My Top Dividend Stock Just Crashed

My top high yield dividend stock, HSM, just crashed 15% in a single day. This was 25% of my dividend portfolio, paying me over $8,000 a year in annual dividends. And I woke up today to a $14,700 loss. I call that just another Wednesday. The longer you're investing, you'll encounter some of these days where you have huge swings in something you own. But the key is to not react emotionally to it and don't let the price action tell you how to think about the investment. But this sell-off was caused by a real piece of news that I needed to look into. I woke up and I had texts and calls from people cuz they know I own HSM. Our community in dividend.com was messaging and talking about HSM wanting me to do a video on it, get my thoughts. But I wanted to make sure I did my research on it first. And here is that video. I read the press releases. I read the investor presentation. I listened to the investor update call they had today. And I did my own research compiling all this information, plus additional sources and some backend math. So today, I'm going to give my full breakdown on what happened with HSM and why it sold off 14% in a day. And that news has to do with Hesidstream's main sponsor and the primary source of their revenue, Chevron. Chevron and Hes Midstream just had a transaction that really transforms the relationship between the two companies and it completely blindsides some people who were invested in Hes Midstream for the sole reason of they thought Chevron would end up acquiring it. I personally was never in that camp and when I started buying H Midstream last year, I was getting comments in some of the videos I put out where they were asking me and wanting my thoughts on a Chevron acquisition and that wasn't a part of my investment thesis. Today we found out that Chevron is out of Hess MedStream. And when I say out, I mean as an owner. So here's what's happening with the deal. Chevron is no longer going to be an owner of Hes Midstream. HSM is getting all 38% of their units and this is now going to be a fully publiclyowned independent company. There is no longer that sponsor relationship. HSM is giving Chevron $200 million in cash. But then on top of that, they are also giving Chevron lower fees in exchange. This is for 2027 to 2033. On top of this, Chevron is also divesting out of the DJ basin and they are giving those mid-stream assets located in Colorado to HSM. So HSM now owns two different regions of midstream assets. On top of that, Chevron is giving HSM a 20% stake in the Saddle Horn pipeline and that's 100% of that GP relationship. So HSM is giving them some cash agreed upon lower fees and both parties have negotiated contracts now through 2045. This is a huge extension of their existing contracts. So they have Chevron locked down to 2045 and this will become important later. So this is the exact opposite of what some of the shareholders of HSM wanted where they wanted Chevron to end up buying HSM. Instead, Chevron is exiting completely as a sponsor. HSM is now a fully independent public company. There's no takeout premium to go private. HSM is going to be forming a new fully independent board. They're also going to be revealing a new company name in the future. And this whole transaction is expected to close year end 2026. So, what was the market's verdict when this news was announced? They absolutely hated it. The stock sold off 14.63%. It went from $38.69 to $33.3. The activity level in HSM was 10x the normal volume. So, this was a very hyped up day for HSM. Let's roll the intro video and then I'll dive in and give my exact analysis on HSM, what I'm doing with my position, and how I think about it going forward. My name is Zach. This is dividend data and you should leave a like and subscribe to the channel if you enjoy the video. And if you want to use the stock research tool that I'll show throughout, it's all available at dividenda.com. Link in the description and pin comment of the video. We're continually releasing new updates really almost every single day. One of the more notable ones recently is a mobile app for dividend data. You can try it out if you scan the QR code right here or you can see it on the home screen or in the bottom left corner of the sidebar. It says get the app. Now, I have a lot more research to go into this specific transaction, but let's start off back in the terminal. And we'll start with my portfolio. So, HSM, I mentioned one of my top holdings. My total return is still positive on it cuz I bought it around this time last year where it also had a big crash. And what do you know, that one was also caused from some Chevron related news. But the interesting thing is that in that year, the dividend for HSM went up 7%. So in terms of yield on cost, it's actually the highest dividend yield of the past 5 years. Right now for HSM, it's the 100th percentile after today's stock price crash, the forward-looking dividend yield is 9.55%. So the yield on cost is higher than where I was buying the stock in 2025. And this is where we get to the potential opportunity for those of you if you're looking to start building a position in HSM because one part of the news that I will be discussing is how this company has been derisked and they have basically guaranteed that they will be around as a public company for many many more years to come. That wasn't exactly clear before and in some of my old HSM videos where I talked about that Chevron acquisition possibility. I didn't want that to happen because I wanted this to be a long-term position I could build up and reinvest all my earned dividends in. So, let's get back to what happened in the deal because there is a lot to discuss. So, first let's start with the absolute numbers. And the headline here is that the company is getting smaller. In 2026, the guidance for adjusted IBIDA was $1.2 billion. And in the 2027 guidance they just gave, the midpoint was $900 million. That's a 27.3% reduction. Now, for free cash flow, the guidance for the public shareholders plus the unit holders was $922 million. And in 2027, the midpoint guidance is $575 million. That's negative 37.7% adjusted free cash flow. So, in terms of the absolute raw numbers, Hes Midstream is now a smaller company despite it getting more assets. And I'll dive into that. But this is where it gets interesting because now that economic value is split up between less hands. There are fewer slices of the pie. Before the deal, there was 26.18 million shares or units and they have now cancelled out the roughly 40% of economic ownership that Chevron had. So after closing, there will only be 127.9 million units or shares. So that means you who owns the public holding of HSM, you now own roughly 38% more economic interest. So each of your individual holdings are now actually worth more relative of the ownership. So this is where it gets interesting. Now on a per unit basis, it's actually not as much of a decline as the raw numbers show. Ultimately, the per unit or per share metric is what matters here. So adjusted IBIDA per unit based on the 2026 guidance before this was $6. And based on that lower 2027 guidance, it would actually now be $74, which is a positive 17.2% increase. Adjusted free cash flow is basically flat, going from $447 to $4.50 per unit. That's plus 0.5%. The distribution held at the Q4 2026 rate, which I'll explain that. That's a big thing since many of us are dividend investors here and the distribution was a big part of investing. There's a lot of news related to that. But based on 2026 of $3.17, they are going to have one more increase in 2026 which will bring it to $323 for 2027. So you're still going to be getting more distributions next year than you did this past year. However, HSM now has more debt per unit as well. Previously, this was the best mid-stream company in the entire market in terms of their debt to IBIDA ratio. It was around 3x and now it's closer to 4x. There was a 61% increase due to this deal. And I'll dive into all that as well. Now, when I was reading into this, I was like how some of you probably were. I was looking at the absolute numbers and I was wondering what happened to all the cash flow because I already did the math back then. We already knew that they were going from three rigs to two rigs and that didn't really make sense for the entire difference in losses here. So, the big change around free cash flow here with HSM comes from these new fee cuts. Now, they did that in exchange for taking out the ownership of Chevron plus getting some long-term contracts. So, they have a more guaranteed long-term anchor customer that's estimated to decline $475 million of their total adjusted free cash flow in 2027. Now, they're making that up some with their new assets in the DJ Basin and Saddle Horn economic interest. That's another $200 million up estimated there. And that's how you get to the $575 million of estimated adjusted free cash flow in 2027 for Hes Midstream. Now, those absolute decline numbers that I showed previously included economic ownership associated to Chevron because there's like all this weird stuff with the partnership. It used to be even weirder in the past. They had another GP previously. It looks like it's going to be a lot more simple going forward, which will be nice. But over the trailing 12 months, HSM public shareholders had $694 million of free cash flow. So that still will be going down on an absolute basis. And here's the 2027 guidance. If you don't want to believe me, this is from the official Hess investor presentation that they just put out today. Adjusted IBIDA of $850 million to $950 million, capex of $125 million. And the nice thing is that these are all very mature assets. They don't require a lot of reinvestment. So these things generate best-in-class industry generating free cash flow. Adjusted free cash flow $525 million to $625 million, which more than covers the distributions. So after distributions, they'll have an additional $110 million to $210 million. And their basic plan right now is they want to pay off some of that debt in the short term. They're going to do their fourth quarter 2026 distribution growth that they already promised. And then in 2027, their plan is to maintain the dividend at the current mount. So, one way to think about this deal is that Hesminstream is paying for the buyback of Chevron shares by basically giving up some of their fees. They're giving up about $285 million of free cash flow in the next few years. Now, here's the thing. They also don't have to pay those distributions to Chevron because Chevron was an owner, so they were getting distributions as well. So, they don't have to pay $253 million of distributions. So, it really only cost them about $32 million and they were able to retire 38% of Chevron's ownership plus a $200 million cash payment at signing. And if you were the management of Hest Midstream and you wanted to grow the business in the long run, this was a big win. They now have guaranteed contracts through 2045. It's still fixed fee with CPI escalators. So, that means it's going up every single year with inflation. That's a cap of 3% in the Bakan and 2% in the DJ, which they just got. They rewrote some of the minimum volume commitments and now it's a minimum revenue commitment. In principle, it's the same, but basically protects the downside. About 70% of HSM's revenue is fully protected to the downside. They have an 80% revenue floor through 2033, and it can never go below that level. They set it up where it has to go up every single time. that grew ebida per unit for the public shareholders and is now a more independent diversified company with two different basins plus a 20% ownership stake in a pretty large pipeline. Now where they're losing is that distribution growth is ending in the short term. They said no growth in 2027. They haven't given any comments as to how much growth will be in the years after that. In my opinion, I think there still will be growth as the business will be growing overall. But the question is how much they want to pay off that debt. They now have more leverage. It's about a 4.1x debt to ebida ratio. By the way, that's still less than MLX, which is another mid-stream asset that I own. They previously at a 3x multiple, which was the lowest in the entire industry of public mid-stream stocks. Chevron is still their biggest customer. However, it is more diversified now. Third parties are now up to 20% of their overall volumes. It was less than 10% before, and there's no longer the potential win of a buyout in the short term. And you can make the argument that HSM's dividend payment is actually more secure now than it was earlier this year. They have 1.39x distribution coverage with their free cash flow. So that gives a payout ratio of about 72%. And on the lowest end of their guidance at 79%. The only risk here is that now their leverage is higher. And in July 2027, they have to do some refinancing on debt. But in my opinion, I think they're actually in a much better position relating to being able to raise money, get new debt, and that's due to the long-term contracts they have with Chevron. The fact that they have that locked down to 2045, it makes it much easier to raise debt. They're in a more secure position with more reliable cash flow. But let's dive into that dividend growth question because that was a big reason why everyone liked HSM. This company raised their distribution every single quarter and it continued going up and up even through 2020 when the oil and gas market was doing terribly. Many mid-stream stocks cut their payments. HSM did not. They continued raising it and the 5-year compound annual growth rate of the dividend is 9.36%. And that's crazy for a stock which is now yielding a 9.55% dividend yield. And that was one of my big reasons why I loved this stock. It was the combination of high yield and high dividend growth. But now the growth is going to be done for 2027. So they're going to be doing a Q4 2026 increase cuz they have one more this year. And this is from their official investor presentation. Their plan is to hold distributions at that level and then maintain through 2027. So based on what they're saying, there will not be a dividend increase in 2027. And this payment is now very secure going into the future, but they're going to be using the excess free cash flow that they generate to pay down some of that debt. They want to target a three and a half to 3.7x adjusted Ebido ratio. Previously, they were getting criticized by some people because of the 3x ratio, and that's cuz they had no way of deploying capital. But now, after this deal, they're in a position to pursue even some growth opportunities because they're a fully independent company. They have a more diversified asset base and they have a foundation to kind of play around and try and grow for the future. So management said they're going to be looking for some opportunities to increase their scale and expand the business profile even beyond the DJ Basin assets they just got and that pipeline 20% interest. However, they did tease and they said this on the earnings call as well. This doesn't mean dividend growth is over from here. They're just not going to be doing that 5% plus commitment that they've been doing every year at least for 2027. They said potential share repurchases and distribution growth will only be funded with excess adjusted free cash flow after those base distributions. And right now the guidance is $110 million to $210 million of adjusted free cash flow after that base distribution. Now in 2027, a lot of that will likely go to the debt and then it's pretty unknown beyond them. They could continue that in 2028. In 2029, this is assuming no growth from these estimates. they could get down to a 3.7x ratio by then and that would be the base case for when dividend growth would start accelerating again for HSM and then by 2030 they would likely be at that 3.5x the lowest end of the leverage ratio but you have to keep in mind that their business is going to be in a better position to keep growing from now on and they have built-in fee rises and escalators so in the Bakan they're going to be getting 3% just from that CPI increase they're going to be getting 2% in the DJ so if you're like me and you're reinvesting your dividends or your distrib contributions in ATSM. If you assumed the old dividend growth rate versus the new plan and then you also factor in the drop in stock price that just happened, your income actually wouldn't end up being that different. With this drop in stock price, you're likely actually pick up more units over time. And that's because you're reinvesting at lower prices. And I'm actually looking forward to that with my HSM stake, reinvesting my dividends. I hope the stock price stays down over the next few months. And now the business is trading at an even more attractive valuation. These are using the 2027 guidance numbers they gave. It's now trading at 8.81 times IBIDA, 7.35 times price to free cash flow at a 13.6% free cash flow yield. And the distribution yield, factoring in one more increase that they said they're doing, that will be 9.79%. And I went to give you some estimates of what the current intrinsic value per unit is for HSM based on the new guidance they just gave. So if you assume they should trade at 9 times EV to IBIDA, that would give a $34.40 40 intrinsic value. If the stock were to trade at 12% free cash flow yield, that would give an implied value of $3746. If you do the dividend discount model on it, there's a range depending on what kind of growth rates you have on the stock over time. But the base estimate was $39.94. If you do a DCF through 2045, the base case is $46.78. So this sell off in stock price bringing the price down to $33.3, it kind of gives you more of a margin of safety buying into HSM. And yes, the stock price had a huge drop on the day, but I don't think the intrinsic value of the company really declined that much from this news. And you can make an argument that it went up. And the one thing I know is that this mid-stream business is going to be around for a lot longer now. By the way, in the description and pin comment of this video, I'll try and attach some of uh the documents that I found over time, the investor presentation, the press releases, all that because they're pretty interesting to read through and you should read through it if you're a shareholder. And the management of Hes Midstream, they are definitely more bullish on the future after this deal. And it makes sense. It puts them in a way better position for future growth. They're no longer as reliant on Chevron. They can act independently and grow the business. In one quick deal, they went from a onebasin isolated company to now they have two very good mid-stream assets in different basins plus a 20% stake in a pipeline and hes midstream. Now with the DJ plus the backend, they are the second largest production asset group for Chevron. The largest is the Perian Basin. Their combined gathering volumes have gone up significantly. The Bakan had a lot of gas which I preferred and liked, but they are growing that now even more. Plus, in the DJ, they get increased crude gathering. So, overall, their volumes are up. And these are two mature areas that don't require a lot of reinvestment. So, they have best-in-class free cash flow conversion. It's greater than 60%. What they like about the DJ Basin, it's Chevron's primary partner. So, with the DJ Basin acquisition, they get gathering and transportation pipelines. Chevron is still the primary customer there, but they said that they see significant thirdparty customer volume and opportunity. They have a 20% ownership in the largest crude oil pipeline out of the basin. That's this Saddle Horn pipeline. The two other owners are 10K. That's another public stock. They own 40%. Planes, I think that's another public stock. They own 40%. And this transports from Colorado down to Oklahoma. And this is on top of their existing Bakan gas gathering and processing, crude terminaling and gathering and water services. And they have 100% fixed fee contracts through 2045 with Chevron. That includes downside protections. They have 80% minimum revenue commitments through 2033 and that cannot ever be adjusted downwards once set. So we once again this year have another big change in the corporate structure of HSM. Personally, I'm not scared off by this 14.6% drop in a day. I do think that their stock price could stay pretty low in this range for the coming months and over the next year or so we'll likely have a lot of churning of the shareholder base. But I do think in the long run, this is in a pretty good position to be a high quality mid-stream oil and gas stock that you can own. Finally, a lot of the weirdness of the whole sponsor relationship will be put in the rearview mirror. It's also rather unique in that the distributions for HSM, you don't get a K1 for your taxes. It shows up on your 1099 div. So, in my personal dividend portfolio, I'm not planning to do anything different. I'm going to keep holding my HSM. I'm going to be reinvesting my dividends. I already have a pretty large position. I feel pretty good about it from this current valuation after the 14% drop. I'm going to be getting about $2,000 of dividends in November that I'll be reinvesting. I hope the share price is still low then. And now at a 9.55% dividend yield, I'm getting more interested into adding after this drop. I wasn't necessarily thinking about it a couple weeks ago, but today after this news, I'd be more likely to add and start building my position dollar cost averaging more over time. I'm not looking to get out of it, but that's just my opinion. You should do your own research before you make any investing decisions. Do not just blindly follow whatever I say. Do your own research.