Intrinsic Value Hess Midstream LP (HESM)

• Previous Close: $35.47
• Intrinsic Value: $15.77
• Upside potential: -56%

Stock Valuation Context

Business Model And Market Position

Hess Midstream LP operates as a critical infrastructure provider in the North American energy sector, specializing in midstream services for oil, natural gas, and natural gas liquids (NGLs). The company’s revenue model is anchored in long-term, fee-based contracts with Hess Corporation and third-party customers, ensuring stable cash flows through gathering, processing, storage, and transportation services. Its assets are strategically located in the Bakken shale play, a prolific hydrocarbon basin, reinforcing its role as a key logistics partner for upstream producers. Hess Midstream differentiates itself through integrated operations, offering end-to-end midstream solutions that enhance efficiency for producers while minimizing volumetric risk. The company’s market position is bolstered by its alignment with Hess Corporation’s production growth, providing visibility into future capacity expansions. As a pure-play midstream entity, HESM benefits from regulatory tailwinds supporting energy infrastructure development, though it remains exposed to commodity price volatility indirectly through producer activity levels.

Revenue Profitability And Efficiency

Hess Midstream reported $1.50 billion in revenue for FY 2024, with net income of $223.1 million and diluted EPS of $2.51. Operating cash flow stood at $940.3 million, reflecting robust cash generation from its fee-based contracts. Capital expenditures totaled $306.1 million, directed toward maintaining and expanding infrastructure. The company’s profitability metrics are supported by high utilization rates and cost-efficient operations, though leverage to Hess Corporation’s production volumes introduces some dependency.

Earnings Power And Capital Efficiency

The company demonstrates strong earnings power, with operating cash flow covering capital expenditures and dividends comfortably. Its capital efficiency is evident in the disciplined allocation of capex toward high-return projects, primarily in the Bakken region. The fee-based revenue model minimizes direct commodity price exposure, enhancing predictability. However, the partnership structure implies reliance on Hess Corporation’s upstream performance for volume growth.

Balance Sheet And Financial Health

Hess Midstream’s balance sheet shows $4.3 million in cash and equivalents against total debt of $3.47 billion, indicating a leveraged but manageable position. The debt is primarily used to fund infrastructure investments, with cash flows sufficient to service obligations. The lack of significant near-term maturities provides flexibility, though interest rate risk remains a consideration given the floating-rate debt component.

Growth Trends And Dividend Policy

Growth is tied to Hess Corporation’s production expansion in the Bakken, with incremental volumes driving midstream utilization. The company has a track record of steady dividend increases, distributing $2.76 per share in FY 2024, supported by a high distribution coverage ratio. Future growth capital is likely to be prioritized over aggressive dividend hikes to maintain balance sheet strength.

Valuation And Market Expectations

The market values HESM for its stable cash flows and growth potential, though its valuation multiples reflect midstream sector headwinds, including investor sentiment toward fossil fuel infrastructure. The partnership’s yield and contract visibility are key attractions, but reliance on a single basin and anchor customer may limit premium pricing.

Strategic Advantages And Outlook

Hess Midstream’s strategic advantages include its integrated asset base and long-term contracts, which provide revenue stability. The outlook is cautiously optimistic, with growth contingent on Bakken production trends and potential third-party volume commitments. Regulatory support for energy infrastructure and Hess Corporation’s operational execution will be critical drivers.

Sources

Hess Midstream LP 10-K, investor presentations