Compressor Stations And Capa Gas Plant Will Boost Production Capacity

Key Takeaways

• Completion of new compressor stations and civil construction on the Capa gas plant could boost operational capacity and revenue via increased processing volumes.
  
• Maintaining a strong gross adjusted EBITDA margin above the target demonstrates effective cost management, potentially enhancing net margins.
  
• Hess Midstream faces risks from volatile weather, macroeconomic factors, oil price uncertainties, and reliance on third-party volumes, impacting revenue and earnings stability.

Catalysts

Owns, operates, develops, and acquires midstream assets and provide fee-based services to Hess and third-party customers in the United States.

• Hess Midstream is completing two new compressor stations and commencing civil construction on the Capa gas plant, which is likely to enhance operational capacity and increase revenue through higher processing volumes.
  
• Running a 4-rig drilling program with expectations of increased production from the Bakken is set to drive throughput volumes, positively impacting future revenue growth.
  
• The strategy of maintaining a strong gross adjusted EBITDA margin of approximately 80%, above the 75% target, indicates effective cost management that could improve net margins.
  
• The financial flexibility projection of more than $1.25 billion through 2027 for potential shareholder returns, including unit repurchases, could lead to improved earnings per share (EPS).
  
• Targeted annual 5% growth in distribution per Class A share, supported by existing minimum volume commitments (MVCs), can provide a stable increase in earnings, appealing to income-focused investors.

Hess Midstream Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Hess Midstream's revenue will grow by 10.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 16.4% today to 37.0% in 3 years time.
• Analysts expect earnings to reach $749.2 million (and earnings per share of $3.87) by about May 2028, up from $250.1 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $453.7 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 20.1x on those 2028 earnings, up from 17.4x today. This future PE is greater than the current PE for the US Oil and Gas industry at 11.3x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.6%, as per the Simply Wall St company report.

Hess Midstream Future Earnings Per Share Growth

Risks

• Weather challenges, such as severe winter conditions, can negatively impact throughput volumes and consequently reduce revenues and earnings.
  
• There is macroeconomic volatility impacting Bakken operations, which could affect rig activity and future production levels, impacting revenue predictability and growth potential.
  
• Declining net income and adjusted EBITDA compared to the previous quarter, driven primarily by lower volumes, could signal vulnerabilities in maintaining consistent profit margins and earnings.
  
• Uncertainties in oil prices and potential future adjustments in Hess's drilling activities could impact production volumes and forecasted revenues or net margins.
  
• Dependency on third-party volumes to maintain growth poses a risk if there are fluctuations or declines in third-party production, potentially affecting overall revenues and earnings stability.

Valuation

• The analysts have a consensus price target of $44.0 for Hess Midstream based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $2.0 billion, earnings will come to $749.2 million, and it would be trading on a PE ratio of 20.1x, assuming you use a discount rate of 6.6%.
• Given the current share price of $37.24, the analyst price target of $44.0 is 15.4% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.