![Hess Corp, Global Infrastructure Partners, Bakken, shale, midstream, joint venture, JV](/sites/default/files/styles/hart_news_article_image_640/public/image/2019/02/hess-gip-bakken-midstream-jv.jpg?itok=SM7gcanb)
The Bakken hasn’t lost its appeal for some in the oil and gas industry despite the low commodity price environment.
Hess Corp. (HES) said June 11 that it’s selling half of its Bakken midstream assets in a joint venture (JV) deal that will form a premier midstream company in the play valued at $5.35 billion.
Hess, based in New York, reached a JV agreement with Global Infrastructure Partners (GIP) to form the Bakken-focused Hess Infrastructure Partners with plans to launch a MLP IPO following the closing of the transaction.
As part of the agreement, Hess will sell a 50% interest in its Bakken midstream assets to GIP for $2.675 billion in cash.
Hess and GIP will each own 50% of the midstream JV. However, Hess will retain control of the midstream assets’ operations and annual budgeting process, giving it control of day-to-day decisions.
"The scale of this monetization is dramatically larger than we could have envisioned, making it an extremely bullish deal from Hess' standpoint, in our view," said Pavel Molchanov, senior vice president and equity research analyst at Raymond James Equity Research, in a report.
According to Molchanov, the valuation for the Hess/GIP JV is "very rich." Based on forward EBITDA guidance of $290-300 million, the transaction multiple is 18x EBITDA, which is “lofty even for publicly traded MLPs, to say nothing of private transactions," he said.
Combined with borrowing by the JV, total cash proceeds to Hess, on an after-tax basis, will be $3 billion. This equates to "16% of the entire company's market cap as of yesterday's close," Molchanov said.
Proceeds will be used to strengthen the company's balance sheet, providing room to continue investing above cash flow, and for potential share buybacks.
Molchanov said he projects outspending for Hess of $1.6 billion in 2015 and $0.9 billion in 2016.
Bakken Midstream JV
The board of directors for Hess Infrastructure Partners will be composed of six directors, with three members elected by Hess and three by GIP.
Hess, through its elected directors, will retain control of the midstream assets’ operations and annual budgeting process. Other decisions, such as capital structure, debt and equity offerings, and new contracts will require joint approval by the elected directors form both companies.
"The joint venture with its strategically located assets will be one of the largest midstream operators in the Bakken," said John Hess, CEO, in the release.
The JV is composed of processing and storage, logistics and gathering assets serving Bakken producers. The assets include:
Gas Processing and Storage Assets
- Tioga Gas Plant; and
- Mentor, Minn., Propane Storage Terminal.
Logistics
- Tioga Rail Terminal and crude oil rail cars; and
- Ramberg Trucking Facility.
Gathering
- Red Sky Gathering System;
- Hawkeye Gathering System; and
- Goliath Gathering System.
The Tioga Gas Plant is the single largest cryogenic plant in North Dakota. The plant has processing capacity of 250 million cubic feet per day (MMcf/d) and NGL extraction capacity of 60,000 barrels per day (bbl/d). It is also the only plant with ethane extraction, which is sold under long term contract to Nova Chemicals Corp.
Hess said it is currently evaluating a capacity upgrade to the Tioga Plan to 300 MMcf/d from 250 MMcf/d.
The gathering assets have a combined current throughput of 205 MMcf/d and 33 Mbbl/d, which the company said are strategically positioned to capitalize on third-party growth. The company forecasts capacity expansion to about 330 MMcf/d and 205 Mbbl/d to support growth in the play.
Hess will operate the assets owned by the JV as a contract service provider. Employees who currently work in the assets will remain Hess employees.
The JV will incur $600 million of debt, upon closing of the transaction, through a five-year loan facility with proceeds distributed equally to both partners. Additionally, the JV will have independent access to capital, including a $400 million five-year senior revolving credit facility that is fully committed.
"By capitalizing on the financial strength and midstream energy experience of Global Infrastructure Partners, the joint venture will be in a strong position to fund future energy infrastructure investments and continue to grow its midstream business,” Hess said in the release.
The transaction is expected to be completed early in the third quarter of 2015, subject to customary closing conditions.
Hess E&P Outlook
Hess will have a highly advantaged liquidity position compared to its peer group following the closing of the transaction. Together with the proceeds from the transaction, cash on hand and an untapped $4 billion revolving credit facility, the company will have around $8 billion of liquidity.
The company plans to use some of that liquidity in bolstering its E&P operations in the Bakken.
"This team’s experience and contributions will be key to maximizing the value not only from the JV, but also from the Hess upstream assets," said Greg Hill, COO and president of E&P at Hess, in a conference call.
Hill said the company has one of the best portfolios in the Bakken that is competitively advantageous in a number of ways, including its infrastructure, acreage position in the core of play and manufacturing capabilities.
"We know from bench marking that we're delivering some of the highest return wells in the play," he said.
During the first quarter of 2015, Hess operated an average of 12 rigs, compared with 17 rigs at year-end 2014. The company brought 70 gross operated wells on production in the first quarter. Drilling and completion costs per operated well average $6.8 million in the first quarter of 2015, down from $7.5 million in first-quarter 2014.
As of April, the company is operating eight rigs and plans to continue at that level for the remainder of 2015.
The company will continue to work toward its long term goal of reaching about 175,000 thousand barrels of oil equivalent per day (Mboe/d) of net production by 2020 as oil prices recover.
"We still have a robust well inventory, with more acreage in the core than any other operator," he said.
Contact the author, Emily Moser, at emoser@hartenergy.com.
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