Hess Midstream - Earnings Call - Q1 2025

Executive Summary

• Revenue slightly exceeded consensus, but EPS missed: Q1 2025 revenues were $382.0M vs $381.6M consensus, while basic EPS was $0.65 vs $0.686 consensus; weather-driven volume softness and higher interest expense (note redemption charges) weighed on EPS. Bolded: Revenue beat; EPS miss [*]
• Adjusted EBITDA of $292.3M and Adjusted Free Cash Flow of $190.7M; gross Adjusted EBITDA margin remained robust at ~82%, above the 75% long-term target.
• Full-year 2025 guidance reaffirmed: net income $715–$765M, Adjusted EBITDA $1.235–$1.285B, capex ~$300M, Adjusted FCF $735–$785M; throughput ranges maintained (gas processing 455–465 MMcf/d, terminals 130–140 Mbbl/d).
• Capital returns: quarterly distribution raised to $0.7098 per Class A share; strategy contemplates multiple repurchases per year and >$1.25B flexibility through 2027, a continuing catalyst for shareholder yield.

What Went Well and What Went Wrong

What Went Well

• Maintained strong profitability despite weather: Adjusted EBITDA $292.3M, gross Adjusted EBITDA margin ~82% (above 75% target).
• Throughput growth YoY: gas processing +8%, oil terminaling +7%, water gathering +9% vs Q1 2024, driven by higher production and third-party volumes.
• Management reiterated confidence and capital return framework: “We remain focused on execution, delivery, and growth… return capital to our shareholders on a consistent and ongoing basis” — John Gatling; CFO highlighted leverage ~3.1x with plan for growing EBITDA and ongoing repurchases.

What Went Wrong

• Weather-driven volume softness vs Q4: gas processing averaged 424 MMcf/d vs 447 MMcf/d in Q4 2024; management attributed softness to severe winter weather, guiding recovery in Q2.
• EPS below consensus: basic EPS $0.65 vs $0.686 consensus; higher net interest expense ($56.4M) and charges from redeeming 5.625% notes pressured earnings [*].
• Operating costs up YoY: total operating costs/expenses rose to $144.6M from $133.6M, reflecting higher employee costs, pass-through electricity/water trucking, and depreciation on new assets.

Transcript

Operator (participant)

Good day, ladies and gentlemen, and welcome to the First Quarter 2025 Hess Midstream Conference Call. My name is Kevin, and I'll be your operator for today. At this time, all participants are on a listen-only mode. After the speaker's presentation, there'll be a question-and-answer session. To ask a question during the session, you'll need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Please be advised today's conference is being recorded for replay purposes. I would now like to turn the conference over to Jennifer Gordon, Vice President of Investor Relations. Please proceed.

Jennifer Gordon (VP of Investor Relations)

Thank you, Kevin. Good afternoon, everyone, and thank you for participating in our first quarter earnings conference call. Our earnings release was issued this morning and appears on our website, www.hessmidstream.com. Today's conference call contains projections and other forward-looking statements within the meaning of the federal securities laws. These statements are subject to known and unknown risks and uncertainties that may cause actual results to differ from those expressed or implied in such statements. These risks include those set forth in the risk factor section of Hess Midstream's filings with the SEC. Also, on today's conference call, we may discuss certain GAAP financial measures. A reconciliation of the differences between these non-GAAP financial measures and the most directly comparable GAAP financial measures can be found in the earnings release. With me today are John Gatling, President and Chief Operating Officer, and Jonathan Stein, Chief Financial Officer.

I'll now turn the call over to John Gatling.

John Gatling (President and COO)

Thanks, Jennifer. Good afternoon, everyone, and welcome to Hess Midstream's First Quarter 2025 Conference Call. Today, I'll discuss our first quarter performance and review Hess Corporation's results and outlook for the Bakken. Jonathan will then review our financial results and guidance. In the first quarter, Hess Midstream delivered strong operating and financial performance despite challenging weather. Throughput volumes averaged 424 million cu ft per day for gas processing, 125,000 barrels of oil per day for crude terminaling, and 126,000 barrels of water per day for water gathering. In line with our guidance, throughput volumes were down compared to the fourth quarter, reflecting lower production from Hess due to severe winter weather in January and February, partially offset by higher third-party oil volumes and a strong recovery in March. Now turning to Hess Upstream highlights.

Earlier today, Hess reported first quarter net production for the Bakken averaged 195,000 barrels of oil equivalent per day. Hess reiterated their plans to continue running a four-rig drilling program in 2025 and expects Bakken net production to be in the range of 210,000-215,000 barrels of oil equivalent per day in the second quarter, up approximately 9% at the midpoint compared to the first quarter. Turning to Hess Midstream guidance, we're reaffirming our previously announced full year 2025 financial and throughput guidance. In the second quarter, we expect volumes growth from the first quarter across our oil and gas systems, partially offset by higher seasonal maintenance activity. Turning to Hess Midstream's capital program, our multi-year projects continue as planned. In 2025, we remain focused on completion of two new compressor stations and their associated gathering systems, as well as starting civil construction on the Kappa gas plant.

Full year 2025 capital expenditures remain unchanged and are expected to total approximately $300 million. In summary, we remain focused on executing our strategy of disciplined, low-risk investments to meet basin demand while maintaining reliable operations and strong financial performance. We expect our growth strategy to generate sustainable cash flow and create opportunities to return additional capital to our shareholders. I'll now turn the call over to Jonathan to review our financial results and guidance.

Jonathan Stein (CFO)

Thanks, John, and good afternoon, everyone. We continue to execute a financial strategy that prioritizes return of capital to shareholders with a demonstrated track record of differentiated shareholder returns. Since the beginning of 2021, we have returned $1.95 billion to shareholders through accretive repurchases. In addition, through the combination of our 5% targeted annual distribution growth and 10 distribution level increases following each repurchase, we have increased our distribution per Class A share by approximately 57% since 2021. As a result, our total shareholder return yield is one of the highest of our midstream peers. Furthermore, our leverage of approximately 3.1x Adjusted EBITDA is one of the lowest among our peers, highlighting our differentiated ability to deliver significant shareholder returns while also maintaining balance sheet strength.

In January, we announced that we expect to generate greater than $1.25 billion of financial flexibility through 2027 for incremental shareholder returns, including the potential for multiple unit repurchases per year over this period. We have also announced that we are targeting annual distribution for a Class A share growth of at least 5% through 2027, which is supported by existing MVCs. This week, we announced our first quarter distribution increase that is consistent with this targeted 5% annual growth per Class A share. Turning to our results, for the first quarter of 2025, net income was $161 million compared to $172 million for the fourth quarter of 2024. Adjusted EBITDA for the first quarter of 2025 was $292 million compared to $298 million for the fourth quarter of 2024.

As guided in January, Adjusted EBITDA decreased relative to the fourth quarter of 2024, as was primarily attributable to low volumes and revenues, partially offset by lower costs and the annual increase in rates due to inflation. Total revenues, excluding pass-through revenues, decreased by approximately $13 million, primarily driven by lower throughput volumes from severe winter weather during the first quarter, as John described, resulting in segment revenue changes as follows: processing revenues decreased by approximately $7 million, and gathering revenues decreased by approximately $6 million. Total costs and expenses, excluding depreciation and amortization, pass-through costs, and net of our proportional share of LM4 earnings decreased by approximately $7 million, primarily from lower third-party processing fees and lower G&A allocations under our omnibus and employee secondment agreements, resulting in adjusted EBITDA for the first quarter of 2025 of $292 million.

Our gross adjusted EBITDA margin for the first quarter was maintained at approximately 80%, above our 75% target, highlighting our continued strong operating leverage. First quarter capital expenditures were approximately $50 million, and net interest, excluding amortization of deferred finance costs, was approximately $51 million, resulting in adjusted free cash flow of approximately $191 million. We had a drawn balance of $128 million on our revolving credit facility at quarter end. Turning to guidance, for the second quarter of 2025, we expect net income to be approximately $170 million-$180 million, and adjusted EBITDA to be approximately $300-$310 million, reflecting higher volumes and revenues, partially offset by seasonally higher maintenance costs. We also expect CapEx to increase in the second and third quarters, consistent with seasonally higher activity levels.

For the full year 2025, we are reaffirming all previously announced guidance and expect net income of $715 million-$765 million and Adjusted EBITDA of $1,235 million-$1,285 million. With total expected capital expenditures of approximately $300 million, we expect to generate adjusted free cash flow of $735 million-$785 million. With distributions per Class A share targeted to grow at least 5% annually, we expect excess adjusted free cash flow of approximately $135 million after fully funding our targeted growing distributions. For the remainder of 2025, we expect growing adjusted EBITDA in each quarter, consistent with increasing volumes. As implied by the midpoints in our guidance, we anticipate adjusted EBITDA in the second half of the year to be approximately 11% higher relative to the first half.

In summary, we are very pleased to have delivered additional incremental return of capital to Hess Midstream shareholders and look forward to a visible trajectory of growth in our operational and financial metrics that underpin our unique and differentiated financial strategy with a focus on consistent and ongoing return of capital to our shareholders. This concludes my remarks. We'll be happy to answer any questions. I will now turn the call over to the operator.

Operator (participant)

Thank you. Ladies and gentlemen, if you have a question or a comment at this time, please press star one one on your telephone. If your question has been answered or you wish to move yourself from the queue, please press star one one again. We'll pause for a moment while we compile our Q&A roster. Our first question comes from Jeremy Tonet with J.P. Morgan. Your line is open.

Eli Johnson (Analyst)

Hi, this is Eli Johnson on for Jeremy. Just wanted to start on the Bakken outlook in light of ongoing macroeconomic volatility. Can you just help frame some of the sensitivities for the business and how we should be monitoring those throughout the year, recognizing MVCs are likely playing a role here? Thanks.

John Gatling (President and COO)

Sure. Yeah, I'll touch on it and then can hand it over to Jonathan. Obviously, in the basin itself, it's very operator-dependent. There's a lot of moving parts to the basin. There's a lot of different ways that the programs are being managed by the different operators. From Hess's perspective, we've not really seen any change in activity. Hess just reaffirmed that the plans to run four rigs for the rest of this year were well above MVC levels. I would say that from a growth trajectory, we really haven't seen a step change in activity, and we're really not anticipating it in the near term. As you mentioned, we do have MVCs. They're established through 2027. We'll also be setting our 2028 MVCs later in the fall and early next year. That provides protections, but from our perspective, the activity is still there.

In fact, we're continuing to see the same level of activity in our third-party business as well. Both Hess and third parties remain fairly active. I don't know, Jonathan, if there was anything you wanted to add there.

Jonathan Stein (CFO)

John, thanks. What I would just add is, I think as a reminder that one of the hallmarks of Hess Midstream has really been our proven track record of stability and visibility, even through volatile periods. That includes, of course, underpinning that is our contracts that have no direct commodity price exposure that generate our take-or-pay type revenue, include inflation escalators, and our operating model, which gives us a 75% EBITDA margin. Remember, our CapEx spend is relatively low, so only $125 million of ongoing CapEx in our CapEx program. Of course, our low leverage at three times EBITDA, one of the lowest in the sector and no near-term maturities. As John mentioned, of course, our MVC set through 2027, which was set based on a four-rig program, and our 5% targeted distribution growth could be delivered even at MVC levels.

We are well-positioned for the growth, as John said, no change there. We are well-positioned to capture that growth, but we are also well-positioned for stability during a volatile period.

Eli Johnson (Analyst)

Got it. That's great color from both, so thank you. I guess just thinking about the volumes in excess of the MVCs, just maybe the split there, third parties, where you see those volumes right now, and any color you can provide on performance against the MVCs would be great. Thanks.

John Gatling (President and COO)

Yeah. Just as a reminder, the MVCs are set at approximately 80% of the nomination. We are much closer to the nomination and continue to expect to see the volume growth over the longer term. As far as Hess versus third parties, we do expect over the long term, third parties to represent approximately 10% of our total volume. If Hess is continuing to grow, by proxy, the third parties are growing essentially at the same rate since we kind of expect that to be in that 10% range. We are constantly looking for opportunities to capture more volumes. I think with our strategic footprint, we are able to capture offset well pads that may be operated by others. Those are always things that enable us to actually bring additional volumes in the system.

In fact, in the first quarter, oil outpaced our gas slightly, and it was a result of those kind of offset well pads where we were actually able to capture third-party volumes that were recently brought on in the first quarter. It is a nice way to kind of mitigate the portfolio of production that we have got between Hess and third parties, but Hess still represents the lion's share of our production.

Eli Johnson (Analyst)

Understood. I'll leave it there. Thanks.

John Gatling (President and COO)

Thank you.

Operator (participant)

One moment for our next question. Our next question comes from Naomi Marfatia with UBS. Your line is open.

Naomi Marfatia (Associate Director and Equity Research Analyst)

Hi, good morning. Thanks for taking my question. My first question is on recent rig count. Hess has reaffirmed its four-rig cadence, but we've seen fears of rig decline overall given the current macro environment. Just kind of curious on your thoughts of how should we think about any risk to rig reduction at this point, and if you could perhaps discuss how Hess's rig levels are contemplated in the Hess Midstream's 2025, 2026, or 2027 outlook at this point. Thanks.

John Gatling (President and COO)

Yeah. I mean, I think as Hess has always done, and I think the Midstream does it the same way, is we look past short-term volatility, and we're looking for longer-term supply demand. We see the Bakken as a premier basin in the U.S. that provides a lot of oil, both domestically and internationally. From our perspective, we're continuing to see the rig plan that we've got in place, as we mentioned, both I mentioned and Jonathan mentioned about our MVCs. We have those protections in place through the contract structure, but we are continuing to expect at a relatively consistent activity level, continue to expect to see oil volumes continuing to grow, and obviously gas volumes continuing to grow as well with slight increases in GOR. Overall, I think we're feeling pretty good about the activities.

There's obviously some uncertainty in the market right now, but from our perspective, we're seeing stability both for the Hess-operated production, but also the third parties that we're supporting. We're continuing to see approximately the same level of activity going on. The basin rig count floats around quite a lot. It can depend on maintenance activities. It can depend on rig moves. I wouldn't necessarily in the short term read too much into that, but just keep looking at the longer term. That's kind of how we're looking at it.

Jonathan Stein (CFO)

Yeah. I would just highlight, just really underpinning what John said, is that we did reaffirm all of our guidance for 2025. Of course, that also means we're also reaffirming our forward guidance in terms of growth through 2026 and 2027, which is all underpinned by the MVCs, which is, again, as I said, can support our 5% targeted distribution growth.

Naomi Marfatia (Associate Director and Equity Research Analyst)

Thanks. That's helpful. Maybe another one on buybacks and secondaries. We saw a buyback in January, which was a 4Q push, and I've not heard about any additional buybacks for this quarter. Just curious if there was any change in cadence as it relates to buybacks or secondaries now that GIP owns less than 10% of Hess.

Jonathan Stein (CFO)

Sure. Yeah. In terms of, let me hit secondaries first. In terms of secondaries, as we've always said, there's no plan for secondaries. Those are investor demand-driven to the extent that investors, there's demand for secondaries. GIP will evaluate that demand relative to their own discipline view of value. If there is a match, then obviously they would execute a secondary, but there's no specific plan or cadence for those. In terms of the repurchases, as we announced in January, we have more than, and as I said in my remarks, we have more than $1.25 billion of financial flexibility through 2027. I expect to do multiple repurchases a year as we've done in the past. There's no change to that guidance. Over the past couple of years, we have done about $100 million a quarter generally, but that's not necessarily set in stone.

Really, that may vary from time to time, but no change in terms of multiple repurchases per year. We expect to continue to do that through the rest of this year going forward.

Naomi Marfatia (Associate Director and Equity Research Analyst)

Great. Thanks. That's helpful. I'll leave it there.

Operator (participant)

One moment for our next question. Our next question comes from Praneeth Satish with Wells Fargo. Your line is open.

Praneeth Satish (Analyst)

Thanks. Good morning. Q1, the gas processing volumes were 424 MMCF per day versus the guidance of 455-465 due to the weather challenges in January. Can you maybe just share where processing volumes are at currently into April? Have volumes kind of recovered into the range that you're forecasting for the year of 455-465? Just trying to understand the cadence.

John Gatling (President and COO)

Yeah. I mean, I think the way to look at the volumes, and yeah, January and February were very difficult weather challenges. Two things were occurring in that period of time, and we kind of anticipated this in late January that this was going to be something that was going to affect first quarter performance. Temperatures were lower for longer. They did not hit those extreme temperatures that we have seen in the past, but they were sub-zero, -20, -30 degrees, but the wind played a significant impact in the weather. That had a direct impact on Hess volumes and then ultimately the throughputs that came through our system. As far as what we are seeing now, we have seen a very strong recovery, and I think you can, without giving specific second quarter guidance, you kind of know what our reaffirmed guidance is for 2025.

You look at where we exited in 2024, and you can kind of see a trajectory there where there is a nice smooth transition into Q2. We are feeling really good about coming out of March really strong. I think the team up in North Dakota has done a great job both on the upstream and the midstream side to manage that, well performance has been strong, well delivery has been strong. Overall, I think we are extremely optimistic about the volumes coming into the system and continuing the trajectory that will meet our guidance for the year.

Praneeth Satish (Analyst)

Got it. Thanks. I just wanted to, I know this is not kind of the base case now, but I am just trying to understand at what oil price would Hess consider shifting down to a three-rig program. Does not seem like that is the case, but at the same time, we are seeing oil prices continue to weaken and OPEC taking action here. Just trying to understand how much cushion there is on that four-rig count.

John Gatling (President and COO)

Yeah. I mean, I think maybe I'll hit it, and then Jonathan could add any additional context. From our perspective, we're looking past the short-term volatility, and I think Hess has done that over the long term. I mean, Hess and Hess Midstream obviously ready to prepare in any kind of extreme price environments, but from our perspective, we're trying to really look through the short-term price volatility. Again, we do see there being need for the production. We're seeing activity levels remain relatively consistent in the basin. There's some fluctuations for smaller operators, but as we talk to Hess and as we anticipate the development, the economics of these wells just keep getting better. Hess is drilling three and four-mile laterals. It's brought on its first two four-mile laterals. They're very, very strong producing wells. These lower the break-evens for both three and four-mile wells.

When you start talking about some of the price sensitivity, the ability to execute those efficient longer laterals are lowering that break-even, which takes some of the relief, some of the pressure off of the price. Again, I think both Hess and Hess Midstream look past short-term volatility to try and maintain that consistent activity level. I don't know, Jonathan, if there was anything else you wanted to add.

Jonathan Stein (CFO)

No, that was great. I think, as you said, we're positioned for growth. There's no change right now, and Hess continues to reaffirm four rigs, as John said, and all the factors he said. As I highlighted earlier, we also have a proven track record of manning through volatile periods as well. Nothing to add.

Praneeth Satish (Analyst)

Gotcha. Thank you.

Operator (participant)

One moment for our next question. Our next question comes from Doug Irwin with Citi. Your line is open.

Doug Irwin (Equity Research Analyst)

Hi. Thanks for the question. Maybe just one more macro question for the Bakken just in the context of rising GORs. I realize it's still early days and you're focused on the long term here, but just curious if you have a view on what gas growth would look like in the basin in a scenario where you're potentially seeing flat crude production near term.

John Gatling (President and COO)

Yeah. I mean, I think when you talk, it relates to the North Dakota Pipeline Authority, but Justin Kringstad kind of often talks about flatter oil, but growing gas. We do see that in our production. I mean, when you look at Hess, we do anticipate oil growth. So it's a little bit different than the basin. On the GOR side, the question you asked about GORs, we do anticipate GORs to increase over time as those wells mature and as the kind of gas makes its way through the production system. From our perspective, I think going from about three, three and a half BCF of total gas growing to five to six BCF of gas in the basin for the macro, which again is coming from the North Dakota Pipeline Authority, we see a similar trajectory as it relates to gas growth versus oil.

As the wells mature, we do anticipate GORs to increase over time. This is all predicted and something that we've been talking about for quite some time. We do expect gas volumes to continue to increase over time.

Doug Irwin (Equity Research Analyst)

Got it. That's helpful. A follow-up just on capital allocation. You maybe remind us how much of that $1.25 billion of flexibility you talk about is driven by leverage capacity versus excess cash flow. I think in the past, you've shown at least a bit of an appetite to temporarily move above three times leverage to buy back shares. Just curious how you're thinking about that target today in the context of capital allocation.

Jonathan Stein (CFO)

Sure. In terms of the 1.25, it is about half. We have talked about our leverage falling below 2.5 times by the end of 2026 and then through 2027. That gives you about half a turn. If you work out the growth on our EBITDA based on the guidance we have given through trajectory through 2027, you can get to about half of the $1.25 billion. As our free cash flow grows quicker than our 5% target growth, that also gives us excess free cash flow, and that gives you about the other half. So about half in terms of leverage capacity and the other half in terms of cash.

Doug Irwin (Equity Research Analyst)

Got it. Thanks.

Operator (participant)

One moment for our next question. Our next question comes from John MacKay with Goldman Sachs. Your line is open.

John MacKay (VP of Equity Research)

Hey, team. Thanks for the time. Two quick ones for me. First, you mentioned the increasing four-mile laterals at Hess as that becomes kind of more of the overall well mix. Does that change the CapEx intensity for Hess Midstream going forward? If we're thinking about, I don't know, CapEx per incremental barrel or something like that?

John Gatling (President and COO)

No, not particularly. Most of the well pad locations, the surface locations are generally set. We are still building some greenfield sites, but I would say, generally speaking, the three- and four-mile laterals get placed close to the same approximate location as the two-mile laterals were. What it ends up doing is it ends up making some of those areas that were a little more marginal, a little more economic. It may shift the sequence of when wells are drilled. As Jonathan mentioned, we're in that $100 million to $125 million of ongoing capital that's related to well tie-ins, and we really don't anticipate that being materially different as a result of the longer lateral drilling by Hess.

John MacKay (VP of Equity Research)

That's helpful. Thanks. Second quick one, just going to gas growth in the basin and Egress. There's a new residue pipeline kind of proposed out there. Curious just any thoughts you can share on that, and then maybe just broadly kind of the state of Egress across the basin overall on the gas side. Thanks.

John Gatling (President and COO)

Sure. When you're talking about the gas, are you talking about the Bison takeaway system?

John MacKay (VP of Equity Research)

No, I think it would be Intensity One, but curious if Bison's come sooner, I guess.

John Gatling (President and COO)

Yeah. I think Bison is a bit more kind of focused on the residue gas export. I think overall, we obviously work very closely with Hess to make sure that flow assurance is there. We have got all the commitments we need to make sure that we have got plenty of capacity to get out of the basin. I do think as gas continues to grow, I think others that maybe have not been as focused on flow assurance, there could be some additional challenges for them. As we think about Hess's and Hess Midstream's volumes, we feel like we have got that well taken care of through the export agreements we have got in place. For the new expansions that are in place, Bison as an example, Hess is a shipper on the Bison XPress system, and that just adds some additional flexibility to Northern Border and the ONEOK system.

John MacKay (VP of Equity Research)

Appreciate the thoughts. Thank you.

John Gatling (President and COO)

Thank you.

Operator (participant)

I'm not showing any further questions at this time. As such, thank you for your participation. This does conclude today's presentation. You may now disconnect and have a wonderful day.