Business Overview and History

Hess Midstream LP (NYSE:HESM) is a fee-based, growth-oriented midstream company that has consistently delivered strong financial performance and shareholder returns. With its strategic footprint in the prolific Bakken shale play, Hess Midstream has established itself as a reliable and well-positioned player in the North American energy infrastructure landscape.

Hess Midstream was formed in 2015 as a 50/50 joint venture between Hess Corporation and Global Infrastructure Partners (GIP), a part of BlackRock. The company was created to own, operate, develop and acquire a diverse set of midstream assets and provide fee-based services to Hess and third-party customers, primarily located in the Bakken and Three Forks shale plays in the Williston Basin area of North Dakota.

In April 2017, Hess Midstream completed an initial public offering as a master limited partnership. As part of the IPO, Hess Infrastructure Partners contributed a 20% controlling economic interest in certain midstream assets to the partnership, while retaining the remaining 80% interest in these assets, as well as a 100% interest in Hess Bakken water services business and the general partner of the partnership.

In December 2019, Hess Midstream underwent a restructuring where it acquired Hess Infrastructure Partners, including the remaining 80% interest in the midstream assets and the general partner interest. This transaction converted Hess Midstream's organizational structure from a master limited partnership into an Up-C structure, with Hess Midstream LP becoming the publicly traded successor.

The company conducts its business through three operating segments - gathering, processing and storage, and terminaling and export. Hess Midstream generates substantially all of its revenues from long-term, fee-based commercial agreements with Hess Corporation, including minimum volume commitments, inflation escalators and fee recalculation mechanisms.

Over the years, Hess Midstream has faced challenges common to the midstream industry, such as fluctuations in commodity prices, weather impacts, and the need for ongoing capital investments to maintain and expand its asset base. However, the company's strategic positioning, long-term customer agreements, and financial discipline have allowed it to navigate these challenges and deliver consistent operational and financial performance for its shareholders.

Financial Performance and Shareholder Returns

Hess Midstream has consistently demonstrated strong financial performance, with a focus on generating stable, fee-based revenues and predictable cash flows. For the full year 2024, the company reported net income of $659 million and adjusted EBITDA of $1.136 billion, representing a 12% increase compared to the prior year. Total revenues for 2024 were $1.50 billion, up from $1.35 billion in 2023, driven by higher physical volumes that were above prior-year minimum volume commitment (MVC) levels, higher third-party revenues, and higher affiliate pass-through revenues, partially offset by lower tariff rates.

The company's robust financial position has enabled it to prioritize shareholder returns through a differentiated capital allocation strategy. Since 2021, Hess Midstream has returned a total of $1.95 billion to shareholders through accretive unit repurchases. Additionally, the company has consistently increased its distribution per Class A share, with the most recent hike of over 10% in 2024, significantly outpacing its targeted 5% annual growth. In 2024, Hess Midstream paid total cash distributions of $2.00 per Class A share in the first three quarters and declared a $0.70 per share distribution for the fourth quarter.

Driven by growing oil and gas throughput volumes, as well as steadily increasing fees, Hess Midstream is projecting further financial growth in the coming years. For 2025, the company expects net income to range between $715 million and $765 million, with adjusted EBITDA anticipated to be in the $1.235 billion to $1.285 billion range, representing an 11% increase at the midpoint compared to 2024.

Operational Highlights and Outlook

Hess Midstream's operations are organized into three core segments: gathering, processing and storage, and terminaling and export. The company's strategic positioning in the Bakken, coupled with its long-term, fee-based commercial agreements with Hess and growing third-party volumes, have underpinned its consistent operational performance.

In 2024, Hess Midstream reported strong volume growth across its systems, with gas processing volumes averaging 420 million cubic feet per day, crude terminaling volumes averaging 123,000 barrels of oil per day, and water gathering volumes averaging 125,000 barrels per day. Looking ahead, the company expects continued volume growth, projecting approximately 10% increases in oil and gas throughput in 2025, followed by similar growth rates in the subsequent years.

For 2025, Hess Midstream anticipates gas processing volumes to average between 455 million and 465 million cubic feet per day, crude terminaling volumes to average between 130,000 and 140,000 barrels of oil per day, and water gathering volumes to average between 120,000 and 130,000 barrels of water per day. The company expects further growth in 2026 and 2027, with gas volumes projected to increase by approximately 10% in 2026 and 5% in 2027, while oil volumes are expected to grow by approximately 5% annually over the same period.

To support this anticipated volume growth, Hess Midstream is actively investing in strategic expansion projects, including the construction of new compressor stations and a 125 million cubic feet per day Capa Gas Plant, which is expected to be operational in 2027. These investments, coupled with the company's ongoing commitment to operational efficiency and asset optimization, position Hess Midstream to meet the growing midstream infrastructure needs of its customers in the Bakken region.

Risks and Challenges

While Hess Midstream has demonstrated resilience and adaptability in the face of industry headwinds, the company is not without its risks and challenges. The company's substantial reliance on Hess Corporation as its primary customer and sponsor creates a degree of concentration risk, potentially exposing Hess Midstream to any operational or financial challenges faced by Hess.

Additionally, Hess Midstream's growth prospects are closely tied to the ongoing development and production activities in the Bakken. Any slowdown or curtailment of upstream activity in the region could adversely impact the company's throughput volumes and financial performance.

Regulatory changes, such as stricter environmental regulations or pipeline safety standards, could also increase Hess Midstream's operating costs and capital expenditures, potentially affecting its profitability and cash flow generation.

Segment Overview

Gathering Segment

Hess Midstream's gathering segment includes natural gas gathering and compression, crude oil gathering, and produced water gathering and disposal. The natural gas gathering and compression system connects Hess and third-party owned or operated wells to the Tioga Gas Plant, the LM4 gas processing plant, and other third-party pipeline facilities. The system has approximately 1,420 miles of pipelines with a current capacity of up to 675 MMcfd and an aggregate compression capacity of 530 MMcfd. The crude oil gathering system connects Hess and third-party wells to the Ramberg Terminal Facility, the Tioga Rail Terminal, and the Johnsons Corner Header System, consisting of approximately 590 miles of pipelines with a capacity of up to 290 MBbld. The produced water gathering system transports produced water from well sites by approximately 330 miles of pipelines to 12 water handling and disposal facilities owned by Hess Water Services, with a combined permitted disposal capacity of 180 MBbld.

Processing and Storage Segment

Hess Midstream's processing and storage segment includes the Tioga Gas Plant, the 50% equity investment in the LM4 gas processing plant, and the Mentor Storage Terminal. The Tioga Gas Plant has a total processing capacity of 400 MMcfd and includes cryogenic processing, fractionation, and stabilized y-grade liquid recovery capabilities. The LM4 plant, which was placed in service in 2019, has a total processing capacity of 200 MMcfd, of which Hess Midstream is entitled to 100 MMcfd. The Mentor Storage Terminal has an aggregate working storage capacity of 330 MBbls, consisting of an underground cavern and aboveground bullet storage tanks.

Terminaling and Export Segment

Hess Midstream's terminaling and export segment includes the Ramberg Terminal Facility, the Tioga Rail Terminal, 550 crude oil rail cars, the Johnsons Corner Header System, and other connections into the Dakota Access Pipeline (DAPL). The Ramberg Terminal Facility has a combined pipeline and truck receipt capability of 200 MBbld and a redelivery capability of up to 285 MBbld. The Tioga Rail Terminal has a 140 MBbld crude oil and 30 MBbld NGL rail loading capability, with three crude oil storage tanks having a combined capacity of 290 MBbls.

Financials

Key Financial Metrics

HESM,NYSE:HESM

Net Income (2024): $659 million Annual Revenue (2024): $1.50 billion Annual Operating Cash Flow (2024): $940.3 million Annual Free Cash Flow (2024): $634.2 million Net Income (Q4 2024): $172.1 million Adjusted EBITDA (2024): $1.136 billion Adjusted EBITDA (Q4 2024): $298 million Projected Adjusted EBITDA (2025): $1.235 billion to $1.285 billion Projected Capital Expenditures (2025): Approximately $300 million

Liquidity

Hess Midstream maintains a strong liquidity position, supported by its consistent cash flow generation and prudent financial management. As of December 31, 2024, the company had $4.30 million in cash and a $1 billion revolving credit facility with $15 million drawn. This robust liquidity position provides flexibility to fund growth initiatives and manage potential market volatility.

Outlook and Guidance

For the first quarter of 2025, Hess Midstream anticipates volumes to be lower than the fourth quarter of 2024 due to the impact of severe winter weather in January and the possibility of further weather-related impacts in the first quarter. However, for the full year 2025, the company expects approximately 10% growth in volumes across its oil and gas systems compared to 2024.

Looking further ahead, Hess Midstream projects continued growth in 2026 and 2027. Gas volumes are expected to increase by approximately 10% in 2026 and 5% in 2027, while oil volumes are expected to grow by approximately 5% annually over the same period. To support this growth, the company is beginning construction on a new 125 million cubic feet per day Capa Gas Plant, which is expected to be operational in 2027.

Conclusion

Hess Midstream has established itself as a reliable and well-positioned player in the North American midstream sector, with a track record of strong financial performance and shareholder returns. The company's strategic focus on the Bakken region, underpinned by long-term, fee-based contracts and a disciplined capital allocation strategy, have positioned it for continued growth and success.

While the company faces certain risks and challenges, Hess Midstream's experienced management team, operational excellence, and financial strength suggest the company is well-equipped to navigate the evolving industry landscape and deliver value to its shareholders in the years to come. The company's diversified midstream assets and stable, fee-based revenue model have enabled it to generate consistent financial performance despite volatility in commodity prices, and its ongoing investments in infrastructure expansion position it well to capitalize on the growing midstream needs of the Bakken region.