Hess Midstream Partners (HESM) likely isn't on the radar of most retirees. That's because it's a small master limited partnership (MLP). As a result, it doesn't stand out amid the sea of larger midstream companies, most of which have converted into taxable corporations. Those moves have allowed investors to hold them in their retirement account.
Hess Midstream, however, is doing something about that. The company recently announced a series of transactions that will make it much more appealing to dividend-seeking investors like retirees.
Drilling down into Hess Midstream's proposal
Hess Midstream recently unveiled a string of moves that will enhance its operations. First, the company will acquire Hess Infrastructure Partners from its sponsors, oil producer Hess (HES 1.72%) and private equity giant Global Infrastructure Partners. That deal will put all of Hess' oil and gas midstream assets in the Bakken shale under one umbrella. Hess Midstream will now own 100% of those oil and gas midstream assets as well as the water services business Hess sold to Hess Infrastructure earlier this year. The transaction will create one large-scale midstream company with an enterprise value of more than $7.25 billion.
As part of that transaction, Hess Midstream will eliminate the incentive distribution rights (IDRs) that it used to pay Hess Infrastructure Partners. That will enable the company to retain more cash, which it can use for other things, such as investing in expansion projects.
In addition, Hess Midstream will convert from an MLP to a corporation for tax purposes. Consequently, investors will be able to hold shares of the company in their retirement account.
Adding fuel to its growth engine
Hess Midstream's moves will not only simplify its corporate structure but also enhance its growth prospects. The acquisition of Hess Infrastructure will boost the company's distributable cash flow per share by an incremental 6% next year. Meanwhile, it will add more than 15% to the bottom line in both 2021 and 2022. That has the company on track to grow its EBITDA by a 25% compound annual growth rate in the 2019 to 2021 time frame, which is the fastest pace in its peer group.
Because of that, Hess Midstream affirmed its plan to increase its 7.7%-yielding dividend at a 15% annual rate through at least 2021. In the company's view, it can deliver that growth while maintaining a healthy coverage ratio of 1.2 times, which is an improvement from its prior view that coverage would average 1.1 times. In other words, the payout is becoming increasingly more sustainable.
The higher coverage level will provide the company with more retained cash flow that it can use to expand its midstream footprint. That will enable it to continue to grow while maintaining a strong financial profile. From the company's perspective, it can deliver on its expected dividend growth while keeping its debt-to-EBITDA ratio below three times. That's the lowest leverage ratio in its peer group and will further enhance the long-term sustainability of Hess Midstream's high-yielding dividend.
The only question that remains is what will fuel Hess Midstream's growth after 2021 because that's when Hess plans to tap the brakes on its Bakken growth program. The company does have options, including pursuing more third-party expansion projects and acquiring Hess' midstream assets in the Gulf of Mexico. Given Hess Midstream's strong balance sheet, it has the financial flexibility to capture opportunities to drive growth beyond 2021. However, it's still an area that investors should monitor since part of the company's attraction are its strong near-term growth prospects.
An increasingly appealing income stock
Hess Midstream's latest moves make it a much more attractive stock for income-focused retirees. Not only can they now hold shares of the company in a retirement account, but the transaction also enhances the company's growth prospects. Therefore, retirees can collect a fast-growing, high-yield dividend for the next few years to help them meet their income needs.