Hess Midstream Operations LP: A 10% Yield That Keeps on Growing?
A High-Yield Stock You Likely Haven’t Considered
This has got to be the most interesting high-yield stock I’ve seen in a long time. It comes from a beaten-down industry, and many of its peers have slashed their payouts to investors. Yet, its own distributions have only been increasing. And management is forecasting even higher payouts in the future.
Sound too good to be true?
Well, check out Hess Midstream Operations LP (NYSE:HESM).
As its name suggests, Hess Midstream Operations is in the midstream energy business. The partnership owns, operates, develops, and acquires a diverse set of midstream assets located primarily in the Bakken and Three Forks Shale plays in North Dakota. With these assets, HESM provides natural gas processing and gathering, crude oil terminaling and gathering, and water services to its sponsor Hess Corp. (NYSE:HES), as well as to third-party customers.
Due to the outbreak of COVID-19 and the subsequent downturn in commodity prices, oil and gas companies are not in the best shape. Over the past few months, we’ve seen quite a few energy companies—including some of the most established ones—cut their dividends.
Hess Midstream Operations LP, on the other hand, is doing the exact opposite.
On July 27, the partnership announced that the board of directors of its general partner declared a quarterly cash distribution of $0.4363 per share. That’s a 1.2% increase quarter-over-quarter and a five percent increase year-over-year. The newly declared distribution will be paid on August 14 to shareholders of record as of August 6. (Source: “Hess Midstream LP Announces Increased Quarterly Distribution,” Hess Midstream Operations LP, July 27, 2020.)
With HESM stock trading at $18.41 apiece, the distribution translates to an annual yield of about 10%.
Mind you, this is not the first time that Hess Midstream Operations raised its payout to investors. As a matter of fact, since the partnership went public in April 2017, it has paid a higher cash distribution every single quarter. (Source: “HESM Dividend History,” Nasdaq, last accessed August 7, 2020.)
Given today’s challenging environment, you might be wondering whether this double-digit yielder can actually afford those distribution hikes.
Well, Hess Midstream Operations reported earnings in July. The report showed that, in the second quarter of 2020, the partnership generated $150.0 million in distributable cash flow, which was approximately 1.2 times the amount needed to cover its actual distributions for the quarter. (Source: “Hess Midstream LP Reports Estimated Results for the Second Quarter of 2020,” Hess Midstream Operations LP, July 29, 2020.)
The reality is that, even though the energy industry is facing a lot of headwinds, Hess Midstream Operations is running a largely fee-based business. For instance, when providing services to its sponsor Hess Corporation, business is done 100% through fee-based contracts with minimum volume commitments (MVCs). This allows the partnership to minimize its exposure to commodity price volatility. (Source: “Investor Relations Presentation June 2020,” Hess Midstream Operations LP, last accessed August 7, 2020.)
And the best could be yet to come. HESM’s management expects the partnership to continue growing its distribution per share at an annual rate of five percent through 2022. This year, the distribution coverage ratio is projected to be 1.2 times. In 2021 and 2022, the partnership expects to achieve a wider margin of safety and have a distribution coverage ratio of 1.4 times. (Source: Hess Midstream Operations LP, July 29, 2020, op. cit.)
In the company’s latest earnings conference call, Hess Midstream’s Chief Financial Officer Jonathan Stein said:
Even in periods of great uncertainty, the strength of our business model is clear. With revenues that are approximately 95% protected by MVCs for the next 2.5 years and our annual rate redetermination mechanism that adjusts our rates to changes in volume and capital, we have differentiated visibility to our financial metrics, including approximately 25% adjusted EBITDA growth in 2020 and 2021. Conservative leverage of 3x adjusted EBITDA or less, distribution per share targeted to increase 5% annually and expected free cash flow of $750 million in 2021 and 2022.
(Source: “Hess Midstream LP (HESM) on Q2 2020 Results – Earnings Call Transcript,” Seeking Alpha, July 29, 2020.)
Bottom Line on Hess Midstream Operations LP
Add it all up and it’s clear that Hess Midstream Operations stock is a special one. The partnership is already offering a generous annual yield of about 10%, and it plans to continue raising the payout at a decent clip while maintaining a wide margin of safety.
If things go as management projects, HESM stock investors could be in for a big payday.