Earnings Call Transcript - HESM Q1 2025

Operator, Operator

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 in listen-only mode. After the speaker's presentation, there will be a question and answer session. 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 Investment Relations. Please proceed.

Jennifer Gordon, VP, IR

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 cubic feet 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 to 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 volume 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 Capa 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, at 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 $1.25 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 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. 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 cost 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 Succumbent 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 to $180 million and adjusted EBITDA to be approximately $300 million to $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 to $765 million and adjusted EBITDA of $1,235 million to $1,285 million. With total expected capital expenditures of approximately $300 million, we expect to generate adjusted free cash flow of $735 million to $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, Operator

Our first question comes from Jeremy Tonet with JPMorgan.

Elias Jossen, Analyst at JPMorgan

This is Elias Jossen 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?

John Gatling, President and COO

Sure. Yes, I'll touch on it and then I can hand it over to Jonathan. Obviously, in the basin itself, it's very operator dependent. There are a lot of moving parts to the basin. There are 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 the plans to run four rigs for the rest of this year. We're 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 not anticipating it in the near term. We do, as we mentioned, have MVCs that are established through 2027, which 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. So 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'd just add is, as a reminder, 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 with contracts that have no direct commodity price exposure, that generate our toll-based type revenue with inflation escalators. Our operating model 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 3 times EBITDA is one of the lowest in the sector and no near-term maturities. As John mentioned, our MVCs set through 2027, which was set based on a four-rig program. Our 5% targeted distribution growth could be delivered even at MVC levels. Therefore, 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.

Elias Jossen, Analyst at JPMorgan

Got it. That's great color from both. 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.

John Gatling, President and COO

Yes. And just as a reminder, the MVCs are set at approximately 80% of the 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, third parties are growing essentially at the same rate since we kind of expect that to be in that 10% range. We're constantly looking for opportunities to capture more volumes. I think with our strategic footprint, we're able to capture offset well pads that may be operated by others. Those are always opportunities that enable us to bring additional volumes into the system. In fact, in the first quarter, oil outpaced our gas slightly, resulting from those kinds of offset well pads where we were able to capture third-party volumes that were brought on in the first quarter. It's a nice way to kind of mitigate the portfolio of production between Hess and third parties, but Hess still represents the lion's share of our production.

Elias Jossen, Analyst at JPMorgan

Understood. I'll leave it there. Thanks.

Naomi Marfatia, Analyst at UBS

Hi, good morning. Thanks for taking my first question. My first question is on basin rig count. Hess has reaffirmed its four-rig cadence. But do you think the oil rig decline overall, given the current macro environment? So just kind of curious on your thoughts on how we should think about any rig reduction at this point. And if you could perhaps discuss how Hess rig levels are contemplated and has it changed the 2025, 2026 to 2027 outlook at this point?

John Gatling, President and COO

Yes. I mean, I think as Hess has always done, and I think the midstream does the same way, we look past short-term volatility and look for longer-term supply and 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 in place. As we mentioned, our MVCs provide protections through the contract structure, but we are continuing to expect at a relatively consistent activity level, with oil volumes continuing to grow and gas volumes continuing to grow as well with a slight increase in GOR. Overall, I think we're feeling pretty good about the activity. There's some uncertainty in the market right now, but from our perspective, we're seeing stability, both for the Hess-operated production and the third parties that we're supporting. We're continuing to see approximately the same level of activity. The basin rig count fluctuates quite a lot. It can depend on maintenance activities and rig moves, so I wouldn't read too much into that in the short term, but just keep looking at the longer term, and that's kind of how we're looking at it.

Jonathan Stein, CFO

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

Naomi Marfatia, Analyst at UBS

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. So kind of just curious if there was any change in cadence as it relates to buybacks or secondaries now that GIP is less than 10% of Hess owned?

Jonathan Stein, CFO

Certainly. Regarding secondaries, as we've mentioned before, there are no plans for secondaries since they are driven by investor demand. If investors show interest in secondary GIP, we will assess that interest in relation to our careful valuation approach. If it aligns, we would proceed with a secondary, but there is no predetermined schedule for these. Concerning repurchases, as we stated in January, we have over $1.25 billion in financial flexibility available until 2027 and anticipate executing multiple repurchases annually, similar to our past practices. There is no change to that expectation. In recent years, we have generally executed about $100 million in repurchases each quarter, but that is not fixed and can fluctuate. However, we do not expect any changes regarding multiple repurchases per year and plan to continue this practice for the remainder of this year and beyond.

Naomi Marfatia, Analyst at UBS

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

Praneeth Satish, Analyst at Wells Fargo

Thanks. Good morning. So Q1, the gas processing volumes were 424 MMcf per day versus the guidance of 455 to 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 to 465? Just trying to understand the cadence.

John Gatling, President and COO

Yes. I mean, I think the way to look at the volumes, and yes, January and February were very difficult weather challenges. Two things were occurring during that time. We had anticipated in late January this would affect first quarter performance. Temperatures were lower for longer. They didn't hit extreme temperatures we've seen in the past, but they remained sub-zero, minus 20, minus 30 degrees, with significant wind impact. This had a direct impact on Hess volumes and the throughputs that went through our system. As far as what we're seeing now, we've seen a very strong recovery. Without giving specific second quarter guidance, you kind of know what our reaffirmed guidance is for 2025. If you look at where we exited in '24, you see a trajectory there with a smooth transition into Q2. We're feeling really good about coming out of March strongly. The team up in North Dakota has done a great job, both on the upstream and midstream side, to manage that. Well performance has been strong, and well delivery has been strong. Overall, I think we're extremely optimistic about the volumes coming into the system and continuing the trajectory to meet our guidance for the year.

Praneeth Satish, Analyst at Wells Fargo

Thank you. I wanted to ask, although this isn't the current scenario, what oil price would lead Hess to consider reducing to a 3-rig program? It doesn't appear that this is on the table right now, but with oil prices declining and OPEC taking action, I'm curious about the flexibility regarding the current 4-rig count.

John Gatling, President and COO

Yes. 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. Hess Midstream is obviously prepared for any kind of extreme price environments. However, from our perspective, we really look through the short-term price volatility. We see there being a continuing need for production. We're seeing activity levels remain relatively consistent in the basin. There are fluctuations for smaller operators but as we talk to Hess and anticipate the development, the economics of these wells just keep getting better. Hess is drilling 3- and 4-mile laterals, having brought on its first two 4-mile laterals. They're producing strongly. These reduce the breakevens for both 3- and 4-mile wells. When discussing some price sensitivity, the ability to execute those efficient longer laterals is lowering that breakeven, alleviating some price pressure. Both Hess and Hess Midstream look past short-term volatility to maintain consistent activity levels. I don’t know, Jonathan, if you have anything else to add.

Jonathan Stein, CFO

No, that was great. As you said, we're positioned for growth. There's no change right now, and Hess continues with a firm 4 rigs, as John mentioned. All the factors you addressed are relevant, and importantly, we have a proven track record of navigating volatile periods as well. So nothing to add.

Doug Irwin, Analyst at Citi

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, a scenario where you're potentially seeing flat crude production near-term.

John Gatling, President and COO

Yes. I mean, when you talk about the North Dakota pipeline, Justin Kringstad often talks about flatter oil but growing gas. We do see that in our production. When you look at Hess, we anticipate oil growth, so it's a little different than the basin. But on the GOR side, as you asked, we expect GORs to increase over time as those wells mature and as the gas integrates into the production system. From our perspective, we think going from about 3, 3.5 Bcf of total gas to 5 to 6 Bcf of gas in the basin is realistic, as predicted by the North Dakota Pipeline Authority. We see a similar trajectory for gas growth alongside oil.

Doug Irwin, Analyst at Citi

Got it. That's helpful. And then a follow-up just on capital allocation. Can you maybe remind us how much of that $1.25 billion of flexibility you talked 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 3 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. So in terms of the $1.25 billion, it's about half. We've talked about our leverage falling below 2.5 times by the end of 2026 and then through 2027, which gives you about half a turn. If you work out the growth on our EBITDA based on the guidance we've provided through the trajectory to 2027, you can expect about half of the $1.25 billion from that. Additionally, as our free cash flow grows quicker than our 5% target growth, that gives us excess free cash flow, accounting for the other half. So about half is related to leverage capacity and the other half is driven by cash.

John Mackay, Analyst at Goldman Sachs

Hey team. Thanks for the time. Two quick ones for me. First, you mentioned the increasing 4-mile laterals that Hess is adopting; does that change the CapEx intensity for HESM going forward if we look at CapEx per incremental barrel or something like that?

John Gatling, President and COO

No, not particularly. Most of the well pad locations remain fairly constant. We are still building some greenfield sites. However, generally speaking, the 3- and 4-mile laterals are placed close to the same approximate location as the 2-mile laterals were. What it does is it makes some of those marginal areas more economic. It may shift the sequence of when wells are drilled, but as Jonathan mentioned, we're maintaining that $100 million to $125 million of ongoing capital that's related to well tie-ins, which we don’t anticipate changing materially because of the longer lateral drilling by Hess.

John Mackay, Analyst at Goldman Sachs

That's helpful. 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 if you can share any thoughts on that, and then broadly, what is the current state of egress across the basin on the gas side?

John Gatling, President and COO

Sure. When you're talking about the new residue pipeline, are you referencing the Bison takeaway systems?

John Mackay, Analyst at Goldman Sachs

No, I'm thinking about the intensity one but curious, Bison's coming sooner, I guess.

John Gatling, President and COO

Yes. I think Bison is more focused on residue gas export. We work closely with Hess to ensure flow assurance is maintained. We have all the commitments we need to guarantee ample capacity out of the basin. I think as gas continues to grow, others who haven’t been as focused on flow assurance may encounter additional challenges. For Hess and Hess Midstream volumes, we're confident we've got that covered through the export agreements in place. For the new expansions currently active, Bison, as an example, has Hess as a shipper on the Bison express system, which adds additional flexibility to Northern Border and the ONEOK systems.

Operator, Operator

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.