Hess Midstream LP (HESM) Q1 2026 Earnings Call Transcript

Access earnings results, analyst expectations, report, slides, earnings call, and transcript.

Overview

The earnings call reflects positive sentiment with strong financial metrics: a 14% increase in adjusted free cash flow, an 8% annualized distribution increase, and improved guidance for 2026. Despite revenue decline due to weather, gross margins remain high, and strategic CapEx reduction supports growth. The Q&A reveals confidence in maintaining growth and leveraging efficiencies with Chevron. The market cap suggests a moderate reaction, leading to a positive outlook (2% to 8%) over the next two weeks.

Key Financial Performance

Net Income $158 million for Q1 2026, compared to approximately $168 million in Q4 2025. The decrease was primarily due to lower revenues caused by severe winter weather in January and February.

Adjusted EBITDA $300 million for Q1 2026, compared to $309 million in Q4 2025. The decrease was primarily due to lower revenues caused by severe winter weather in January and February.

Total Revenues Decreased by approximately $15 million in Q1 2026. Segment revenue changes: Gathering revenues decreased by approximately $14 million, Processing revenues decreased by approximately $6 million, and Terminaling revenues increased by approximately $5 million. The decrease was primarily due to severe winter weather.

Gross Adjusted EBITDA Margin Maintained at approximately 83% for Q1 2026, above the 75% target, highlighting strong operating leverage.

Capital Expenditures Approximately $10 million for Q1 2026, significantly lower than Q4 2025 due to severe winter weather limiting activity.

Adjusted Free Cash Flow Approximately $237 million for Q1 2026, an increase of 14% from Q4 2025. The increase was due to lower capital expenditures and strong operating leverage.

Revolving Credit Facility Balance $343 million drawn balance at the end of Q1 2026.

Distribution Increase Increased by 2% in Q1 2026, approximately 8% on an annualized basis for Class A shares. This increase included a targeted 5% annual increase and a distribution level increase following a $60 million share and unit repurchase.

Adjusted Free Cash Flow Guidance for 2026 Increased to $910 million to $960 million, reflecting a 20% increase year-over-year at the midpoint. The increase was due to reduced capital expenditure and deferral of cash taxes.

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Operating Highlights

New Compressor Stations: Successfully brought online the second of two new compressor stations in Q1 2026, following completion in Q4 2025.

Third-party Gas Volumes: Captured additional third-party gas volumes in March 2026, offsetting earlier volume reductions due to severe winter weather.

Capital Expenditure Reduction: Reduced 2026 estimated capital expenditure by one-third to approximately $100 million due to operational efficiencies, including Chevron's move to longer laterals.

Adjusted Free Cash Flow: Increased 2026 adjusted free cash flow guidance to $910 million to $960 million, reflecting a 20% year-over-year increase at the midpoint.

Operational Performance: Maintained gross adjusted EBITDA margin at approximately 83%, above the 75% target, despite severe winter weather impacts.

Shareholder Returns: Executed a $60 million share and unit repurchase in March 2026 and increased Class A share distribution by 2%, approximately 8% annualized.

Debt Leverage Reduction: Focused on reducing debt leverage while providing incremental shareholder returns.

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Risk or Challenges

Severe Winter Weather Impact: Severe winter weather in January and February caused a decrease in throughput volumes and restricted activity levels, impacting operational performance and financial results.

Planned Maintenance Impact: Planned maintenance at the Tioga Gas Plant in the second quarter is expected to reduce volumes by 5 million to 10 million cubic feet per day, potentially affecting revenue and operational efficiency.

Revenue Decrease: Revenues decreased by approximately $15 million in the first quarter of 2026, primarily due to severe winter weather, which impacted gathering and processing revenues.

Seasonal Capital Expenditure Variability: Capital expenditures were seasonally lower in the first quarter due to weather restrictions but are expected to increase in the second and third quarters, potentially straining cash flow.

Debt Leverage: The company has a drawn balance of $343 million on its revolving credit facility, which could pose financial risks if not managed effectively.

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Guidance & Outlook

Volume Growth: Throughput volumes are expected to grow for the rest of 2026, excluding the impact of planned maintenance at the Tioga Gas Plant in Q2, which is expected to reduce volumes by 5-10 million cubic feet per day for the quarter.

Capital Expenditures: 2026 capital expenditures have been reduced by one-third to approximately $100 million due to the completion of the second compressor station and Chevron's move to longer laterals, which reduces well-connect CapEx. Capital spending is expected to be seasonally higher in Q2 and Q3.

Adjusted Free Cash Flow: 2026 adjusted free cash flow guidance has been increased to $910 million to $960 million, reflecting a 20% year-over-year increase at the midpoint.

Net Income and Adjusted EBITDA: For the full year 2026, net income is expected to be between $650 million and $700 million, and adjusted EBITDA is projected to be between $1.225 billion and $1.275 billion, approximately flat compared to 2025.

Second Half Performance: Second half volumes are expected to be higher than the first half, driving higher EBITDA in the latter part of the year.

Cash Taxes: No material cash taxes are expected to be paid until after 2028, following recent IRS guidance on the corporate alternative minimum tax.

Shareholder Returns: Excess adjusted free cash flow of approximately $280 million is expected after funding a 5% annual distribution growth, which will be used for incremental shareholder returns and debt repayment.

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Shareholder Return Plan

Distribution Increase: Increased distribution by 2%, approximately 8% on an annualized basis for Class A shares. This includes a targeted 5% annual increase for Class A shares and a distribution level increase following the share repurchase.

Annual Distribution Growth: Targeted 5% annual distribution growth fully funded for 2026.

Share Repurchase: Completed an accretive $60 million share and unit repurchase from the public and sponsor in March 2026.

Incremental Shareholder Returns: Excess adjusted free cash flow of approximately $280 million after funding distribution growth will be used for incremental shareholder returns and debt repayment. Additional opportunities for returns of capital will be evaluated as the year progresses.

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Key Q&A

Q:What does the change in CapEx mean for well-connect/turn-in-line activity for the year and growth expectations for year-end or into 2027?

A:The reduction in CapEx from $150 million to approximately $100 million reflects the completion of infrastructure build-out and upstream efficiencies like longer laterals, which reduce well-connect CapEx. This adjustment is strategic and does not change growth expectations. The company is generating significant free cash flow, supporting 5% targeted distribution growth, share repurchases, and debt repayment.

Q:Has there been any change to the third-party outlook due to the Middle East conflict?

A:There have been no major macro changes to the third-party outlook. The company had additional third-party volume in Q1 due to operational challenges faced by other midstream providers. The target remains 10% third-party volumes, with any additional volumes being upside. The macro environment has not caused significant changes.

Q:Is there a longer-term leverage target relative to distribution growth and buyback cadence?

A:There is no change to the return of capital approach. The company plans to use free cash flow after distributions to pay down debt, aiming for a stronger balance sheet. The leverage target is expected to naturally decrease as EBITDA grows, with a range of around 2.5x to 3x debt-to-EBITDA by 2028.

Q:Was the strong terminals revenue in the quarter due to any one-off factors, and what is the structure of the terminaling contract?

A:The strong terminals revenue was partly due to a tariff adjustment under the cost-of-service contract, which is rebalanced annually based on expected OpEx, CapEx, and volumes. The contract runs through 2033, aiming for a mid-teen return. Tariffs will adjust annually based on operational factors.

Q:What are the drivers for the implied 8% growth in the second half of the year?

A:The 8% growth in the second half is driven by increased volumes as weather improves, Chevron completes longer laterals, and more wells come online. Q1 was the low point due to weather, and Q2 will see planned maintenance impacting volumes slightly. Growth will pick up in the latter half of the year.

Q:What is the broader growth outlook beyond 2026, and how will free cash flow be utilized?

A:Chevron's target of 200,000 barrels of oil equivalent per day underpins volume guidance and EBITDA growth. Free cash flow will primarily be used for shareholder returns and debt repayment. The company will consider bolt-on opportunities, but the bar remains high due to the strength of the existing business model.

Q:Are there any longer-term cost or structural opportunities being worked on with Chevron, and could savings flow back to Chevron?

A:Efficiencies like longer laterals reduce breakeven costs and capital requirements, benefiting both Chevron and Hess Midstream. The contract structure, which runs through 2033, does not allow for tariff renegotiation or changes without special approvals. The focus remains on operational optimization.

Q:Can the Q1 terminals revenue run rate be assumed for the rest of the year?

A:The Q1 terminals revenue was impacted by weather and included a tariff step-up. While the tariff adjustment is a factor, the Q1 run rate may not fully extrapolate to the rest of the year due to potential variations in throughput and third-party terminaling.

Q:Review of Unclear Management Responses

A:None of the questions were avoided or lacked clarity. All responses were detailed and addressed the questions directly.

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Earnings Word Cloud

The most frequently occurring keywords in this quarter's earning call

HESM Transcript

Hess Midstream LP (HESM) Q1 2026 Earnings Call Transcript

Positive5-4

Hess Midstream LP (HESM) Q4 2025 Earnings Call Transcript

Unknown2-2

The earnings call presents a mixed outlook. While there are positive aspects such as targeted distribution growth, strong EBITDA margins, and potential share repurchases, there are also concerns including lower revenues due to third-party volumes, maintenance, and inflationary pressures. The Q&A session did not provide significant new insights but highlighted the company's focus on deleveraging and optimizing operations. Given the market cap and mixed signals, the stock price is likely to remain within a neutral range over the next two weeks.

Hess Midstream LP (HESM) Q3 2025 Earnings Call Transcript

Unknown11-3

The earnings call presents a mixed outlook. Financial performance shows slight improvements in EBITDA and revenues, but net income decreased slightly. The Q&A section reveals uncertainties about future rig activity and flat EBITDA in 2026 despite higher gas volumes, which tempers optimism. Positive aspects include strong operating leverage, cash flow, and shareholder returns. However, the lack of detailed guidance and potential rig reductions introduce caution. Given the company's market cap, the stock is likely to remain stable, with a neutral prediction for stock price movement over the next two weeks.

Hess Midstream LP (HESM) Q2 2025 Earnings Call Transcript

Positive7-30

The earnings call reveals strong financial performance with increased net income and EBITDA, alongside positive guidance for future growth. The Q&A session confirmed continued growth in gas processing volumes and a robust buyback program, reinforcing positive sentiment. The company's strategic plans and financial flexibility support further shareholder returns, enhancing the outlook. Despite some uncertainties in management responses, the overall sentiment is positive, with expected stock price movement in the 2% to 8% range over the next two weeks.

HESM Report

Hess Midstream LP 10-K

10-K

2023-02-27

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