Hess Midstream (HESM) Q1 2026 Earnings Transcript

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Date

Monday, May 4, 2026 at 10 a.m. ET

Call participants

- Chief Executive Officer — Jonathan Stein

- Chief Financial Officer — Michael J. Chadwick

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Full Conference Call Transcript

Jonathan Stein: Thanks, Jennifer. Welcome, everyone, to our first quarter 2026 earnings call. Today, I will discuss our first quarter performance and outlook for the remainder of the year. And then I will hand the call over to Mike to review our financials. In the first quarter, we continued to execute our operational priorities and deliver our financial strategy. We delivered solid operational performance and achieved our guidance, which included the impact of severe winter weather in January and February. In March, we completed an accretive $60 million share and unit repurchase from the public and our sponsor. Lastly, we increased our distribution 2%, or approximately 8% on an annualized basis for Class A shares.

This increase included our targeted 5% annual increase for Class A shares and a distribution level increase following our repurchase that maintains our total distributed cash on a lower share and unit count. Turning to our results, during the quarter, throughput volumes averaged 430 million cubic feet per day for gas processing, 119,000 barrels of oil per day for crude terminaling, and 115,000 barrels of water per day for water gathering. In line with our guidance, throughput volumes were down compared to the fourth quarter, primarily due to severe winter weather in January and February, partially offset by recovery in March as well as capture of additional third-party gas volume.

Consistent with our annual guidance, we continue to expect volumes to grow the rest of the year, excluding the impact of planned maintenance at the Tioga Gas Plant in the second quarter that is expected to reduce volumes by 5 million to 10 million cubic feet per day for the quarter. Turning to Hess Midstream LP’s capital program, in the first quarter, we safely brought online the second of two new compressor stations after completing it in 2025. In the first quarter, capital expenditures were $10 million, seasonally lower than 2025 as severe winter weather restricted activity levels.

We expect our capital spend to be seasonally higher in the second and third quarters as we continue to execute our program, including completion of greenfield high-pressure gathering pipeline infrastructure that we started in 2025. However, with the second compressor station online, and reflecting Chevron’s move to longer laterals, which reduces well connect CapEx for Hess Midstream LP, we have now reduced our 2026 estimated capital expenditures by a third to approximately $100 million. As a result of this reduction, and together with the deferral of cash taxes, we are increasing our 2026 adjusted free cash flow guidance to $910 million to $960 million, reflecting a 20% increase year over year at the midpoint.

Hess Midstream LP remains a leader in shareholder cash returns with one of the highest free cash flow yields across our peer set. In summary, we remain focused on executing safe and reliable operations while leveraging our historical investment in existing infrastructure to continue generating significant adjusted free cash flow, allowing us to provide returns to our shareholders through growing distributions and incremental share repurchases while simultaneously continuing to reduce our debt leverage. With that, I will hand the call over to Mike to review our financial performance for the first quarter and guidance.

Michael J. Chadwick: Thanks, Jonathan, and good morning, everyone. Today, I will discuss our financial results for the first quarter of 2026 and provide an update on our second quarter financial guidance and outlook for 2026. Turning to our results, for the first quarter of 2026, net income was $158 million compared to approximately $168 million in the fourth quarter of 2025. Adjusted EBITDA for the first quarter of 2026 was $300 million compared with $309 million in the fourth quarter. The decrease was primarily due to lower revenues, primarily caused by severe winter weather in January and February.

Total revenues, including pass-through revenues, decreased by approximately $15 million, resulting in segment revenue changes as follows: gathering revenues decreased by approximately $14 million, processing revenues decreased by approximately $6 million, while terminaling revenues increased by approximately $5 million. Total costs and expenses, excluding depreciation and amortization, pass-through costs, and net of our proportional share of LM4 earnings, decreased by approximately $6 million, primarily from lower seasonal maintenance and lower third-party offloads, resulting in adjusted EBITDA for the first quarter of 2026 of $300 million. Our gross adjusted EBITDA margin for the first quarter of 2026 was maintained at approximately 83%, above our 75% target, highlighting our continued strong operating leverage.

First quarter 2026 capital expenditures were approximately $10 million, significantly lower than in 2025 as severe winter weather limited activity. Net interest, excluding amortization of deferred finance costs, was approximately $53 million, resulting in adjusted free cash flow of $237 million, an increase of 14% from the fourth quarter of 2025. We had a drawn balance of $343 million on our revolving credit facility at the end of the first quarter of 2026.

For the second quarter of 2026, we expect net income to be $150 million to $160 million and adjusted EBITDA to be approximately flat with the first quarter at $295 million to $305 million, which includes the impact of planned second quarter maintenance at the Tioga Gas Plant. We expect adjusted free cash flow in the second quarter of 2026 to decrease relative to the first quarter of 2026 as capital expenditures in the second quarter are projected to be seasonally higher than the first quarter. As we said on our fourth quarter call, we expect second half volumes to be higher than the first half, helping to drive higher EBITDA in the second half of the year.

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, approximately flat at the midpoint compared with 2025. As Jonathan mentioned, our cash position is strong and notable among our peer set. We now expect full year 2026 capital expenditures of approximately $105 million and expect to generate adjusted free cash flow of between $910 million and $960 million and excess adjusted free cash flow of approximately $280 million after fully funding our targeted 5% annual distribution growth, which we expect to use for incremental shareholder returns and debt repayment.

As mentioned, we no longer expect to pay $15 million of cash taxes in 2026 and do not expect to pay material cash taxes until after 2028, following the recent interim guidance from the IRS on the application of the corporate alternative minimum tax. In March, we executed an accretive $60 million share repurchase transaction from both the sponsor and the public, and as the year progresses, we will continue to evaluate additional opportunities for incremental returns of capital. This concludes my remarks. We will be happy to answer any questions. I will now turn the call over to the operator.

Operator: We will now open the call for questions. Ladies and gentlemen, if you have a question or a comment at this time, please press star 11 on your telephone. If your question has been answered and you wish to remove yourself from the queue, please press star 11 again. Our first question comes from Jeremy Tonet with JPMorgan Securities. Your line is open.

Analyst: Good morning, everyone. This is Francina on for Jeremy. Thank you so much for taking questions. I just wanted to zoom in a bit more on the change to CapEx here and what this means for well connect turn-in-line activity for the year and whether there are any read-throughs or changes to growth expectations for year-end or into 2027 that we can derive from this. Thank you.

Jonathan Stein: Hi. Thanks for the question. If you look at what has been happening with CapEx for us really since the end of last year, we have been reducing CapEx as we are approaching the end of our infrastructure buildout, which has been years in the making as we continue to build out our strategic footprint in the Bakken. CapEx was low in the first quarter due to restricted activity from the weather as well as seasonal dynamics.

That is normal for the first quarter, and we do expect that to be the low point of the year and then pick up as we continue to build out over the next few quarters, including, as I mentioned, completing our greenfield high-pressure gathering pipeline infrastructure we started last year and expect to complete this year. So nothing is changing strategically. The downsizing of our guidance this year from $150 million to $100 million is really right-sizing our CapEx to account for upstream efficiencies like longer laterals, which, as I discussed, can reduce well connect CapEx for us. That is very positive. If we reflect on this, it is an extraordinary business model.

With lower CapEx, we are generating significant free cash flow that supports our 5% targeted distribution growth as well as incremental return of capital to our shareholders, like the share repurchase we did this quarter, while simultaneously being able to do debt repayment.

Analyst: Thank you. That is helpful. I would also like to touch on the third-party outlook and whether you have had any changes to that since the Middle East conflict has been ensuing. Thank you.

Jonathan Stein: Sure. In terms of third parties, nothing in terms of major macro changes. We did have some additional third-party volume in the first quarter, as I mentioned. That was some additional throughput from other midstream providers that really highlights the optionality we have in our system that allows flexibility for others to utilize it during operational challenges they have. We are still targeting 10% third-party volumes, and that is incorporated into our guidance. Any additional third-party volumes would be upside. I am not seeing anything dramatic, just the normal third parties coming to utilize optionality in our system, but no major changes due to the macro environment at this point.

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

John Mackay: Hey, team. Thank you for the time. Last call, you spent some time talking about a bit of evolution on the balance sheet side, thinking about lower leverage over time. I am just wondering, we are a quarter later now. Have you had time to refine that and be able to put out a longer-term leverage target relative to the distribution growth and maybe some buyback cadence you have talked about?

Michael J. Chadwick: Yeah, I can talk to that, and thanks, John, for the question. There is no change to our return of capital approach that we outlined in our December guidance note or as we talked about in our fourth quarter call in February. We do plan to use a portion of our free cash flow, after distributions, to pay down debt. It is a conservative financial strategy that is consistent with the volume profile and Chevron’s target for about 200,000 barrels of oil equivalent per day plateau production in the Bakken.

We will still have a balanced strategy that includes incremental return of capital beyond our 5% annual distribution growth, and we plan to have a stronger balance sheet as a result. All of that is underpinned by the MVCs that we have out to 2028, which continue to provide significant downside protection. We are still aiming for about $1 billion of free cash flow after distributions through 2028. Every distribution increase or share buyback is approved by our board, and we plan to use that free cash flow for incremental return of capital and paying down our debt. So no change there.

John Mackay: Alright. I appreciate that. Second one, apologize, it is a little bit in the weeds, but terminals revenue was really strong in the quarter. Is there any kind of one-off in there, or is this new implied rate the go-forward we should think of?

Michael J. Chadwick: I think you are reading that right. There is an element of implied rates in terminals. As you recall, it is a cost-of-service rate that gets adjusted every year for our expectation of OpEx, CapEx, and any volumes that drive a targeted return. That is part of the reason you are seeing stronger performance there. It is a tariff adjustment.

John Mackay: Do you mind just reminding us of the structure of that contract going forward? Thank you.

Michael J. Chadwick: That goes through to 2033, and it is rebalanced every year as part of a calculation that aims to return a specific mid-teen return, and it is based on anticipated volumes, CapEx, and OpEx in order to serve that and to generate that return. The tariffs will flex up and down. If we have lower volumes anticipated, then the tariff will go up. If we have lower CapEx, for example, then the tariff will go down. And that is through to 2033.

John Mackay: Alright. Thank you very much.

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

Doug Irwin: I am just trying to pick up on the second quarter guidance you gave here. I think my math, just looking at the full-year midpoint, implies something around 8% growth in the second half of the year. Can you talk about some of the drivers you see contributing to growth in the second half and where there might be risks to the upside or downside from here?

Jonathan Stein: Sure. Let me start. On the volume side, as we said, the first quarter is the low point in terms of volume. We do have planned maintenance at the Tioga Gas Plant in the second quarter, which takes out 5 million to 10 million cubic feet per day. Absent that, we would have seen some additional growth into the second quarter. As the year progresses, Chevron continues to do longer laterals, so you will start to see that pick up as those completions are finished later in the year and more wells come online. That will drive additional volumes as we continue to grow through the year.

There is no change to our overall guidance, and yes, about 8% on an EBITDA basis increase in the second half is about right. It will be driven by the cadence of volumes as we come off the low point due to weather, get through the maintenance in the second quarter, and then see continued volume growth from there.

Doug Irwin: Understood. My second is on the broader growth outlook beyond 2026. We have Chevron messaging plateauing