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About Hess Midstream
If you were with us way back when, you know a little bit about midstream.
For those who weren’t, let us lend you a helping hand.
In the oil and gas industry, there is upstream, midstream and downstream.
In essence, without getting too deep in the weeds, upstream involves the process of extracting oil out of the ground, perhaps through drilling or fracking whereas the midstream (which is the main topic of discussion today) is the process of transporting the oil from one place to another, perhaps to where it is drilled to a port or terminal somehow connected to a refinery, which brings us to the downstream, which is basically where said oil is refined or purified, which is one of the last steps in the process just prior to the oil being deemed safe and ready for commercial use, at your local gas station.
Given the name of this company, you probably know that today is more about the transportation process more than anything, as Houston, Texas-based specialized oil and gas company Hess Midstream is in the business of moving oil and gas from one area to another, and although Hess Midstream is based in where else but Texas, it apparently focuses its operations predominantly in the polar opposite segment of the country, the great state of North Dakota, more specifically in the more oil-heavy segments of the state such as in and/or near the Bakken region, around Williston, North Dakota.
Being just miles from the Canadian border, you can see that polar is a sort of double entendre in this context.
At any rate, the way in which Hess Midstream generates revenue is primarily through transporting and storing products (predominantly oil and gas) on behalf of its clients and for its services it receives a fee, seemingly on a usage basis, where the more oil and/or gas that’s transported, the more the transporter receives, which is a sensible and fairly easy to grasp business model.
Hess Midstream as a potential investment can evidently be thought of as a quasi-American infrastructure play, given that this company and its operations are undoubtedly critical to our everyday lives, as it would be exceptionally challenging to not have easy access to the oil we need to move our vehicles or the gas we need to power our stoves.
This being the case, we think this company (among other major midstream, pipeline companies) is fairly recession resistant, however, certainly perhaps not all that resistant to the unprecedented pressures exuded by COVID-19, as travel demand fell off an absolute cliff upon the initial public onset of COVID, pushing the price of oil and associated fuel prices down, more than likely impacting those operating in the midstream as well, as there might have not been as much oil to transport around the country during this era.
Nevertheless, we will verify whether or not this was actually the case later in this stock analysis article and with that, now is a great time to dig more into the company’s core financials, ratios, metrics and other relevant figures that are aimed at assisting us in ultimately determining whether or not Hess Midstream (NYSE: HESM) is a company worth an investment today.
Hess’ stock financials
Trading at a current share price of $29.11, Hess Midstream is also accompanied by a market capitalization of $2 billion, a price-to-earnings (P/E) ratio of 14.74 as well as an annually issued dividend of $2.40, which speaks a bit to the relative stability of its operations and line of business, as it can likely afford issuing $0.60 each quarter if it is consistently generating cash from its operations in the Bakken and elsewhere.
From a valuation perspective, Hess seems to be in good shape as its shares are seemingly trading at a mild discount relative to what they are actually worth given that its present price-to-earnings ratio is lower than the commonly held fair value benchmark of 20.
So far, so Hess and so good.
With respect to this pipeline operator’s balance sheet, Hess Midstream’s executives are tasked with taking care of and handling nearly $3.6 billion in terms of total assets as well as $3.3 billion in terms of total liabilities, which is cutting it a little close, however, all things considered, this is an industry that requires a lot of capital, equipment and maintenance, no matter how large an operator may be.
Therefore, we don’t immediately find it troubling that this company has an objectively elevated amount of total liabilities, especially since it is still total asset-heavy, even if not by all that wide of a margin.
Additionally, as briefly alluded to before, this company likely doesn’t have much difficulty in generating consistent amounts of cash through its operations and therefore won’t have much trouble in terms of servicing said debt and other liabilities in the years to come.
Or so we hope!
As it relates to the company’s income statement, Hess’ total annual revenues since 2018 have been, contrary to what we initially predicted, growing a fair amount year-over-year (YOY), surpassing our initial expectations with respect to COVID-19 and its impact(s) on the oil and gas industry, again, particularly in the context of midstream.
More specifically, Hess’ total annual revenue in 2018 stood at $713 million, rising the following year to $848 million, standing at just north of $1 billion in 2020, continuing this upward trajectory to $1.2 billion in 2021 to its latest reported figure (displayed on TD Ameritrade’s platform) of $1.275 billion (2022), which initially baffled us in that it seems as though Hess Midstream thrived during the peak COVID-19 era.
Upon further thought and analysis, this could possibly be a byproduct of demand for oil and chemical storage increasing as demand for said products dried up, as both the primary, better known company, Hess Corporation (not Hess Midstream, but a larger, technically different company with its own associated ticker symbol), an oil and gas company, as well as other external oil and gas companies (think ExxonMobil and Chevron, among others) needed somewhere to store their excess products and solutions while demand was, for lack of a better term, in the toilet.
Regardless, Hess Midstream’s revenues since 2018 have been absolutely applaudable, especially during the COVID-19 era, giving us some further confidence that it can continue preserving its revenues during the economic headwinds and storms that are surely to come.
With respect to the company’s cash flow statement, Hess Midstream’s net income and total cash from operations have been consistent (and positive) as all get out, putting some more credence behind our initial assumptions that this company hardly has any trouble extracting cash from its operations, not to mention that we enjoy that it has been consistent on these fronts, which we initially expected but validation in this sense hardly hurts.
Hess’ stock fundamentals
According to the figures displayed on TD Ameritrade’s platform, Hess Midstream’s ability to produce a trailing twelve month (TTM) net profit margin greater than that of the industry (on average) appears to be rather effortless, as the company’s listed TTM net profit margin is a whopping 46.88% in comparison to the industry’s respective average of an impressive but not even close 19.08%.
This is more than likely a result of the company specializing its operations and capabilities so heavily in North Dakota, as it practically dominates its operations within the region and has also probably discovered countless ways in which it can further optimize its operations in the area while also cutting its costs over time as well.
At any rate, the management team and those out in the field under the Hess Midstream umbrella have seemingly done a fantastic job in attaining a more than competitive TTM net profit margin with respect to the competition.
As it pertains to the company’s core TTM return metrics, specifically with respect to its assets and investment(s), Hess Midstream didn’t disappoint once again, as they are also fairly competitive, with the competition, for example, also according to the figures displayed on TD Ameritrade’s platform, Hess’ TTM return on assets stand slightly above at 16.51% to the industry’s respective average of 15.52%, implying that Hess has just been a bit better at extracting returns from the capital and other assets it owns and deploys.
Should you buy Hess Midstream stock?
While midstream can be seen as sort of boring to the novice, it isn’t likely going away anytime soon and this particular operator has certainly found its geographical niche in North Dakota.
Hess Midstream’s revenues in recent history have been as steady as they come, its TTM net profitability is in a wonderful state, its balance sheet is in fine condition and it has clearly weathered many of the COVID-19-related storms that shook most of the oil and gas industry.
We see no reasons for this company to diverge from its current core competencies and with its shares (NYSE: HESM) trading at a modest discount relative to intrinsic value, we deem Hess Midstream’s stock worthy of a “buy” rating.
DISCLAIMER: This analysis of the aforementioned stock security is in no way to be construed, understood, or seen as formal, professional, or any other form of investment advice. We are simply expressing our opinions regarding a publicly traded entity.