Hess Midstream's Revised Outlook and the Implications for Midstream Energy Investors

Assessing Midstream Exposure to Upstream Production Cuts

Hess Midstream LP (HESM) has revised its 2025–2027 guidance in response to upstream production cuts by its parent company, Hess Corporation, and Chevron's reduced drilling activity in the Bakken region. Chevron's decision to cut rigs from four to three in Q4 2025 will plateau oil throughput volumes by 2026, directly impacting Hess Midstream's revenue streamsHess Midstream LP Announces Updated Guidance^[1]. However, gas gathering and processing volumes are expected to grow through 2027, with full-year 2025 gas throughput averaging 455–465 MMcf and 440–450 MMcf per day, respectivelyHess Midstream LP Announces Updated Guidance (2025-09-18)^[2]. This divergence between oil and gas dynamics highlights the midstream sector's sensitivity to upstream decisions, particularly in regions reliant on horizontal drilling.

The company's Adjusted EBITDA is projected to remain flat in 2026 compared to 2025, with growth resuming in 2027 due to inflation escalation provisions in its commercial agreements and continued gas throughput expansionHess Midstream LP Announces Updated Guidance - Morningstar^[3]. This outlook underscores the importance of gas infrastructure in stabilizing midstream cash flows amid oil production volatility.

Valuation Analysis: Is Hess Midstream Undervalued?

Hess Midstream's valuation appears compelling relative to peers and intrinsic value estimates. As of Q3 2025, the company trades at an EV/EBITDA multiple of 7.8xHess Midstream - Public Comps and Valuation Multiples^[4], significantly below the sector averages of 11.35x (ONEOK) and 13.24x (Kinder Morgan)OKE vs KMI - EV to EBITDA Ratio^[5]. This discount reflects broader midstream sector undervaluation, driven by equity performance pressures and forward-looking EBITDA estimates that remain below 10-year historical averagesMidstream and MLP Valuations Are Compelling - ETF Database^[6].

Intrinsic value models further support this thesis. A discounted cash flow analysis (Growth Exit 5Y) estimates HESM's intrinsic value at $51.60, compared to its current stock price of $41.00, implying a 25.9% upsideHESM Intrinsic Value | Hess Midstream LP (HESM)^[7]. The company's fee-based business model, with 75% of cash flows derived from fixed-fee contractsHess Midstream LP Announces 2025 Guidance, Extends Return of Capital Program Through 2027^[8], adds defensive qualities, insulating it from commodity price swings. Additionally, Hess Midstream's capital expenditures are expected to decline sharply in 2026–2027 due to the Capa gas plant project's suspension, enhancing free cash flow and supporting its return-of-capital frameworkHess Midstream LP Announces Updated Guidance^[9].

Identifying Undervalued Infrastructure Assets in the Midstream Sector

Hess Midstream is not alone in its undervaluation. The broader midstream sector offers attractive opportunities for investors seeking defensive, yield-driven assets. For instance, Enbridge (ENB) is undervalued by 74.3%, while Pacific Gas & Electric (PCG) trades at 179.6% below intrinsic valueUndervalued Infrastructure Stocks 2025^[10]. These metrics align with the sector's average EV/EBITDA of 7.47x, which remains below historical normsEV/EBITDA Multiple by Sector/Industry 2025 | Siblis Research^[11].

Key drivers of midstream undervaluation include:
1. Fee-Based Cash Flows: Companies like Hess Midstream and Targa Resources generate predictable cash flows from long-term contracts, reducing exposure to commodity cyclesExamining Midstream EBITDA Guidance for 2025 and Beyond^[12].
2. Infrastructure Modernization: Growing demand for LNG export facilities and data center power infrastructure is expected to drive midstream growthEnergy Markets In Focus Q3 2025^[13].
3. Dividend Yields: The Alerian MLP Infrastructure Index (AMZI) offers a 7.0% yield as of January 2025, outpacing broader market averagesMidstream/MLP Tailwinds Intact in 2025^[14].

Strategic Implications for Investors

For midstream energy investors, Hess Midstream's revised guidance and valuation present a strategic inflection point. While upstream production cuts will temporarily flatten oil throughput, the company's gas infrastructure and inflation-linked contracts position it for 2027 growth. Investors should also consider the sector's broader undervaluation, particularly in gas-focused and fee-based assets.

However, risks persist, including prolonged oil price volatility and regulatory headwinds. Diversification across midstream subsectors—such as natural gas pipelines (e.g., Kinder Morgan) and petroleum transportation (e.g., ONEOK)—can mitigate these risks while capturing growth in energy transition infrastructureMidstream Companies Reaffirm 2025 Guidance - ETF Database^[15].

Historical backtesting of HESM's performance around earnings releases from 2022 to 2025 reveals actionable insights for timing strategies. While the stock often experiences short-term pressure (average cumulative return of -1.3% at day 10), it has historically rebounded strongly by day 24, with cumulative returns turning positive and reaching +3.7% by day 30. A contrarian approach—buying on the earnings date and holding for 25–30 days—has historically captured this recovery phase, outperforming short-term momentum trades (≤5 days). This pattern suggests that investors with a medium-term horizon may benefit from holding HESM through initial volatility, aligning with its long-term growth trajectory.