Hess Midstream's Governance Shift: A Path to Resilience or a Risky Gamble?

The midstream energy sector has long been a haven for investors seeking stable, fee-based cash flows. Hess Midstream Partners L.P. (HESM), a key player in this space, has undergone significant governance changes in 2025, reshaping its ownership structure and board composition. While these reforms aim to enhance accountability, lingering corporate governance risks—rooted in concentrated ownership, restrictive partnership terms, and asymmetrical stakeholder influence—threaten to undermine shareholder value. For investors, the question remains: Does this shift position HESM for sustainable growth, or is it a speculative bet on a company still tethered to its parent's strategic priorities?

The Governance Overhaul: A Facelift, Not a Revolution

In June 2025, Hess Midstream announced a governance overhaul following Global Infrastructure Partners' (GIP) exit, reducing Hess Corporation's stake to 37.8% and elevating public ownership to 62.2%. The board now limits Hess-affiliated directors to four of eight seats, with the remainder designated for independent members. Major decisions—such as distributions, capital expenditures, and related-party agreements—require approval from both a Hess-aligned director and an independent director. This structure aims to balance accountability and operational ties to Hess, which retains contractual control over key midstream assets.

On paper, the changes reflect progress: public shareholders now hold majority stakes, and independent oversight has been strengthened. However, the reforms stop short of addressing deeper governance risks embedded in HESM's partnership framework.

Risk 1: The Parent's Shadow

Despite Hess's reduced ownership, its influence over HESM remains outsized. The commercial agreements between Hess and HESM—unchanged by the governance updates—anchor the partnership's financial health. Hess retains control over the terms of midstream services, including transportation, storage, and processing fees. While these contracts provide HESM with predictable cash flows, they also create a conflict of interest: Hess, as both partner and competitor in the energy sector, could prioritize its own growth over maximizing HESM's returns.

Investors must ask: How transparent are these agreements? Can HESM renegotiate terms if Hess's interests diverge? The answer is unclear. The governance reforms do not address contractual asymmetries, leaving HESM vulnerable to decisions that benefit Hess at its expense.

Risk 2: Limited Shareholder Agency

Public shareholders now own a majority stake, but their ability to influence governance is constrained. The dual-approval requirement for major decisions ensures Hess cannot act unilaterally, but it does not empower minority investors. Independent directors, while numerically balanced with Hess appointees, lack the authority to override Hess's strategic preferences. Furthermore, the partnership agreement's terms—such as distribution policies or capital allocation priorities—may remain rigid, limiting flexibility to adapt to market shifts.

Consider this: If Hess pushes for aggressive distributions to fund its upstream projects, HESM's long-term reinvestment could suffer. Public shareholders, despite their majority, have no voting mechanism to block such moves.

Risk 3: The "Fee-Based" Mirage

HESM's midstream business model, insulated from commodity price swings, is often cited as a strength. Yet this stability comes with trade-offs. Fee-based contracts reduce volatility but also cap growth potential. In a sector where innovation and scale matter, HESM's reliance on Hess's projects could hinder its ability to pursue independent expansion. Meanwhile, Hess's 37.8% stake gives it enough influence to prioritize its own priorities, potentially sidelining HESM's strategic autonomy.

Valuation vs. Risk: A Speculative Calculus

HESM's valuation appears attractive, with a dividend yield of ~6.5% and a P/CF ratio of 12x—below its five-year average. However, the governance risks outlined above suggest this may be a value trap.

While the $1.25 billion financial buffer for repurchases or acquisitions provides short-term comfort, it's insufficient to offset systemic governance flaws. Investors in HESM are effectively betting that Hess will act in their interests—a gamble that history often discredits. Parent companies rarely prioritize minority shareholders over their own agendas.

Investment Takeaway: Proceed with Caution

HESM's governance reforms are a step forward but fall short of addressing structural risks. The partnership's health hinges on Hess's goodwill, not enforceable safeguards. For conservative investors, this remains a speculative play: the dividend is appealing, but the upside is capped by Hess's influence, while downside risks—such as contractual disputes or misaligned priorities—are real.

Aggressive investors might consider a small position, but only if they closely monitor governance developments and Hess's strategic moves. For most, better opportunities exist in midstream peers like Enterprise Products Partners (EPD) or Energy Transfer (ET), which offer stronger shareholder protections and autonomous growth profiles.

In the end, Hess Midstream's governance evolution is a reminder: even in stable sectors, control structures matter. Without true independence, the path to shareholder value remains bumpy—and the risks, unresolved.