Hook & thesis
Hess Midstream (HESM) is trading at roughly $31.05 today, offering a dividend yield just over 10% after a market panic sparked by Chevron's decision to divest its stake. The headline - forced ownership change and shortened fees for Chevron in the Bakken - is real, but market reaction appears disproportionate relative to HESM's cash-generating ability and valuation multiples.
My trade idea: buy HESM at $31.05 with a protective stop at $28.50 and a primary target of $38.00 over the next 180 trading days. The company generates meaningful free cash flow, pays a sizable quarterly distribution, and now has increased operational independence to pursue multi-basin growth and buybacks. If the company can stabilize volumes and convert its cash flow into returns for unitholders, the reward-to-risk here is compelling.
What Hess Midstream does and why the market should care
Hess Midstream LP owns and operates gathering, processing, storage, and export infrastructure serving crude oil and natural gas producers in the DJ Basin and Bakken/Three Forks shale plays. Its business splits across gathering, processing & storage, and terminaling & export, with assets such as the Tioga gas plant, Ramberg terminal facilities, and crude-by-rail capability.
Midstream companies matter because they convert upstream production into marketable product and collect stable, fee-like cash flows. For HESM, the combination of long-term contracts, processing fees and throughput-linked tariffs historically produced predictable cash flow — the sort investors bid up for yield and stability. Even after Chevron's commercial reshuffle, HESM still controls physical assets that are hard to replicate and that support take-or-pay style economics when production remains healthy.
How the selloff created an opportunity
The market punished HESM after Chevron announced a carve-out and tariff concessions; headlines emphasize a $3-4 billion hit on Chevron's side and the end of Chevron's ownership. That news pushed HESM toward its 52-week low ($29.52) and sent the stock into oversold territory (RSI ~33). Short-term technical momentum is bearish, but valuation and cash flow metrics argue this is more of a headline-driven reprice than a structural breakdown.
Key numbers that matter
- Current price: $31.05.
- Market cap: $6.40B (implied by outstanding shares and price).
- Enterprise value: $7.60B.
- EV/EBITDA: ~6.2x - cheap for midstream assets with long-lived contracts.
- Free cash flow: $837.8M (most recent measure).
- Reported EPS: $2.92 and P/E ~10.5x.
- Dividend: quarterly distribution of $0.7888 per share (last reported); trailing yield ~10% at current price.
- 52-week range: $29.52 - $41.44.
Why the numbers support a buy
Put bluntly: HESM is generating strong cash flow relative to its public valuation. The company shows nearly $838M of free cash flow and trades at an EV/EBITDA multiple of ~6.2x — levels that historically attract buyers in midstream when macro oil & gas fundamentals remain intact. The payout is generous but still backed by cash flow; that makes this a viable income play while waiting for the market to reprice HESM from headline fear back toward fundamentals.
Quarterly context
HESM beat Q2 expectations with $0.75 per share and reported weaker volumes offset by higher tariff rates and lower operating costs. Management guided Q3 Adjusted EBITDA to $310-320M and kept full-year guidance roughly flat versus the prior year while flagging some deferred maintenance and higher capex in the back half. That combination – beat, but soft volumes and near-term cost pressure – is precisely why the stock sold off: investors worry about near-term cash-flow volatility. The selloff, however, appears to price in a much deeper and more prolonged earnings hit than the guidance suggests.
Valuation framing
At a market cap of about $6.4B and enterprise value of $7.6B, HESM's EV/EBITDA of ~6.2x and P/E near 10.5x look cheap for midstream assets that produce contract-driven cash flow. The yield near 10% is a market signal of stress, not necessarily insolvency. Free cash flow of $837.8M materially covers distributions and leaves room for deleveraging or buybacks, depending on management priorities. In short: cheap multiples + solid FCF + high distribution equals an opportunity if downside is controlled.
Catalysts that can re-rate the stock
- Completion and clarity around Chevron's divestiture terms - if commercial arrangements and transition mechanics are cleaner than feared, uncertainty premium should compress.
- Stabilizing or rising Bakken/Three Forks production - throughput recovery would lift volumetric fee income.
- Sharper-than-expected cost reductions or execution on deferred maintenance leading to improved Q3/Q4 EBITDA beyond guidance.
- Share buybacks or accelerated payout policy enabled by FCF and lower share count (the market has noted material share-count reductions recently).
- Macro: a resilient crude price environment that supports upstream drilling and produced volumes.
Trade plan (actionable)
Entry price: $31.05 (current).
Stop loss: $28.50 - this sits below the recent 52-week low ($29.52) and provides a disciplined downside guard should the market continue to reprice the asset on contract risk or a broader midstream selloff.
Target price: $38.00 - this represents a return to a mid-to-high 30s trading multiple consistent with normalization toward historical moving averages (50-day SMA is near $37.12) and partial recovery from the post-divestiture panic.
Horizon: long term (180 trading days). I expect this trade to play out over several months as contract transition risk is absorbed, Q3 results are reported, and the market digests Chevron's formal separation. There is a credible mid-term path (45 trading days) to capture a partial rebound if the company reports above-guidance fundamentals; however, the preferred plan is to hold through a couple of earnings cycles and collect distributions while downside is limited by the stop.
Position sizing & risk framing
Given headline risk and operational complexity, limit any single-position allocation to an amount consistent with a high-yield, midstream income allocation in a diversified portfolio (for many retail investors that will be single-digit percentage exposure at most). The stop at $28.50 caps losses and preserves capital for redeployment if the macro or contract environment deteriorates.
Risks and counterarguments
- Contract & commercial risk: Chevron's negotiated fee concessions materially reduce midstream fee revenue in the Bakken for years, which could lower EBITDA and FCF more than expected.
- Volume risk: Sustained lower upstream drilling and production would reduce throughput-based earnings and could compress the yield if the company cuts distributions.
- Leverage & balance sheet: Debt metrics appear elevated (debt-to-equity is reported at high levels), so any cash shortfall could force distribution reductions or asset sales to repair the balance sheet.
- Execution & maintenance costs: Management flagged increased deferred maintenance and higher capex in H2, which could pressure near-term free cash flow and cause the market to reprice yields higher.
- Counterargument: The market could be right to price in a structural decline if Chevron's reduced tariffs permanently shrink the addressable cash pool and competing operators take market share. In that scenario the dividend may prove unsustainable and the stock would trade materially lower.
Why I'm comfortable pressing Buy now
Two features tip the balance in favor of buying: first, the company still generates substantial free cash flow (~$838M) which materially exceeds distributions on a run-rate basis; second, valuation multiples are compressed (EV/EBITDA ~6.2x, P/E ~10.5x), giving the upside room for a mean reversion trade if the market's worst-case assumptions prove exaggerated. The stop at $28.50 limits the largest part of the headline-driven downside while leaving room for dividend capture and potential capital appreciation.
What would change my mind
I would abandon the thesis and cut exposure if any of the following occur: a) management announces a sustained distribution cut, b) Q3 results show a meaningful and continuing decline in fee-bearing volumes that cannot be offset by tariff adjustments, c) cash flow materially underperforms guidance such that free cash flow no longer covers the payout plus necessary capex, or d) oil & gas activity in HESM's basins collapses, pushing throughput assumptions materially lower.
Conclusion
HESM's post-Chevron selloff is a classic event-driven re-pricing. The assets are cash-generating, the valuation is inexpensive, and the dividend yield is attractive — but headline risk and operational execution remain real. For disciplined traders and income-seeking investors willing to accept company- and sector-specific risks, buying HESM at $31.05 with a stop at $28.50 and a target of $38.00 over the next 180 trading days represents a balanced way to capture yield while managing downside.