Hess Midstream Q1 2025 Earnings Call Transcript

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April 30, 2025

There are 9 speakers on the call.

Operator

Good day, ladies and gentlemen, and welcome to the First Quarter twenty twenty five Hess Midstream Conference Call. My name is Kevin, and I'll be your operator for today. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised today's conference is being recorded for replay purposes.

Operator

I would now like to turn the conference over to Jennifer Gordon, Vice President of Investor Relations. Please proceed.

Speaker 1

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.

Speaker 1

These risks include those set forth the Risk Factors 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.

Speaker 2

Thanks, Jennifer. Good afternoon, everyone, and welcome to Hess Midstream's first quarter twenty twenty five 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.

Speaker 2

Throughput volumes averaged 424,000,000 cubic foot 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 two and ten thousand to 215,000 barrels of oil equivalent per day in the second quarter, up approximately 9% at the midpoint compared to the first quarter.

Speaker 2

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 multiyear projects continue as planned.

Speaker 2

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 Capa gas plant. Full year 2025 capital expenditures remain unchanged and are expected to total approximately $300,000,000 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.

Speaker 3

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 $1,950,000,000 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.

Speaker 3

Furthermore, our leverage of approximately 3.1 times 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 $1,250,000,000 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 per 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.

Speaker 3

For the first quarter of twenty twenty five, net income was $161,000,000 compared to $172,000,000 for the fourth quarter of twenty twenty four. Adjusted EBITDA for the first quarter of twenty twenty five was $292,000,000 compared to $298,000,000 for the fourth quarter of twenty twenty four. As guided in January, adjusted EBITDA decreased relative to the fourth quarter of twenty twenty four 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 $13,000,000 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 $7,000,000 and gathering revenues decreased by approximately $6,000,000 Total costs and expenses, excluding depreciation and amortization, pass through costs and net of our proportional share of LM4 earnings decreased by approximately $7,000,000 primarily from lower third party processing fees and lower G and A allocations under our Omnibus and employee succumbent agreements, resulting in adjusted EBITDA for the first quarter of twenty twenty five of two ninety two million dollars Our gross adjusted EBITDA margin for the first quarter was maintained at approximately 80%, above our 75% target, highlighting our continued strong operating leverage.

Speaker 3

First quarter capital expenditures were approximately $50,000,000 and net interest, excluding amortization of deferred finance costs, was approximately $51,000,000 resulting in adjusted free cash flow of approximately $191,000,000 We had a drawn balance of $128,000,000 on our revolving credit facility at quarter end. Turning to guidance. For the second quarter of twenty twenty five, we expect net income to be approximately $170,000,000 to $180,000,000 and adjusted EBITDA to be approximately $300,000,000 to $310,000,000 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 $715,000,000 to $765,000,000 and adjusted EBITDA of 1,235,000,000 to $1,285,000,000 With total expected capital expenditures of approximately $300,000,000 we expect to generate adjusted free cash flow of $735,000,000 to $785,000,000 With distributions per Class A share targeted to grow at least 5% annually, we expect excess adjusted free cash flow of approximately $135,000,000 after fully funding our targeted growing distributions.

Speaker 3

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.

Speaker 3

I will now turn the call over to the operator.

Operator

Our first question comes from Jeremy Tonet with JPMorgan. Your line is open.

Speaker 4

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.

Speaker 2

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.

Speaker 2

There's a lot of different ways that the programs are being managed by the different operators. From Hess' 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. And I would say that from a growth trajectory, we really haven't seen a step change in activity, and we're really anticipating it in the near term. We do, as you mentioned, we do have MVCs.

Speaker 2

They're established through 2027. We'll also be setting our 28 MVCs, later in the fall and early next year. So, again, that provides protections, but from our perspective, the activity is still there. And in fact, we're continuing to see the same level of activity in our third party business as well. So, both Hess and third parties remain fairly active.

Speaker 2

I don't know, Jonathan, if there was anything you wanted to add there.

Speaker 3

John, thanks. What I'd 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 toll road 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 $125,000,000 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.

Speaker 3

And as John mentioned, of course, MVC set through 2027, which was set based on a four week program. And our 5% targeted distribution growth could be delivered even at MVC levels. So we're well positioned for the growth. As John said, no change there. We're well positioned to capture that growth, but we're also well positioned for stability during a volatile period.

Speaker 4

Got it. That's that's great color from from both. So thank you. And then, 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.

Speaker 4

Thanks.

Speaker 2

Yeah. And just as a reminder, the MVCs are set at approximately 80% of nomination. So we're 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. So 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.

Speaker 2

We're constantly looking for opportunities to capture more volumes. Think with our strategic footprint, we're able 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. And in fact, in the first quarter, you know, oil outpaced our gas slightly, and it was a result of of those kind of offset well pads where we were actually able to capture third party volumes that that were recently brought on in the first quarter. So that's it's a nice way to kind of mitigate the the the portfolio of of production that we've got between Hess and third parties, but Hess still represents the lion's share of our production.

Speaker 4

Understood. I'll leave it there. Thanks.

Operator

Thank you. One moment for our next question. Our next question comes from Naomi Masfretia with sorry. Naomi Naomi Masfretia with UBS. Your line is open.

Speaker 5

Hi. Good morning. Thanks for taking my question. My first question is on base and rig count. Health has reaffirmed its four rig cadence, but you've seen fewer of rig decline overall given the current macro environment.

Speaker 5

So just kind of curious on your thoughts on how should we think about any risk to a RIG reduction at this point, and if you could perhaps discuss how has some RIG levels are contemplated in the HES midstream twenty twenty five, 20 20 six, or 2027 outlook at this point? Thanks.

Speaker 2

Yeah. I mean, I think, as Hess has always done, and I think the midstream does does it the same way is we look past short term volatility, and we're looking for longer term, supply demand. And we see the Bakken as a, you know, premier basin in The US that provides a lot of, oil, both domestically and internationally. And so from from our perspective, we're continuing to see, the the rig plan that we've got in place. As we mentioned, both I mentioned and Jonathan mentioned about our MVCs, so 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 then obviously gas volumes continuing to grow as well with slight increases in GORs.

Speaker 2

So overall, I think we're feeling pretty good about the activities. There's obviously some uncertainty in the in the market right now. But from from our perspective, we're we're seeing stability both for the Hess operated production, but also the 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.

Speaker 2

It can depend on maintenance activities. It can depend on rig moves. So wouldn't necessarily, in the short term, read too much into that, but just keep looking at the at the longer term, and that's that's kinda how we're looking at it.

Speaker 3

Yeah. And I would just highlight, you know, just really underpinning what John said is that we did reaffirm all of our guidance for 2025, And, of course, that also means we're, also reaffirming our forward guidance in terms of growth to '26 and '27, which is all underpinned, by the MVCs, which is, again, as I said, can support our 5% targeted distribution growth.

Speaker 5

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

Speaker 3

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.

Speaker 3

And then, 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 $1,250,000,000 of financial flexibility through 2027 and 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 $100,000,000 a quarter generally, but that's not necessarily set in stone.

Speaker 3

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

Speaker 5

Great. Thanks. That's helpful, Elizabeth.

Operator

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

Speaker 6

Thanks. Good morning. So, you know, q one, the gas processing volumes were 4.24 MMcf per day versus the guidance of 4.55 to 4.65 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 April to April?

Speaker 6

Just trying to understand the the cadence.

Speaker 2

Yeah. I mean, I I think the way to look at the volumes and, yeah, January and February were very difficult weather challenges. Two things were occurring in in that period of time, and we kind of, anticipated this in late January that this was gonna be something that was gonna affect first quarter performance. Temperatures were lower for longer. They they didn't hit those extreme temperatures that we've seen in the past, but they were, you know, sub zero, you know, minus 20, minus 30 degrees, but the wind played a a significant impact in the in the weather.

Speaker 2

And that had a direct impact on, Hess volumes and then ultimately the throughputs that came through our system. As far as what we're seeing now, we've seen a very strong recovery. And I think, you know, you can without giving specific second quarter guidance, you you kinda know what our reaffirmed guidance is for 2025. You look at where we exited in in '24, and you can kinda see a a trajectory there where there's a nice smooth transition into into into q two. So we're we're feeling really good about coming out of March really strong.

Speaker 2

I think the team up in North Dakota has done a great job both on the upstream and the midstream side to manage that. And well performance has been strong, well delivery has been strong. So overall, I think we're extremely optimistic the volumes coming into the system and continuing the trajectory that will meet our guidance for the year.

Speaker 6

Got it. Thanks. And then secondly, just wanted to I know this isn't the base case now, but I'm just trying to understand at what oil price would Hess consider shifting down to a three rig program. It doesn't seem like that's the case, but at the same time, we are seeing oil prices continue to weaken and OPEC, you know, taking action here. So, just trying to understand, you know, how much cushion there is, on on that four rig count.

Speaker 2

Yeah. I mean, I think maybe I'll hit it and then, you know, Jonathan could add any additional context. From from our perspective, you know, we're looking past the short term volatility, and I think Hess has has done that over the 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.

Speaker 2

And again, we do see there being need for the production. We're seeing activity levels remain relatively consistent in the basin. There are some fluctuations for smaller operators. But as we talk to Hess and as we anticipate the development, you know, the economics of these wells just keep getting better. And we're know, Hess is drilling three and four mile laterals.

Speaker 2

It's brought on its first two, four mile laterals. They're very, very strong producing wells. These lower the breakevens for both three and four mile wells. So when you start talking about some of the price sensitivity, the ability to execute those efficient longer laterals are lowering that breakeven, which takes some of the relief, some of the pressure off of the price. And again, I think both Hess and Hess Midstream look past short term volatility to try and maintain that consistent activity level.

Speaker 2

I don't know, Jonathan, if there's anything else you wanted to add.

Speaker 3

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

Speaker 6

Gotcha. Thank you.

Operator

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

Speaker 7

Hi. Thanks for the question. Maybe just one more macro question for the Bakken, just in the context of of rising GORs. I realize it's still early days and you're focused on the long term here. 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.

Speaker 2

Yeah. I mean, I think the you know, when you talk relates to the North Dakota Pipeline Authority, but Justin Crinstead kinda often talks about, you know, flatter oil, but growing gas. We do see that in 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. But the g on the GOR side, the question you 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.

Speaker 2

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. You know, we see a similar trajectory as it relates to to gas growth versus versus oil. So as the wells mature, we do anticipate GORs to increase over time. This is this is all predicted and something that we've been talking about for for quite some time. So, we do expect gas volumes to continue to increase over time.

Speaker 7

Got it. That's helpful. And then a follow-up just on capital allocation. Can you maybe remind us how much of that $1,250,000,000 of flexibility you talk about is driven by leverage capacity versus excess cash flow. And 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.

Speaker 7

Just curious how you're thinking about that target today in the context of capital allocation.

Speaker 3

Sure. So, in terms of the 1.25, it's it's about half. You know, we've talked about our, leverage falling below two and a half times by the end of twenty twenty six and then through 2027, that gives you about a half a turn. So if you work out growth on our EBITDA based on the, guidance we've given through trajectory through 2027, you can get to about, half of the 1,250,000,000.00. And then 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.

Speaker 3

So about half, in terms of leverage capacity and the other half in terms of, cash.

Speaker 7

Got it. Thanks.

Operator

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

Speaker 8

Hey, team. Thanks for the time. Two quick ones for me. Just 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 Hessam going forward if we're thinking about, you know, CapEx per incremental barrel or something like that?

Speaker 2

No, not particularly. You know, most of the well pad locations, the surface locations are are generally set. You know, 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 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, so it may shift the sequence of when wells are drilled.

Speaker 2

But, you know, as Jonathan mentioned, we're in that one hundred to one hundred and twenty five 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.

Speaker 8

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 that 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.

Speaker 2

Sure. And when you're talking about the are you talking about the bison takeaway system?

Speaker 8

Think it might be intensity one, but curious, bison's coming sooner, I guess.

Speaker 2

Yeah. I think bison is a is a bit more kind of focused on the residue gas export. I think overall, you know, we we obviously work very closely with Hess to make sure that, flow assurance is is there. We've got all the commitments we need to make sure that we've got plenty of capacity to get out of the basin. I do think as gas continues to grow, I think others that maybe haven't been as focused on flow assurance, there could be some additional challenges for them.

Speaker 2

But as we think about Hess' and Hess Midstream's volumes, we feel like we've got that well taken care of through the export agreements we've got in place. And for the new expansions that are in place, Bison as an example, Hess is a shipper on the Bison Express system, and that just adds some additional flexibility to to Northern Border and the the OneOak system. Appreciate the thoughts. Thank you. Thank you.

Operator

And 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.

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