(Idea) Hess Midstream - The 2028 Volume Reset Looks Worse Than It Is
Please see 2025 write-up titled: (Idea) Hess Midstream - A Potential Acquisition Target For Chevron
By: Jon Costello
Last September, I wrote that I expected Hess Midstream (HESM) to be acquired by Chevron (CVX) within six to twelve months at approximately $40 to $41 per share. Lo and behold, no transaction has occurred, but HESM reached $41.44 earlier this week.
I was right about the price but wrong about how it would get there. Looking back at my earlier valuation, I placed too much weight on a corporate event and too little on HESM’s transition from a capital-intensive construction phase into a period of substantially higher free cash flow.
The shares sold off after the company reported second-quarter earnings on August 3, as the market appeared to treat lower minimum volume commitments beginning in 2028 as evidence that Chevron’s Bakken business is deteriorating. The quarter also included throughput declines across all five systems, including 18.9% for crude oil gathering and 14.6% at crude terminals.
The operating weakness is a real concern, but the table also captures the central attraction of the investment case. Adjusted EBITDA declined only 0.7%, while Adjusted Free Cash Flow increased 19.5% as capital spending fell 56.3%. HESM’s volumes are weakening, but its transition out of a capital-intensive construction phase is allowing substantially more of its earnings to reach shareholders.
Whether that improvement in cash flow is durable depends partly on how much revenue remains protected if throughput continues to weaken. That makes the structure of HESM’s minimum volume commitments central to the valuation.