Fitch Affirms Hess Infrastructure Partners, LP.
HESINF's Outlook mirrors the Hess Corporation's (HES/BBB-) Negative Outlook. On March 9, 2018, Fitch affirmed the HES's 'BBB-' IDR and revised the Outlook to Negative from Stable. Given the importance of HES to HESINF, a change in the credit quality at HES will generally be reflected in Fitch's view of HESINF's credit quality.
HESINF's operational condition is sound, which has been underscored by the recent 3Q18 report from the master limited partnership that HESINF sponsors, Hess Midstream Partners, LP (HESM). This report featured full-year crude oil gathering volumes of 85,000 to 90,000 barrels per day (bpd), an increase from the initial 2018 guidance of 75,000bpd to 85,000 bpd.
HESINF is a joint venture between HES and Global Infrastructure Partners. The senior secured recovery rating of 'RR1' reflects an expectation for a recovery of 91% to 100%, which reflects HESINF's strength and certain terms of the senior secured credit facilities. The senior unsecured recovery rating of 'RR4' reflects an expectation for a recovery of 31% to 50%, which is level frequently awarded for senior unsecured securities in the 'BB' ratings category. The Recovery Ratings for both the senior secured and senior unsecured debt reflect the gathering and processing sub-sector's track record for recovery outcomes.
KEY RATING DRIVERS
HES Bakken Operations Solid: Contractually, HES subsidiaries are the only recipients of all of HESINF's services. HES guarantees the service obligations of these subsidiaries. The HES-HESINF guaranteed contracts have fee mechanisms by which HES protects HESINF from volume downsides and other risks. One type of protection, Minimum Volume Commitments (MVCs), has from time to time been triggered to determine the payment for some of HESINF's services. Fitch views HES as a strong performer with a consistent track record of strong reserve growth at economical costs. Within the Bakken formation region, which HES states it gets first call on capital among operated properties, the company continues to make progress moving down the cost curve. Since 2017, HES's trend of quarterly Bakken barrel of oil equivalent production has been upward in an unbroken line. In June 2018, HES added a fifth Bakken drilling rig, and in September the company added a sixth rig, which Fitch sees as positive developments. HESINF is joint venturing to construct the Little Missouri 4 natural gas processing plant. The growth represented by the Little Missouri 4 plant is backstopped by expected Bakken growth, which is contractually provided for under the foundational HES/HESINF contracts.
Small Single-Basin Midstream Company: Fitch forecasts that HESINF will post approximately $500 million in EBITDA in 2018 on a consolidated basis. The level of $500 million is, in fact, a figure that Fitch typically views as the boundary marker between investment grade and high yield IDRs for midstream companies. Small companies generally have less money-raising options when challenges arise in a sector. In addition to being on the border between small size and large size, the HESINF only serves a single producing region of the U.S., the Bakken formation region of North Dakota. The Bakken produces all seven hydrocarbons, but the primary target is crude oil. Dating back to the late 2014 collapse in crude oil prices, North Dakota has not been the largest or fastest growing hydrocarbon-producing region. The last twelve months have seen the resumption of impressive growth in North Dakota. Fitch acknowledges that volume risk is largely mitigated by HESINF's contracts with HES subsidiaries.
Contracts Provide Two-Fold Revenue Protection: HESINF is a 100% fee-based business. Its unit-fees are subject to recalculation till the expirations of the main contracts in 2023 (longer for the Terminal and Export agreement). The re-calculation's objective is to furnish HESINF with a set return, with such recalculation taking into account changes to the cumulative ( until 2023) production profile (among other things). At the end of 2017, the tariff was updated to incorporate offsetting factors relative to assumptions in the recalculation 12 months prior. The offsetting factors were an increase in the forecast of capital investment (potential impact: raises the unit-fee) and an increase in the forecast of volumes (potential impact: lowers the unit fee). In addition to this re-calculation structure, the suite of contracts provides that near-term total revenues may be bolstered by MVCs. In the 2017 10-K of HESINF investee HESM, it was disclosed that in 2017 minimum volume shortfall fee payments of $61.6 million were earned (on a consolidated basis). The setting of MVCs is also an annual exercise. MVCs are established each year for the current year and the two thereafter. MVCs, once set, cannot be re-set lower. HES, as HESINF's counterparty, will bear high effective unit costs in a downside volume scenario, by operation of the two revenue protection mechanisms.
Size is an important differentiating factor as Fitch rates gathering and processing companies. Smaller gathering and processing companies generally do not have a diverse portfolio of assets, from which a choice asset can be sold during challenging times in their production regions. Fitch expects HESINF to post EBITDA of approximately $500 million in 2018. In 2017, HESINF's peer EQT Midstream Partners (EQM; BBB-) posted approximately $700 million of EBITDA.
The basin served is also a factor in setting the rating for a gathering and processing company. HES (BBB-/Negative) provide strong revenue assurance terms in its subsidiaries' contracts with HESINF. Since HES, which does business around the globe, credit quality is partly driven by its operations in North Dakota, the performance of this producing region is relevant. North Dakota's Bakken formation overall (and HES is representative) has shown solid growth since mid-2017. The outlook is good for continued growth, as supported by the advent of adequate pipeline transportation, and producer efficiencies. Yet the outlook is also informed by the past production profile, and a recognition that crude oil is a volatile international commodity. Of relevance is the fact that from about the beginning of 2015 to mid-2017, Bakken production fell for the industry. For the peer EQM, its basin, the Marcellus basin, showed strong growth throughout a period of low natural gas prices that began in 2012.
Leverage for HESINF and EQM have both historically been strong for their ratings, with both companies in a range around 2.0x leverage historically. Leverage is a lesser driver of ratings for companies like these, compared to size and basin production track record.
Fitch's Key Assumptions Within Its Rating Case for the Issuer
--Fitch price deck for Brent crude oil, which includes a $65 per barrel price for 2019.
--Oil gathering revenues reflect oil production that is at or below the Oil gathering MVC level for 2019.
--Capital expenditures in the 2018-2020 period are generally for additional well-connects. 2018 capital expenditures will encompass construction of the Little Missouri 4 natural gas processing plant, related compression, and well-connects.
Developments That May, Individually or Collectively, Lead to Positive Rating Action
--Positive rating action for HES.
--A significant acquisition which diversifies the company's business risk, provided that leverage is commensurate with the risks involved in the new business that is established.
Developments That May, Individually or Collectively, Lead to Negative Rating Action
--Negative rating action for HES.
--GIP exits HESINF and the new ownership structure vests in HES all of HESINF's special board decisions.
--Adverse changes in certain terms in the array of HESINF's contracts.
--Adjusted leverage rising above 4.0x on a sustained basis in the context of HESINF maintaining its current size.
HESINF has ample liquidity. Capital expenditure plans are expected to support organic growth opportunities to its existing systems, and management anticipates funding these cash on hand or using the company's $600 million revolver due 2022. Maturities are manageable, with the company's only obligation in the next five years is to keep a step-up amortization schedule on the $200 million term loan of 0% in year one to 10% in year five. Additionally, Hess Midstream Partners, LP (HESM), the publicly traded entity within the Hess Infrastructure corporate structure, maintains a $300 million Revolver that matures in March 2021, which is another source of funding for capital expenditures and operating activities for the same pool of assets. As of Sept. 30, 2018, this facility remains undrawn. During its quarterly earnings call for 3Q18, HESM reported that it has maintained a very strong liquidity profile and has not tapped its revolver, and is focused on funding its growth capex plans primarily with retained cash.
FULL LIST OF RATING ACTIONS
Fitch has affirmed the following ratings:
Hess Infrastructure Partners, LP
--Long-term IDR at 'BB';
--Senior secured term loan A at 'BB+'/'RR1';
--Senior secured revolving credit facility at 'BB+'/'RR1';
--Senior unsecured notes at 'BB'/'RR4'.
The Rating Outlook is Negative.
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|Publication:||Daily the Pak Banker (Lahore, Pakistan)|
|Date:||Jan 16, 2019|
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