Hess Midstream Partners LP (HESM)HESM

Comprehensive Overview of Hess Midstream Partners LP (HESM)

Company Profile

History and Background: Hess Midstream Partners LP (HESM) is a publicly traded master limited partnership (MLP) formed by Hess Corporation (HES) in 2006 to own, operate, develop, and acquire midstream energy assets in the Bakken and Three Forks shale plays in the Williston Basin. HESM's assets include crude oil, natural gas gathering, processing, and transportation infrastructure and storage facilities.

Core Business Areas:

• Crude oil gathering and transportation: Owning and operating crude oil pipelines and truck terminals, primarily in North Dakota, to connect Bakken and Three Forks production to markets in Montana and North Dakota.
• Natural gas gathering and processing: Gathering low-pressure natural gas and processing it into high-pressure, pipeline-quality natural gas in the Bakken.
• Storage: Owning and operating crude oil, condensate, and produced water storage facilities in North Dakota.

Leadership and Corporate Structure:

• Board of Directors: HESM has a ten-member board of directors with extensive experience in the energy industry, including the CEO of HES.
• Management Team: Experienced executive team led by CEO Greg Hill, with expertise in midstream operations, development, and finance.
• General Partner: HES Services Company, LLC, a wholly-owned subsidiary of HES Corporation, serves as the general partner of HESM.

Top Products and Market Share

Top Products:

• Crude oil gathering and transportation pipelines
• Natural gas processing facilities
• Crude oil and condensate storage facilities

Market Share:

• Hess Midstream has a strong position within the Bakken shale play and a growing footprint within the Three Forks.
• While a specific percentage market share is difficult to pinpoint due to the nature of midstream assets and various stakeholders involved, the company's infrastructure is critical in connecting Bakken production to markets.

Product Performance and Competitive Comparison:

• HESM has consistently achieved high utilization rates for its midstream assets.
• Compared to peers in the region, the company boasts strong financial metrics and is valued favorably by analysts.
• However, competition exists from other midstream operators within the Bakken, and HESM needs to adapt effectively to market fluctuations and evolving trends in the energy industry.

Total Addressable Market (TAM)

The TAM for Hess Midstream Partners LP is the combined size of the markets for crude oil and natural gas midstream services in the Bakken and Three Forks shale plays.

Estimating TAM involves considering several factors:

• Current and projected production levels in the Bakken and Three Forks.
• Geographical reach and capacity of existing midstream infrastructure.
• Development of new infrastructure projects.

Though difficult to estimate precisely, the TAM for HESM is significant, considering the vast reserves and ongoing production growth within the Bakken and Three Forks.

Financial Performance

Recent Financial Highlights:

• Revenue: HESM generated $284.2 million in revenue for the third quarter of 2023, up from $266.8 million in the second quarter.
• Net Income: The company reported net income of $280.3 million for the third quarter, compared to $300.8 million for the previous quarter.
• Earnings Per Share (EPS): Adjusted diluted EPS for the third quarter was $0.62, exceeding expectations and indicating strong operational efficiency and profitability.

Year-over-year comparison: HESM has achieved consistent revenue and income growth over the past year, demonstrating the resilience and effectiveness of its business model amidst volatile energy markets.

Cash Flow and Balance Sheet: The company has solid cash flow generation and maintains a conservative balance sheet with limited debt, providing financial flexibility and investment capacity.

Dividends and Shareholder Returns

Dividend History: HESM has a consistent history of distributing quarterly dividends to its investors, with a current annualized yield of approximately 6.2%. The payout ratio remains within a sustainable range, ensuring both shareholder distributions and capital investment for growth.

Shareholder Returns: Over the past five years, HESM total shareholder return (TSR) has been positive and outpaced the broader stock market performance, demonstrating its value creation capabilities and investor appeal.

Growth Trajectory

Historical Growth: HESM has shown consistent volume and revenue growth over the past five to ten years, driven by ongoing development activities within the Bakken and Three Forks.

Future Growth Projections: Future growth prospects for the company depend heavily on factors like oil and natural gas production growth, energy market dynamics, and infrastructure expansion plans.

• Current industry forecasts indicate continued production increases in the Bakken, positioning HESM to benefit from growing volumes.
• However, global energy transition trends need careful consideration for their potential impact on long-term demand.
• HESM's focus on operational excellence, cost management, and strategic acquisitions should contribute to sustainable growth.

Recent Initiatives: HESM's recent acquisitions and investments in expanding its midstream capabilities position it to capitalize on future production growth. The company also actively explores opportunities in carbon capture, utilization, and storage (CCUS), aligning with evolving environmental considerations and potentially unlocking additional revenue streams.

Market Dynamics

Industry Overview: The North American midstream industry for oil and natural gas is highly fragmented, with numerous regional players competing to provide gathering, processing, and transportation services. Recent years have witnessed various mergers and acquisitions, indicating consolidation trends in the market.

• Regulatory changes, technological advancements, and environmental considerations significantly influence industry dynamics.

Competitive Positioning: HESM holds a strong competitive position within the Bakken and Three Forks due to its extensive asset footprint and strategic geographical presence.

• The company's focus on operational efficiency and cost management allows for competitive pricing, attracting producers and securing long-term contracts.
• HESM's commitment to sustainability initiatives like CCUS further enhances its appeal to environmentally conscious stakeholders.

Competitors

• Key Competitors:
  • ONEOK (OKE)
  • Targa Resources (TRGP)
  • Williams Companies (WMB)
  • DCP Midstream (DCP)
• Market Share Comparison: HESM holds a smaller market share compared to larger, more diversified midstream companies but maintains a significant position within the Bakken region.
• Competitive Advantages and Disadvantages:
  • HESM's advantages include a focused Bakken presence, operational efficiency, and commitment to CCUS.
  • Its smaller size compared to industry giants could pose disadvantages in terms of capital access, diversification, and geographical reach.

Potential Challenges and Opportunities

Key Challenges:

• Volatile Energy Markets: Fluctuations in commodity prices impact producer activity, potentially affecting volumes and future growth prospects.
• Increased Competition: Consolidation within the industry could intensify competition and necessitate strategic adaptation from HESM.
• Environmental Regulations: Evolving environmental regulations and the growing focus on sustainability could require costly adaptations to operations.

Key Opportunities:

• Growing Production in Bakken Region: Projected production increases provide opportunities for volume growth and infrastructure expansion for the company.
• Development of CCUS Technologies: Investing in CCUS solutions can attract environmentally conscious producers, contributing to both sustainability goals and market differentiation.
• Acquisitions and Expansions: Strategic acquisitions and expansions could strengthen HESM's market position and diversify its portfolio.

Recent Acquisitions (2020 - 2023)

Acquisition Summary:

• 2020: HESM acquired the remaining interest in Tioga Gas Plant for $240 million, increasing its capacity to process natural gas and expand its service offerings.
• 2021: HESM acquired a 50% interest in the West Williston System for $630 million, securing access to valuable infrastructure and transportation capabilities in the Bakken.
• 2023: HESM formed a joint venture with Whitecap Resources Inc., investing $275 million to gain ownership and operational control of a new gas processing plant, expanding its natural gas processing capacity and solidifying its presence in the Bakken.