Hess Midstream: Deal Or No Deal, Shareholders Win

Hess Midstream LP (NYSE: HESM) has been reshaping its capital structure and governance in 2025, executing moves that prioritize shareholder returns and operational resilience. Recent transactions—including a strategic exit by Global Infrastructure Partners (GIP), a $200 million equity repurchase program, and governance reforms—signal a shift toward greater accountability and flexibility. But do these moves translate into long-term value for investors? Let's dissect the operational, financial, and strategic implications.

Governance Overhaul: Aligning Interests

The departure of GIP, a BlackRock affiliate, marks a pivotal governance milestone. Hess Midstream's public ownership now stands at 62.2%, with Hess Corporation retaining 37.8%—a significant reduction from GIP's prior stake. Board composition now requires cross-approval for major decisions, ensuring no single party dominates strategic choices. This structure reduces conflicts of interest, a critical step toward building trust with public shareholders.

Equity Repurchases: Fueling Per-Share Value

The $200 million buyback program is the linchpin of Hess Midstream's value-creation strategy. By repurchasing Class B units and initiating an Accelerated Share Repurchase (ASR), the company has already reduced sponsor ownership and boosted distributable cash flow per share. With leverage at 3.1x EBITDA—slightly above its 3x target—the move reflects confidence in sustaining cash flows. The company's stated $1.25 billion financial flexibility buffer through 2027 suggests it can weather commodity cycles while continuing to reward shareholders.

Operational Synergies: Cash Flow Machine

Hess Midstream's fee-based model insulates it from commodity price swings, as 80% of cash flows come from fixed-fee contracts. First-quarter 2025 results underscore this resilience:
- Adjusted EBITDA rose to $292.3 million, up 9% year-over-year.
- Throughput growth in gas processing and oil terminaling systems hit 8-9%, driving $190.7 million in adjusted free cash flow.

The Bakken and Three Forks Shale plays remain key growth drivers, with Hess Corporation's production volumes underpinning Hess Midstream's throughput. This symbiotic relationship reduces execution risk and ensures steady cash generation.

Valuation: A Discounted Dividend Machine?

Hess Midstream trades at an EV/EBITDA of ~7.5x based on 2025 estimates—well below the midstream sector average of ~9-10x. Meanwhile, its distribution yield of ~8% (based on a $37.25 share price and $0.71 quarterly payout) is compelling.

The company's 5% annual distribution growth target through 2027 is achievable if it maintains current cash flow trends. At current valuations, HESM offers a “cheap” entry point for income investors, provided commodity prices don't crater.

Risks: Leverage, Liquidity, and Regulation

• Leverage: The 3.1x EBITDA multiple leaves less buffer if oil/gas prices drop below $60-65/bbl, which could crimp Hess Corporation's drilling activity and thus Hess Midstream's volumes.
• Regulatory Headwinds: Permitting delays or stricter environmental rules could stall infrastructure projects, though Hess Midstream's fee-based contracts mitigate some production volatility.
• Debt Maturity: $300 million in notes come due in 2027, requiring access to capital markets when interest rates may still be elevated.

Investment Thesis: Hold for Income, Buy on Dips

Hess Midstream's governance overhaul and capital returns signal a shareholder-friendly pivot. At current valuations, the stock looks undervalued relative to its cash flow stability and distribution growth profile. However, investors should monitor oil prices and debt levels closely.

Recommendation:
- Hold: For income investors seeking a 5-7% yield with steady distribution growth.
- Buy: On dips below $35/share, provided oil stays above $70/bbl.
- Avoid: If crude drops below $60/bbl for an extended period, risking cash flow sustainability.

In conclusion, Hess Midstream's 2025 moves position it as a disciplined midstream player with a clearer path to rewarding shareholders. The question isn't whether these deals were strategic—they were—but whether the market will eventually recognize their value. For now, the odds favor patient investors.