Q1 2025 Hess Midstream LP Earnings Call
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Catherine: Good day, ladies and gentlemen, and welcome to the first quarter 2025, Hess Midstream Conference call. My name is Catherine and I'll be your operator for today at this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question during the session need to press star one on your telephone you didn't hear an automated message advising your hand, just raced to Australia.
Speaker Change: Please press Star 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: Thank you, Kevin and 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 Dot Hess midstream Dot com.
Jennifer Gordon: 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.
Jennifer Gordon: Factor's section of Hess midstream filings with the SEC.
Jennifer Gordon: On today's conference call, we may discuss certain GAAP financial measures.
Jennifer Gordon: 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.
John Gatling: 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: Thanks, Jennifer and good afternoon, everyone and welcome to Hess Midstream first quarter 2025 conference call.
Speaker Change: Today I'll discuss our first quarter performance and review Hess Corporation's results and outlook for the Bakken John.
John Gatling: Jonathan will then review our financial results and guidance.
John Gatling: In the first quarter Hess midstream delivered strong operating and financial performance despite challenging weather.
John Gatling: Throughput volumes averaged 424 million cubic foot per day for gas processing.
John Gatling: 125000 barrels of oil per day for crude terminalling.
John Gatling: 126000 barrels of water per day for water gathering.
John Gatling: In line with our guidance throughput volumes were down compared to the fourth quarter, reflecting lower production from house due to severe winter weather in January and February partially offset by higher third party oil volumes and a strong recovery in March.
John Gatling: Now turning to Hess upstream highlights.
John Gatling: Earlier today Hess reported first quarter net production for the Bakken averaged 195000 barrels of oil equivalent per day.
John Gatling: 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 215000 barrels oil per day in the second quarter.
John Gatling: Approximately 9% at the midpoint compared to the first quarter.
John Gatling: Turning to Hess midstream guidance, we're reaffirming our previously announced full year 2025 financial and throughput guidance.
John Gatling: 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.
John Gatling: Turning to Hess Midstream capital program.
John Gatling: Our multi year projects continue as planned in 2025, we remain focused on completion of two new compressor stations and their associated gathering systems.
John Gatling: As well as starting civil construction on the cap a gas plant.
John Gatling: Full year 2025 capital expenditures remain unchanged and are expected to total approximately $300 million.
John Gatling: In summary, we remain focused on executing our strategy of disciplined low risk investments to meet basin demand, while maintaining maintaining reliable operations and strong financial performance.
John Gatling: We expect our growth strategy to generate sustainable cash flow and create opportunities to return additional capital to our shareholders.
John Gatling: I'll now turn the call over to Jonathan to review, our financial results and guidance.
Jonathan: Thanks, John and good afternoon, everyone.
Jonathan: We continue to execute a financial strategy that prioritizes return of capital to shareholders with a demonstrated track record of differentiated shareholder returns.
Jonathan: Since the beginning of 2021, we have returned $1 $95 billion to shareholders through accretive repurchases. In addition to 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.
Jonathan: 57% since 2021.
Jonathan: As a result, our total shareholder return the ELD is one of the highest of our midstream peers.
Jonathan: Furthermore, our leverage of approximately three one times adjusted EBITDA is one of the lowest among our peers.
Jonathan: Highlighting our differentiated ability to deliver significant shareholder returns, while also maintaining balance sheet strength.
Jonathan: In January we announced that we expect to generate greater than one point to $5 billion, our financial flexibility through 2027 incremental shareholder returns.
Jonathan: <unk> the potential for multiple purchases per year over this period.
Jonathan: We have also announced that we are targeting annual distribution per class a share growth of at least 5% through 2027.
Jonathan: Which is supported by existing N V sees this.
Jonathan: This week, we announced our first quarter distribution increase that is consistent with this targeted 5% annual growth per class a share.
Jonathan: 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 with $292 million compared to.
Jonathan: Two $298 million for the fourth quarter of 2024.
Jonathan: As guided in January adjusted EBITDA decreased relative to the fourth quarter of 2024 and was primarily attributable to lower volumes and revenues, partially offset by lower costs and the annual increase at rates due to inflation.
Jonathan: 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.
Assessing revenues decreased by approximately $7 million and gathering revenues decreased by approximately $6 million.
Jonathan: Total costs and expenses, excluding depreciation and amortization pass through costs and net of our proportional share of all of them for earnings decreased by approximately $7 million, primarily from lower third party processing fees and lower G&A allocations under our omnibus and employers that come and agreements.
Jonathan: Resulting in adjusted EBITDA for the first quarter of 2025 of $292 million.
Jonathan: 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.
Jonathan: First quarter capital expenditures were approximately $50 million.
Jonathan: Net interest excluding amortization of deferred finance costs was approximately $51 million.
Jonathan: Resulting in adjusted free cash flow of approximately $191 million, where they drive balance of $128 million on our revolving credit facility at quarter end.
Jonathan: 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.
Jonathan: Costs, we also expect Capex to increase in the second and third quarters, consistent with seasonally higher activity levels for.
Jonathan: 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 billion with total expected capital expenditures of approximately three.
Jonathan: $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.
Jonathan: After fully funding our targeted growing distributions.
Jonathan: For the remainder of 2025, we expect growing adjusted EBITDA in each quarter consistent with increasing volumes.
Jonathan: As implied by the midpoint in our guidance, we anticipate adjusted EBITDA in the second half of the year to be approximately 11% higher relative to the first half.
Jonathan: In summary, we are very pleased to have delivered additional incremental return of capital test midstream shareholders and look forward to a visible trajectory of growth and 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.
Jonathan: This concludes my remarks, we'll be happy to answer any questions I will now turn the call over to the operator.
Jonathan: Thank you ladies and gentlemen, if you have a question or a comment at this time. Please press star one on your telephone. If your question has been answered you were seeing with yourself from the queue. Please press star one again, we will pause for a moment, while we compile the Q&A roster.
Speaker Change: Our first question comes from Jeremy Tonet with JP Morgan Your line is open.
Speaker Change: Hi, This is Jonathan on for Jeremy just wanted to start on the dock and outlook in light of ongoing macroeconomic volatility.
Speaker Change: Can you just help frame some of the sensitivities for the business and how we should be monitoring those throughout the year, recognizing MVC is or likely playing a role here.
Speaker Change: Sure Yeah, I'll I'll I'll touch on it and then can hand, it over to Jonathan you know obviously in the basin itself. It's it's very operator dependent it's going to there's a lot of moving parts to the basin. There's a lot of different ways that are that are the.
Jonathan: Grams are being managed by by the different operators from Hess perspective, we've not really seen any any change in activity has 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.
Jonathan: Change in activity and we're really not anticipating it in the near term.
Jonathan: We do as you mentioned, we do have M. B sees their established through 2027 will also be setting our 28 N V sees a later in the fall and early next year.
Jonathan: So again that that provides protections but from from our perspective. The activity is still 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 remained fairly active.
Speaker Change: I don't know Jonathan if there was anything you wanted to wanted to add there.
So Jon Thanks that was.
Speaker Change: Well 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.
Speaker Change: That includes of course underpinning that is our contracts that have no direct commodity price exposure.
Speaker Change: <unk> generated 12 O type revenue include inflation escalators, and our operating model, which gives us a 75% EBIT margin.
Speaker Change: Our capex spend is relatively low so only $125 million of ongoing capex and our Capex program of course, a little leverage at three times EBITDA, one of the well within the sector and no near term maturities and as John mentioned of course, the MVC as that through 2027, which was set based on a four rig program.
Speaker Change: And our 5% targeted distribution growth could be delivered even a MVC level. So we're well positioned for the growth as John said no change they are well positioned to capture that growth, but we're also well positioned for stability during a volatile period.
Speaker Change: Got it that's that's great color Tom from both so thank you.
Speaker Change: And then you know.
Speaker Change: I guess, just thinking about the volumes in excess of the Nbc's.
Speaker Change: Just maybe the split there are third parties.
Speaker Change: Where you see those volumes right now and any color you can provide on performance against the N V six would be great. Thanks.
Just as a reminder, the N V. C's are set at approximately 80% of the of the nomination so where we're much closer to the nomination and continue to expect to see the volume growth over the over the longer term.
Speaker Change: 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 it passed is continuing to grow by by 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're constantly looking for opportunities.
Speaker Change: To capture more volumes I think with our strategic footprint, we're able to capture offset well pads that that may be operated by others.
Speaker Change: Those are always things that enable us to to actually bring additional volumes in the system and in fact in the first quarter.
Speaker Change: 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 portfolio of production that we've got between Hess and third parties, but has still represents the lion's share.
Speaker Change: Share of our production.
Speaker Change: Understood I'll leave it there. Thanks. Thank you one moment for our next question.
Speaker Change: Our next question comes from.
Speaker Change: Naomi must for Atwood.
Speaker Change: Alright.
Speaker Change: Nuomi Naomi my first tier with UBS. Your line is open.
Speaker Change: Hi, good morning, Thanks for taking my question.
Speaker Change: My first question is on <unk>.
Speaker Change: <unk> has reaffirmed its Florida at Gaydon, but do you think.
Decline overall, given the current macro environment.
Speaker Change: Just any thoughts of how should we think about any risk to us. It makes a reduction at this point and if you could perhaps discuss how has done.
Jamie: You didn't go ahead Jamie.
Jamie: If I can let you do anything different.
Jamie: Look at defined.
Jamie: Yeah, I mean, I think as Hess has always done and I think the midstream does does it the same way as we look past short term volatility and we're looking for longer term supply demand and we see the Bakken as a premier basin in the U S that provides a lot of oil.
Jamie: Oil, both domestically and internationally and so 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 N. B C. So we have we have those protections in place through the through the contract structure, but we're continuing to expect at a at a.
Jamie: Totally consistent activity level continued to expect to see oil volumes continuing to grow and then obviously gas volumes continuing to grow as well with what with slight increases in G are so so overall I think we're feeling pretty good about the activities. There's obviously some uncertainty.
Jamie: Some uncertainty and are in the market right now, but from from our perspective, we're seeing stability both for the Hess operated.
Jamie: Production, but also the third parties that were supporting we're continuing to see approximately the same level of activity going on the basin rig count.
Jamie: Floats around quite a lot it can depend on maintenance activities that can depend on rig moves so I wouldn't necessarily in the short term read too much into that but there's just keep looking at the at the longer term and that's that's kind of how we're looking at it.
Jamie: Yeah, I would just highlight 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% 27.
Jamie: Which is all underpinned by the MVC, which is again as I said I can support our 5% targeted distribution growth.
Speaker Change: Tom that's helpful. Maybe another one on buybacks and secondly.
Speaker Change: We saw a buyback in January which is a part of your budget and have not heard about any interest in buybacks for the quarter, but kind of just curious if there was any change in cadence as it relates to buyback, but secondly, now that you have less than 10%.
Sure Yeah in terms of let me hit the secondary is first in terms of secondaries.
Speaker Change: As we've always said there's no plan for secondaries those are investor demand driven to accept that investors are theres demand for secondary J P will evaluate that demand relative to their own.
Speaker Change: A disciplined view of value and then if there is a batch that 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 of that as I said in my remarks, they are more than one point to $5 billion of financial flexibility through 2027 aspect.
Speaker Change: Do multiple of your purchases a year as we've done in the past Theres 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.
Speaker Change: Really you know that may vary from time to time, but no change in terms of multiple repurchases per year, and we expect to continue to do that through the rest of this year going forward.
Speaker Change: Okay. That's helpful.
Speaker Change: One moment for our next question.
Speaker Change: Our next question comes from pretty Satish with Wells Fargo. Your line is open.
Satish: Thanks, Good morning so.
Speaker Change: Q1, the gas processing volumes were $4 24 Mcf per day.
Speaker Change: 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.
Speaker Change: Into April have volumes kind of recovered into the range that you are forecasting for the year $4 55 to 465.
Speaker Change: I'm just trying to understand the cadence.
Speaker Change: Yeah, I mean I think.
Speaker Change: The way to look at the volumes in January and February were very difficult weather challenges.
Speaker Change: 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 they didn't hit those extreme temperatures that we've seen in the past, but they were you know sub zero minus 20 minus 30 degrees, but the wind.
Speaker Change: Played a significant impact in the in the weather.
Speaker Change: And that had a direct impact on Hess volumes and then ultimately the throughput they came through our system as far as what we're seeing now we've 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 in <unk>.
Speaker Change: Four and you can kind of see a trajectory there where there's a nice smooth transition into India into Q2. So we're 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 and well performance has been strong well delivery has been strong.
Speaker Change: So overall I think we're extremely optimistic about the about the volumes coming into the system and continuing the trajectory that will will will meet our guidance for the year.
Speaker Change: Got it thanks.
Speaker Change: And then secondly, I just wanted to I know this isn't the kind of the base case now, but I'm just trying to understand at what oil price would have to consider shifting down to a three rig program.
Speaker Change: It doesn't seem like that's the case, but at the same time, we are seeing oil prices continue to weaken and OPEC.
Speaker Change: Action here, so just trying to understand how much cushion there is on that four rig count.
Speaker Change: I mean, I think maybe I'll hit it and then you know Jonathan get out any additional context from from our perspective, you know we're looking past the short term volatility and I think he says has done that over the over the long term I mean, Hess and Hess midstream, obviously ready to prepare and any kind of extreme price environments, but from our perspective, we're trying to really look.
Through the short term price volatility and again, we do see there being.
Speaker Change: No need for the production, we're seeing activity levels remain relatively consistent in the basin. There are some fluctuations are for smaller operators, but as we talk to has and as we anticipate the development.
Speaker Change: The economics of these wells, just keep getting better and where Hess is drilling three and four mile laterals. It's brought on its first two four mile laterals. They are very very strong producing wells. These lower the break evens for for both three and four mile well. So when you start talking about some of the price sensitivity the ability to execute those those efficient longer law.
Speaker Change: Literally are lowering that breakeven, which takes some of the relief some of the pressure off of our off price and again.
Speaker Change: I think both Hess and Hess midstream looks look past short term volatility to try and maintain that consistent activity level I don't know, Jonathan if theres anything else you want to add.
Jonathan Hess: No that was that was great I think as you said, we're positioned for growth as no change right now and that has continued to reaffirm for Vegas 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 managing through volatile periods as well so I think that.
Speaker Change: Thank you.
Speaker Change: Yeah.
Speaker Change: One moment for our next question.
Doug Arun: Our next question comes from Doug Arun with Citi. Your line is open.
Speaker Change: Yeah.
Speaker Change: Hi, Thanks for the question, maybe just one more macro question for the backend just in the context of rising <unk>.
Speaker Change: 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.
Speaker Change: An area, where you're potentially seeing flat flat crude production near term.
Speaker Change: Yeah, I mean, I think the you know.
You talked relates to the North Dakota pipeline authority, but Justin Grinstead kind of often talks about flatter flatter oil, but growing gas and we do see that in our production I mean, when you look at <unk>, we do anticipate oil growth. So it's a little bit different in the basin, but the G. On the <unk> side the question.
Speaker Change: You you asked about <unk>, we do anticipate <unk> to increase over time as those wells mature and as the kind of gas.
Speaker Change: His way through the through the production system. So from from our perspective, I think the going from about 335 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.
Speaker Change: Two to get gas growth versus versus oil so as the wells mature we do anticipate <unk> to increase over time. This is this is all predicted and something that we've been talking about for quite some time. So we do expect gas volumes to continue to increase overtime.
Speaker Change: Got it that's helpful. And then a follow up just on capital allocation can you maybe remind us how much of that one 5 billion. The flexibility can you talk about is driven by leverage capacity versus excess cash flow.
Speaker Change: 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 Change: Curious, how youre thinking about that target today in the context of gasification.
Speaker Change: Sure.
Speaker Change: So in terms of the 1.25 its about half you know we've talked about our.
Speaker Change: Leverage falling below two and a half times by the end of 2026 of them through 2027 that gives you about a half a turn so if you work out the growth on our.
Speaker Change: EBITDA based on the guidance.
Speaker Change: Guidance, we've given through trajectory through 2027, you can get to about half of the wall 0.2, 5 billion and then as our free cash flow grows quicker than our 5% target growth that also gives us excess free cash flow that gives you about the other half to about half are in terms of leverage capacity and the other half in terms of our cash.
Speaker Change: Yeah.
Speaker Change: Got it thanks.
Speaker Change: One moment for our next question.
Speaker Change: Our next question comes from John Mccabe with Goldman Sachs. Your line is open.
John Mccabe: Hey team. Thanks for the time two quick ones for me first you mentioned the increasing four mile laterals that has as that becomes kind of more of the overwhelming does that change the capex intensity for some going forward. If you think about capex per incremental barrel or something like that.
John Mccabe: No not not particularly you know most of the well pad locations. The surface locations 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 claw.
John Mccabe: Close to the same approximate location as the as the two mile laterals were.
John Mccabe: What it ends up doing is it ends up making some of those areas that were a little more marginal or more economic so it may shift the sequence of when wells are drilled but as Jonathan mentioned, we're in that 100 125 million of ongoing capital. That's that's related to well tie ins and we really don't anticipate that being materially different as a.
John Mccabe: Of the longer lateral drilling by by Hess.
Speaker Change: Okay. That's helpful. Thanks second quick one.
Speaker Change: I'm, just going to gas growth in the basin and egress Theres, 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 sure.
Speaker Change: Sure and when you when you're talking about are you talking about the bass the bison takeaway systems I don't know if there might be a intensity one but curious pricings coming sooner I guess, so yeah I I think bison is as it is.
Speaker Change: As a bit more kind of focused on the residue gas export I think overall you know we we obviously work very closely with has to make sure that our flow.
Speaker Change: Flow assurances 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.
Speaker Change: I do think as gas continues to grow I think others that maybe haven't been as focused on flow assurance could there could be some additional challenges for them, but as we think about hesse's and Hess midstream volumes.
Speaker Change: We feel like we've got that well taken care of through the through the export agreements we've got in place and for the new expansions that are in place. You know Bison is an example, hess has as a as a shipper on the on the Bison Express system.
Speaker Change: And that just add some additional flexibility to northern border and the one oak system.
Speaker Change: Appreciate the thoughts. Thank you. Thank you.
Speaker Change: 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.
Speaker Change: Okay.
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