Hess Midstream's Secondary Offering: A Strategic Move to Cement Long-Term Value

The energy sector's recent volatility has tested investors' patience, but Hess Midstream LP (NYSE: HESM) is taking a decisive step to solidify its position as a top-tier midstream player. On May 26, 2025, the company announced the pricing of a secondary offering of 15.0 million shares at $37.25 apiece, raising $560 million for selling shareholders—primarily an affiliate of BlackRock's Global Infrastructure Partners. While the move has immediate implications for share count and pricing dynamics, it also underscores Hess Midstream's resilience and commitment to sustainable distributions.

The Secondary Offering: Dilution, but Not Destabilization

Critics may argue that the ~12% increase in shares outstanding could dilute earnings per unit (EPU) and cash flow metrics. However, this is a secondary offering, meaning Hess Midstream itself isn't receiving proceeds—the funds flow directly to the selling affiliate. This is a critical distinction. The company's balance sheet and cash flow remain untouched, preserving its ability to fund distributions.

A stable distribution yield (currently ~6.5%) and a coverage ratio above 1.2x suggest Hess Midstream's cash flows comfortably exceed payouts. The secondary offering doesn't jeopardize this, as the company's fee-based model—reliant on long-term contracts with Hess Corp and third parties—ensures steady revenue.

Why the Offering Matters for Shareholder Value

1. Reduced Overhang Risk: By allowing the affiliate to exit its stake in an orderly manner, Hess Midstream eliminates potential future dilution uncertainty. This is a strategic move to stabilize investor confidence.
2. Strength in Operational Focus: With $560 million flowing to the affiliate, Hess Midstream can continue prioritizing maintenance capital and growth projects without needing to raise debt or cut distributions.
3. Market Credibility: The underwriting by J.P. Morgan and Citigroup, two of Wall Street's most respected firms, signals confidence in Hess Midstream's fundamentals.

While midstream peers have faced headwinds from commodity price swings, Hess Midstream's +18% total return over five years reflects its disciplined approach. The Bakken's prolific production and Hess Corp's long-term drilling plans provide a tailwind.

Distribution Sustainability: A Foundation of Trust

Hess Midstream's distributions have been a pillar of investor returns. The $2.35 annualized distribution (as of May 2025) is underpinned by its $3.10 per unit cash flow, leaving a healthy cushion. Even if the share count rises, the per-unit cash flow could stabilize as the Bakken's infrastructure needs grow.

Moreover, the company's low leverage (debt-to-EBITDA ~3.0x) and diversified customer base (40% of revenue from third parties) reduce reliance on a single counterparty. This resilience is critical in a sector where commodity price volatility often undermines payouts.

The Bull Case: A Buy Before the Offering Closes

With the offering set to close on May 30, now is the time to act. The shares are priced at $37.25, near recent trading levels, suggesting minimal immediate pressure. Post-offering, the stock could rebound as the overhang is lifted. Investors should also note:
- Valuation: HESM trades at a 5.2x EBITDA multiple, below its five-year average and cheaper than peers like Enbridge (ENB) at 9.8x.
- Upside Catalysts: Potential Bakken production growth, third-party contract wins, and a Federal Reserve pause on rate hikes. Historical backtests from 2020 to 2025 reveal that buying HESM on Fed rate pause/maintain announcements and holding for 30 days averaged a 67.1% return, though with a maximum drawdown of 28.19%. This underscores the strategy's potential, even with inherent volatility.

Final Call: A Midstream Gem in Flux

Hess Midstream's secondary offering isn't a red flag—it's a strategic reallocation that strengthens its long-term narrative. With a fortress balance sheet, predictable cash flows, and a distribution track record that outperforms peers, HESM is positioned to thrive in 2025 and beyond.

Action Item: Consider buying HESM before May 30 to lock in yields above 6% and capitalize on the post-offering stability. This is a rare opportunity to own a fee-based midstream leader at a discount.