Hess Midstream (HESM) Q4 2025 Earnings Transcript

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DATE

Feb. 2, 2026 at 10 a.m. ET

CALL PARTICIPANTS

• Chief Executive Officer — Jonathan Stein
• Chief Financial Officer — Michael Chadwick

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TAKEAWAYS

• Capital Expenditures -- $150 million expected in 2026, reflecting a 40% decrease from 2025, with guidance of less than $75 million per year for 2027 and 2028.
• Fourth Quarter Volume -- Gas processing averaged 444 million cubic feet per day, crude terminaling averaged 122,000 barrels of oil per day, and water gathering averaged 124,000 barrels of water per day, all generally flat year over year but down sequentially due to severe December weather.
• Full-Year 2025 Volumes -- Gas processing averaged 445 million cubic feet per day, crude terminaling averaged 129,000 barrels of oil per day, and water gathering averaged 131,000 barrels of water per day.
• Adjusted EBITDA -- $1.238 billion in 2025, representing approximately 9% growth from 2024.
• Fourth Quarter Financials -- Net income was $168 million and adjusted EBITDA was $309 million, both down from third quarter levels, primarily driven by severe winter weather, lower third-party volumes, and annual LM4 maintenance.
• Segment Revenues -- Gathering revenues decreased $11 million, processing by $6 million, and terminaling by $2 million in the fourth quarter, offset by cost declines for the quarter.
• Gross Adjusted EBITDA Margin -- 83% for the fourth quarter, exceeding the 75% target.
• Minimum Volume Commitments (MVCs) -- Approximately 95% of 2026 revenues protected by MVCs, decreasing to 90% in 2027 and 80% in 2028.
• 2026 Guidance -- Net income of $650 million to $700 million and adjusted EBITDA between $1.225 billion and $1.275 billion, both approximately flat at the midpoint versus 2025.
• Adjusted Free Cash Flow -- Anticipated at $850 million to $900 million for 2026, up 12% from 2025 at the midpoint, with approximately $210 million excess after funding targeted distributions.
• Distribution Growth Target -- 5% annual per Class A share through 2028, fully covered by free cash flow at established MVC levels.
• Rate Structure -- 85% of revenues are fixed fee with annual inflation escalators capped at 3%; remaining 15% subject to annual rate resets through 2033.
• Leverage Profile -- Management expects to delever naturally below three times as EBITDA grows and debt remains flat; no new target leverage ratio defined.
• Shareholder Returns and Capital Allocation -- Excess free cash flow after distributions will be allocated to additional shareholder returns and debt repayment, not to leverage buybacks.
• Growth Drivers Through 2028 -- Management cited inflation escalators, organic gas volume growth, and sustained lower capital spend as core drivers of approximately 10% annualized adjusted free cash flow growth through 2028.
• Third-Party Volume Expectation -- Management expects third-party volumes to remain at 10% of total, with no anticipated changes in the outlook.

SUMMARY

Management confirmed substantial capital discipline with a marked reduction in annual capital expenditures as the infrastructure build-out concludes, highlighting a sharp transition to significant free cash flow generation. The call specified the protection of nearly all 2026 revenue via minimum volume commitments, reinforcing predictability despite weather-related volume impacts in early 2026. Leadership stated clear priorities for allocating excess cash flow above required distributions, including increased returns to shareholders and further debt reduction, without dependence on increased leverage or external growth. The financial outlook into 2028 is tied to preset inflation-linked tariffs, lower ongoing capital requirements, and alignment with Chevron (NYSE: CVX)'s Bakken development strategy, collectively supporting stable income visibility and 5% annual distribution growth. No changes were indicated in anticipated third-party contributions and the company emphasized a conservative approach to leverage, absent any new explicit target.

• Management explicitly reiterated reliance on fixed-fee contracts and annual inflationary rate adjustments to provide revenue stability under variable conditions.
• Chadwick directly addressed questions on leverage, stating repayment will occur through organic free cash flow, with no specific target ratio beyond continued deleveraging below three times EBITDA.
• Stein highlighted operational integration with Chevron and upstream-midstream collaboration as foundational to sustaining low capital intensity over the long term.
• Management noted the shift to capital-light maintenance spend, projecting recurring annual CapEx below $75 million beyond the current fiscal year.
• Winter weather was acknowledged as the primary factor affecting first-half volumes; recovery and seasonal increases are expected, but guidance continues to include conservative volume contingencies.

INDUSTRY GLOSSARY

• Minimum Volume Commitment (MVC): Contractual obligation where customers guarantee payment for a set minimum quantity of throughput, regardless of actual usage, ensuring baseline revenue for the midstream operator.
• Adjusted Free Cash Flow: Cash generated by the company after capital expenditures and distributions, available for discretionary purposes such as debt repayment or additional shareholder returns, excluding non-operating or one-time items.

Full Conference Call Transcript

Jonathan Stein: Thanks, Jennifer. Welcome everyone to our fourth quarter 2025 earnings call. Today, I will review our 2025 performance, our 2026 and long-term guidance issued in December, and then I'll hand the call over to Mike to review our financial performance for the fourth quarter and guidance. In 2025, we continued our record of strong performance execution, completing our multiyear projects on time and on budget, and strategically growing our gas gathering and compression system. With the system now substantially built, our projected capital spending will be significantly lower. In 2026, we expect to spend approximately $150 million, a 40% reduction in capital spending relative to 2025.

We expect our capital spend to decrease even further in 2027 and 2028 to less than $75 million per year. This lower capital highlights our ability to leverage our historical investments to drive significant free cash flow generation that supports our unique combination of shareholder return and balance sheet strength through a combination of targeted 5% distribution per Class A share growth through 2028, potential incremental share repurchases, and debt repayment. Now turning to Hess Midstream results. Fourth quarter volumes were generally flat year over year, but down relative to the third quarter due to severe weather through the month of December. Gas processing volumes averaged 444 million cubic feet per day.

Crude terminaling volumes averaged 122,000 barrels of oil per day, and water gathering volumes averaged 124,000 barrels of water per day. For full year 2025, Hess Midstream's gas processing volumes averaged 445 million cubic feet per day. Crude terminaling volumes averaged 129,000 barrels of oil per day, and water gathering volumes averaged 131,000 barrels of water per day, resulting in full year adjusted EBITDA of $1.238 billion. Looking forward, for 2026, we expect lower volumes across our systems as severe winter weather has continued through January and into February, together with normal contingencies for the rest of the winter period.

On a full-year basis, we are reiterating the volume guidance that we gave in December for the full year of 2026 and expect growth in volumes across our systems through the rest of the year consistent with historical seasonal volume expectations. With revenues that are approximately 95% protected by MVCs on a full-year basis, we anticipate net income and adjusted EBITDA to be higher through the rest of 2026 relative to our first quarter guidance.

Looking beyond 2026, leveraging our historical investment in infrastructure and consistent with Chevron's optimized development program for the 5% annualized net income and adjusted EBITDA growth and approximately 10% annualized adjusted free cash flow growth through 2028 that is supported by gas volume growth, contracted annual inflation tariff rate adjustments, and lower operating and capital spend.

In summary, with adjusted EBITDA growth and a moderating capital program, we expect significant adjusted free cash flow generation in 2026 of $850 to $900 million, reflecting 12% growth over 2025 at the midpoint, followed by annualized growth of approximately 10% through 2028, which we expect to use for incremental shareholder return and debt repayment above and beyond our 5% targeted distribution growth that can be delivered even at already set MVC levels. With that, I'll hand the call over to Mike to review our financial performance for the fourth quarter and guidance.

Michael Chadwick: Thanks, Jonathan, and good morning, everyone. Today, I will summarize our financial highlights for 2025, provide details on our first quarter financial guidance and outlook through 2028, which we issued in December. For 2025, we delivered strong results with full-year net income of approximately $685 million and adjusted EBITDA of $1.238 billion. This adjusted EBITDA represents a growth of approximately 9% from 2024. For the fourth quarter, net income was $168 million, compared to approximately $176 million in the third quarter. Adjusted EBITDA for the fourth quarter was $309 million, compared with approximately $321 million in the third quarter.

The decrease is primarily due to lower revenues caused by severe winter weather followed by a slow recovery through December, as well as lower interruptible third-party volumes and annual maintenance at LM4. Total revenues, excluding pass-through revenues, decreased by approximately $19 million, resulting in segment revenue changes as follows: Gathering revenues decreased by approximately $11 million, processing revenues decreased by approximately $6 million, and terminaling revenues decreased by approximately $2 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 allocations under our omnibus and employee secondment agreements, lower seasonal maintenance activity, partially offset by higher processing fees, resulting in adjusted EBITDA for the fourth quarter of $309 million. Our gross adjusted EBITDA margin for the fourth quarter was maintained at approximately 83%, above our 75% target, highlighting our continued strong operating leverage. Fourth quarter capital expenditures were approximately $47 million, marking lower fourth quarter activity as well as the completion of our compression build-out.

Net interest, excluding amortization of deferred finance costs, was approximately $54 million, resulting in adjusted free cash flow of approximately $208 million. We had a drawn balance of $338 million on our revolving credit facility at year-end. For 2026, we expect net income to be approximately $150 million to $160 million and adjusted EBITDA to be approximately $295 million to $305 million, including the impact of severe winter weather that continued through January and the potential for additional winter weather events through the quarter. We expect adjusted free cash flow in 2026 to increase relative to 2025 as capital expenditures in the first quarter are projected to be lower than the fourth quarter.

Turning to our rates for 2026 and beyond, the majority of our systems that represent approximately 85% of our revenues are fixed fee with rates increasing each year based on an inflation escalator capped at 3%. For our terminaling systems, water gathering systems, and a gas gathering subsystem that represents approximately 15% of our revenues, we continue to reset our rates through our annual rate redetermination process through 2033. In general, tariff rates across most of our systems are higher in 2026 than 2025 rates.

For the full year 2026, we continue to expect net income of between $650 million and $700 million and adjusted EBITDA of between $1.225 billion and $1.275 billion in 2026, approximately flat at the midpoint compared with 2025. As Jonathan mentioned, approximately 95% of our revenues are covered by minimum volume commitments in 2026. We continue to target a gross adjusted EBITDA margin of approximately 75% in 2026, with total expected capital expenditures of approximately $150 million.

We expect to generate adjusted free cash flow of between $850 million and $900 million and excess adjusted free cash flow of approximately $210 million after fully funding our targeted 5% annual distribution growth, which we expect to use for incremental shareholder returns and debt repayment. Looking beyond 2026, we have visible drivers, including gas volume growth, that continue to make up 75% of our revenues, inflation escalators, and lower capital spend, that support the guidance we issued through 2028 that results in annualized adjusted free cash flow growth of approximately 10% through 2028 from 2026 levels, generating approximately a billion dollars of financial flexibility to continue return of capital to shareholders and pay down debt. This concludes my remarks.

We'll be happy to answer any questions. I'll now turn the call over to the operator.

Operator: Thank you. And wait for your name to be announced. To withdraw your question, please press 11 again. Our first question comes from the line of Doug Irwin from Citi.

Douglas Irwin: Hey, good morning. Thanks for the question. I'm just trying to start maybe with the balance sheet. You've made a few mentions here of debt repayment, maybe taking more of a priority this year. Historically, I know you've pointed to about three times being the optimal level for Hess Midstream. Just curious, is that still the right way to think about it? Or are you maybe targeting a lower level today? And if so, could you maybe just provide some more commentary around maybe what drove that decision and then how that might impact capital allocation decisions here moving forward.

Michael Chadwick: Can I take that one, Jonathan? So we plan to use a portion of our future free cash flow after distributions to pay down debt as the guidance in December indicated. And the conservative financial strategy we're following there is consistent with our volume profile and Chevron's target of 200,000 barrels of oil per day plateau production in the Bakken. So we'll still have a balanced strategy. So that includes the incremental return of capital beyond our 5% annual distribution growth and balance sheet strength. So in terms of our three times leverage, we will expect to naturally delever below the three times in the next few years.

Our EBITDA will grow, we won't be increasing the absolute level of debt. So with some portion of our free cash flow after distributions being used for debt repayment, we expect to delever below this level of three. As we said in our December guidance release, we're also funding incremental shareholder returns for free cash flow after distributions, rather than leverage buybacks. And so it's just a bit more of a conservative approach that we're following that is in line with our profile and Chevron's target of 200,000 barrels of oil per day plateau.

Having said that, we've got significant free cash flow that we see being generated that'll enable both the pay down of debt and further distributions back to shareholders. Don't know, Jonathan, if you want to add anything there.

Jonathan Stein: Nope. That was great. Understood. Thanks for that. And then a follow-up maybe just on the third-party outlook. We've heard commentary from at least one big player in the Bakken talking about scaling back activity in the current crude environment. Just curious what you see is the impact to Hess Midstream there, if at all. And if you could maybe just provide a bit more commentary around what you're hearing from third-party customers in general? And then I guess tying on to that, I know you mentioned the 200,000 barrel oil equivalent day from Chevron, which they've kind of stood by.

I guess, is there an environment where that outlook might be at risk in your view based on the discussions you've had with them? Sure.

Michael Chadwick: Okay. So on the third party, really no change to our outlook there. So expecting 10% on average across oil and gas. Of course, you know, quarter to quarter, that could have, you know, some variability. You know, if you go back to the third quarter of last year, we had probably higher. We did have higher third parties as there was maintenance on northern border, and we're able to provide additional optionality for third parties to able to do additional routes, alternative routes to get to northern border. As well as optionally for other takeaway. So from time to time, it may feel a bit more. Time to time, a little bit less.

But on average, we expect to continue to see 10% third party as part of our volumes and no change to that going forward. In terms of the 200,000, I mean, no change there. You just heard Chevron recently just Friday on their call, reiterating the 200,000 above a day target with continued optimization program. And I think it's important to highlight the guidance that we've given out in terms of the volume guidance and the EBITDA growth to 2028. As well as reduced capital spending with that supports our free cash flow growth over this period is also consistent, you know, with that plan.

So no change there expected, and we're continuing to, you know, work with Chevron to work through the optimized and optimize our volumes as well. Understood. Thanks for the time.

Operator: Thank you. One moment for our next question. Our next question comes from the line of Jeremy Tonet from JPMorgan Securities LLC.

Elias Jossen: Hey. Good morning, everyone. This is Eli on for Jeremy. Wanted to get a sense of growth drivers further out in the forecast horizon. In that 2028 time frame, how much of the outlook is based on cost cutting and how does that contribute to the growth outlook?

Jonathan Stein: Sure. Let me just start and say that, you know, as we look forward, right, as I just mentioned, the plan that we've given out, the guidance, which includes the EBITDA growth and net income growth as well as our free cash flow growth, is consistent with the plan that Chevron laid out. You know, that growth in terms of EBITDA is really driven by inflation escalators, a bit of growth in gas as well. And then the free cash flow growth is also increasing even more than that as a result of reduced capital as we go from our, you know, complete the infrastructure build-out and move to even a lower capital level going forward.

So down to $150 million this year, 40% lower than $75 million in 2027-2028. So those are really the drivers of the growth. And I think, you know, I think it's important as we think about this long term and the business line going forward for Hess Midstream. We've gone through a period here of transition and gone through a period here of integration with Chevron. And while, you know, many things have changed as we've optimized our plan together with Chevron, I think it's also important to highlight take a moment just to highlight the unique combination of elements that's still a part of our plan.

That includes significant free cash flow generation, leveraging the historical spend with significantly lower capital that I just talked about that driving that 10% free cash flow growth through 2028. We have distributions that have continued to target to go at 5% per share annually. Fully funded by free cash flow, and able to achieve that growth even at MVC level. And we have significant free cash flow distribution free cash flow after distribution that supports, as Mike said, both incremental shareholder returns and balance sheet strength.

And all of this is consistent, as we said, with Chevron's development plan that targets 200,000 BOE per day with continuing opportunities for our optimization as well as 95% MVC revenue protection this year in 2026. And 90% MVC revenue protection 2027. So, you know, we've talked a lot about changes as a result of transition. But I think it's important to highlight that we continue to have the element of visibility and consistency, the shareholder returns, and balance sheet strength. That have been and continue to be the hallmark of Hess Midstream and really a differentiator in the strategy.

So when we talk about the long term for Hess Midstream, while things have changed, it's really a lot more of the same unique combination that has always been our hallmark.

Elias Jossen: Got it. That's great color. Thanks. And then maybe just to pick up on some of the remarks you made about CapEx just there. How low could we see CapEx actually be flexed? I think you've given some parameters around it, but just get a sense of, you know, how low that could get. Thanks.

Michael Chadwick: Yeah. Sure. So in the first quarter, you know, we're expecting CapEx, as I said in my remarks, to be lower than the fourth quarter. And, you know, we've guided $150 million for 2026 and $25 million of that is for completing the compression and gathering pipeline build-out. Then we've got about another $125 million for the gathering systems and well connects and maintenance. Guided that in 2027 and 2028, we expect to be about $75 million, if not lower, and, you know, this is a trend that is following the reset that we said earlier about 2026. Following the rigs coming down from four to three from Chevron, and, you know, it's consistent with that plan.

Jonathan, I don't know if you want to add any further color on that.

Jonathan Stein: Yeah. The one thing I would just add is, you know, there's been a lot of discussion, obviously, we're as we've kind of gotten to the end here of our big build-out, you know, we really spent years building out our gathering and compression system. And just a couple of things to highlight. First is our ability now to go to this lower CapEx level really leveraging the historic investment. First is a function of the partnership that we have, the tight integration that we have with Chevron that historically with Hess and now with Chevron, that allows us it has allowed us to optimize our upstream and midstream investments so we don't overbuild and overinvest.

And that's the result of that is one of the best EBITDA build multiples in the sector. The second thing I would say is that as Chevron talked about the development plan and optimizing the plan, that is also driving, of course, lower CapEx for us. And you know, one of the things just as an example, you know, as you heard Chevron talk about having increasing percentage of longer laterals. So if you think about that from our point of view, longer laterals, you know, not only make the wells more economic, so significantly increasing the breakeven, but also, in general, produce the same volume but with less wells reducing our well connect capital requirement.

So also, a very positive effect there. So all that means that, you know, we can really continue to see this downtrend. This year, we have a little bit left to do in terms of pipeline. Build out at $150 million, still 40% less than last year. And then we're moving down to a much lower level at that less than $75 million on an ongoing basis as we really just have ongoing capital going forward to support the system and drive the significant free cash flow that comes out of this business model.

Elias Jossen: Great. Thanks for all the color. I'll leave it there.

Operator: Thank you. One moment for our next question. Our next question comes from the line of John Mackay from Goldman Sachs and Company.

John Mackay: I think a lot of them have been answered. I want to just zoom in a little bit more on the weather piece. Is there any way you can kind of give us a snapshot of what you're seeing on the ground right now? Particularly, are you seeing, you know, some of the issues we've seen in past years with power down, etcetera? Or once the weather to improve a little bit or once the temperatures start to improve a little bit, should we start to see production coming back online? Maybe just frame it for us relative to maybe some prior years.

Jonathan Stein: Sure. Yeah. I don't think this is yeah. You think back a few years ago where we had, you know, the significant power, you know, power lines down across the state, and, you know, that really went on for, you know, the first half of the year. We're really just seeing, you know, significantly extreme cold weather, you know, some snow, but really the cold, which has an impact on our system across the board. And so particularly on the gas side.

So you know, that, I think, as we do start to see improving weather, certainly, that would be helpful, and that, you allows more activity to occur and also just to begin the recovery in terms of getting more production online and getting our making our system optimizing it back again. So we do still have in our, as we mentioned, contingencies, you know, in the I'd say the weather has continued certainly all through the month of January and a bit here into February, just getting started. You know, we have continued contingencies in our in our forecast. In our guidance, you know, for the rest of the winter.

But, certainly, you know, as we come out of the winter, certainly, as we talked about, we expect to see increasing volumes seasonally as we get into the second and third quarter. I don't know, Mike, you want to just talk about the rest of the year?

Michael Chadwick: Yeah. I think we, you know, as Jonathan said in his opening remarks that we're gonna see this the first half of the year's volumes lower than the second half. So there'll be a pickup in the second half of the year. One thing I'd highlight, though, is, obviously, we're at 95% coverage with our MVCs. So there's a floor. You know, production were to be lower, we've got 95% covered with MVCs, and that translates into 2027 as well at 90%, you know, before getting to 80% in 2028. So there's good protection for a many downside.

Know, in terms of phasing, as Jonathan's described, you know, first quarter, we've been, you know, hit by the weather, and we'll be recovering from that. Second and third quarters are typically better months, and we'll get more production from that. And then the fourth quarter, we typically dial in some conservatism, because we start getting back into winter weather again and the OpEx again there as well. Will have an element of reduced and that's just phasing, seasonal phasing.

John Mackay: That's great. Appreciate all the color. Super quick second one for me. Just following up on Doug's question. Apologies if I missed it. But do you guys have a kind of longer-term leverage target in mind now specifically? Or is it just a, hey. We expect to kind of, you know, put some more cash towards that over time and delever as EBITDA grows. Just trying to think if you have a new target. Yeah.

Michael Chadwick: Yeah. I think what we're planning to do over the next three years with our free cash flow after distributions is just use that to both strengthen the balance sheet by delivering by paying down debt, and including that as of our fundamental, you know, incremental shareholder returns. So it's not a designed level that we want to get to. It's just gonna naturally occur that as EBITDA starts to build a backup, as we don't increase the absolute level of debt, and as we include some free cash flow towards paying down debt, our 3%, you know, our three times leverage is naturally gonna delever. But there's no specific target we're gonna get to.

One of the key things that Jonathan's highlighted, obviously, is the free cash flow that we expect to generate over the next three years. And that's gonna be substantial in the context of being able to fund not only our growth of 5% on distributions within the MVCs, but also to pay down debt and also provide shareholder returns, you know, over the next few years supported by our strong MVC position.

John Mackay: Alright. Got it. Thank you for the time. Appreciate it.

Operator: Thank you. At this time, there are no further questions. This concludes today's conference call. Thank you for participating. You may now disconnect.

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