I’m Buying This 7% Yield Energy Stock Nobody’s Talking About

Summary

In this video, Zach reviews Hess Midstream (HSM), a high-yield dividend stock in the midstream oil and gas sector. He discusses the company's impressive 5-year return of 192.1% and its unique combination of high yield and strong dividend growth. Zach breaks down Hess Midstream's business model, emphasizing its focus on energy infrastructure and long-term, fee-based contracts with its largest customer, Hess Corporation. He explores HSM's reliable financials, growth prospects, and dividend sustainability, concluding that the stock is undervalued and an attractive investment for dividend growth investors.

Takeaways

• 😀 Hess Midstream (HSM) has shown an impressive total return of 192.1% over the past 5 years, equating to an annualized growth rate of 23.9%.
• 😀 Despite early struggles post-2017 IPO, HSM has been a strong performer, with an all-time return of 176% and a compound annual growth rate (CAGR) of 13.2%.
• 😀 HSM is a high-quality dividend growth stock, offering a current yield of 7.37% and a 5-year dividend growth rate of 10.49%.
• 😀 HSM operates with a business model that includes natural gas, crude oil, and water gathering pipelines, with most of its assets located in the Williston Basin of the U.S. and parts of Canada.
• 😀 The company benefits from long-term, fee-based contracts with Hess Corporation, which account for 85% of its revenue and help stabilize cash flows.
• 😀 The dividend is highly sustainable, with a low payout ratio of 37% based on free cash flow, ensuring a reliable and growing dividend stream for investors.
• 😀 Hess Midstream's unique corporate structure as an umbrella partnership corporation (UPC) allows it to avoid the typical K1 tax form, which is beneficial for dividend investors.
• 😀 HSM's financial outlook is positive, with the company targeting a minimum of 5% annual dividend growth through 2027, though past performance suggests this could be surpassed.
• 😀 Hess Midstream's revenue is predominantly driven by natural gas (75%), followed by crude oil (15-20%) and water gathering (5-10%).
• 😀 Despite the complex corporate structure, HSM shares are traded publicly under the ticker symbol HSM, and its stock is currently undervalued according to the dividend discount model, suggesting a margin of safety for investors.

Q & A

What is Hess Midstream, and how does it operate?

Hess Midstream is a midstream oil and gas company focused on the transportation of crude oil, natural gas liquids, and water. It operates primarily in the Williston Basin in the northwest United States, offering pipelines, storage, and rail transport services for its energy infrastructure.

How has Hess Midstream performed financially over the past few years?

Over the past five years, Hess Midstream has delivered a total return of 192.1%, which is an annualized return of 23.9%. The stock's compound annual growth rate (CAGR) since going public in 2017 is 13.2%, which is strong for a midstream company.

What makes Hess Midstream an attractive dividend stock?

Hess Midstream offers a high yield of 7.37%, along with a strong dividend growth track record. The company has a five-year compound annual growth rate of the dividend at 10.49% and a three-year growth rate of 8.93%. The dividends are raised every quarter, making it appealing for dividend-focused investors.

How does Hess Midstream generate its revenue?

Hess Midstream generates revenue by charging fees for transporting natural gas liquids, crude oil, and water through its pipeline network. The company has long-term contracts with its largest customer, Hess, which account for 85% of its revenue, providing stable cash flow.

What is the significance of Hess Midstream's relationship with Hess Corporation?

Hess Midstream has a close relationship with Hess Corporation, which is its largest customer. Hess provides a significant portion of the company's revenue through long-term, fee-based contracts. These contracts are crucial in ensuring consistent cash flow for Hess Midstream.

What is the corporate structure of Hess Midstream, and how does it affect investors?

Hess Midstream has a complex corporate structure involving a partnership between Hess and Global Infrastructure Partners. The public company, Hess Midstream Limited Partnership (HSM), is controlled through this partnership. The structure is not a Master Limited Partnership (MLP), but an Umbrella Partnership C-Corporation (UPC), which makes tax reporting simpler for investors, as they receive a 1099 instead of a K-1 form.

How sustainable is Hess Midstream's dividend?

Hess Midstream's dividend appears sustainable, as the company has enough free cash flow to cover it. The company has a payout ratio of 37% based on free cash flow, which is considered very manageable. Additionally, the company targets at least a 5% annual dividend growth through 2027.

What are the company's future growth prospects?

Hess Midstream is poised for continued growth with an expected 5% annual growth in dividend per share until at least 2027. The company is also forecasting volume growth in its gas processing, oil terminaling, and water gathering businesses, with growth projections for fiscal years 2025 to 2027.

How does the merger between Hess and Chevron impact Hess Midstream?

The merger between Hess and Chevron is not expected to directly affect Hess Midstream, as the company operates independently. However, Chevron will inherit Hess's contracts with Hess Midstream, which remain valid through 2033. This could benefit Hess Midstream, as Chevron may invest more in the operations, potentially increasing growth opportunities.

How does the Dividend Discount Model (DDM) valuation suggest Hess Midstream's stock is priced?

Using the Dividend Discount Model, Hess Midstream's stock is undervalued based on its current dividend and growth projections. For example, with a 5% dividend growth rate and a 10% discount rate, the stock's present value is estimated at $53.81, implying a 28.33% upside. Even with more conservative estimates, the stock remains undervalued, offering a margin of safety for dividend investors.