Hess (HES 1.47%) offers investors big-time oil-fueled growth potential. The oil producer believes it has the resources to expand its oil production by a 10% compound annual growth rate through 2025. That should allow it to grow its cash flow at an even higher 20% yearly pace, assuming oil prices cooperate. That fast-growing cash flow could eventually give Hess the funds to increase its dividend, which currently has a below-average yield of 1.7%.
While Hess might one day be a much more compelling income stock, the company does offer yield seekers an attractive alternative in the form of its master limited partnership Hess Midstream Partners (HESM). That entity already pays an enticing yield of 8%, which it intends on increasing by a 15% annual rate over the next few years. That makes it an appealing option for income-seeking investors to consider.
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Bakken-fueled income
Hess Midstream Partners owns a network of oil and gas infrastructure in the Bakken shale of North Dakota. These midstream assets support the operations of Hess as well as third-party producers in the region. The MLP makes its money by charging fees to these customers as oil and gas volumes move through its system of gathering pipelines, processing plants, and storage terminals.
The currently anticipated volumes for 2019 should supply the company with between $103 million and $108 million in cash this year. That's enough money to support the MLP's high-yielding payout by more than 1.1 times, even with the assumption that it will increase its distribution by 15% this year.
Hess Midstream expects its cash flow to grow at a healthy pace in the coming years as it hooks up more newly drilled wells to its existing system as well as completes expansion projects. The company, for example, is working with Targa Resources (TRGP 0.61%) to build a new natural gas processing plant in the region, which should start up in the third quarter. Meanwhile, the MLP recently approved the expansion of its Tioga Gas Plant, which should be in service by the middle of 2021. These projects will support the production growth of Hess and other customers for the next few years, giving Hess Midstream a clear path to continue increasing its distribution at a 15% annual rate through at least 2021.
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Ample fuel to continue expanding in the future
Hess currently expects the Bakken to be one of its main growth engines through 2021. While the company plans to transition the region into a cash flow machine by 2022, that doesn't mean its MLP will run out of fuel. That's because Hess Midstream has multiple avenues to drive growth beyond that time frame. One of those is to make acquisitions from its parent, Hess Infrastructure Partners, which is a joint venture controlled by Hess and a private equity fund that owns midstream assets in the Bakken. That entity, for example, recently acquired Tioga Midstream from Summit Midstream Partners (SMLP -0.63%) for $90 million. In addition to that, it acquired Hess' existing Bakken water services business for $225 million. The infrastructure joint venture granted Hess Midstream Partners the right of first offer to purchase these water assets in the future. Meanwhile, Hess also owns midstream infrastructure in the Gulf of Mexico that it could drop down to its MLP.
Besides those internal growth opportunities, Hess Midstream Partners could make outside acquisitions. For example, it could buy midstream assets in the Bakken shale from third-party owners like its parent did by acquiring Summit Midstream's water gathering assets. It could also seek out other joint venture investment opportunities similar to its partnership with Targa Resources to build a new gas processing plant in the region. Furthermore, it could expand into new areas such as the Permian Basin so that it can reduce its dependence on not only Hess but the Bakken to drive growth.
With a virtually debt-free balance sheet, Hess Midstream Partners has the financial flexibility to pursue a range of investment opportunities. That should enable the MLP to continue growing its cash flow so that it can keep increasing its high yield distribution at a healthy pace in the years to come.
The best of both worlds
While Hess offers high-octane growth potential, the oil producer pays an underwhelming dividend. Because of that, income seekers might want to consider Hess' MLP. Not only does it offer a much bigger payout, but it has equally enticing growth prospects. Those dual fuels could enable the company to generate big-time total returns over the next several years.
