Hook & thesis
Hess Midstream (HESM) is the kind of income‑first energy name that looks a lot better if oil and associated crude differentials stay firm. The company currently yields roughly 7.8% while generating meaningful free cash flow; that income cushion plus manageable valuation give asymmetric upside if volumes recover and tariffs stay supportive.
My trade thesis: buy HESM around $38.50 with a 180‑day time frame. Higher oil prices and incremental Bakken lift from strategic customers should lift throughput and margins, protecting the distribution and enabling buybacks or modest debt paydown. The trade is a cash‑flow driven, income + value play rather than a purely cyclical momentum bet.
What Hess Midstream does and why it matters
Hess Midstream is a midstream operator focused on gathering, processing, storage and terminaling in the Bakken and Three Forks plays. Its assets include the Tioga gas plant, rail and terminal facilities, crude gathering and produced water handling. That geographic concentration creates both downside (single‑basin exposure) and upside (logistics leverage to Bakken crude when differentials widen).
Why the market should care: midstream cashflows are highly sensitive to underlying commodity economics but are also supported by take‑or‑pay like tariffs, long‑term contracts and high incremental margins on throughput. When oil prices rise and refiner demand tightens, spreads and volumes tend to follow. For HESM this shows up as stronger tariff revenue, improved utilization of storage/rail assets and higher processing throughput at plants like Tioga.
Recent performance and the data that matters
Operationally, HESM's most recent quarter (Q2 2026) beat on the headline EPS number with $0.75 per share, up 1.4% year‑over‑year, even as throughput dipped. Management offset volume weakness through higher tariff rates and some operating efficiencies. Looking forward, management guided Q3 adjusted EBITDA to $310–$320 million and kept full‑year guidance roughly flat versus 2025 while flagging higher deferred maintenance and rising capital spend in the second half.
Key numbers that support the trade:
- Current price: $38.79 and I'm recommending an entry of $38.50.
- Market cap: roughly $8.0 billion; enterprise value about $8.7 billion.
- Profitability: diluted EPS about $2.92 and a P/E near 13.5.
- Cash generation: free cash flow approximately $837.8 million - a large cushion relative to the market cap and distributions.
- Dividend: quarterly distribution of $0.7888 and a yield near 7.8% with a history of consecutive increases.
- Valuation multiples: EV/EBITDA roughly 7.1; price-to-free-cash-flow roughly 6.
Valuation framing
HESM is not expensive on common midstream metrics. An EV/EBITDA near 7.1 and P/E in the low‑teens imply the market is pricing in only modest growth or persistent headwinds. For an asset that produces nearly $0.84 billion of free cash flow annually, that multiple implies tangible capital returns to unitholders or accelerated debt reduction if volumes cooperate.
Peer comps are not in this writeup, but the logic is straightforward: in a higher oil environment, midstream earnings typically re‑rate as distribution coverage improves and leverage questions fade. If oil rallies and Bakken volumes follow, HESM's multiple could expand toward the mid‑teens EV/EBITDA or P/E 15–18 territory, which supports upside from current levels.
Technical and flow context
Technicals are mildly constructive for a controlled entry: 10–50 day moving averages cluster in the high $39s while the RSI near 38 suggests the name is closer to oversold than overbought. Short interest has been meaningful (short interest in the low millions, days‑to‑cover around 4–5), which can add volatility but also fuel squeezes if a positive catalyst arrives.
Catalysts that could drive the trade
- Higher WTI and Bakken realizations - stronger oil prices tend to increase crude-by-rail and throughput economics, directly boosting tariffs and handling fees.
- Chevron and other operator activity - incremental wells in the Bakken coming online increase volumes; management has highlighted Chevron wells as a near‑term upside.
- Dividend stability and modest buybacks - continued or resumed buybacks with rising distribution coverage would be a positive re‑rating event.
- Tightening crude differentials - if regional differentials compress versus WTI, Bakken crude becomes more attractive and volumes for terminals and rail increase.
Trade plan
Entry: $38.50. Target: $44.00. Stop loss: $34.00.
Horizon: long term (180 trading days). I expect the trade to play out over roughly six to eight months because infrastructure and midstream cash flow improvements need time to show up in reported EBITDA and distributable cash flow. That time frame allows for oil price cycles, ramping of incremental customer wells, and potential corporate actions (buybacks/debt paydown) that often follow improved cash generation.
Position management: start with a full position at entry or scale in if you prefer lower execution risk. If distributions are maintained and coverage improves, consider moving the stop to breakeven at mid‑horizon and using a trailing stop thereafter. If the company announces material capex overruns or customer disruptions, tighten stops or exit.
Risks and counterarguments
- Concentrated geography and customer base. HESM is heavily exposed to the Bakken and has a large single customer relationship with Chevron. If Chevron pulls back drilling or reallocates volumes, EBITDA could decline quickly. This concentration is why some large investors have trimmed or exited positions.
- Rising capex and deferred maintenance. Management noted a pick up in second‑half capital spending and deferred maintenance. Higher capex reduces free cash flow and limits the ability to sustain buybacks or increases, pressuring the distribution if prolonged.
- Leverage and liquidity metrics. The company carries a relatively high debt footprint relative to book equity and limited cash on hand. That raises refinancing risk if credit markets tighten or rates move sharply higher.
- Commodity downturn. The most obvious counterargument: if oil weakens materially, differentials widen and Bakken volumes fall, then tariff revenue and throughput margin compress, which would hit distributions and the share price. The trade is oil‑price sensitive.
- Macro/event risk. Terminal or rail disruptions, regulatory changes, or a large customer bankruptcy would create immediate downside and could invalidate the thesis.
Counterargument to my thesis: critics will point to the company's concentration and a recent quarter that only beat due to higher tariffs while volumes fell. Those are valid concerns; if higher tariffs prove temporary or capex overruns persist, the distribution could come under pressure and the valuation premium would evaporate.
What would change my mind
I would reduce conviction or exit the trade if any of the following occur: a) management withdraws or materially cuts the distribution; b) sequential declines in coverage metrics and free cash flow persist beyond two consecutive quarters; or c) the company announces large, unplanned capital commitments that meaningfully erode liquidity. Conversely, I would upgrade the target if sustained volume recovery from Chevron and other operators materializes and management accelerates buybacks or explicit debt paydown.
Conclusion
HESM is a tradeable income play. At ~$38.50, the stock offers a material yield, solid free cash flow and reasonable valuation multiples for a midstream operator. The upside scenario is straightforward - higher oil prices and Bakken activity would lift throughput and margins, improving distribution coverage and supporting a re‑rating. The downside is real and centered on concentration and capex/leverage dynamics, so the $34 stop is critical to protect capital.
Trade summary: enter at $38.50, target $44.00, stop $34.00, horizon long term (180 trading days). Keep an eye on oil price moves, company commentary on coverage and capex, and any operational updates from major customers.