Hess Midstream: The Cash Flows Are Fine, the Question Is Chevron

Hess Midstream: The Cash Flows Are Fine, the Question Is Chevron

I have argued for a long time that the closest thing the oil patch offers to a bond with an escalator is a fee-based midstream operator with long-dated contracts, a growing distribution, and a balance sheet that can survive a downturn. Hess Midstream still scores on every one of those tests. What has changed is not the machine. It's that the person now running the machine is Chevron, and until Chevron answers the strategic questions it inherited with this asset, the market will keep discounting it.

The units last traded around $39, up 13.5% on the year but still about 6% below the 52-week high of $41.75, while the average Street fair-value estimate sits closer to $37. That gap is the whole story in miniature: a good asset, clean cash flow, and a price that has already outrun what most analysts think it's worth — because the controlling variable in this story lives neither on the income statement nor on the balance sheet.

The Cash Machine Still Works

Let me start with the operations, because the second-quarter report was better than the market's initial reaction suggested. Hess Midstream generated adjusted EBITDA of $313.7 million in Q2, roughly flat against the $316.0 million it posted a year earlier but a step up from the $300.0 million it printed in Q1. Operating cash flow came in at $278.6 million, adjusted free cash flow at $231.6 million, and management raised the quarterly distribution to $0.7888 per Class A share, which represents about 65% of the quarter's adjusted free cash flow and works out to roughly 1.5 times coverage.

To be fair to the tape, the quarter did miss on the income statement: analysts were looking for around $446 million of revenue and $0.84 a share, and the company printed $399 million and $0.75. The gap is not a business problem. A large slice of consolidated net income flows to the sponsor's Class B units before public Class A shareholders are paid, depreciation is heavy, and cash taxes begin arriving in 2026. The cash-flow statement is the honest lens, and on that basis the machine delivered.

Even with throughput down — oil terminaling fell 15%, water gathering 12%, and gas processing 4% — cash kept compounding, because contracts, not volumes, set the floor. That is the fee-based distinction: gross adjusted EBITDA margin ran near 85% in the quarter, and on a trailing basis the business carries an EBITDA margin around 75% with returns on invested capital near 21%.

Management reaffirmed its full-year outlook this month with adjusted free cash flow guided to $910–$960 million on capital spending of only about $105 million, falling below $75 million annually in 2027 and 2028. Put a calculator to that and the picture is clear: this is a business converting itself into a low-capex cash engine even while volumes stand still.

Why the Cash Flow Is So Predictable

A large part of the stability is the contract architecture. Hess Midstream operates on 100% fee-based contracts that minimize commodity price exposure, and the minimum volume commitments — set at 80% of Chevron's nominations and, critically, cannot be reduced once set — provide minimum levels of cash flow regardless of what the rig count does. The contracts run through 2033, and management has been explicit that even at minimum volume levels the targeted distribution remains fully funded. That is what separates this from an E&P: the price of oil can do almost anything and the distribution math barely moves.

The Sponsor in the Room

Now let's talk about the 800-pound sponsor. Chevron completed its acquisition of Hess Corporation in July 2025, after an arbitration panel threw out Exxon's claim that it had a contractual right to bid for Hess's crown-jewel assets in Guyana. With that deal, Chevron inherited Hess Midstream's general partner and a roughly 38% equity stake — positioning it as both the controlling shareholder and the operator's sole meaningful customer.

The consequences arrived quickly. In September 2025 Hess Midstream cut its guidance for 2025, 2026 and 2027, telling investors to expect adjusted EBITDA to remain roughly flat through 2027 after years of double-digit growth; the units fell about 10% in a day. The driver was Chevron's decision to run a leaner Bakken program, holding production near 200,000 barrels of oil equivalent per day rather than growing it the way Hess had planned. The January guidance confirmed the reset: roughly flat volumes in 2026, gas throughput growing only about 1.5% a year through 2028, oil essentially flat.

The Street read the message. Morgan Stanley downgraded the stock to Underweight with a price target of $38 in June, and the complaint from nearly every analyst on the name is the same: limited visibility into long-term growth and the strategic overhang of a sponsor whose eventual plans for the asset remain undefined.

What the Sell-Down Actually Means

Here is where the story gets more interesting than the bear case allows. Chevron has been unwinding its position in an orderly, accretive way. In August 2025 Hess Midstream signed a $100 million repurchase that included Class B units bought from a Chevron affiliate; in March 2026 it followed with an accretive $60 million repurchase, buying back 455,811 Class B units from Chevron at $39.49 — roughly $18 million — alongside a $42 million accelerated buyback of public Class A shares. After those transactions, Chevron's consolidated stake sits at roughly 37.8%, with the public holding about 62.2%.

Chevron selling units back into the partnership at market prices, where they are then cancelled, is a sponsor quietly monetizing without dumping stock on the open market — and every cancelled unit mechanically raises distributable cash flow per remaining share. Combined with the roughly $1 billion of free cash flow after distributions the company expects over 2026-2028, that supports the targeted distribution growth of at least 5% a year through 2028. The bull case here was never a growth story. It is a conservation story: hold the cash, pay it out, buy back the shares, and let the sponsor exit on its own schedule.

From a Valuation Perspective

The units are not cheap the way a deep-value file looks cheap, which is precisely why I am not chasing them at $39. Hess Midstream trades at roughly 9.6 times trailing EV/EBITDA — a notch above Energy Transfer's ~8.3x but well below the 15-20x premiums Williams and Enbridge command — and near Street estimates of worth. On cash flow the stock looks better: about 7.8 times price-to-operating-cash-flow with a dividend yield near 7.9%, the richest of the peer set I compare it against (Energy Transfer ~6.3%, Enterprise ~5.8%). The 21-25x earnings multiple looks alarming but is distorted by the sponsor's Class B economics, heavy depreciation, and the arrival of cash taxes; the cash-flow multiples are the honest lens.

The problem is not the multiple. The problem is that the market is being asked to pay a predictability premium for cash flows whose volume driver is controlled by a shareholder whose strategic plans are an open question. Net debt of roughly $3.7 billion is about 3 times trailing EBITDA — manageable, and the stated target is below 3x — so the balance sheet does not gate the story. The gating question is entirely about Chevron, and that is exactly what the 52-week range of $31.63–$41.75 reflects: the bear case sits near $32 if Chevron's Bakken intentions turn more conservative, the bull case above $40 if the endgame resolves cleanly.

The Bottom Line

Risks deserve straight naming. There is concentrated counterparty risk, because Chevron is both customer and controller. There is Bakken maturation, with flat-to-declining oil volumes visible in the lower minimum-volume commitments scheduled for 2028. There is the arrival of cash taxes this year. And there is the strategic endgame — full divestiture, a take-private, or an indefinite status quo — which is Chevron's call, not Hess Midstream's.

Even if Chevron never drills another incremental Bakken well, the distribution is funded by contract rather than by drillbit. The operational machine survives the bear case. What the bear case does to the stock is what it has already done: it caps the multiple.

All things considered, this is a high-quality cash-flow business whose shares have already re-rated this year to a point where the margin of safety against Street estimates of worth is thin. The issue with Hess Midstream was never the machine — it is, and remains, Chevron, both as the customer whose drilling plan sets the volumes and as the sponsor whose exit strategy the market is waiting to see. I rate Hess Midstream a Hold. I would get more constructive below $37–$38, back toward where the analysts value the business, or the day Chevron's endgame becomes legible — a clean divestiture or a premium take-private — because either one would finally remove the overhang that has kept this name from being worth what its own cash flows say it is.