HOUSTON – Hess Midstream LP (NYSE: HESM) closed Friday at $39.14, delivering an annualized dividend yield of 8.06% based on its latest quarterly payout. While the yield stands out in the midstream sector, Wall Street remains cautious, with the average analyst price target of $37.50 sitting 4.2% below the current share price.
The company's most recent distribution of $0.7888 per share, paid on August 14, represents a 1.2% increase from the previous quarter. This brings the annualized payout to $3.1552 per share. The yield outpaces key peers: Western Midstream Partners (NYSE: WES) offers approximately 7.69%, while MPLX LP (NYSE: MPLX) yields 7.37%.
Cash Flow Improves Despite Weaker Volumes
Hess Midstream's second-quarter results showed a mixed picture. Revenue dipped 3.7% year-over-year to $399 million, but adjusted free cash flow surged 19.5% to $231.6 million. The improvement was driven by a 56% reduction in capital expenditures, which fell to $30.6 million, as the company completed its compression buildout.
Gross adjusted EBITDA margin expanded to 85%, up from 82% in the prior year. For the full year, management reaffirmed its adjusted EBITDA guidance of $1.25 billion, while raising its adjusted free cash flow forecast to $935 million at the midpoint. Planned distributions of $655 million leave approximately $280 million in excess cash, implying a coverage ratio of 1.43 times.
Volumes Decline Across Key Metrics
Operational volumes tell a more concerning story. Oil gathering fell 19% year-over-year to 103 thousand barrels per day, while crude terminaling dropped 15% to 117 thousand barrels per day. Water gathering slipped 12% to 121 thousand barrels per day, and gas processing declined 4% to 433 thousand cubic feet per day following scheduled maintenance at the Tioga Gas Plant.
CEO Jonathan Stein highlighted the company's operational priorities, noting a "safe and efficient maintenance program" that contributed to the strong free cash flow generation.
Analyst Sentiment and Risks
Of the seven analysts surveyed by S&P Global, five rate HESM as a Hold, while two assign the lowest available rating. Recent downgrades reflect concerns about long-term growth. Morgan Stanley's Robert Kad set a $39 target with a Sell rating in August, while Goldman Sachs' John Mackay issued a $32 target with a Sell rating earlier in the month.
The primary risk stems from HESM's reliance on Chevron Corporation (NYSE: CVX), its sponsor and largest customer. Chevron has reduced Bakken drilling to three rigs, and HESM projects oil volumes to remain largely flat through 2028. However, approximately 95% of 2026 projected revenue is backed by minimum-volume commitments, and fee-based contracts run through 2033.
Market Outlook
With no earnings or distribution announcements scheduled for next week, investors will likely focus on oil price trends and Bakken activity. The stock's 200-day moving average sits near $37.32, suggesting potential support. If shares can reclaim the $40 level, sentiment could improve, but analysts see limited upside from current levels.
For income-focused investors, the 8% yield appears secure given the robust coverage ratio. However, the market's cautious stance suggests that capital appreciation may be elusive in the near term.
