New 125 Million Cubic Feet Per Day Gas Plant Will Boost Throughput

Key Takeaways

• Strategic infrastructure projects and capturing third-party volumes are expected to enhance throughput, operational efficiency, and net margins.
  
• Disciplined capital expenditures and stable CapEx are projected to drive significant free cash flow growth, boosting shareholder returns and earnings.
  
• Planned maintenance, weather disruptions, and reliance on Hess Corporation and third-party volumes could undermine Hess Midstream's revenue and margin stability amidst increased capital expenditures.

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 plans to grow throughput by approximately 10% across oil and gas systems in 2024, driven by Hess' development activity and strong gas capture, positively impacting revenue and net margins.
  
• The construction of a 125 million cubic foot per day greenfield gas processing plant set to be online in 2027 is likely to support future processing volumes and revenue growth.
  
• Hess Midstream's strategic focus on capturing additional third-party volumes in the Bakken could enhance revenue and operational efficiency, contributing to higher net margins.
  
• The infrastructure build and multiyear projects, such as two new compressor stations, are designed to support expected production growth, potentially increasing throughput and driving earnings.
  
• Continued disciplined capital expenditures and stable CapEx are expected to lead to adjusted free cash flow growth above 10% per year through 2026, boosting potential shareholder returns and earnings per Class A share.

Hess Midstream Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Hess Midstream's revenue will grow by 10.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 13.1% today to 48.6% in 3 years time.
• Analysts expect earnings to reach $947.3 million (and earnings per share of $3.3) by about January 2028, up from $190.2 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 15.7x on those 2028 earnings, down from 22.3x today. This future PE is greater than the current PE for the US Oil and Gas industry at 12.6x.
• Analysts expect the number of shares outstanding to grow by 9.56% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.86%, as per the Simply Wall St company report.

Hess Midstream Future Earnings Per Share Growth

Risks

• The planned maintenance activities and potential operational disruptions, such as those from wildfires, suggest potential volatility in throughput volumes, which can impact overall revenue stability and growth prospects.
  
• There is a reliance on the continued performance and strategic actions of Hess Corporation's upstream activities, meaning any unforeseen downturns or shifts in Hess's production plans could directly affect Hess Midstream's earnings and revenues.
  
• Increased capital expenditures related to infrastructure development, such as new compressor stations and a greenfield gas processing plant, could pressure net margins and cash flow if not matched by an increase in revenue.
  
• Any unpredictable weather or power disruptions in North Dakota, as observed with recent wildfires, pose a risk to consistent volume delivery, which could negatively impact revenue and EBITDA growth.
  
• Dependence on third-party volume growth and a relatively stable percentage of third-party volumes could pose a risk to achieving projected throughput and revenue targets if broader market conditions fail to support anticipated growth.

Valuation

• The analysts have a consensus price target of $41.4 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 $1.9 billion, earnings will come to $947.3 million, and it would be trading on a PE ratio of 15.7x, assuming you use a discount rate of 7.9%.
• Given the current share price of $40.75, the analyst's price target of $41.4 is 1.6% 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.