Hess Midstream Stock: High-Yielder Hikes Dividends for 25 Straight Quarters
January 31, 2023
Why HESM Stock Is Bullish
The energy sector is cyclical in nature, with companies’ earnings dependent on where we are in the economic cycle and what the price of oil and natural gas is at the moment.
One energy company that has been reporting tremendous financial results despite economic headwinds and severe weather conditions is Hess Midstream LP (NYSE:HESM). Things are going so well at the company that management has raised Hess Midstream stock’s high-yield dividend for the last 25 consecutive quarters.
While some dividend hogs might be wary of the energy sector because of the impending recession this year, there’s more than enough reason to remain bullish on HESM stock.
Hess Midstream acquires, develops, and operates oil, gas, and water midstream assets primarily in the prolific North Dakota Bakken Shale and Three Forks Shale regions. The company uses its infrastructure assets to provide services to Hess Corp. (NYSE:HES) and third parties. (Source: “About Us,” Hess Midstream LP, last accessed January 30, 2023.)
Because the company signs 100% fee-based contracts to gather, process, store, move, and export crude oil and natural gas, its bottom line isn’t as susceptible to fluctuations in commodity prices as the bottom lines of other energy companies. Minimum-volume commitments provide Hess Midstream LP with downside protection. Its contracts, which are set on a rolling three-year forward basis (send or pay), cannot be adjusted downward once set. Any shortfall payments are made quarterly.
Moreover, Hess Midstream LP locks in its customers to long-term contracts, with its commercial contracts extending through 2033. The company sets its fees annually for all future years in its initial contract terms in order to achieve contractual returns on capital deployed. On top of that, its fees escalate each year based on the Consumer Price Index (CPI).
This is a win-win for Hess Midstream, no matter what’s happening with oil and gas prices. The arrangement provides the company with a reliable and growing cash flow base, as well as opportunities to grow its business. It also provides accretive financial opportunities to buy-and-hold Hess Midstream stock investors.
Despite Headwinds, Hess Midstream LP Reports Another Solid Quarter
On January 25, Hess Midstream announced fourth-quarter 2022 net income of $149.8 million, compared to $165.1 million in the same prior-year period. After deducting noncontrolling interests, the fourth-quarter net income attributable to Hess Midstream was $21.8 million, a 29% increase over the $16.9 million, or $0.51 share, in the same prior-year quarter. (Source: “Hess Midstream LP Reports Estimated Results for the Fourth Quarter of 2022,” Hess Midstream LP, January 25, 2023.)
In the fourth quarter of 2022, Hess Midstream generated adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of $245.1 million, distributable cash flow of $202.6 million, and adjusted free cash flow (FCF) of $144.1 million.
The company’s full-year 2022 net income was $620.6 million, adjusted EBITDA was $982.9 million, and adjusted FCF was $610.6 million.
John Gatling, Hess Midstream LP’s president and chief operating officer, commented, “Despite severe weather conditions in 2022, we delivered volume growth and made targeted compression additions that increased our gas capture capability and position us well for expected volume growth in 2023 and beyond.” (Source: Ibid.)
Business Outlook
For full-year 2023, Hess Midstream LP expects to report net income in the range of $600.0 to $640.0 million and adjusted EBITDA in the range of $900.0 million to $1.0 billion. Also for 2023, the company forecasts capital expenditures of approximately $225.0 million, with a focus on expanding its gas compression capacity and gathering system well connects. (Source: “Hess Midstream LP Announces 2023 Guidance and Return of Capital Framework Through 2025,” Hess Midstream LP, January 25, 2023.)
For 2024 and 2025, Hess Midstream LP expects that its net income and adjusted EBITDA will climb by at least 10% per year, with this growth being supported by gas processing and gathering throughput volumes that represent approximately 75% of the company’s total affiliate revenues (excluding pass-through revenues).
Also for 2024 and 2025, Hess Midstream expects that its adjusted FCF will grow by greater than 10% on an annualized basis, which would be more than sufficient to fully fund the company’s targeted growing distributions.
Hess Midstream LP has also extended its annual distribution-per-share growth target of five percent through 2025, with expected annual distribution coverage of at least 1.4 times.
Gatling commented, “Hess Midstream is well-positioned, generating growing Adjusted EBITDA, Adjusted Free Cash Flow and distributions, underpinned by expected production growth in the Bakken. With our robust balance sheet, unique contract structure, and strong cash flow generation, we have flexibility to deliver ongoing and significant return of capital to our shareholders.” (Source: Ibid.)
25th Consecutive Quarterly Dividend Hike
Thanks to its strong cash flow, Hess Midstream has been able to raise its quarterly distribution for the last 25 consecutive quarters. Most recently, on January 23, management declared a quarterly cash distribution of $0.5696 per share, for an inflation-fighting yield of seven percent. (Source: “Distribution Payments,” Hess Midstream LP, last accessed January 30, 2023.)
HESM stock’s fourth-quarter distribution represents a 1.2% increase over its $0.5627 distribution in the third quarter of 2022, which equals a five-percent increase on an annualized basis. The distribution is payable on February 13 to shareholders of record as of the close of business on February 2.
The company’s wonderful financial results and strong outlook have been helping Hess Midstream stock climb steadily. As of this writing, HESM stock is up by:
- Four percent over the last month
- 15% over the last three months
- Seven percent over the last six months
- Five percent year-to-date
- 13% over the last 12 months
Chart courtesy of StockCharts.com
For the next 12 months, analysts estimate that HESM stock will climb in the range of 10% to 16%. In contrast, some analysts estimate that the S&P 500 will crater by 17% in the same period. (Source: “Jeremy Grantham Warns of a 17% Plunge in the S&P 500 This Year,” BNN Bloomberg, January 24, 2023.)
The Lowdown on Hess Midstream Stock
Over the last two years, the energy sector has been the biggest winner of the stock market. The sector is expected to outperform the overall market again in 2023. This trend should help juice investor optimism and propel Hess Midstream stock higher over the coming years.
Regardless of how the economy performs, roughly 95% of Hess Midstream LP’s revenue is protected by minimum-volume commitments. This provides the company with a solid balance sheet and cash flow stability, which should allow HESM stock to continue paying frothy dividends that rise every quarter for the foreseeable future.
