Midstream energy sector standout Hess Midstream (NYSE:HESM) boasts a steady stream of revenue, primarily underpinned by contractual commitments, and exhibits potential for future expansion. With a generous dividend yield of 6.85%, the company, which experienced over 30% stock growth in the past year, presents a compelling option for income-focused investors seeking value.
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Hess Midstream’s Steady Model
Hess Midstream is a midstream company that owns and operates various midstream assets. HESM’s assets include oil, gas, and produced water handling facilities, located mainly in the highly productive oil-gathering regions of the Bakken, and Three Forks Shale plays in North Dakota’s Williston Basin.
The company operates in gathering, processing, and terminaling. The gathering segment relies on a 1,380-mile pipeline network for transporting natural gas, crude oil, and produced water to processing and export terminals. The processing segment operates top-tier facilities with a combined capacity of over 600 MMcf/d. Finally, the terminaling segment focuses on storing, transporting, and exporting crude oil and Natural Gas Liquids (NGLs).
The company’s operational stability is strengthened by its long-term commercial contracts that run until 2033, with the expectation of further extensions. Moreover, Hess Midstream’s business model is fee-based, with minimum volume commitments through 2026. This reduces the unpredictability linked to commodity prices and provides a steady source of earnings, reinforcing the strength of midstream companies in the energy sector.
Hess Midstream’s Recent Financial Results
The company reported mixed results for the first quarter of 2024. Revenue of $355.60 million surpassed expectations of $351.86 million and marked a significant year-over-year increase from $305 million. Adjusted EBITDA increased 15% year-over-year, reaching $276 million. However, reported earnings per share (EPS) of $0.59 fell short of the consensus estimates of $0.64, partly due to increased income tax and elevated interest expenses from borrowings and share repurchases.
The company recently completed a $100 million repurchase transaction, buying over 2.7 million Class B shares from its sponsors. The move, funded by cash reserves, resulted in the cancellation of an equal number of Class B shares, simplifying the company’s ownership structure. Furthermore, the firm’s board declared a quarterly cash distribution of $0.6516 per Class A share, marking an approximate 2.7% increase from the prior quarter.
What Is the Price Target for HESM Stock?
Analysts following the company have taken a cautiously optimistic stance on the stock. For example, UBS analyst Manav Gupta recently raised the price target on the shares from $38 to $40 while keeping a Buy rating, noting expectations for an increase in Q2 EBITDA driven by increased volume.
Hess Midstream is rated a Moderate Buy overall, based on the recommendations and price targets recently assigned by three analysts. The average price target for HESM stock is $38.33, representing a potential upside of 3.45% from current levels.
The stock has steadily increased, climbing over 88% in the past three years. It trades at the high end of its 52-week price range of $25.98 – $37.31 while showing ongoing positive price momentum, trading above its 20-day (36.16) and 50-day (35.47) moving averages. With an EV to EBITDA of 5.956x, the stock looks undervalued relative to industry peers, with the Oil & Gas Midstream industry average at 9.725x.
Final Analysis on HESM
Hess Midstream’s steady earnings, resulting from a predictable fee-based business model, are coupled with a generous dividend yield of 6.85%, offering a valuable proposition for income-focused investors. Despite mixed results in Q1 2024, the company recorded a significant year-over-year increase in revenue and adjusted EBITDA. The shares show positive momentum while trading at a relative value, making it an appealing opportunity in the midstream energy sector.
