Hess Midstream: Unlocking Undervalued Growth in a Discounted Midstream Sector

In the shadow of a midstream sector trading at a persistent discount to its long-term valuation norms, Hess Midstream LP (HESM) emerges as a compelling case study in undervalued growth potential. With a 14% year-over-year surge in Adjusted EBITDA to $316 million in Q2 2025 and a projected $1.235 billion to $1.285 billion in Adjusted EBITDA for the full yearHess Midstream LP Reports Estimated Results for the Second Quarter of 2025^[1], the company is defying the sector's broader malaise. Yet its current EV/EBITDA ratio of 9.45 sits below its 5-year average of 10.72Hess Midstream LP (HESM) Statistics & Valuation - Stock Analysis^[2], suggesting a disconnect between its operational strength and market valuation. This gap, coupled with the midstream sector's historically discounted multiples, presents a unique opportunity for investors seeking infrastructure plays in a low-volume environment.

Financial Performance: A Foundation of Resilience

Hess Midstream's Q2 2025 results underscore its operational and financial resilience. The company reported earnings per share (EPS) of $0.74, surpassing analyst estimates of $0.66, while revenue of $414.2 million exceeded expectations by $9 millionEarnings call transcript: Hess Midstream Q2 2025 shows strong earnings beat^[3]. This outperformance is driven by record throughput volumes across oil and gas systems, supported by high midstream system availability and strong upstream production from its parent, Hess Corporation. For 2025, Hess Midstream has reaffirmed guidance of 10% volume growth and 11% Adjusted EBITDA growth, with Adjusted Free Cash Flow projected to range between $725 million and $775 millionHess Midstream LP Announces 2025 Guidance, Extends Return of Capital Program Through 2027^[4]. These figures not only cover its 5% annual distribution growth target but also generate excess cash for shareholder returns, including potential unit repurchases.

Historical data on HESM's earnings surprises reveals a nuanced picture. While the company has consistently outperformed expectations, a backtest of its post-earnings performance since 2022 shows mixed results. In the 1- to 5-day window following positive EPS surprises, the stock has averaged cumulative returns between -0.2% and -2.1%, with statistically significant declines on days 4 and 5. However, by day 10, the average cumulative return begins to recover, reaching +1.05% after 30 days—though still trailing the benchmark's +1.41%. This suggests that while short-term market reactions to HESM's earnings beats have been muted or negative, longer-term investors may see gradual value realization, albeit with limited statistical significance in outperformance.

Valuation Metrics: A Sector in Discount, a Company in Growth

The midstream sector as a whole remains undervalued relative to its historical averages. Master limited partnerships (MLPs) trade at an EV/EBITDA of 8.8x, below their 10-year average of 10.4x, while midstream C-Corps hover at 11x, slightly under their 10-year average of 11.7xWhat’s Driving Midstream Company Performance? | Hennessy Funds^[5]. Hess Midstream's EV/EBITDA of 9.45 sits comfortably within this discounted range but reflects a company with above-average growth prospects. Its trailing PE ratio of 13.16 and forward PE of 11.46Hess Midstream LP (HESM) Statistics & Valuation - Stock Analysis^[6] further highlight its appeal to income-focused investors, particularly given its 7.16% dividend yield, which outpaces peers like Antero Midstream (5.0%) and the energy sector average (3.49%)Hess Midstream Partners and Its Competitors^[7].

Operational Efficiency: Building for the Long Term

Hess Midstream's operational efficiency is a cornerstone of its value proposition. In Q2 2025, the company achieved a gross Adjusted EBITDA margin of 80%, exceeding its 75% targetHess Midstream: A Fee-Based Growth Engine Fueling Shareholder Returns^[8], a testament to its disciplined cost structure. Strategic investments in infrastructure, including two new compressor stations and a 125 MMcf/day gas processing plant slated for 2027, are designed to enhance throughput and processing capacityHess Midstream LP Announces Guidance, Increases and Extends^[9]. These projects align with its fee-based model, which insulates it from commodity price volatility and ensures stable cash flows even in low-volume environments.

Moreover, Hess Midstream's leverage profile is improving. With a long-term target of 3x Adjusted EBITDA and projected leverage below 2.5x by 2026Hess Midstream LP Announces Updated Guidance^[10], the company is de-risking its balance sheet while maintaining flexibility for growth. This contrasts with peers like Enterprise Products Partners and Kinder Morgan, who face higher capital expenditures and more variable volume exposureHess Midstream: A Fee-Based Growth Engine Fueling Shareholder Returns^[11].

Low-Volume Resilience: MVCs as a Safety Net

In a low-volume environment, Hess Midstream's minimum volume commitments (MVCs) with Hess Corporation provide a critical buffer. These long-term agreements guarantee baseline throughput volumes, ensuring cash flow stability even if upstream production dips. For example, gas gathering volumes are projected to average 475–485 MMcf/day in 2025, supported by MVCs that imply 10% annual growth through 2026Hess Midstream LP Announces 2025 Guidance, Extends Return of Capital Program Through 2027^[12]. This structural advantage positions Hess Midstream to outperform peers reliant on spot markets or discretionary production levels.

Conclusion: A Discounted Gem in a Discounted Sector

Hess Midstream's combination of robust financial performance, disciplined capital allocation, and structural resilience makes it a standout in a midstream sector trading at a discount. While its EV/EBITDA of 9.45 may appear elevated relative to MLP averages, its growth trajectory and improving leverage profile justify a premium. For investors seeking exposure to energy infrastructure in a low-volume environment, Hess Midstream offers a rare blend of stability and upside—a company building for the future while delivering today.