Tactical Expansion In Oil And Gas Promises Robust Revenue And Earnings Growth

Key Takeaways

• Anticipated infrastructure expansions and a focus on gas capture are poised to drive significant future revenue and capacity growth.
  
• Disciplined financial strategy and strong shareholder returns suggest potential improvements in net margins and earnings per share growth.
  
• Delays in key projects and flat oil production could affect Hess Midstream's profitability amidst rising expenditures and competitive pressures in the Bakken basin.

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 a 10% growth in throughput volumes across their oil and gas systems in 2024, driven by Hess' development activity and a focus on gas capture, which is expected to boost revenue.
  
• The construction of two new compressor stations and associated gathering pipelines is underway, with engineering and planning for a 125 million cubic foot per day gas processing plant to start in 2025, potentially increasing future capacity and revenue.
  
• Hess Midstream expects to maintain stable capital expenditures through 2026 while anticipating greater than 10% annualized growth in adjusted EBITDA, indicating potential earnings growth.
  
• The company plans to generate over $1.25 billion of financial flexibility through 2026 for shareholder returns, including potential unit repurchases, which could positively impact earnings per share (EPS).
  
• A focus on a disciplined financial strategy with a low leverage ratio and a strong track record in shareholder returns through distribution growth and share repurchases indicates potential for improved net margins and EPS growth.

Hess Midstream Future Earnings and Revenue Growth

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 $690.2 million (and earnings per share of $3.38) by about October 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 14.9x on those 2027 earnings, down from 19.1x today. This future PE is greater than the current PE for the US Oil and Gas industry at 10.8x.
• Analysts expect the number of shares outstanding to decline by 2.58% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 7.88%, as per the Simply Wall St company report.

Hess Midstream Future Earnings Per Share Growth

Risks

• Hess Midstream's forecast includes risks from unexpected events like wildfires causing power outages, which may lead to reduced throughput volumes and, consequently, impact revenue and EBITDA growth targets.
  
• The company notes that the Bakken basin's overall oil production is expected to remain flat, while gas production increases, which could affect Hess Midstream's profitability if third-party volumes don't grow as expected, impacting revenue and net income.
  
• Capital expenditure guidance reflects an increase for 2024, mainly due to faster drilling by Hess and multiyear project execution, which may place pressure on free cash flow if revenue growth does not adequately offset these expenditures.
  
• The company's strong financial outlook through 2026 depends on large-capacity projects like a gas processing plant being completed on schedule; any delays could hinder expected EBITDA and cash flow growth as planned expansions are integral to their financial strategy.
  
• The competitive landscape and potential M&A activity in the Bakken basin could impact Hess Midstream's strategic positioning, with implications for market share and revenue stability if they fail to capture third-party volumes or beneficial acquisitions.

Valuation

• The analysts have a consensus price target of $40.2 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 $690.2 million, and it would be trading on a PE ratio of 14.9x, assuming you use a discount rate of 7.9%.
  
• Given the current share price of $34.83, the analyst's price target of $40.2 is 13.4% 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.