Hess Midstream LP

HESM Details

Hess Midstream LP (NYSE: HESM) is a partnership firm that owns, operates, develops, and acquires midstream infrastructure assets focused on the Williston Basin in North Dakota and provides fee-based services to Hess Corp. and third-party customers. The partnership firm is managed and controlled by Hess Midstream GP, LLC, general partner of HESM’s general partner that is owned 50:50 by Hess Corp. and GIP II Blue Holding Partnership, LP (together, “Sponsors”). The company generates revenue by charging fees for gathering, compressing, and processing natural gas and natural gas liquids (NGLs). As of July 16, 2021, the company’s market capitalization stood at USD 6.88 billion.

Public Offering of Class A Common Shares: On March 15, 2021, HESM’s sponsors completed a public equity offering of 6.90 million of its Class A common shares, including underwriters' option to purchase 900 thousand additional shares at USD 21.00 per Class A share. As a result, the sponsors received USD 139.9 million as net proceeds from the offering after deducting underwriting discounts.

Q1FY21 Results: HESM reported a slight decline of 0.68% in total revenues to USD 288.8 million in Q1FY21 (ended March 31, 2021) compared to USD 290.8 million in Q1FY20, due to a decline in revenues from the terminal and export services offset by the increase in revenues from oil & gas gathering services. However, net income increased 23.72% YoY to USD 159.6 million in Q1FY21 vs. USD 129.0 million in Q1FY20 due to decreased operating and maintenance expenses. As of March 31, 2021, the company’s cash balance stood at just USD 1.5 million, with total debt amounting to USD 1.90 billion.

Key Risks: Hess Corp.’s drilling activity solely determines the need for generated water disposal services offered by the company. Therefore, any significant reduction in Hess Corp.'s drilling activities due to any reason such as the impact of supply and demand factors, delays in production from wells due to government regulation, water shortages, weather-related conditions, etc., might lead to a deterioration in the HESM’s financial position.

Outlook:

FY21 Guidance (Source: Earnings Release, April 28, 2021)

Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation

(Analysis by Kalkine Group)

* % Premium/(Discount) is based on our assessment of the company’s FY21E trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

HESM Daily Technical Chart (Source: REFINITIV)

Stock Recommendation: HESM stock price increased by 31.67% in the past 12 months and is currently leaning towards the higher end of the 52-week range of USD 14.56 to USD 27.62. The stock is currently trading between its 50 and 200 DMA levels, and its RSI Index is 29.50. We have valued the stock using the EV/EBITDA-based relative valuation methodology and arrived at a target price of USD 20.04. Considering the company’s growth prospects, robust dividend yield, highly leveraged balance sheet, associated risks, and current valuation, we recommend an "Expensive" rating on the stock at the closing price of USD 23.20, down 1.78% as of July 16, 2021.

* The reference data in this report has been partly sourced from REFINITIV.

* All forecasted figures and industry information have been taken from REFINITIV.