HESM: Dividend Growth And Buybacks Will Offset Bakken Development Uncertainty

Key Takeaways

• The company benefits from stable, fee-based revenues and strong growth potential due to essential infrastructure and long-term contracts in key U.S. energy markets.
  
• Conservative financial management and ongoing investments support rising dividends, robust cash flow, and increased shareholder returns even under inflationary pressures.
  
• Heavy reliance on Bakken production and Chevron activity, limited diversification, and rising ESG pressures heighten operational, financial, and strategic risks for long-term stability.

Catalysts

Owns, operates, develops, and acquires midstream assets and provide fee-based services to Hess and third-party customers in the United States.

• Anticipated sustained strong throughput growth driven by robust upstream production and ongoing U.S. energy export demand, positioning the company to benefit from elevated utilization rates and higher revenues across gas processing, oil terminaling, and water gathering through at least 2027.
  
• Multi-year minimum volume contracts with Hess Corp (now under Chevron), providing highly predictable, inflation-resistant fee-based revenue streams through the late 2030s, which supports stable adjusted EBITDA and consistent dividend/distribution growth.
  
• Large, strategic, and largely irreplaceable infrastructure footprint in the core Bakken shale combined with ongoing investments (like compressor stations and the Capa gas plant) enables Hess Midstream to capture incremental volume growth as domestic and export energy needs remain high, further supporting margin and EBITDA expansion.
  
• Conservative leverage and investment-grade balance sheet (recent BBB
• upgrade) create additional financial flexibility for continued buybacks and rising distributions, directly supporting EPS and total shareholder return, with $1.25B in planned repurchases/distributions through 2027.
  
• Long-term focus on disciplined, low-risk growth investments and high-operating leverage (80% EBITDA margin) ensures the company can convert volume and pricing tailwinds into higher free cash flow and net income, further enhancing returns even amid inflation and cost pressures.

Hess Midstream Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Hess Midstream's revenue will grow by 1.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 21.8% today to 31.7% in 3 years time.
• Analysts expect earnings to reach $543.1 million (and earnings per share of $3.01) by about April 2029, up from $352.9 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $659.8 million in earnings, and the most bearish expecting $457.6 million.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 13.8x on those 2029 earnings, down from 14.4x today. This future PE is lower than the current PE for the US Oil and Gas industry at 15.1x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.98%, as per the Simply Wall St company report.

Risks

• The company's revenues and cash flow are heavily reliant on sustained production growth from Hess Corporation (now under Chevron), and any reduction in drilling activity, changes to Chevron's capital allocation, or shifts in Bakken development strategy could materially reduce throughput volumes, impacting both revenue and EBITDA.
  
• Limited geographic diversification exposes Hess Midstream to regional risks (such as local environmental regulations, basin-specific production declines, or adverse market dynamics in the Bakken), which could put downward pressure on margins and overall earnings stability during periods of basin or operational challenges.
  
• As the Bakken matures, flat or declining long-term oil production and slower-than-expected gas growth could lead to excess midstream capacity and underutilization of pipeline and gathering assets, reducing throughput, revenue, and ultimately compressing net margins.
  
• The exit of a major independent shareholder (GIP) removes a layer of governance independence; despite new board mechanisms, increased sponsor influence could lead to capital allocation decisions or strategic shifts that are less favorable for public shareholders, potentially affecting valuation and the consistency of shareholder-focused returns.
  
• The ongoing global energy transition and stricter environmental policies raise long-term structural risks; expanding ESG-driven investor scrutiny and regulation could increase Hess Midstream's cost of capital and operating expenses, while gradual displacement by renewables may limit growth opportunities and put future revenue and earnings at risk.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of $38.67 for Hess Midstream based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analysts, you'd need to believe that by 2029, revenues will be $1.7 billion, earnings will come to $543.1 million, and it would be trading on a PE ratio of 13.8x, assuming you use a discount rate of 7.0%.
• Given the current share price of $39.32, the analyst price target of $38.67 is 1.7% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.