Earnings Call Transcript - HESM Q2 2025

Operator, Operator

Good day, ladies and gentlemen, and welcome to the Second Quarter 2025 Hess Midstream Conference Call. My name is Gigi, and I'll be your operator for today. Please be advised that 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, Vice President of Investor Relations

Thank you, Gigi. Good afternoon, everyone, and thank you for participating in our second 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 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 Jonathan Stein, Chief Executive Officer; John Gatling, President and Chief Operating Officer; and Mike Chadwick, Chief Financial Officer. I'll now turn the call over to Jonathan Stein.

Jonathan C. Stein, CEO

Thanks, Jennifer. Welcome, everyone, to our second quarter 2025 earnings call. I have a few opening comments, and then I'll hand the call over to John Gatling to review our operations and Mike Chadwick to review our financials. I wanted to first say that we are all excited and eager to work together with our new Chevron colleagues to continue to drive value for our shareholders. Our new board members, including our new Chair, Andy Walz, Chevron's President of Downstream, Midstream and Chemicals have significant experience across the upstream, midstream and downstream businesses and complement the operational and financial expertise of our current Board members. I am also excited to welcome Mike Chadwick to his new role as Chief Financial Officer of Hess Midstream. I've worked alongside Mike for the past 20 years as he's progressed through various financial roles at Hess Corporation, and we are fortunate to have his experience and leadership capabilities working with the midstream. I am also excited to step into my new role as CEO of Hess Midstream. Since our IPO, we have created value for shareholders through operational excellence and execution that drives a visible trajectory of growth and supported by a financial strategy that includes a differentiated combination of balance sheet strength and a priority on shareholder returns. With the continuity of the midstream team in place, we are excited to take this strategy forward as we continue to build Hess Midstream with a unique combination of sector-leading growth and shareholder returns. Today, I want to focus briefly on three themes. First, we continue to deliver outstanding operational performance, which you can see reflected in the quarter that we reported today and also in our fourth annual sustainability report, which we issued a few weeks ago and which highlights our commitment and track record of safe and reliable execution. In the second quarter, throughput increased across all segments, and we are in line with our annual guidance for volumes to grow by approximately 10% across all oil and gas systems in 2025 compared with 2024. Second, we continue to deliver outstanding financial performance. We are estimating an approximate 11% increase in adjusted EBITDA growth in 2025, with approximately 7% growth at the midpoint in the second half of the year. With total expected capital expenditures of approximately $300 million, we expect to generate adjusted free cash flow of approximately $725 million to $775 million, which more than covers our targeted 5% annual distribution growth and generate excess free cash flow. And third, we are committed to our ongoing financial strategy, which prioritizes return of capital to our shareholders and has made Hess Midstream's total shareholder return yield one of the highest of our midstream peers, while also maintaining one of the lowest leverage ratios. Highlighting our balance sheet strength, last week Hess Midstream's senior unsecured debt was upgraded by S&P to an investment-grade rating of BBB- following the close of the Chevron Hess merger. Since 2021, we have returned greater than $2 billion to shareholders through accretive repurchases and have increased our distribution per Class A share by more than 60% to 5% targeted annual distribution growth and distribution level increases following each share repurchase transaction. We expect to generate greater than $1.25 billion of financial flexibility through 2027 for incremental shareholder returns, including the potential for further unit and share repurchases over this period. With a consistent strategy at Hess Midstream, we are excited for the future. We have a visible trajectory of growth that underpins our unique and differentiated financial strategy with a continued focus on consistent and ongoing return of capital to our shareholders. With that, I'll hand the call over to John to review our operational performance for the second quarter.

John A. Gatling, President and COO

Thanks, Jonathan. Today, I'll discuss our second quarter performance, then Mike will review our financial results and guidance. In the second quarter, Hess Midstream delivered record operating performance. Throughput volumes averaged 449 million cubic feet per day for gas processing, 137,000 barrels of oil per day for crude terminaling and 138,000 barrels of water per day for water gathering. Throughput increased across all segments of our business, with gas processing and oil terminaling volumes increasing by approximately 6% and 10%, respectively, from the first quarter, primarily driven by outstanding upstream production performance and high midstream system availability. Turning to Hess Midstream guidance, we're again reaffirming our previously announced full year 2025 oil and gas throughput guidance. In the third quarter, we expect volume growth from the second 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 the completion of two new compressor stations and associated gathering systems as well as continuing to progress 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 capital to our shareholders. I'll now turn the call over to Mike to review our financial results and guidance.

Michael J. Chadwick, CFO

Thanks, John, and good afternoon, everyone. I wanted to say first that I'm really excited to join the Hess Midstream team and look forward to meeting you in the future. Today, I'm going to review our results for the second quarter and our financial guidance, and then we will open the call for questions. For the second quarter of 2025, net income was $180 million compared to $161 million for the first quarter. Adjusted EBITDA for the second quarter of 2025 was $316 million compared to $292 million for the first quarter. The increase in adjusted EBITDA relative to the first quarter was primarily attributable to the following. Total revenues, excluding pass-through revenues, increased by approximately $30 million, primarily driven by higher throughput volumes resulting in segment revenue changes as follows: gathering revenues increased by approximately $16 million; processing revenues increased by approximately $9 million; terminaling revenues increased by approximately $4 million; and third-party services and other income increased by approximately $1 million. Total costs and expenses, excluding depreciation and amortization, pass-through costs and net of our proportional share of LM4 earnings increased by approximately $6 million, primarily from higher seasonal maintenance activity and third-party processing fees. This resulted in adjusted EBITDA for the second quarter of 2025 of $316 million. Our gross adjusted EBITDA margin for the second quarter was maintained at approximately 80%, above our 75% target, highlighting our continued strong operating leverage. Second quarter capital expenditures were approximately $70 million and net interest, excluding amortization of deferred finance costs, was approximately $52 million, resulting in adjusted free cash flow of approximately $194 million. We had a drawn balance of $273 million on our revolving credit facility at quarter end. In January, we announced that we are targeting annual distribution per Class A share growth of at least 5% through 2027 which is supported by our existing MVCs. This week, we announced our second quarter distribution that included our targeted 5% annual growth per Class A share and an additional increase utilizing the excess adjusted free cash flow available for distributions following the repurchase. Turning to guidance, for the third quarter of 2025, we expect net income to be approximately $175 million to $185 million and adjusted EBITDA to be approximately $315 million to $325 million, reflecting higher volumes and revenues, partially offset by seasonally higher maintenance costs. We also expect CapEx to increase in the third quarter, consistent with seasonally higher activity levels. For the full year 2025, we are updating net income and adjusted free cash flow guidance to include the impact of an incremental $15 million in expected interest expense, mainly on higher debt balance following the repurchase transactions completed so far this year. The updated net income guidance also includes the impact of an incremental $15 million in expected income tax expense resulting from ownership changes following the previously completed secondary equity offerings and repurchase transactions. As a result, we now expect net income of $685 million to $735 million. We are maintaining our adjusted EBITDA guidance range of $1.225 billion to $1.285 billion, implying growth of approximately 7% in adjusted EBITDA at the midpoint in the second half of the year. With total expected capital expenditures of approximately $300 million, we now expect to generate adjusted free cash flow of approximately $725 million to $775 million. With distributions per Class A share targeted to grow at least 5% annually from the new higher distribution level, we expect excess adjusted free cash flow of approximately $125 million after fully funding our targeted growing distributions. We continue to have more than $1.25 billion of financial flexibility through 2027, that can be used for continued execution of our return of capital framework, including potential ongoing unit and share repurchases. This concludes my remarks. We will be happy to answer any questions. And I will now turn the call over to the operator.

Operator, Operator

Our first question comes from Jeremy Tonet at JPMorgan Securities LLC.

Vrathan Reddy, Analyst

This is Vrathan Reddy on for Jeremy. I wanted to start off with the Hess deal now closed, if you guys have any insight into Chevron's view on the Bakken and whether the rig count there could change and if there were to be changed, could you remind us of the sensitivity to HESM in terms of the EBITDA growth you guys have laid out in the expectation for higher volumes across the systems in '26 and '27?

John A. Gatling, President and COO

Yes. I'll briefly address this and then Jonathan and Mike can provide additional insights. Currently, we are operating four rigs and have observed robust performance in our upstream operations, thanks to our longer laterals and excellent midstream availability. We will maintain strong execution and keep our focus on these areas. Each year, we will revise our development plan as we receive updates from Chevron, our sponsor. This will occur towards the end of the year, followed by guidance issuance in January.

Vrathan Reddy, Analyst

Got it. And then turning to capital allocation. Wondering if you could talk a little bit specifically about your appetite for buybacks at current prices. And with GIP sell down now complete, if we should think about any change in the magnitude of repurchases going forward.

Michael J. Chadwick, CFO

Yes. So with buybacks, as we announced in January, we have about $1.25 billion of financial flexibility through 2027, and we expect to do multiple repurchases a year as we've done in the past. So there's no change to that guidance. As we previously mentioned, our January repurchase that was in lieu of not having completed a repurchase in Q4 of last year. Our May repurchase of $200 million which included the public for the first time. That got us back into our cadence of about $100 million every quarter. However, the size of that is not set in stone. But generally, $100 million a quarter is what we will be completing as we have done over the last couple of years.

Jonathan C. Stein, CEO

And this is Jonathan. As we said at the beginning, as I said in my comments, overall, there's no change to our strategy in terms of our business strategy and to our financial strategy. And you saw that just this week we issued, as Mike said, our quarterly dividend announcement on Monday night that included our distribution level increase as well as the $200 million increase on the $200 million share buyback that we did earlier. So really no change in our return on capital program going forward. You mentioned GIP. Obviously, GIP out in terms of secondaries. That's not something that we expect. But in terms of return on capital, which is really always focused on, that framework that continues as is.

Operator, Operator

Our next question comes from the line of Saumya Jain from UBS.

Saumya Jain, Analyst

I was wondering how are you guys seeing GORs trending in the near term? And along with that, what's your outlook on the Bakken for heading into 3Q?

John A. Gatling, President and COO

Yes. So the GORs really haven't changed. As the basin matures over the longer term, GORs are expected to increase, which they're acting as exactly as we would expect them to. Looking at the North Dakota Pipeline Authority, Justin Kringstad and the team there are kind of looking at longer-term basin growth in the gas space. And it is anticipated that Bakken gas is going to grow over the long term. And we would expect the Hess and Chevron Bakken volumes to basically follow the same trend. So we're expecting oil to remain in the pipeline authority's forecast, they're expecting oil to remain flattish with gas growing over the longer term.

Saumya Jain, Analyst

Got it. And then could you detail where gas processing volumes are at now over the past months? Any changes to note? Just trying to understand the cadence and same with oil terminal.

John A. Gatling, President and COO

Yes. I think generally speaking, we've seen and expect to continue to see the growth through the end of the year as our guidance has supported that. So again, we had a very, very strong second quarter. We do continue to expect to see growth in the third and fourth quarters and finish the year at guidance. So I would say you would continue to see that grow through '26, '27 as the MVCs have kind of outlined. And again, if there's any changes to the development plan, that will happen as part of our normal annual development prime process, and that will be updated in January.

Operator, Operator

Our next question comes from the line of Doug Irwin from Citi.

Douglas Baker Irwin, Analyst

Congrats, Jonathan, Mike, on the new roles as well. I'm just trying to start with the guidance range here. If I just take the first half guidance, first half '25 guidance, just in the aggregate, I think you're turning about $15 million above the guided midpoint year-to-date, and now third quarter is pointing to a bit more growth from here. Is it fair to say you're turning above the annual midpoint at this point? Or are there may be some variances versus your initial outlook that has kind of shifted around the timing throughout the year here versus your initial second half expectations?

John A. Gatling, President and COO

Maybe I'll discuss the operational side first, then I'll pass it over to Mike and Jonathan. Overall, we had an exceptionally strong second quarter, with minimal weather impact and virtually no maintenance activity. After the more challenging first quarter, we focused on stabilizing operations, and we're quite satisfied with the performance of both upstream and midstream sectors. We anticipate continued growth into the third and fourth quarters. However, as we move forward, we expect some increased maintenance in the latter half of the year. We're still planning the specific activities, but there's still some flexibility. Overall, we remain confident in our current guidance.

Michael J. Chadwick, CFO

Yes, thanks, John. I'll add that we are maintaining our adjusted EBITDA guidance for the year, which already factors in significant growth for the second half. As Jonathan mentioned and I noted, the midpoint of our full year guidance suggests around 7% higher EBITDA in the second half compared to the first half. Even though we expect revenues to increase due to higher volumes, as John pointed out, the timing of maintenance costs means expenses are anticipated to rise in Q3, and we have also set aside some contingency for winter weather in Q4. While winter weather can potentially reduce maintenance costs, Q4 usually experiences some fluctuations in our allocation costs. Therefore, we are keeping the guidance as it stands for the second quarter.

Douglas Baker Irwin, Analyst

Okay. That's helpful. I have a question regarding buybacks. Since it's still early in the relationship with Chevron, do you expect them to take part in buybacks like Hess did, or will future buybacks mainly depend on purchasing shares from public owners? Additionally, if you are buying back more public shares, does the liquidity of those shares affect your ability to maintain a consistent buyback rate as you have in the past?

Jonathan C. Stein, CEO

Sure. This is Jonathan. Yes. Look, there's no change. As we had said in the past, when we had secondaries and buybacks happening simultaneously, there are really two separate objectives. While the secondaries were changing ownership level. The buyback program is really just a return of capital program. And so you would expect over time that we'll have the same participation, more closer to the relative proportional levels of the public and Chevron going forward. So really no change to our approach there. We did include, as you know, now we have the kind of well-tested qualities, the ASR process last time to include the public in our buyback program and have that mechanism available for us to be able to do that going forward as well. So really no change there. And in terms of our liquidity, I think you've seen that our liquidity has continued to increase as we did all the secondary transactions and the public ownership went up, or liquidity at this point in average, a trading volume is more than sufficient to handle our buyback program at the level that we've done in the past and expect to do going forward.

Operator, Operator

Our next question comes from the line of Praneeth Satish from Wells Fargo.

Praneeth Satish, Analyst

Also congrats, Jonathan and Michael on the new roles. Maybe can you just provide any more context around GIP's decision to exit its investment in Hess Midstream back in May? I mean I know they were selling down their stakes, so it wasn't really a surprise. But I guess why do it in May versus maybe after the merger with Chevron?

John A. Gatling, President and COO

Sure. As you know, over the past three years, we have been carrying out secondaries in a very disciplined manner. Each transaction has generally increased in size over time with tighter discounts, reflecting a careful approach. GIP identified an opportunity, as they frequently do. The secondaries were driven by investor demand, which GIP assessed against their value expectations. An opportunity arose in May, prompting them to pursue that. They have their own investor timelines and are executing based on demand and expectations, independent of any potential merger timing. Thus, they continued the disciplined execution from the past when this opportunity emerged.

Praneeth Satish, Analyst

Got it. And then maybe as a follow-up, I guess, right or wrong, some investors have viewed GIP as providing an independent voice that's kind of helped balance the sponsor interest with those of the public. So I guess with GIP now out, how do you think about the new governance structure versus having that third-party institutional investor at the table?

Jonathan C. Stein, CEO

Sure. Yes. No, we agree that one of our differentiating strengths relative to other sponsored midstream companies has been our balanced governance and certainly with GIP. Historically part of the Board that provided some level of that. So consistent with that approach, as you saw, we updated our governance in June following GIP's exit, and that included that certain key decisions require the approval of one independent director. That includes things like leverage above a certain level, issuing equity or major capital decisions, among other key strategic decisions. That mechanism is now in place. As you know, we're adding also a fourth independent Board member, but this mechanism is in place independent of the number of Board members at the time or the timing of the fourth independent member joining the Board. So I think it really highlights our continued belief in the value of a balanced government that we've had historically. And then with this new mechanism in place that we will continue to have going forward.

Operator, Operator

Our next question comes from the line of John Mackay from Goldman Sachs.

John Ross Mackay, Analyst

I wanted to discuss the Chevron aspect further. I understand it's early in the year, and you'll review activity levels later on. Hess has set a target of about 200,000 BOE per day for some time, which we see as a reasonable benchmark. Could you remind us how that 200,000 a day target was established and the reasoning behind it? Additionally, could you provide any insights on why that might be the appropriate target moving forward?

John A. Gatling, President and COO

As we consider the target of 200,000 barrels a day, it primarily involves exceeding 100,000 barrels a day in gross or net oil production, along with expected gas growth over time. From an overall development plan standpoint, we’ve been focused on optimizing upstream drilling activities alongside our midstream infrastructure. It’s essential to have the infrastructure fully in place and utilized to its maximum capacity. When analyzing the long-term build-out and corresponding infrastructure development, we believe that 200,000 barrels a day is a suitable target. Aside from the two compressor stations we are constructing this year, we are also advancing the Capa gas plant. Regarding substantial long-term infrastructure, we’ve reached a stable position. Our aim is to ensure that drilling activities and infrastructure work together effectively to achieve high equipment utilization and optimize the overall system. This is our current approach, and we plan to revisit our development plan in the fall, which integrates upstream and midstream activities. We will also update our long-term guidance in January.

Jonathan C. Stein, CEO

This is Jonathan. One thing just to highlight, John really picked it up on the end, and I think it's important to highlight at this stage, which is one of the historic strengths of Hess Midstream has been the partnership that we've had between the upstream and the midstream between Hess Midstream and the upstream. It has to be able to develop the Bakken in the most optimal way. And now as we go forward with Chevron, there's no change to that partnership. There's no change to the focus on both of us working together to optimize the Bakken and develop it, as John described. And as you said, the normal process will continue, where we get an updated development plan, we'll figure out what's the right infrastructure required to meet that development plan going forward and then we'll update our guidance based on that going forward. So really continuing in that strong partnership that has really been a hallmark of our relationship historically.

John A. Gatling, President and COO

Yes, I think everyone's still focused on rig count and well counts. As we transition into an extended lateral program, the key metric is the lateral footage drilled. From our perspective, the total lateral footage available for development remains unchanged. In fact, we're witnessing slight growth in that area as extended laterals become a larger part of the portfolio, creating opportunities for better economics in wells located in more challenging areas. Drilling a three to four-mile lateral significantly improves the economics and allows us to access some rock formations that were previously difficult. We remain extremely optimistic in this area, and it's a continuing advantage for us as we look ahead to basin development.

Operator, Operator

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.