Hook / Thesis
Hess Midstream (HESM) is a cash-flowing midstream operator that has quietly grown its quarterly payout and maintained healthy operating cash flow through 2025. The market is paying a large discount to the distribution stream and historically achievable price levels: the last print on the tape was $36.30 (quote available 01/29/2026). With an indicated quarterly distribution of $0.7641 declared 01/26/2026 (payable 02/13/2026), the annualized cash payout is roughly $3.0564, implying a yield of about 8.4% at $36.30. That high yield plus durable cash generation argues for a tactical long where upside comes from dividend carry, continued distribution growth and potential multiple expansion.
I'm proposing a defined trade: establish a starter long position in the $35.50-$36.75 range, use a tactical stop near $31.50 to control downside, take partial gains at the recent cycle high ($44) and hold a portion to a stretch target around $50 if cash flow continues to improve and the distribution track record stays intact.
What Hess Midstream does - and why the market should care
Hess Midstream LP owns and operates midstream assets across gathering, processing & storage, and terminaling & exporting. The gathering business - natural gas, crude oil and produced water gathering/disposal - accounts for the largest share of revenue. Midstream cash flows are fundamentally fee-based and less cyclical than upstream production, so investors buy midstream for predictable distributable cash flow and leverage to production activity without commodity price exposure on a per-unit basis.
For HESM, that translates into steady top-line and operating cash flow. In Q3 2025 (period ended 09/30/2025), revenues were $420.9M and operating income came in at $258.9M. Net cash flow from operating activities that quarter was $258.9M, with investing activity of -$80.0M and financing outflows of -$177.9M. Those financing outflows historically reflect distribution payments and balance-sheet management. The company has been increasing the cash distribution quarter after quarter: the most recent declaration on 01/26/2026 was $0.7641 per Class A share; compare that to the $0.5696 declared on 01/23/2023. Consistent increases like this matter - they attract income buyers and reduce the risk of distribution shock if cash flow continues.
Evidence in the numbers
- Revenue trend: Q1 2025 = $382.0M, Q2 2025 = $414.2M, Q3 2025 = $420.9M. The company has shown sequential growth through 2025 quarters.
- Operating income: Q1 2025 = $237.4M, Q2 2025 = $260.2M, Q3 2025 = $258.9M - stable, high-margin midstream cash generation.
- Operating cash flow: Q1 2025 = $202.4M, Q2 2025 = $276.9M, Q3 2025 = $258.9M - demonstrates strong and recurring free cash generation before capex.
- Balance sheet (Q3 2025): total assets $4.4377B, liabilities $4.0112B, equity $426.5M. Fixed assets are large (>$3.3B), reflecting the capital-intensive nature of the business.
- Distribution cadence and growth: quarterly distributions have risen from roughly $0.57 in early 2023 to $0.7641 declared 01/26/2026, showing management has been comfortable raising the cash return to holders while operating cash flow remains robust.
Valuation framing
Market-cap data is not available in the public snapshot provided here, but the most recent trade prints are in the mid-$30s: last quoted price was $36.30 and the previous close was $35.99 (01/29/2026). Over the past 12 months the stock has traded between roughly $31.74 (in early 2025) and a high near $44.14 (mid-2025). That range gives us context: the market has shown the willingness to pay into the low-to-mid $40s for HESM when sentiment or distributable cash flow visibility improves.
Without a formal peer table or an up-to-date market cap in this feed, valuation has to be judged qualitatively: the security currently yields ~8.4% on the declared run-rate distribution. For an income investor that yield is compelling versus other midstream names and many fixed income alternatives. The market is implicitly applying a significant discount to HESM's distribution stream - likely reflecting concerns around leverage, counterparty concentration, or midstream multiples. If operating cash flow continues near recent quarterly levels and the distribution track record remains intact, even modest multiple expansion would drive meaningful upside beyond the yield carry.
Trade plan - entry, stop, targets
- Trade direction: Long HESM (Class A share).
- Entry: 35.50 - 36.75. Start with a base position in that band; scale in up to a full intended position if price liquidity and confirmation are favorable.
- Stop: $31.50 on a closing basis. This is a hard protection level ~12-13% below the top of the entry band and below the recent 12-month low area; if broken it indicates a breakdown in both price structure and possibly distribution safety.
- Targets:
- Target 1 (take ~50% of position): $44.00 - near the 12-month high and a natural resistance zone.
- Target 2 (hold remaining): $50.00 - stretch target if distributions keep growing and multiple expansion returns.
- Position sizing & timeframe: Risk tolerant investors can treat this as a swing/position trade over 3-9 months; size so that the stop-loss represents no more than 1-2% of portfolio capital (i.e., conservative position sizing given the 12-13% stop distance).
Catalysts to drive the trade
- Continued distribution growth - management has been increasing quarterly distributions; another increase or confirmation of distribution coverage would attract income buyers (most recent declaration 01/26/2026; ex-dividend 02/05/2026, pay 02/13/2026).
- Stable-to-improving operating cash flow - consistent Q2/Q3 2025 operating cash flow of ~$250M-$275M keeps coverage comfortable and supports buyback/distribution optionality.
- Macro/commercial improvement - higher regional production volumes or stronger utilization of terminals/export facilities would lift throughput-related fees for the gathering and terminaling segments.
- Multiple re-rating as investor appetite for yield returns - an environment where investors rotate back to high-yielding infrastructure names would compress required yields and lift share price.
Risks and counterarguments
Any midstream trade needs to be balanced with the realities of leverage, counterparty exposure and regulatory/operational risk. Below are the principal risks that could invalidate the thesis:
- Leverage / balance sheet constraints: Total liabilities were $4.0112B with noncurrent liabilities large relative to equity. If interest rates rise or cash flow weakens materially, flexibility to support distributions could be constrained and the market could re-price the security lower.
- Distribution cut risk: Even though distributions have grown, a material drop in volumes or unexpected capex needs could force management to slow or cut the payout. Financing outflows across recent quarters (e.g., Q3 2025 financing -$177.9M) underscore that distributions represent a recurring use of cash.
- Counterparty / concentration risk: Much of HESM's throughput is connected to Hess and regional producers; large spend reductions or lower production from key customers would reduce fee-based revenue.
- Commodity/volume sensitivity: While midstream fees are less commodity-sensitive on a per-unit basis, the absolute level of volumes matters. A sustained drop in upstream activity reduces throughput and fees.
- Market sentiment & yield compression risk: The high current yield reflects a market that demands a higher risk premium. If macro risk aversion rises (rate shock, credit stress), HESM's yield could widen further and the stock could fall even with stable underlying operations.
Counterargument: The market's discount may be justified. High leverage, limited near-term balance sheet flexibility and a concentrated customer base can warrant a lower multiple and a high yield. If you believe the distribution is structurally at risk or that midstream multiples will remain depressed for the next few quarters, the current yield simply compensates for structural downside rather than opportunity. That is a reasonable and defensible view.
What would change my mind
I would become less constructive if any of the following happen:
- A distribution pause or cut, or management language indicating weaker coverage on the next earnings call.
- Operating cash flow drops materially and persistently below the mid-200M quarterly run-rate seen in 2025 (e.g., sustained quarter(s) below ~$180M). That would meaningfully raise cut risk.
- Material increase in leverage ratios from new, large debt-funded projects without secured, fee-based contracts.
Conversely, renewed distribution increases, evidence of sustained cash flow improvement, or contractual take-or-pay expansions would make me more aggressive and could justify moving the stop higher and raising targets.
Bottom line
HESM is a classic income trade: strong recent operating cash flow, a multi-quarter trend of distribution increases, and a current yield (about 8.4% at $36.30) that should attract yield-seeking investors if distribution coverage remains visible. The share price sits below the 12-month highs, offering an asymmetric opportunity where yield and potential re-rating can both contribute to total return.
Execute the trade with strict risk control: enter in the $35.50-$36.75 band, stop at $31.50, take partial profits near $44 and hold a portion to $50 if cash flow and distribution trends continue to improve. Size positions so a stop-out is an acceptable portfolio-level loss.
Disclosure: This is a tactical trade idea and not a recommendation for every investor. Position size, and whether to implement this plan at all, should reflect your own risk tolerance and investment horizon. Monitor quarterly cash flow and distribution commentary closely.
Key company dates referenced: distribution declared 01/26/2026 (ex-dividend 02/05/2026, pay 02/13/2026); quarter ended 09/30/2025 filed 11/06/2025.