Hess Corp.'s Governance Nightmares: Why Its Midstream Assets Are Overvalued and Investors Should Proceed with Caution

Hess Corporation (HES) is facing a perfect storm of governance-related legal risks that threaten to unravel its midstream valuation narrative. Recent lawsuits and regulatory scrutiny reveal a pattern of self-dealing, financial engineering opacity, and environmental liabilities that could send its stock spiraling downward. Investors should take heed: Hess’s midstream subsidiaries are not the cash cows they appear to be—instead, they’re ticking time bombs of regulatory exposure and governance failure. Here’s why shorting Hess now—or at least staying on the sidelines—might be the safest bet.

The Self-Dealing Allegations: A Blueprint for Conflict of Interest

At the heart of the crisis is a May 2025 Texas federal lawsuit filed by an Oklahoma-based independent oil producer. The plaintiff alleges that Hess orchestrated a network of “self-dealing” agreements among its subsidiaries to charge inflated midstream service fees, costing the plaintiff an estimated $69 million in lost revenue. The lawsuit claims Hess used its control over midstream subsidiaries to manipulate pricing, diverting profits unfairly from partners to its own coffers.

This isn’t just a contractual dispute—it’s a red flag for systemic governance failures. Hess’s midstream operations are structured in a way that blurs the line between corporate entities, creating opportunities for unethical financial engineering. For instance:
- Hess engaged J.P. Morgan (JPM) as both a financial advisor for its Chevron merger and the administrative agent for its Hess Midstream LP credit facilities. JPM and its affiliates received $7.6 million in fees from Hess subsidiaries over two years—a conflict of interest that could have skewed financial decisions.
- The Texas lawsuit alleges Hess subsidiaries like Hess Midstream LP charged third parties rates “far exceeding market norms,” leveraging their control to extract excess profits.

Hess’s stock has underperformed its peers by 15% year-to-date, suggesting markets are already pricing in governance risks. But the true reckoning may still be ahead.

Regulatory and Legal Risks: The Domino Effect

The Texas lawsuit is just the tip of the iceberg. Hess’s SEC filings reveal a litany of environmental and fiduciary liabilities, including:
1. Gowanus Canal Superfund Site: Hess faces ongoing cleanup costs for a EPA-designated toxic site in New York.
2. MTBE Litigation: Lawsuits over groundwater contamination from the gasoline additive MTBE, which could cost hundreds of millions.
3. Asset Retirement Obligations: Hess’s liabilities for environmental remediation jumped to $1.335 billion by September 2024—up 12.6% from 2023.

Meanwhile, a separate class-action lawsuit in Texas accuses Hess of breaching fiduciary duties in its 401(k) plan by using overpriced T. Rowe Price funds. A court recently allowed claims to proceed, signaling that Hess’s governance flaws aren’t confined to midstream.

These cases underscore a broader issue: Hess’s opaque corporate structures and lack of transparency are attracting scrutiny from regulators and courts alike. If the Texas self-dealing allegations lead to class-action certification, Hess could face multi-million-dollar settlements—or worse, criminal charges for antitrust violations.

Valuation Impact: Midstream Assets Are Overvalued—And At Risk of Write-Downs

Hess’s midstream segment is a key pillar of its valuation. But if the self-dealing allegations hold, those assets could be drastically overvalued. Here’s why:
- Fee-Based Revenue at Risk: If courts or regulators invalidate the inflated fees, Hess may have to refund $69 million—or more—to partners. That’s a direct hit to earnings.
- Asset Write-Downs: If midstream subsidiaries are deemed “variable interest entities” (as noted in SEC filings), their valuation could plummet if their revenue streams are deemed unsustainable.
- Costly Litigation: Legal fees and settlements from ongoing cases (Gowanus, MTBE, Texas midstream suit) could erode Hess’s already strained balance sheet.

Hess’s P/E ratio of 12.5x is 20% above the energy sector average, implying investors are overpaying for a company with mounting governance risks. A revaluation could easily drop its stock by 25-30% as liabilities come to light.

The Investment Call: Short Now, or Avoid Until Governance Transforms

The writing is on the wall for Hess:
- Short the stock: With legal risks escalating and midstream valuations under threat, a short position could profit handsomely as the stock corrects.
- Avoid new exposure: Until Hess proves transparency in its midstream agreements and settles lawsuits, the risks far outweigh potential rewards.

Sector-wide, this case is a warning for energy firms with vertically integrated structures. Investors should now favor companies with segregated governance for subsidiaries and clear fee disclosure practices—or risk repeating Hess’s fate.

Conclusion: Governance Failures = Overvalued Stock

Hess Corp. is a cautionary tale of how opaque corporate structures and self-dealing can erode investor trust. With legal battles mounting and midstream assets overvalued, now is the time to exit positions or bet against the stock. The energy sector’s next chapter may hinge on whether companies can separate governance from financial engineering—or face the consequences.

Stay vigilant—and stay short.

Disclosure: This analysis is for informational purposes only. Consult a financial advisor before making investment decisions.