New Gas Plant To Expand Capacity And Drive Future Volume Growth

Key Takeaways

• Anticipated volume growth in gas and oil, along with new infrastructure development, is likely to boost revenues and earnings through increased throughput capacity.
  
• Focus on shareholder returns through unit repurchases and distribution increases suggests potential enhancements in earnings per share and stock value.
  
• Dependence on Hess Corporation's growth and Bakken gas volumes, coupled with external challenges, may risk financial stability 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 anticipates significant volume growth, with gas volumes expected to increase by more than 25% from 2024 through 2027, driven by both Hess' development activities and rising third-party volumes. This expansion is likely to boost revenues and earnings.
  
• They are beginning construction on a new 125 million cubic foot per day gas processing plant which is expected to be operational in 2027, providing additional capacity to support throughput growth. This investment will likely bolster revenue growth and EBITDA by accommodating increased gas volumes.
  
• The company's guidance indicates a projected 10% growth in oil and gas volumes for 2025, with similar growth anticipated in subsequent years. These increases in throughput are expected to drive revenue and adjusted EBITDA growth.
  
• Hess Midstream reported adjusted EBITDA growth and expects continued growth by more than 10% in 2025 and 2026, followed by over 5% in 2027. This growth is supported by higher throughput volumes, indicating potential earnings growth.
  
• The company has a strong financial strategy prioritizing shareholder returns, with ongoing plans for unit repurchases and distribution increases through 2027. This focus on returning capital to shareholders might enhance earnings per share and boost stock value.

Hess Midstream Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Hess Midstream's revenue will grow by 9.7% annually over the next 3 years.
• Analysts are assuming Hess Midstream's profit margins will remain the same at 14.9% over the next 3 years.
• Analysts expect earnings to reach $293.8 million (and earnings per share of $3.11) by about March 2028, up from $223.1 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $444.2 million in earnings, and the most bearish expecting $143.3 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 52.6x on those 2028 earnings, up from 22.6x today. This future PE is greater than the current PE for the US Oil and Gas industry at 12.7x.
• 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 7.94%, as per the Simply Wall St company report.

Hess Midstream Future Earnings Per Share Growth

Risks

• The reliance on Hess Corporation's development activity and the Bakken's gas volumes for growth means that any downturn or underperformance in these areas could negatively affect Hess Midstream's revenue projections and profitability.
  
• Severe winter weather impacting production in the first quarter of 2025 and potentially beyond could lead to lower revenue and adjusted EBITDA in the short term.
  
• Projected capital expenditures, including those for the Capa Gas Plant, might lead to increased financial risk or strain if expected volume growth does not materialize, impacting net margins.
  
• The planned regulatory maintenance at the Tioga Gas Plant in 2027 is expected to reduce gas volumes, which could result in lower revenue and earnings for that year.
  
• Potential changes at the sponsor level or in shareholder composition could influence or limit Hess Midstream's capital allocation strategies, including share repurchases, potentially affecting free cash flow and shareholder returns.

Valuation

• The analysts have a consensus price target of $43.6 for Hess Midstream based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $48.0, and the most bearish reporting a price target of just $39.0.
• 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 $293.8 million, and it would be trading on a PE ratio of 52.6x, assuming you use a discount rate of 7.9%.
• Given the current share price of $43.21, the analyst price target of $43.6 is 0.9% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.