Hess Shuffles Midstream Assets in $6.2 Billion Transaction

Hess Corp. (NYSE: HES | HES Price Prediction) and Hess Midstream Partners L.P. (NYSE: HESM) announced Friday that the midstream firm will acquire all the ownership interests in Hess Infrastructure Partners in a transaction valued at $6.2 billion, not including debt. Hess Infrastructure is a joint venture between Hess and Global Infrastructure Partners (GIP).

Hess Midstream is acquiring the 80% interest in Hess Midstream owned by Hess Infrastructure and the infrastructure firm’s outstanding general partner interest and incentive distribution rights (IDRs) in Hess Midstream along with certain other assets.

Hess’s and GIP’s ownership interests in Hess Infrastructure are valued at around $6.2 billion. Hess Midstream also will assume approximately $1.15 billion in Hess Infrastructure’s existing debt. In exchange, Hess Midstream will issue 230 million common units and pay Hess and GIP a total cash payment of $500 million.

Once the transaction is completed, Hess Midstream will be converted from a master limited partnership (MLP) to an “Up-C” corporate structure, which has the effect of eliminating IDR payments. A new company, Hess Midstream L.P., will be created and taxed as a corporation. The old Hess Midstream will be a “controlled subsidiary” of the new one.

Hess and GIP will each own 47% of the new Hess Midstream, and existing common unitholders in the old Hess Midstream will own the remaining 6%, following an expected tax-free exchange of old common units for shares in the new Hess Midstream.

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The transaction is expected to close in the fourth quarter of 2019 and to be non-taxable to current common unitholders of Hess Midstream. The new Hess Midstream “does not expect to make material U.S. federal income tax payments for the next several years,” according to the announcement.

John Hess, CEO of Hess Midstream, commented:

These changes will create unitholder value by combining the strengths of our existing business model with the benefits of a new structure. As a result, HESM will transition from a small-cap MLP into a company with an enterprise value of more than $7.25 billion, no sponsor incentive distribution rights and a sustainable long-term structure.

As of Thursday’s close, Hess Midstream’s market cap was $1.07 billion.

The important part of the announcement for unitholders of Hess Midstream is this: “[A]ll IDR cash flows that were previously distributable to HIP will be retained by HESM and will be available for general corporate purposes.” Among those purposes is a 6% boost in distributable cash flow in 2020 and “greater than 15% accretion in 2021 and 2022.”

Shares of Hess traded down fractionally early Friday to $61.47, in a 52-week range of $35.59 to $73.19. The stock’s 12-month consensus price target is $71.20.

Hess Midstream’s common units traded up over 7.7% Friday morning, at $21.05 in a 52-week range of $16.17 to $23.59. Its consensus price target is $24.80.

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