Most people have probably heard of Hess (HES -0.52%) if for no other reason than they played with a Hess toy truck growing up or used to refuel at one of its branded gas stations before the company sold them off a few years ago. But while you might have some familiarity with Hess, you've probably never heard of its offspring: Hess Midstream Partners (HESM).
That wouldn't be a surprise, since the master limited partnership (MLP) went public less than a year ago. However, income-focused investors will want to get to know this company since, unlike its rather stingy and low-yielding oil producing parent, Hess Midstream Partners offers an attractive payout of more than 6% that it expects to increase at a 15% annual rate for the next several years. It's the type of rapidly growing income stream that would make most income investors sit up and take notice.
Hess Midstream 101
Hess began building out midstream infrastructure in the Bakken Shale of North Dakota several years ago to support its operations in the region. However, with oil prices tumbling and cash flow tightening, the company sold a 50% stake in its Bakken midstream business to a private equity fund to raise cash in the middle of 2015, with plans to eventually take the company public. The co-owners completed that IPO last March.
While Hess seeded its MLP with a portfolio of midstream assets that would generate steady cash flow for investors, the main reason it partnered with private equity and then launched an IPO was to secure capital to grow that platform. That's just what Hess Midstream Partners has done since that time, quietly flying under the radar as it executed its growth initiatives that have already allowed the company to raise its payout to investors each quarter since going public, increasing by a 15% annualized rate. It has also achieved that strong distribution growth while maintaining a comfortable 1.2 coverage ratio.
Just getting started
Hess Midstream Partners, however, is still in the early stages of building out its platform, backed by Hess' recent announcements that it's ramping up its investments in the Bakken to increase output 15% to 20% annually through 2020. Some of that growth is already well under way, since Hess Midstream recently commissioned the Hawkeye Oil Facility and the Johnson's Corner Header System.
Meanwhile, more growth is coming down the pipeline, after the company recently entered into a joint venture with Targa Resources Corp. (TRGP 2.23%) to build a new natural gas processing plant in the region. Targa will construct the Little Missouri 4 plant at its existing Little Missouri facility. Hess Midstream and Targa expect to complete that project by the end of this year and finish up some additional infrastructure to support volume growth in early 2019. On top of that, Hess Midstream also expects to invest capital to expand its gas compression capacity and to connect newly drilled wells from Hess and third-party producers to its oil and gas gathering system. These expansion projects, along with increasing volumes on its legacy systems as Hess and others ramp up output, gives Hess Midstream Partners clear visibility that it can deliver 15% annual distribution growth for the next few years.
The company also has plenty of fuel to keep growing, since it has no debt and $300 million of capacity available on its credit facility. It could use those funds to finance additional organic growth projects as well as acquisitions from Hess or third parties. If Hess Midstream were to use its balance sheet to accelerate growth, that decision could enable the company to increase its payout at an even faster rate than the current forecast or extend the visibility of its outlook well past 2020.
Certainly worth watching
With a more than 6% yield that's on pace to grow at a 15% clip over the coming years, Hess Midstream Partners is a company income investors should at least put on their watchlist. While it's not growing as fast as other rivals, it offers a lower-risk high-yield that could help investors meet their financial goals.