Hess Midstream Stock: Bullish 8%-Yielder Raised Quarterly Payout Again
May 3, 2024
Why HESM Stock Is Attractive
Despite rumors that it’s going to be acquired, Hess Midstream LP (NYSE:HESM) continues to do what it does best: ignore the gossip and maximize the use of its midstream energy infrastructure.
Whether it’s a near-term or long-term outlook, Hess Midstream is able take advantage of market strengths, weaknesses, and inherent volatility.
Why? Unlike other midstream oil and natural gas energy companies, the partnership is on the receiving end of an 85% fixed-fee, revenue-based contract to gather, process, move, store, and export crude oil and natural gas. (Source: “Investor Relations Presentation: April 2024,” Hess Midstream LP, last accessed April 30, 2024.)
The company owns, operates, develops, and acquires oil, gas, and water midstream assets in the prolific North Dakota Bakken and Three Forks Shale areas in the Williston Basin of North Dakota. Hess Midstream provides strategic infrastructure assets and services, primarily to its parent company, Hess Corp (NYSE:HES), but also to third parties. (Source: “About Us,” Hess Midstream LP, last accessed April 30, 2024.)
As a result, the company’s bottom line isn’t susceptible to fluctuations in oil and gas prices. Hess Midstream is like a tollkeeper that collects fees whether its clients use its infrastructure or not.
Minimum volume commitments provide the partnership with downside protection. Its contracts, which are set on a rolling three-year forward basis (send or pay), cannot be adjusted downward once set, and any shortfall payments are made quarterly. (Source: “Investor Relations Presentation: April 2024,” Hess Midstream LP, op. cit.)
Hess Midstream’s current commercial contracts are locked in through 2033. Its fees are set annually for all future years of a contract in the initial term of that contract. This allows the company to earn contractual returns on the capital it deploys. On top of that, the partnership’s fees escalate each year based on the Consumer Price Index (CPI).
This provides Hess Midstream with steady, growing cash flow and opportunities to expand its business and provide reliable dividends and long-term capital appreciation to Hess Midstream stockholders.
Both of Hess Midstream LP’s Sponsors Being Acquired
Interest in HESM stock has increased significantly since late October 2023, when Chevron Corp (NYSE:CVX) announced plans to acquire Hess Corp in a deal valued at $53.0 billion. (Source: “Chevron Announces Agreement to Acquire Hess,” Chevron Corporation, October 23, 2023.)
Hess Corp has a 37.8% stake in Hess Midstream LP.
Then, in January 2024, BlackRock Inc (NYSE:BLK) announced plans to acquire Global Infrastructure Partners for $3.0 billion in cash and about 12 million shares of BlackRock common stock. (Source: “BlackRock Agrees to Acquire Global Infrastructure Partners (“GIP”), Creating a World Leading Infrastructure Private Markets Investment Platform,” BlackRock Inc, January 12, 2024.)
Through a joint venture, Global Infrastructure Partners owns 26.8% of Hess Midstream LP.
The big question is, what will happen to Hess Midstream once its two sponsors are acquired? Chevron hasn’t said whether it will purchase Hess Midstream, and BlackRock hasn’t commented on the joint venture.
For now, Hess Midstream’s contracts with Hess Corp are intact through 2033. Hess Midstream’s management said it doesn’t believe there will be any change to its Global Infrastructure joint venture.
It certainly makes sense that Chevron Corp would add Hess Midstream LP to its portfolio. Hess Midstream is responsible for supporting Hess Corp’s crucial operations in the Bakken formation. It also supports many third-party customers. Hess Midstream’s send-or-pay contracts mean it has a steady cash flow. Furthermore, as its output rises, Hess Midstream will naturally generate more revenues.
Q1 Net Income Climbed 14% Year-Over-Year
For the first quarter ended March 31, Hess Midstream announced that its net income increased by 13.9% year-over-year to $161.9 million. After deductions for noncontrolling interests, its net income was $44.6 million, or $0.60 per share. (Source: “Hess Midstream LP Reports Estimated Results for the First Quarter of 2024,” Hess Midstream LP, April 25, 2024.)
The partnership’s revenues and other income were $355.6 million, up by 16.6% from $305.0 million in the first quarter of 2023.
Its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) climbed in the first quarter of 2024 to $275.8 million. Its adjusted free cash flow (FCF) advanced from $142.2 million in the first quarter of 2023 to $194.2 million in the first quarter of 2024.
In the first quarter of 2024, the company’s throughput volumes for gas gathering and gas processing increased by 16% year-over-year, throughput volumes for crude oil gathering increased by 14% year-over-year, throughput volumes for terminaling increased by 13% year-over-year, and throughput volumes for water gathering increased by 47% year-over-year.
Looking ahead, Hess Midstream LP expects to report full-year adjusted EBITDA of $1.13 billion to $1.18 billion, which represents 12.5% growth at the midpoint. It also expects to report adjusted FCF of $685.0 to $735.0 million, compared to $605.8 million in 2023.
Quarterly Dividend Increased to $0.65 Per Share
Hess Midstream is a cash cow with a long history of rewarding income investors.
The partnership has raised its dividends for the last seven consecutive years. In fact, it has raised its dividend level almost quarterly. Over the last three years, management has increased Hess Midstream stock’s dividend by 11.0% on an annual basis. (Source: “Dividends,” Hess Midstream LP, last accessed April 30, 2024.)
In April, the company declared a hike to HESM stock’s dividend by 2.7% quarter-over-quarter and 11% year-over-year to $0.6516 per share (to be paid on May 14). That translates to a yield of 7.9% (as of this writing).
Commenting on the increase, Jonathan Stein, Hess Midstream’s chief financial officer, said, “We continue to execute on our differentiated financial strategy, prioritizing consistent and ongoing return of capital to our shareholders.” (Source: “Hess Midstream LP Announces Distribution Per Share Level Increase,” Hess Midstream LP, April 22, 2024.)
“We expect to continue to have more than $1.25 billion of financial flexibility through 2026 that can be used to support our return of capital framework, including potential additional and ongoing unit repurchases that could support further distribution per share level increases.”
Hess Midstream Stock Recently Hit Record High
Hess Midstream LP’s dividend program isn’t the only thing the company’s shareholders have been able to rely on. HESM stock has also been rewarding buy-and-hold investors with share-price appreciation.
Since the start of 2021, with dividends reinvested, Hess Midstream has provided total returns of 126% (as of this writing). Over the same period, the S&P 500 has returned 35.1%. Had investors not reinvested their dividends, the total returns from Hess Midstream stock would have slipped to 76%.
On April 3, HESM stock hit a record intraday high of $36.84. It has retraced a little since then. As of this writing, Hess Midstream stock is up by:
- 11% year-to-date
- 27% year-over-year
- 16% since I wrote about HESM stock in October 2023
Chart courtesy of StockCharts.com
The outlook for shares of Hess Midstream LP is robust, with analysts providing a 12-month target of $38.00. This points to potential gains of more than 10%.
The Lowdown on Hess Midstream LP
When it comes to the energy sector, midstream companies like Hess Midstream don’t really care what the price of oil is; they bring in money from long-term send-or-pay contacts.
100% of Hess Midstream LP’s fee-based contracts reduce commodity price exposure, 85% of its revenues are protected by minimum volume commitments, and its annual fee increases are based on CPI escalations.
This helps explain how Hess Midstream has been able to grow its EBITDA every year since the company was formed in 2015. It also explains how management has been able to increase Hess Midstream stock’s distribution for the last seven years.
Recently, the company reported solid first-quarter results with solid revenue and earnings growth.
For dividend hogs, management recently increased HESM stock’s quarterly dividend by 11% year-over-year. Moreover, Hess Midstream LP is targeting five-percent annual growth in its distributions through 2026.
