Hess Midstream LP (NYSE: HESM)

Sector: Energy Industry: Oil & Gas Midstream CIK: 0001789832
ROIC (Qtr) 0.35
Total Debt (Qtr) 3.77 Bn
Revenue Growth (1y) (Qtr) 2.16
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About

Investment thesis

Bull case

  • The capital expenditure outlook that management disclosed in the fourth quarter call represents a dramatic 40% reduction from the prior year, a figure that is underpinned by the completion of a multi‑year gathering and compression system build‑out. This disciplined spend is expected to lower capital outlays to roughly $150 million in 2026, with a further decline to below $75 million in 2027 and 2028, freeing significant cash that can be redirected to shareholder distributions or debt reduction. The company’s guidance explicitly states that this lower capex will support a projected adjusted free cash flow expansion of 10% annually through 2028, a growth trajectory that outpaces the company’s own 5% distribution target. The free cash flow resilience is reinforced by a 95% volume commitment coverage for 2026, which protects revenue even in a weather‑impacted environment. The combination of lower debt, higher free cash flow, and a consistent distribution policy positions the company as an attractive income play with strong upside potential.
  • The Q&A session revealed a shift in the company’s integration strategy following the Chevron merger, with a clear emphasis on leveraging Chevron’s optimized development plan to achieve a 200,000 BOE per day plateau in the Bakken. This partnership is expected to drive gas volume growth, as Chevron’s drilling cadence increases, which in turn supports Hess Midstream’s gas processing throughput that averaged 444 million cubic feet per day in 2025. Management’s reference to “long‑term growth” through 2028 suggests that the company will capture a larger share of the regional production curve, especially as the gas field expands and new wells become productive. The company’s ability to capitalize on Chevron’s scale and well‑connect strategy will likely reduce upstream bottlenecks and improve throughput reliability, which is critical for maintaining high operating margins.
  • Hess Midstream’s operational metrics demonstrate a robust gross adjusted EBITDA margin of 83% in the fourth quarter of 2025, surpassing the 75% target and indicating strong operating leverage. The company’s management highlighted that the majority of revenue is protected by fixed‑fee contracts, a feature that insulates the business from short‑term price volatility. Fixed‑fee exposure also aligns with the company’s long‑term risk‑reduction strategy, as it mitigates the impact of volatile commodity spreads on cash flow. Moreover, the maintenance of high margins amid lower volumes during severe weather underscores the resilience of the business model.
  • A new compressor station commissioned in January 2026 provides an additional 50 MMcf/d of capacity, with the potential to scale up by 20 MMcf/d. This expansion enhances the company’s ability to service higher volumes, especially during peak demand periods, and positions it to capture incremental gas volumes from Chevron’s expanding operations. The station’s modular design reduces capital risk while providing operational flexibility, allowing Hess Midstream to adjust output in response to market conditions. Such capacity expansion also reinforces the company’s long‑term volume protection strategy, further cementing its revenue base.
  • The company’s debt profile, at roughly $3.8 billion and a leverage ratio of 3.1x adjusted EBITDA, sits comfortably below the industry benchmark for midstream operators. Management’s assurance that leverage will naturally decline as EBITDA grows, coupled with a strategic focus on free cash flow, implies a disciplined approach to balance‑sheet management. Lower leverage translates to reduced interest expense, improving net income and freeing cash for distributions or further capital investments. This conservative stance also positions the company favorably for refinancing or debt‑repayment initiatives should market conditions deteriorate.
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Bear case

  • While the company highlights a 95% minimum volume commitment coverage for 2026, the reliance on fixed‑fee contracts and third‑party volumes exposes it to the risk that Chevron’s drilling schedule could slow, directly reducing the volumes the company can service. A decline in Chevron’s production pace would undermine the projected volume growth and could force the company to lower rates or negotiate renegotiated terms, compressing margins. The company’s guidance assumes a 10% third‑party volume share, but management’s response to a question about third‑party outlook was largely evasive, providing no concrete evidence of a stable or growing third‑party base. The potential for a contraction in third‑party volumes creates a hidden downside that may erode the company’s revenue base.
  • The company’s capital spending schedule shows a significant reduction to $150 million in 2026, yet this figure is still heavily dependent on the completion of a compression build‑out. Management’s statement that the company will “continue to use lower capital” is vague and does not account for potential unforeseen maintenance or regulatory compliance costs that could arise. If unexpected capital requirements emerge, the company could be forced to increase spending or tap its revolving credit facility, thereby increasing debt levels and diluting shareholder returns. The company’s focus on lower capex also means it may forgo strategic acquisitions that could generate long‑term growth.
  • The company’s forecast of a flat to slightly positive EBITDA in 2026 ignores the potential impact of severe winter weather on throughput volumes. The Q&A highlighted that the company expects “lower volumes” in 2026 due to winter weather, yet the guidance remains flat, suggesting a potential underestimation of weather‑related disruptions. A persistent cold spell could lead to extended shut‑ins and higher operating costs, eroding margins and free cash flow. The company’s assumption that volume commitments will fully protect revenue is contingent on the reliability of third‑party supply, which could be compromised.
  • The company’s debt profile, while currently at a leverage of 3.1x adjusted EBITDA, remains significant given the oil and gas sector’s exposure to commodity price swings and regulatory changes. Management’s lack of a specific leverage target or timeline for deleveraging introduces uncertainty. The company’s strategy to “delever naturally” as EBITDA grows could be compromised if revenue growth stalls, leading to a higher debt‑to‑EBITDA ratio that could weaken credit metrics and increase borrowing costs.
  • The company’s focus on fixed‑fee contracts, while providing revenue stability, also exposes it to rate pressure if market conditions change. The company’s reliance on inflation escalators capped at 3% means that revenue growth may lag behind rising operating costs, compressing gross margins. Management’s emphasis on maintaining a 5% distribution growth could be at odds with the need to reinvest in maintenance or to upgrade infrastructure to keep pace with aging assets.
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Segments Breakdown of Revenue (2025)

Product and Service Breakdown of Revenue (2025)

Peer comparison

Companies in the Oil & Gas Midstream
S.No. Ticker Company Market Cap P/E P/S Total Debt (Qtr)
1 FLNG Flex LNG Ltd. - - - 1.85 Bn
2 LNG Cheniere Energy, Inc. - - - 22.81 Bn
3 GEL Genesis Energy Lp - - - 3.04 Bn
4 PBA Pembina Pipeline Corp - - - 1.16 Bn
5 VNOM Viper Energy, Inc. - - - -
6 PAGP Plains Gp Holdings Lp - - - 2.14 Bn
7 CQP Cheniere Energy Partners, L.P. - - - 14.47 Bn
8 VG Venture Global, Inc. - - - 34.21 Bn