Hess Midstream LP Annual Report - A Comprehensive Investor Overview

Hess Midstream LP (HESM) plays a vital role in the energy sector, operating the essential infrastructure that connects energy producers to markets. As a "midstream" company, HESM gathers, processes, and transports crude oil, natural gas, and natural gas liquids (NGLs) from production sites, primarily in North Dakota's prolific Bakken Shale region.

This annual report highlights a year of stable operations, strategic financial management, and consistent performance for Hess Midstream.

1. Business Overview and Operational Performance

Hess Midstream's operations are divided into three core segments, each critical to moving energy from wellhead to market:

• Gathering: This segment collects raw oil and gas from wells. In the fiscal year ending December 31, 2023, crude oil gathering volumes increased by 3%, and natural gas gathering volumes rose by 5%. Sustained drilling activity in the Bakken drove these increases.
• Processing and Storage: This segment transforms raw natural gas into marketable products and stores them. Natural gas processing volumes grew by 4%, driven by efficient plant utilization and strong demand for natural gas liquids (NGLs).
• Terminaling and Export: This segment prepares finished products for shipment. Crude oil terminaling volumes remained robust, averaging 250,000 barrels per day, consistent with the prior year.

Overall, the company executed operations solidly, maintaining high system uptime and efficiency across its integrated asset base.

2. Financial Performance - Revenue, Profit, and Growth Metrics

Hess Midstream delivered strong financial results for fiscal year 2023. The company reported total revenues of approximately $1.35 billion, a 6% increase over the previous year. Higher throughput volumes and inflation-linked tariff adjustments primarily drove this growth.

Key financial highlights include:

• Adjusted EBITDA, a crucial profitability measure for midstream companies, reached $1.05 billion, climbing 7% year-over-year and demonstrating strong operational efficiency.
• Net Income stood at $580 million, marking a 9% increase from 2022.
• Distributable Cash Flow (DCF), which measures cash available for shareholder distributions, ** totaled $850 million**, providing robust coverage for these payouts.

Approximately 85% of Hess Midstream's revenue comes from long-term, fee-based contracts with Chevron Corporation (following its acquisition of Hess Corporation). This relationship provides significant revenue stability and predictable cash flows, though it also presents a concentration risk.

In early 2024, the company executed a $250 million Accelerated Share Repurchase (ASR) program, repurchasing approximately 8.5 million shares. This move aimed to enhance shareholder value and optimize the capital structure. Hess Midstream also maintained its strong commitment to shareholder returns, declaring quarterly dividends of $0.62 per share for all four quarters of 2024 and targeting 2% annual distribution growth for 2025.

3. Major Wins and Challenges This Year

Hess Midstream navigated a dynamic year, achieving several key successes while addressing ongoing challenges:

Wins:

• Consistent Volume Growth: The company achieved steady increases in gathering and processing volumes, exceeding initial guidance.
• Strong Financial Performance: It delivered robust revenue and EBITDA growth, showcasing operational efficiency and pricing power.
• Strategic Capital Allocation: Hess Midstream successfully executed the ASR program while maintaining a healthy balance sheet and growing distributions.
• Operational Excellence: The company maintained high asset reliability and safety standards, minimizing downtime.

Challenges:

• Inflationary Pressures: Hess Midstream experienced increased operating costs due to higher labor, material, and utility expenses. However, contractual cost reimbursements and tariff adjustments largely offset these pressures.
• Regulatory Uncertainty: The company navigated evolving environmental regulations and permitting processes, which can affect future project development timelines.
• Customer Concentration: While a source of stability, high reliance on Chevron for revenue remains a key risk. Any significant changes in Chevron's Bakken strategy or financial health could impact HESM.

4. Financial Health - Cash, Debt, and Liquidity

Hess Midstream maintains a disciplined approach to its balance sheet, ensuring financial stability. As of December 31, 2023:

• Cash and Cash Equivalents: Approximately $120 million.
• Total Debt: Approximately $3.5 billion.
• Net Debt to Adjusted EBITDA Ratio: A healthy 3.3x, comfortably within the company's target range and covenant limits. This ratio indicates the company's ability to cover its debt with its earnings.

The company's debt structure primarily consists of various unsecured notes:

• $600 million of 5.625% notes due 2026
• $750 million of 5.875% notes due 2028
• $500 million of 5.125% notes due 2028
• $400 million of 6.500% notes due 2029
• $600 million of 4.250% notes due 2030
• $650 million of 5.500% notes due 2030

Hess Midstream also holds a $1.5 billion Revolving Credit Facility. At year-end, it had drawn approximately $200 million, leaving substantial liquidity of $1.3 billion for operational flexibility and potential growth initiatives.

5. Key Risks That Could Hurt the Stock Price

Investors should be aware of several key risks that could affect Hess Midstream's stock price and financial performance:

• Customer Concentration: The primary risk stems from the company's significant reliance on Chevron Corporation. Any reduction in Chevron's Bakken production, changes in their contractual agreements, or financial distress could materially impact Hess Midstream's revenues and cash flows.
• Commodity Price Volatility: Although HESM's contracts are largely fee-based, sustained low oil and gas prices could reduce drilling activity by producers like Chevron, eventually leading to lower throughput volumes.
• Regulatory and Environmental Risks: Stricter environmental regulations, increased permitting hurdles, or shifts in energy policy could impact operations, raise compliance costs, or delay expansion projects.
• Operational Risks: Operating complex midstream infrastructure inherently carries risks such as accidents, equipment failures, or natural disasters. These events could lead to service interruptions and financial penalties.
• Interest Rate Risk: While a significant portion of the company's debt is fixed-rate, potential increases in interest rates could affect the cost of future borrowings or refinancing existing debt.

6. Competitive Positioning

Hess Midstream holds a strong competitive position in the Bakken Shale, primarily due to its integrated asset footprint and strategic alignment with Chevron. Its assets are strategically located to serve a substantial portion of Bakken production, benefiting from long-term, fee-based contracts that provide stable cash flows. The midstream sector's high capital intensity and significant regulatory barriers to entry further solidify the company's competitive advantage. This deep integration with Chevron's operations offers a significant edge over competitors who lack such dedicated and strategic relationships.

7. Leadership and Strategy

Hess Midstream experienced no significant changes in executive leadership during the past year. The company's strategy remains steadfast: maximize cash flow from its existing high-quality asset base, maintain disciplined capital allocation, and deliver consistent distribution growth to unitholders. The company emphasizes operational efficiency, cost management, and exploring organic growth opportunities within its current footprint.

8. Future Outlook

Hess Midstream has provided optimistic guidance for fiscal year 2024, projecting:

• Adjusted EBITDA in the range of $1.07 billion to $1.10 billion.
• Distributable Cash Flow between $860 million and $890 million.
• Capital Expenditures of approximately $200 million, primarily for maintenance and minor growth projects.

The company anticipates continued stable production from the Bakken, which will support sustained volume throughput. Its strategic priorities for the coming year include maintaining a strong balance sheet, targeting a net debt to Adjusted EBITDA ratio below 3.5x, and continuing its commitment to distribution growth for 2025. The long-term relationship with Chevron will remain a cornerstone of its business, with ongoing services and reimbursements extending well into 2025 and beyond.

9. Market Trends and Regulatory Changes

Several market trends and regulatory shifts could influence Hess Midstream's operating environment:

• Bakken Production Stability: The Bakken region is anticipated to maintain stable to modest growth in oil and gas production, providing a solid foundation for HESM's volumes.
• Energy Transition: While Hess Midstream primarily focuses on traditional hydrocarbons, the broader energy transition narrative could influence investor sentiment and the long-term availability of capital for fossil fuel infrastructure.
• Environmental Regulations: Increased scrutiny on methane emissions and water management practices could lead to higher compliance costs or require investments in new technologies.
• Interest Rate Environment: The prevailing interest rate environment will influence the cost of capital and refinancing strategies, impacting the company's future financial flexibility.