Hess Midstream: Chevron Clarity Nears (Downgrade)

Hess Midstream (HESM) reported a strong Q2, with revenue up 13% to $414 million and adjusted EBITDA reaching $316 million, driven by robust volume growth across its system. The company reiterated its 2025 guidance for approximately 11% EBITDA growth and raised its dividend by 5.1%, underpinned by a highly predictable, fee-based contract structure with minimum volume commitments. Following Chevron's (CVX) recent acquisition of Hess Corp., HESM's credit rating was upgraded, and a full acquisition by CVX, which now holds a 37.6% stake, is increasingly anticipated, potentially at a premium. Despite recent share appreciation, the analyst maintains a 'buy' rating, emphasizing HESM's attractive dividend yield and stable cash flows due to its insulated business model.

Analysis

Hess Midstream (HESM) demonstrated strong operational and financial performance in its second-quarter results, beating earnings estimates with a $0.02 beat at $0.74 per share, driven by a 13% year-over-year revenue increase to $414 million. This top-line growth was fueled by significant volume increases across gas processing (+7%), oil terminaling (+9%), and water gathering (+11%). The company's financial health is further underscored by a nearly $40 million annual increase in adjusted EBITDA to $316 million, maintaining exceptional 82% margins and generating $194 million in free cash flow. This performance supports the company's reiterated 2025 guidance for approximately 11% EBITDA growth and a robust capital return program, including a 5.1% dividend hike and a targeted $100 million quarterly share repurchase. The core investment thesis is anchored by HESM's highly predictable cash flow, which is insulated from commodity volatility by 100% fee-based contracts and protected from volume risk by minimum volume commitments (MVCs) that are locked in to rise through 2033. The recent completion of Chevron's (CVX) acquisition of Hess Corp. has introduced a significant new dynamic; CVX now holds a 37.6% stake in HESM, leading to a credit rating upgrade for HESM to investment grade. A full acquisition of HESM by Chevron is now considered the most likely scenario, drawing parallels to CVX's prior acquisition of Noble Midstream, with potential clarification expected at Chevron's November investor day. Governance provisions requiring independent director approval for major transactions provide a safeguard for public unitholders against unfavorable contract changes or a low-ball acquisition offer.

Key Decisions for Investors

• Investors should recognize HESM's dual-return profile, which combines a secure 7.1% dividend yield, targeted to grow 5% annually, with a significant M&A catalyst in a potential full acquisition by Chevron.
• Monitor Chevron's investor day in November closely for any strategic announcements regarding its 37.6% stake in HESM, as a potential takeover is considered probable and could command a premium price above current levels.
• Given that the stock has already appreciated 14% since May, new investors should weigh the solid fundamental outlook against the more moderate near-term upside, as the risk-reward profile has shifted from 'strong buy' to 'buy'.
• Current holders can be confident in the downside protection offered by HESM's contract structure, which guarantees rising minimum volumes and fee-based revenues, alongside a governance structure that prevents Chevron from unilaterally imposing unfavorable terms.