driven by higher crude oil terminaling volumes.
Industry Trends
According to the North Dakota Pipeline Authority, oil production in the Bakken basin is expected to remain relatively flat, while natural gas production is forecasted to grow from around 3.5 Bcf/d to 5 Bcf/d over the next several years. This trend is expected to benefit Hess Midstream's natural gas gathering, processing, and terminaling operations.
Liquidity and Financial Position
As of Q3 2024, Hess Midstream reported a debt-to-equity ratio of 7.44x and cash of $99.6 million. The company has a $1.4 billion senior secured credit facility, consisting of a $1.0 billion revolving credit facility and a $400 million term loan facility. As of Q3 2024, there were no borrowings outstanding under the revolving credit facility and $392.5 million drawn on the term loan facility. The company's current ratio and quick ratio both stood at 1.11x as of Q3 2024, indicating a solid short-term liquidity position.
Conclusion
In conclusion, Hess Midstream LP is a well-positioned midstream company that has leveraged its strategic location, long-term customer agreements, and operational expertise to establish itself as a leading provider of midstream services in the Bakken region. With a focus on sustainable growth, consistent financial performance, and a commitment to delivering value to its shareholders, Hess Midstream appears poised to continue its trajectory of success in the years to come. The company's robust guidance, strong operational metrics, and strategic focus on the growing natural gas market in the Bakken region provide a solid foundation for future growth and value creation.