On August 3, Hess Midstream LP (NYSE:HESM) reported second-quarter results that raised more questions than they answered. Net income fell to $173.7 million from $179.7 million a year earlier, yet the board raised the quarterly distribution to $0.7888 per Class A share anyway. Free cash flow actually grew while the top line shrank. That mismatch, a smaller profit funding a bigger payout, is the real story of the quarter, and it says something about where midstream cash actually comes from.
Cash Flow Keeps Climbing Regardless
Despite lower revenue, Adjusted Free Cash Flow rose to $231.6 million from $193.8 million in the second quarter of 2025. CapEx dropped to $30.6 million from $70 million, a 56% decline the company attributes to finishing its gas compression expansion. Spending less while collecting steady fees is a straightforward way to grow cash even when volumes soften. Total operating costs and expenses fell to $145.8 million from $154.0 million on lower employee costs and lower maintenance expense, and Gross Adjusted EBITDA Margin widened to 85% from 82% a year earlier.
The board used that cushion to raise the quarterly distribution by $0.0096 per share over the first quarter of 2026, declared on July 27, and payable August 14, to shareholders of record as of August 6. Management also reaffirmed full-year 2026 guidance, targeting Adjusted EBITDA of $1.23 billion to $1.28 billion and Adjusted Free Cash Flow of $910 million to $960 million, and it still expects roughly $1 billion of Adjusted Free Cash Flow after distributions available through 2028 for shareholder returns and debt repayment.
Volumes Are Moving The Wrong Way
The reason revenue fell in the first place is throughput. Oil terminaling volumes dropped 15% compared with the second quarter of 2025, water gathering fell 12%, and gas processing slipped 4%, the last driven mostly by planned maintenance at the Tioga Gas Plant, though the first two point to less new drilling activity feeding the system. Total revenue fell to $399 million from $414.2 million, and Adjusted EBITDA slipped to $313.7 million from $316 million even with higher tariff rates and third-party services partly offsetting the volume loss.
Noncontrolling interests still absorbed most of the total, leaving Hess Midstream LP with just $96.4 million of the $173.7 million in net income. And the balance sheet carries $256 million drawn on the revolving credit facility as of June 30, sitting alongside a distribution obligation the company just chose to increase rather than hold flat.
What The Market Is Pricing In
Hedge fund ownership of Hess Midstream slipped from 28 funds to 27, a small retreat rather than a stampede. Short interest sits at 6.63% of float, enough to signal a real bear camp forming rather than background noise. The stock trades at a forward P/E of 9.91, as of September 16, a multiple that assumes little of the free cash flow growth or the distribution increase carries forward. That gap between a rising payout and a single-digit multiple is the tension the market has not resolved.
Wait And See On The Volume Trend
Hess Midstream closed the quarter with a business generating more cash on less spending, but doing so on volumes that fell across two of its three main throughput categories. For the bull case to hold, the reaffirmed guidance needs the back half of 2026 to show new-well activity feeding gathering and terminaling volumes back up. For the bear case to hold, declining throughput needs to keep pressuring revenue until the lower capital spending and margin gains can no longer offset it. The distribution increase suggests management sees more of the former than the latter.
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