Expanding Bakken Operations And Shareholder Returns Promise Bright Future

Key Takeaways

• Expansion in gas gathering, processing, and infrastructure development highlights growth in critical operational areas, aiming to enhance revenue through Bakken region support.
  
• Financial strategy focused on shareholder returns via repurchases and high distribution growth, coupled with expectations of significant adjusted free cash flow, suggests robust financial health and operational efficiency.
  
• Dependence on Hess Corporation and execution risks in capital projects could lead to volatility and affect Hess Midstream's earnings, margins, and shareholder returns.

Catalysts

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

• Hess Midstream is focused on increasing gas gathering and processing throughput volumes, indicating a commitment to grow critical sectors of its operations, which could boost revenues as it supports Hess and third-party development in the Bakken region.
  
• The company is making excellent progress on capital plans, including the construction of two compressor stations and associated gathering pipelines, aimed at expanding its operational capacity. This infrastructure development is likely to support future revenue and earnings growth.
  
• A financial strategy that prioritizes return of capital to shareholders through accretive repurchases and high distribution growth rates could enhance shareholder value, driving positive sentiment and potentially underpinning stock valuation.
  
• Hess Midstream's operation in the Bakken area, where it anticipates approximately 10% annualized growth in gas and oil volumes, suggests robust future growth prospects impacting both revenue and net income positively through increased throughput volumes.
  
• The management's expectation of generating adjusted free cash flow significantly higher than its annual distribution growth target for Class A shares implies strong financial health and operational efficiency, which could lead to increased earnings and margins while bolstering cash available for further shareholder returns.

Assumptions

• Analysts are assuming Hess Midstream's revenue will grow by 9.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 11.6% today to 36.2% in 3 years time.
• Analysts expect earnings to reach $690.8 million (and earnings per share of $3.38) by about September 2027, up from $166.9 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.3x on those 2027 earnings, down from 19.7x today. This future PE is greater than the current PE for the US Oil and Gas industry at 9.8x.
• Analysts expect the number of shares outstanding to decline by 5.82% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 7.84%, as per the Simply Wall St company report.

Risks

• Dependence on Hess Corporation's performance and upstream activities could lead to volatility in throughput volumes, directly affecting Hess Midstream's revenue and net income if Hess encounters any production issues.
  
• Planned maintenance activities, such as the outage at the Little Missouri 4 gas plant, might temporarily reduce throughput volumes impacting revenue and EBITDA in the short term.
  
• Risks associated with the execution of capital projects, including the construction of two compressor stations and associated gathering pipelines, could impact capital expenditures and delay improvements in throughput capacity, thereby affecting future earnings and cash flow.
  
• The expectation of increased competition in the Bakken region for gathering and processing could pressure margins or lead to increases in operating costs as efforts to retain or attract third-party business intensify, impacting net margins.
  
• Financial strategy that prioritizes return of capital to shareholders through unit repurchases and distribution growth, while maintaining low leverage, could be at risk if operational or market challenges reduce free cash flow or necessitate higher-than-expected capital expenditures, affecting the ability to sustain shareholder returns and manage debt levels.

Valuation

• The analysts have a consensus price target of $39.8 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 2027, revenues will be $1.9 billion, earnings will come to $690.8 million, and it would be trading on a PE ratio of 13.3x, assuming you use a discount rate of 7.8%.
• Given the current share price of $35.89, the analyst's price target of $39.8 is 9.8% 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.