On Thursday, UBS adjusted its outlook on Hess Midstream Partners LP (NYSE:HESM), increasing the price target to $35 from the previous $33, while reaffirming a Buy rating on the stock. The firm's decision reflects anticipated growth in the company's base natural gas business within its Gathering & Processing (G&P) segment.
The rationale behind the price target hike is rooted in Hess Midstream's approximately 10% multi-year growth outlook, which outpaces the average Midstream peer growth estimate of 3-5%. Additionally, the company's strategy to return capital to shareholders is highlighted, with approximately 15% of its market capitalization expected to be allocated to buybacks over the next three years, coupled with a forecasted 5% annual dividend growth.
Another factor contributing to the positive outlook is the potential for Hess Midstream to be an acquisition target following the announcement of Hess Corporation (NYSE:HES)'s acquisition. Furthermore, UBS notes that Hess Midstream possesses a leading balance sheet in the sector, with a debt-to-EBITDA ratio below 3.0 times.
The analyst from UBS elaborated on the potential scenarios for Hess Midstream's valuation. The upside scenario, which rolls the valuation forward to 2026, suggests a possible value of $39 per share, while the downside scenario, which assumes minimum volume commitment level earnings and excludes buyback assumptions through 2026, implies a value of $26 per share.
The firm emphasizes Hess Midstream's competitive free cash flow yield projections for the years 2024, 2025, and 2026, estimated at 9.3%, 11.9%, and 14.6%, respectively. This financial performance is expected to support significant share buybacks, with an estimated $1.25 billion in repurchases through 2026.
InvestingPro Insights
In light of UBS's updated outlook on Hess Midstream Partners LP (NYSE:HESM), investors may find additional insights from InvestingPro data and tips valuable. According to recent metrics, Hess Midstream has a market capitalization of approximately $7.47 billion and is trading at a P/E ratio of 15.46. When looking at the last twelve months as of Q4 2023, the P/E ratio adjusts to 18.75, indicating a premium valuation relative to its earnings.
InvestingPro Tips suggest that Hess Midstream has shown a commitment to returning value to shareholders, having raised its dividend for 7 consecutive years and maintaining dividend payments for 8 consecutive years. Notably, the company pays a significant dividend to shareholders, with a dividend yield of 7.78% as of the latest data. This aligns with UBS's commentary on the company's strategy to return capital to shareholders through a forecasted 5% annual dividend growth.
Additionally, the company is trading near its 52-week high, at 93.87% of the peak value, and analysts predict the company will remain profitable this year, which corroborates the positive sentiment from UBS. However, investors should be aware that three analysts have revised their earnings downwards for the upcoming period, which may warrant closer attention to the company's performance in the near future.
For those interested in a deeper dive, InvestingPro offers a comprehensive range of metrics and additional InvestingPro Tips for Hess Midstream Partners LP. With the coupon code SFY24 for a 2-year subscription or SFY241 for a 1-year subscription, investors can get an additional 10% off the InvestingPro+ subscription. There are 11 additional InvestingPro Tips available to subscribers, providing a more robust analysis of the company's financial health and market position.
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