Summary
Hess Midstream has significant growth potential.
The limited partnership also offers a generous distribution that will grow.
The combined annual return is likely to be around 20%.
Hess has been keeping the midstream prospects rosy in case Hess needs cash to finance the Guyana partnership.
The ability to repurchase a significant number of shares helps to prop up HESM stock price.
This idea was discussed in more depth with members of my private investing community, Oil & Gas Value Research. Learn More »
onurdongel/E+ via Getty Images Hess Midstream ( HESM ) provided a very un-midstream return in the past year. But it looks like the future has more growth ahead. What is typically thought of as an income vehicle appears to have a greater return than the typical midstream investment well into the future.
One of the reasons for this is that Hess ( HES ) is occupied with the Guyana project. The profitability of that partnership means that it has “first call” on any capital budget needs. A big discovery with the profitability characteristics shown so far make Guyana a very rare find.
But that discovery means that Hess needs to keep extra avenues available to raise cash. Now the second platform began production in February . That should sharply decrease the cash needs of the partnership (especially with prices as strong as they currently are). However, in this low visibility industry, it is very hard to be too careful when it comes to finances. Therefore, it probably “pays” to keep the midstream subsidiary in the best light possible in case a decision is made by either partner to sell more shares to the market. Hess Midstream Partnership Common Unit History And Key Valuation Metrics (Seeking Alpha Website March 12, 2022) The common units show above are currently very near their all-time high. The return from the low point last year is roughly 50% before dividends. That is quite a return for any income related security even considering that the midstream group rallied as part of the upstream recovery.
These units got a big boost in July (give or take) when there was an announcement that the partnership would purchase shares from the two major shareholders of the midstream company. That very necessary transaction has enabled the stock to weather some periodic secondary stock sales. Before the transaction was announced the secondary sales appeared to have a greater affect upon the price of the common. Now, with less shares outstanding, the market is firmly focused on the growth prospects (which include share purchase growth enhancements).
It helped matters a lot that the dividend increased at a time when many midstream companies were either cutting back distributions or nominally increasing distributions. Management further reiterated recently that the quarterly distribution increases will continue, and they should amount to roughly 5% per year.
Since the dividends are well covered and this midstream has one of the lowest leverage ratios in the industry, the market appears to be focused on a very bright future for this midstream company. Seldom do income vehicles offer both growth and income. This is one of the few that offers a very attractive return while retaining that perceived low midstream risk. Hess Midstream Business Association With Hess Corporation Description (Hess Midstream March 2022, Corporate Presentation) Hess Midstream has been growing by double digits for some time. Management announced about an 8% growth for fiscal year 2022. Since the parent company is growing Bakken production in double digits (percent) this year, that attractive growth rate is very likely to continue. Meanwhile, the key leverage ratio remains under 3 so this midstream can continue to grow while financing common unit repurchases.
For Hess, the Bakken is the next most profitable part of the company after the Guyana project. Therefore, the Bakken is likely to receive a lot of company attention once the Guyana project turns cash flow positive. That prospect appears to be very soon (and its aided by some very strong commodity prices). As long as the next cyclical downturn is a couple of years away, the “first call” threat of the Guyana partnership for cash may never happen at the expense of the Bakken. Even if the Bakken development were delayed, the current distribution is reasonably covered. So slower growth in the distribution is highly likely in that event.
Right now the combined return appears to be approximately 20%. The common units have risen more than 10% recently several times. For those investors that choose to drip the distributions, there is […]
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