Hess Midstream Partners LP Stock

Good day, ladies and gentlemen, and welcome to the Hess Midstream Investor Update call. My name is Kevin, and I'll be your operator for today's call.

[Operator Instructions] 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, Investor Relations. Please proceed.

Thank you, Kevin. Good morning, everyone, and thank you for participating in our investor call to discuss our definitive agreement with Chevron to establish Hess Midstream as an independent multi-basin midstream company. Our press release announcing the transaction was issued yesterday 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 press release.

With me today are Jonathan Stein, Chief Executive Officer; and Mike Chadwick, Chief Financial Officer. I'll now turn the call over to Jonathan Stein.

Thank you, Jennifer. Good morning, and welcome to the Hess Midstream Investor Update conference call to discuss the transaction that we announced yesterday. I'm going to review the transaction and our go-forward business strategy, and then Mike will discuss the financial strategy going forward and provide initial guidance. There is also a presentation on the website to be viewed alongside our call comments.

Starting with Slide 3 of the presentation. We are excited to announce today entry into definitive agreement for a significant transformative transaction that will create a new independent multi-basin midstream company with leading positions in the Bakken and the DJ Basin. For Hess Midstream, we are now well positioned for the long term with Chevron as an anchor customer and a solid foundation for independent growth while maintaining shareholder returns.

Looking at the elements of the transaction, Hess Midstream has agreed with Chevron to simplify our Bakken commercial agreements to support ongoing investment. This includes reducing our rates for 2027 through 2033, while extending the contracts through 2045 and replacing multiple volume-based MVCs with a single basin-wide minimum revenue commitment, or MRC, that allows for more flexibility in volume levels while continuing to provide our hallmark downside protection. The MRC will be established 3 years in advance. And once the MRC is established for a given year, it can only be increased and not decreased based on updated annual development plans provided by Chevron. MRCs from 2027 through 2029 have been established on a 2-rig program. All of our fees will now be on a fixed-fee basis and continue to have inflation escalators.

In addition, Hess Midstream will pay Chevron $200 million at closing, which we expect to fund from our revolver. In exchange for the Bakken commercial agreement simplification and cash payment, we will be acquiring DJ Basin midstream assets from Chevron as well as 100% of Chevron's ownership in HESM, including the general partner. The DJ Basin midstream assets include crude oil gathering and storage assets, gas and water gathering systems, 100% of the Black Diamond Gathering System and 20% of the long-haul interstate Saddlehorn pipeline.

In terms of Chevron's ownership in Hess Midstream, this represents a complete exit by Chevron from Hess Midstream and will significantly reduce the total unit share count by approximately 40%, reducing total distributions and supporting transaction accretion on an adjusted EBITDA per share basis. With the complete exit of Chevron and acquisition of the general partner, Hess Midstream will transition to a completely independent midstream company owned 100% by the public.

I am excited to continue as CEO of this new independent company, will be joining the Board of Directors with the initial size of the Board set to 7 members, including myself. The 3 current independent directors will remain on the Board and John P. Reddy, one of these independent directors, will become Chairman of the Board. We will begin the search for the remaining 3 directors as soon as possible, and directors will be elected by the public starting in 2028. In addition, both Hess Midstream and Chevron are aligned during this transaction through multiyear shared services agreements that support the establishment of an independent organization while allowing us to maintain safe and reliable operations.

Turning to Slide 4. After this transaction, we will have created an independent multi-basin midstream company that is well positioned for growth and returns. The addition of the DJ Basin assets will significantly diversify and increase the footprint of our business, approximately tripling our crude gathering throughput and grow our gas gathering throughput by more than 30%, while also broadening our asset base with ownership participation in a long-haul crude pipeline. Our volumes are underpinned by long-term Chevron production plateaus in both the Bakken and the DJ and will continue to be backed by strong commercial contracts with Chevron that now extend through 2045 and are 100% fee-based with inflation escalators.

In addition, primarily through our new MRCs in the Bakken and Chevron ship-or-pay commitments on long-haul pipelines in the DJ, approximately 70% of our revenue is downside protected. With Chevron as our anchor customer in both the Bakken and the addition of the DJ Basin assets that include significant third parties, our third-party volumes will increase to approximately 20% of total volumes. Most importantly, leveraging the stable volume platform, we have the ability to focus on accretive growth opportunities, which we plan to prioritize as part of our go-forward capital allocation priorities. We will continue to maintain a solid financial foundation with an expected 75% adjusted EBITDA margin and low ongoing capital requirements that support our volumes and drive sector-leading free cash flow conversion.

With this free cash flow generation, we will continue to target distribution growth of 5% per Class A share on an annual basis through the fourth quarter of 2026 and expect our 2027 distribution to be maintained at that level, representing an approximate 2% annual distribution per growth rate that is fully funded by our adjusted free cash flow. Looking forward, we expect to have the ability to continue to fully fund distributions at that level, remaining free cash flow positive after distributions and maintain leverage in the range of 3.5 to 3.75x adjusted EBITDA on a long-term basis.

Turning to Slide 5. Following the transaction, Hess Midstream will have a sector-leading gathering platform and adjusted free cash flow conversion. We will gather Chevron's second largest production platform, and we expect to be the largest gathering platform in the Rockies by volumes gathered, providing scale and efficiencies to compete effectively for new third-party business. And we expect to maintain our sector-leading adjusted free cash flow conversion. With an established asset base and significant historical investment, we expect to have one of the lowest reinvestment rates in the sector with low ongoing required capital needs.

Turning to Slide 6. With the addition of the DJ Basin platform, we will own the largest crude gathering system in the basin, operating a unique and irreplaceable system that gathers almost 100% of Chevron's DJ Basin oil gathering volumes. This platform provides a stable cash flow base and a growth platform to capture nearby opportunities with minimal capital investment from a dominant position. The 2 gathering systems, including the Black Diamond Gathering System, have approximately 400,000 barrels a day of crude gathering throughput capacity, 300 million cubic feet per day of natural gas gathering capacity and 2 terminals with a total of 420,000 barrels of storage capacity. These systems are competitively advantaged and have direct connectivity to every major pipeline in the DJ Basin, including Saddlehorn, White Cliffs, Grand Mesa and Pony Express.

Turning to Slide 7. In addition to these gathering systems, Hess Midstream will also own a 20% equity stake in the Saddlehorn pipeline, which is the largest crude oil pipeline out of the DJ Basin, connecting Colorado to the Cushing storage hub in Oklahoma. The addition of long-haul pipeline ownership to Hess Midstream extends our participation in the midstream value chain and provides an additional source of stable and predictable cash flows supported by shipper pay commitments.

Turning to Slide 8. The Bakken remains our historical base, where we have a high-quality integrated portfolio with meaningful scale. Chevron intends to move from 3 to 2 rigs this December. For Hess Midstream, we now expect volume -- Bakken volumes to decline by approximately 5% through 2027 before plateauing in 2028. Our midstream assets remain best-in-class in the Bakken with an integrated platform of 500 million cubic feet per day of gas processing capacity, approximately 500,000 barrels a day of crude oil terminaling capacity, approximately 700 million cubic feet per day of gas gathering pipeline capacity and approximately 300,000 barrels a day of crude oil gathering capacity.

Putting it all together, this significant and transformative transaction creates a unique multi-basin midstream company with a long-term platform supported by Chevron as an anchor customer and a solid foundation for accretive growth and ongoing shareholder returns.

With that, I'll turn the call over to Mike to talk about our financial strategy and guidance.

Thanks, Jonathan. I will go over the transactions as well as our preliminary guidance. As Jonathan said, we are excited to deliver a transformative transaction to our shareholders that we expect to position Hess Midstream for strong performance in the future.

Starting on Slide 9. While Hess Midstream will transform into a new multi-basin company, we will also retain our hallmark downside protection, and we expect our contract terms, combined with enhanced duration, a fixed fee structure and acreage dedications in the DJ Basin to provide long-term throughput visibility for Hess Midstream. The fee structure for all assets will continue to be fixed with inflationary protection. In the Bakken, minimum commitments have been set on a revenue basis on a 2-rig program through the end of 2029. They will continue to be set at 80% on a 3-year rolling basis and once established for any year, cannot be decreased for that year in the future. All currently in place cost-of-service contracts in the Bakken will be converted to this fixed-fee structure. In the DJ Basin, Chevron has ship-or-pay commitments mainly through the Saddlehorn pipeline. Overall, post transaction, approximately 70% of our total revenue has significant downside protection. In terms of throughput and visibility, Chevron will remain our anchor customer, and we will handle approximately 100% of Chevron's Bakken and DJ Basin crude gathering volumes.

Turning to Slide 10. In terms of our financial policy, we have updated our capital allocation priorities to reflect our new independent status following closing of the transaction. First, we expect to grow our distribution at a targeted 5% rate through the fourth quarter 2026 distribution, which will result in approximately 7% growth year-over-year in 2026, followed by approximately 2% growth in 2027. We plan to maintain the distribution at Q4 2026 levels in 2027 and expect to maintain that level while remaining free cash flow positive going forward.

Second, from our larger operational base, we plan to pursue accretive growth opportunities, which includes capturing additional third-party volumes as well as potential M&A opportunities. Third, we expect to maintain our balance sheet strength and are targeting long-term leverage in the range of 3.5 to 3.75x adjusted EBITDA, which is within the boundaries of our peer set. And fourth, we will assess incremental shareholder returns, including distribution increases and/or share repurchases.

Turning to Slide 11. We have issued preliminary 2027 guidance, which refers to ongoing baseline adjusted EBITDA of $900 million at the midpoint. This guidance includes an estimate of the net incremental revenue related to the contract liability associated with our new Bakken commercial agreements. We anticipate spending $125 million in the Bakken and DJ Basins, which consists of approximately $75 million in the Bakken, which includes the scheduled turnaround at Tioga Gas Plant and $50 million in the DJ.

We expect to continue to have sector-leading adjusted free cash flow conversion with a 75% gross adjusted EBITDA margin, leveraging significant historical investment in both basins and low ongoing capital needs. This strong financial basis should provide flexibility and position us well for future growth. We plan to issue updated 2027 guidance after the expected closing of the transaction at the end of the year and updated 2026 fiscal guidance can be found in the appendix to this presentation.

Again, we are excited to deliver a transformative transaction to Hess Midstream holders and look forward to becoming a multi-basin independent midstream company with a long-term platform supported by Chevron as an anchor customer and a solid foundation for accretive growth and ongoing shareholder returns.

With that, I'll hand the call back over to the operator to open the line for questions.

[Operator Instructions] Our first question comes from Ben Lund with Goldman Sachs.

Maybe just starting on the 2027 guide, you're pointing to the midpoint of $900 million and with the contract liability included in there. First, can you maybe help us frame up roughly how much of that $900 million is cash versus noncash recognition from that contract liability?

And then maybe second, maybe frame up what the DJ opportunity looks like in 2027 and maybe longer term?

Thanks, Ben. I'll tackle the first part of your question, and then I'll hand it over to Jonathan to tackle the second part. And let me just walk you through some of that accounting on the noncash piece. So GAAP accounting rules for contract modifications like ours require that the substantial consideration for the transaction be recorded as a deferred revenue liability on the balance sheet, and that will amortize to income over the contract term, which is about 19 years to 2045. So revenue from the new BA and fixed system reservation fees will also be treated for GAAP purposes the same way. They were negotiated as part of the same overall transaction. The net of these movements on these deferred revenue adjustments to EBITDA, they substantially offset each other such that the net impact to 2027 EBITDA is expected to be relatively small.

So this required accounting for deferred revenue does not affect the cash we expect to receive, and we expect adjusted free cash flow to not include the impact of deferred revenue accounting adjustments. So if you work back from the midpoint of our adjusted free cash flow guidance of $575 million with about $125 million of CapEx, interest costs similar to 2026 based on flat debt and with no material cash taxes, it brings you back to the midpoint of our adjusted EBITDA guidance range.

I'd like to just stress that even with -- even if we removed the cash from fixed system reservation fees, our adjusted free cash flow is sufficient to fund our distribution for the foreseeable future. I hope that helps clarify how the noncash portion of that deferred revenue adjustment find its way into EBITDA. We're not expecting it to have a material impact in 2027 because the way and the direction of the contracts offset each other.

I'll hand it over to Jonathan, though, to answer your second part of the question.

Thanks for the question. I mean in terms of the DJ, we're super excited to be adding that to our portfolio. As I talked about in my comments, it really diversifies our platform. It's a platform that Chevron themselves has continued to grow their position over time through successive acquisitions. Like all the basins in the Chevron portfolio, they're continuing to improve their economics as they have bring new technologies and efficiencies and things like longer laterals that drive down breakevens. So really, with all those improvements, we're really looking at a long-term plateau that underpins our volumes from Chevron.

And at the same time, the DJ Basin itself is really well positioned for third parties. It includes, as I mentioned in my comments, already includes significant third-party volumes, that results in an increase in our total third-party volumes to about 20% of our volumes going forward. Similar to the Bakken, where we have significant optionality there as well. The system is largely built out in terms of the asset base. So that will allow us to continue to competitively bid on third-party opportunities. And combined with, as I mentioned, the connectivity that we have to every long-haul pipeline, we expect to be strongly positioned to win new third-party businesses there.

And look, I think it's important to say that like now as an independent company, we really have just -- the DJ in itself really summarizes, I think, one of the really unique elements now of our business model going forward and really makes it a differentiated business model, which is that we have base volumes supported by Chevron as our anchor customer with low ongoing CapEx, supporting significant free cash flow generation, as Mike said, even after distributions and taking away free cash flow after distributions will fully fund our distributions going forward for really the foreseeable future.

And that means that we have like a sponsor level customer commitment. But at the same time now as an independent company, we have the independence to prioritize our capital allocation for growth opportunities and pursue third parties in a disciplined way.

Awesome. That's all clear. Maybe if I can just ask one more on the distribution. You mentioned you're expecting to grow 5% annualized through the back half of this year and then holding flat through '27. I guess I'd just be curious on what has to happen for growth to resume on the distribution. Is that a certain leverage level you want to get to or a coverage ratio you look at? Or is that kind of a longer-term strategic decision to keep it flat?

Yes. Thanks, Ben. I'll tackle that, and it's really driven by our new financial priority and those -- that hierarchy of priorities. As we think through it, we're going to be sustaining that distribution at the Q4 '26 levels. And that will be funded, as we say, out of adjusted free cash flow for the foreseeable future. So that's priority #1. And then after that, we'll look to grow, and we'll do that in a disciplined, accretive manner. And thirdly, we'll try and maintain our balance sheet strength and focus on keeping within that target range of 3.5 to 3.75x leverage. And so those are the first 3 priorities.

And then fourthly, out of any remaining adjusted free cash flow after distributions, we'll look to evaluate whether we want to do shareholder returns, and that might take the form of increases to the distribution or additional buybacks. But it will be in that order of priorities that we focus on how we allocate surplus capital.

Our next question comes from Doug Irwin with Citi.

Maybe just one follow-up on the kind of cash versus noncash piece of the contract structure. I understand kind of your commentary around '27. But just to be clear, I guess, can you talk to kind of how that cash versus noncash dynamic might shift over time? Just essentially wondering if there's the potential for an inflection at some point in the future that could more materially impact the free cash flow outlook.

Yes. No, thanks for the question, Doug. And yes, I think in the long term, we really look towards the adjusted free cash flow as being sufficient really to fund the distribution just on its own. So there is a system fee reservation fees in there, and they do enhance our EBITDA and cash flow, but the accounting would require that, that offsets against the long-term contract nature. And that's really what we're seeing going on against in 2027 as they really do offset each other. But on the long-term basis, we're very comfortable that our adjusted free cash flow is sufficient on its own to fund distributions.

And adjusted free cash flow as well, going forward, it won't include the net impact of any noncash accounting deferred revenue adjustments that we make. We'll be taking those out. And so on a cash basis, we're in a good position. We expect to have in our midpoint of our guidance for 2027, we have about $160 million of adjusted free cash flow after distributions. And so we feel comfortable that, that cash position is really what is going to be able to shore up our distributions going forward.

Doug, this is Jonathan. Just as for [indiscernible], because I know this is a question coming up. Just for clarity, the free cash flow after distributions that we have more than exceeds any fixed system reservation fees that are in our model. So on a go-forward basis, with or without those, we're able to fully fund our distributions from free cash flow for the foreseeable future.

Okay. Understood. And maybe a follow-up on leverage. If I just kind of do some math on '27, I'm getting right around 4x, which is maybe the high end of what you talked about. Just curious kind of how quickly you anticipate being able to get back down to that 3.5 to 3.75 long-term target? And more generally, kind of what's your path to getting there? Is it tied to being able to win some third-party volumes and grow EBITDA? Or is it going to be more tied to paying down debt with some excess free cash flow?

Yes. Thanks, Doug. And the key thing here as well, as we observed, is that the leverage increase is not due to increases in debt. Our debt level is expected to remain relatively flat to 2026, and we're going to be incrementally cash flow positive after distributions, and that will help bring down the debt level that we have going into 2027. And so there is a range around the EBITDA and there is a range around our guidance, and that's why we've gone with a pretty wide guidance range on our leverage in 2027 of 3.75x to 4x.

But we expect to try and get down to the 3.5 to 3.75x in the long range, and we'll use the surplus adjusted free cash flow after distributions in order to get there. We do not anticipate leveraging up further. But obviously, all of that is subject to the appropriate and disciplined look at growth, and that may cause us to temporarily change our view on the leverage, but we would aim to nonetheless get down to the 3.5x to 3.7x long-term guidance.

And this is Jonathan. Let me just add on. I mean the case that we're presenting is really just our base case really based on really, as we talked about, Chevron as our anchor customer as well as 20% total third-party volume. So we're not incorporating any additional upside beyond that. And if we think about what we're going to be focused on really now going forward, it's really -- we'll call it in the short term, but really in the short to medium term, really 3 things. First is continuing to operate at the high level of safety and efficiency that has been the hallmark of Hess Midstream, transitioning through a structured process to an independent company.

And then as Mike said and I said, disciplined pursuit of accretive growth opportunities, none of which are in our plans going forward. And as we do that, as I talked about, we have this incredible strategic footprint, both in the Bakken and DJ. We'll look for commercial opportunities as well as the opportunity for accretive asset or business acquisitions that can complement that footprint, and we can even look outside our footprint.

Now as an independent company, we really have the ability to pursue these opportunities in a disciplined and focused manner. And so again, with Chevron in the Bakken and DJ as our base, there's no pressure. We're not trying to backfill any type of hole. The base that we presented is a solid base that allows us to fund our distributions from free cash flow for the foreseeable future. But -- so we'll keep our focus on financial priorities, including, as Mike said, funding our current distribution and potential incremental shareholder returns from free cash flow while maintaining balance sheet strength.

And again, like we talked about, our leverage is really that 3.75 to 4 only in 2027. And then beyond that, we expect to delever quickly because, again, we're free cash flow positive after distributions going forward. But again, that just really emphasizes what I said earlier. This is just a unique and differentiated business model. We have this base volume. That's our base plan. Chevron is the anchor customer, 20% third parties, but we have now the independence to prioritize capital allocation for growth opportunities.

Got it. If I could maybe sneak one more in as well, just on the contracts. You obviously used to give the explicit MVC levels. Just curious if there's any similar color you can give on the minimum revenue commitments. Is it as simple as just taking 80% of your '27 implied revenue guide and directional guidance on '28 you can give? Like should we essentially just expect these MRCs to hold flat if volumes are plateauing?

Yes, we're not going to -- in the past, we just had the Bakken that was our single basin. So now as a multi-basin, and this just being a percentage, we're not going to give out the MRCs going forward. But as we've talked about, we do expect plateau volumes, now a slight decline in '27, but then plateauing after that in terms of our volumes. So that's an indicator, obviously, of our revenues as well in terms of expectations. So generally, we expect the MRCs to be relatively flat going forward. But then we're not going to be giving those out. We'll give out, of course, guidance each year, and that will be supported by that.

And as we said, Mike really highlighted, still 70% of our revenues are downside protected. That's a combination of these MRCs in the Bakken. But then also in the DJ, Chevron has long-term long-haul ship-or-pay commitments, and again, we're gathering 95% of their crude oil gathering in the DJ. So that really also provides lots of protection as well as, of course, on Saddlehorn, there are as well ship-or-pay commitments as well.

Our next question comes from Jeremy Tonet with JPMorgan Securities LLC.

Just wanted to come back, I guess, as we think about the forward outlook here, and I know you're not providing guidance past '27 at this point. But I guess, as we try to think about directionally speaking, do you expect things to remain flat at that point? Could there be another step down here? I guess we're still waiting for the '29 nominations. And so just trying to get a feel for what the future could hold here.

Sure. Well, I mean, look, we're really excited about the future. Let me just start off by staying there is no step down. There's no cliff or anything like that expected to occur. The 2020 -- as Mike said and I said, the MRCs are already set through 2027 through 2029. So those are already set. And as I just said in the previous question, we expect those to be relatively flat based on a plateau production by Chevron there as well. And again, we've talked about that we can really maintain -- as Mike kind of walked through, the EBITDA itself doesn't have really, on a net basis, much deferred revenue that all just kind of nets out. And so our free cash flow, our EBITDA is expected to be -- what you see for 2027 is a good indicator certainly of a baseline as we go forward. A low ongoing capital gets you to similar free cash flow that we are able, as we said, to be able to fully fund our distributions at that end of 2026 level for the foreseeable future.

And then as I talked about, this is just the baseline. This is just the Chevron plateau and the DJ and the Bakken, 20% third parties. And now with the independence that we have, we have the opportunity to continue to pursue third-party opportunities, whether those be commercially, whether those be, as I said, through accretive and disciplined pursuit of assets or businesses to complement our platform or beyond. All of that -- none of that is in the plan, and we certainly have the ability to do that now. Again, we have that just unique combination of a sponsor level commitment in terms of our volumes, while at the same time, have the independence to pursue additional growth, none of which is in our plan going forward. So no step down. And if anything, we're excited about the upside going forward.

And thinking about the distribution going forward, how do you think about the right level of coverage, be it DCF or free cash flow or otherwise?

Yes. I think we expect to pay our distribution solely from the adjusted free cash flow. So we won't be taking any further leverage for that, and we expect to be able to maintain at the Q4 '26 distribution rate for the foreseeable future. Our adjusted free cash flow is supported, as Jonathan says, by the 70% downside protection that we have. And it will be a function of, as we've discussed, our financial priorities, which will be first prioritizing maintaining that distribution at that level and then seek disciplined accretive growth, maintaining a strong balance sheet and then finally assessing whether there are further shareholder returns that we can do based on either increased distributions or buybacks but in that order.

Got it. But no specific 1.x free cash flow coverage on the dividend or anything like that, it sounds like. And then maybe just going to leverage, I guess, how do you think about this being the right leverage level versus previously, you're looking at something lower, and this doesn't seem to necessarily have growth out of the gate here. So just wondering how you think about that as well?

Yes. This is a complete reset, obviously, with a transformational transaction like this from where we were previously. And as I mentioned earlier, we're not increasing leverage as a function of debt increasing. It is because of the EBITDA profile, and we expect to get down to 3.5 to 3.75x in the long term, which remains within the range for the midstream space, but I think it also gives us the flexibility we need to pursue growth. And so we're comfortable with that in the long range, and that's where we would target it. But if we are going to do growth, it will be in a disciplined manner so that it is accretive, and we aim to get back down to that 3.5 to 3.75x in a short time after that.

Yes. I think it's important to highlight that this is just a different risk model, different profile going forward. We have a diversified basin now. We had before a 2033 contract ending, we had to figure out what to do with. Now we're extending to 2045. We continue to have downside protections as we talked about both indirectly in the Bakken and indirectly in the DJ. We have addition of now long-haul pipeline capacity or ownership as part of our providing stable cash flows there. So at this point, you could say it was a really different model historically and really not even comparable.

If anything, we -- I think as we -- people have asked us in the past, we may have been even kind of underlevered relative to the sector or our potential. But obviously, we maintained that level given the risk that we had, single customer, single basin and a contract termination, if you will, the renegotiation coming up. All of that now, all that has been derisked, all that taken away. And as Mike said, it's not a function of absolute debt level. It's really a function of resetting the business and that going forward. So we're really comfortable.

Again, we're going to continue to at least maintain the base distribution. But to the extent, of course, as Mike said, while maintaining balance sheet strength that we have the ability to have incremental shareholder returns from free cash flow, of course, those will continue to be as they've always been part of our priorities. But moving up in the priority now with the independence that we have to be able to pursue third-party growth in whatever form that is, that's going to be our first priority. And then beyond that, whatever is left over, of course, we'll go back to shareholders as we've always done.

Got it. Just one quick last one, if I could. Just wondering if in the process of the committee or otherwise considered other metrics besides EBITDA per share accretion, seeing if anything else was accretive given that the debt per EBITDA was -- debt to EBITDA was moving up in the transaction, so that impacts that metric.

Yes, sure. Yes. No, of course, the committee looked at all different types of metrics as part of this. There was a process done with our conflicts committee and their own advisers. And of course, they did a full analysis. Of course, we're only just providing EBITDA per share as an accretion metric. But of course, they looked at multiple metrics. The important point, which I think really highlights -- and that's just -- you think of EBITDA per share is just an example of that, is just a 40% reduction in the share count, and that allows for significant accretion or improvement on a per share basis. So you can do the math yourself. You can look at kind of our free cash flow. You can look at where we are relative to 2026. And that significant reduction, obviously, creates -- is a metric, of course, that they looked at and certainly something that we see as important. And when you look at leverage, all of that gets considered into that.

So certainly, again, we look at the situation where we're at. I'm sure the committee looked at it as well relative to where we are currently and looking forward is only just accelerating value to shareholders.

Got it. Just the last one. There's no conversion to C-Corp here, right?

No, that's a good question. We're saying as an Up-C. Really, that allows us to continue to have the structure, particularly as we go into this 2-year transition period with Chevron. The Up-C really provides as a partnership, really the continuity that we have with the existing structure. We don't want to be going through that another potential change right at this moment. And it really supplements, if you will, our ability to have this transition in an organized way. And as I said, that's -- in terms of our priorities, it's really obviously continuing to operate safe and reliably.

But number two, as I mentioned, is really transitioning to an independent company and maintaining the Up-C structure really facilitates that during this process. It doesn't limit us in any way in terms of -- from an investor point of view, in terms of the same way that investors have always invested in us, they will continue to do. It's an important point that from a liquidity point of view, the public shares are still the same as they were. All of this accretion comes from the reduction in Chevron shares.

And then, of course, we'll continue to move people over to Hess Midstream over that 2-year period in a very structured manner as we continue to have the TSA and the secondment agreement to allow us to do that in an organized way that continues -- will allow us to continue to focus on safe, reliable operations at the same time.

Thank you, ladies and gentlemen, this does conclude today's presentation. We thank you for your participation. You may now disconnect, and have a wonderful day.

Good day, ladies and gentlemen, and welcome to the Second Quarter 2026 Hess Midstream Conference Call. My name is Kevin, and I'll be your operator for today. [Operator Instructions]

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.

Thank you, Kevin. Good morning, 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; and Mike Chadwick, Chief Financial Officer. I'll now turn the call over to Jonathan Stein.

Thanks, Jennifer. Welcome, everyone, to our second quarter 2026 earnings call. Today, I will discuss our second quarter performance and outlook for the remainder of the year, and then I'll hand the call over to Mike to review our financials. In the second quarter, we continued to execute our operational priorities and deliver our financial strategies. We completed planned maintenance at TGP on time and under budget.

Our plans for the third quarter includes maintenance at LM4 and completing maintenance work that has now shifted to the second half of the year. Complementing our operational execution, we continue to find efficiencies across our assets on both synergies and improved performance. During the quarter, we also delivered on our financial strategy by strengthening our balance sheet and increasing our distribution in line with our continued prioritization of shareholder returns.

Hess Midstream remains a leader in shareholder returns, and we reiterate our 2026 adjusted free cash flow guidance of $910 million to $960 million or a 20% increase year-over-year at the midpoint.

Turning to our results. During the quarter, throughput volumes averaged 433 million cubic feet per day for gas processing, 117,000 barrels of oil per day for crude terminalling and 121,000 barrels of water per day for water gathering. Compared to the first quarter, throughput volumes were flat to lower on oil, but higher in gas as the maintenance of TGP was offset by the capture of additional third-party volume. Consistent with our annual guidance, we continue to expect volumes to grow in the second half of the year.

Turning to Hess Midstream's capital program. In the second quarter, capital expenditures were $31 million as we continue to execute our program, including completion of greenfield high-pressure gathering pipeline infrastructure. We expect our capital spend to be higher in the third quarter, in line with planned activity. 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 uniquely provide returns to our shareholders through growing distributions and incremental share repurchases while simultaneously continuing to reduce our debt leverage.

With that, I'll hand the call over to Mike to review our financial performance and second quarter and guidance.

Thanks, Jonathan, and good morning, everyone. Today, I will discuss our financial results for the second quarter of 2026 and provide an update on our third quarter financial guidance and outlook for 2026.

Turning to our results. For the second quarter of 2026, net income was $174 million, compared to approximately $158 million in the first quarter. Adjusted EBITDA for the second quarter of 2026 was $314 million compared with $300 million in the first quarter. The increase was primarily due to lower operating expenses with some activity shifting into the second half of the year as well as G&A savings from lower allocations during the quarter.

Total revenues, excluding pass-through revenues, increased by approximately $10 million, resulting in segment revenue changes as follows: Gathering revenues increased by approximately $7 million, and processing revenues increased by approximately $3 million.

Total cost and expenses, excluding depreciation and amortization, pass-through costs and net of our proportional share of LM4 earnings decreased by approximately $4 million, primarily due to lower operating expenses with some activity shifting into the second half of the year as well as G&A savings from lower allocations during the quarter, resulting in adjusted EBITDA for the second quarter of 2026 of $314 million.

Our gross adjusted EBITDA margin for the second quarter of 2026 was maintained at approximately 85%, above our 75% target, highlighting our continued strong operating leverage. Second quarter of 2026 capital expenditures were approximately $31 million, in line with quarterly activity. Net interest, excluding amortization of deferred finance costs, was approximately $51 million, resulting in adjusted free cash flow of approximately $232 million, a decrease of approximately 2% from the first quarter of 2026.

We had a drawn balance of $256 million on our revolving credit facility at the end of the second quarter of 2026, a decrease of approximately $87 million from the first quarter of 2026. For the third quarter of 2026, we expect net income to be approximately $165 million to $175 million and adjusted EBITDA to be approximately flat at the midpoint with the second quarter at $310 million to $320 million as expected, higher revenues and volumes are offset by higher OpEx.

We expect adjusted free cash flow in the third quarter of 2026 to decrease relative to the second quarter of 2026 as capital expenditures in the third quarter are projected to be higher than the second quarter, reflecting increased activity. We continue to expect second half volumes to be higher than the first half of the year.

For the full year of 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, our cash position is strong and notable among our peer set.

We 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 continue to use for incremental shareholder returns and debt repayment. This concludes my remarks. We will be happy to answer any questions.

I will now turn the call over to the operator.

[Operator Instructions] Our first question comes from Jeremy Tonet with JPMorgan.

It's Vrathan Reddy on for Jeremy. I appreciate the comments in the prepared remarks and the full year guide, but maybe curious if you could talk to some of the puts and takes that could drive the high end versus low end? And then on the cost side, how you see OpEx and maintenance timing throughout the balance of the year?

Yes. Thanks for the question. I can take that one. So what it's going to take to get to some of the puts and takes on our EBITDA guidance range, it's going to be pretty much about weather and execution in the second half of the year. So the high end of the range would probably require continued strong execution of our maintenance plan and favorable weather conditions to ensure we have fewer interruptions in our operations.

And on the downside, that would be the opposite. If we get interrupted with weather or any of our maintenance costs become higher, that's going to be on the downside. With regards to phasing, as you heard in our prepared remarks, Jonathan and I both mentioned that we've got a bit of a phasing shift in OpEx, some of the maintenance programs that we were expecting to carry out in Q2 shifted to later in the year. and we expect to pick that up in Q3.

Typically, when we get to Q4, it's a bit of a lower phasing on OpEx as weather takes an impact, but we also expect to see possibly some volatility on the actualization of G&A allocations from the sponsor typically around Q4 as well. And that's the reason why we've kept our EBITDA guidance in the same range as the previous quarter. We've kept it flat for the full year.

Got it. And then could you maybe just dive a little bit deeper on the second half volume growth drivers? I understand is an absence of kind of weather and maintenance-related headwinds, but curious if there's anything else specifically given a little bit of a stronger third-party volumes that we've seen on gas in particular?

It's Jonathan. Yes, I think in terms of the phasing of volume, as we've -- we had always said that we expected the second half of the year to be higher -- some of that is just, as Chevron sets up its own drilling program and optimize, you can have normal phasing in terms of you have wells online, addition of course, Chevron has talked about on the laterals, increased productivity. So all of that will continue to come through in the second half of the year. But really, the volume growth that we had was really planned and just part of normal to phasing.

As Mike said, the way you can kind of think about the year is really continued volume growth quarter-on-quarter from this point forward, at least 5% growth into the second half of the year. That will drive revenues quarter-on-quarter up into the third quarter. As Mike said, OpEx is going to be, they expect to kind of basically increase as we defer from maintenance, things like the end of the third quarter.

So that gets into kind of flat with higher revenues and higher OpEx. And then in the fourth quarter, that we'll have higher revenue and expect OpEx to be at least flat or lower, so driving higher EBITDA into the fourth quarter and then keeping our full year guidance. So just really phasing on the volume side, nothing -- of course, we had good third-party volumes this quarter on gas side, opportunities like that continue to exist. So that would all be upside.

Our next question comes from John Mackay with Goldman Sachs.

Jonathan, you touched on this a little bit, but Chevron also made a point of bringing it up on their call just in terms of the efficiency gains they are seeing in the basin. Anything you can kind of walk us through what you're seeing on the ground and to the extent that you're starting to see kind of initial results maybe any commentary you can share about how to frame up the production growth outlook from here?

Yes. Look, I think anything on production growth is really more a question for Chevron. What I can say from the midstream side, and certainly, those efficiencies are helping in terms of certainly maintaining production. Chairman did mention this even at a lower rig count table to maintain production. -- that volume kind of expectation of approximately 200,000 oil equivalent per day that underpins our guidance. going forward. We've talked about in the past as they drill a lot our laterals that obviously you have less wells to be able to achieve similar volumes. And so that helps us in terms of our CapEx.

And as we've talked about -- we're highly capital efficient, leveraging our historical investment and now even more capital efficiency to be able to get the same volume throughput, if you will. And then as we said, looking forward, again, we're not expecting necessarily production growth per se, consistent with what Chevron has talked about on their side, really expecting, as we talked about our guidance, a lot of that is inflation escalation as you go forward.

And so that's really kind of driver. And some OpEx, David, we are continuing to see synergies that ever seen that acquisition, we're seeing that hemp-to as well, and that's certainly coming through in our OpEx. That's part of what we're seeing in terms of OpEx savings as well. So I'd say, look, it's -- I think would say early days because we're still now a year into the merger acquisition of paste Chevron, but certainly from the midstream side, we're seeing the ability to maintain that production even at lower rig counts and seeing big comp becoming from our point of view, less important as Chevron can really maintain that production level going forward.

I appreciate that the real answer. I want to ask one follow-up, and I understand there's probably not a ton you can say here, but also made a point of mentioning on the call, just a review of kind of their broader midstream strategy in the basin. Is there any kind of context or perspective that you guys are able to share at this point?

Sure. No, I think, look, that one's really mentioned in the context of just Bakken and getting to know the Bakken and the production efficiencies and optimizing that we just talked about. Look, from our side, we're focused on execution of our plan. leveraging the sort of investment to drive free cash flow generation and really producing results like we saw in this quarter.

Our next question. Our next question comes from Doug Irwin with Citi.

I wanted to start with the EBITDA margin this quarter. You hit 85%, which is well above your 75% target and realize there are probably some onetime cost benefits this quarter. But if I look back, it's been quite some time since you've even been below 80%, I think. So just wondering if that target is starting to look a bit conservative today or if there's maybe an expectation of converging back towards that over time.

I'm glad you noticed the strong performance on our margin. It is extraordinary that we are managing to keep a very healthy margin at this quarter. You're right, there are some smaller adjustments that were recorded as credits this quarter. They are relatively minor, but they did help the margin. But the main driver, as I mentioned in my earlier remarks, is phasing of OpEx that shifted across to Q3 and Q4. But while we continue a pretty strong trend of excess of 80%, we're comfortable in maintaining our 75% margin target. It is what we expect on the long term. But we'll enjoy the greater than 80% margins in the meantime. But we're not intending to change our guidance just yet.

Got it. And then maybe just a follow-up on capital allocation. You didn't do a buyback this quarter. And activity has been a little less ratable here despite the free cash flow outlook remaining pretty strong. So just curious kind of how you're thinking about buybacks versus debt paydown and if you kind of have an ultimate target of where you expect to trend relative to that 3x long-term leverage range you've talked about?

Yes. No, thanks, Doug. There is no change to our guidance that we issued in December on our financial plan there. We will use some of the excess adjusted free cash flow to pay down debt as well as perform returns of capital to shareholders. And you saw that in March with the $60 million share repurchase from the public NR sponsor. And in this quarter, we paid down $87 million against the revolver. And we've guided $280 million of excess adjusted free cash flow for this year as a target. So we've got some capacity left to do further shareholder returns of capital or debt pay down.

But I'd say that the Board evaluates this mix of paydown and return of capital during the year and throughout the year, and that's part of their consideration when they evaluate this. And so while we do multiple share buybacks or returns of equity per year, it is ultimately a Board decision. With regards to our longer-term view on leverage, right now, we're at 3% -- I mean 3x leverage, and we expect that to go lower. We're not using any new debt to fund any share returns or share buybacks rather or debt is going to stay in absolute terms, the same.

But then as we've indicated, we'll use some of that adjusted free -- excess free cash flow to pay down some of that debt. So that will drift lower. And then we're guiding an increase in our EBITDA. So the trend will be that the debt ratio will go lower. By 2028, we're expecting to get down in the region of about 2.5x. That's what the guidance would indicate. We don't expect to go much lower than that. But there's no absolute level of debt that we're aiming to try and achieve, but it will -- we do expect it to go lower than 3x.

I'm not showing any further questions at this time. And as such, this does conclude today's presentation. We thank you for your participation. You may now disconnect, and have a wonderful day.

Good day, ladies and gentlemen, and welcome to the First Quarter 2026 Hess Midstream Conference Call. My name is Kevin. I'll be your operator for today. [Operator Instructions] 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.

Thank you, Kevin. Good morning, 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.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; and Mike Chadwick, Chief Financial Officer. I'll now turn the call over to 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'll 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 in unit repurchase on the public and our sponsor. And 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 volumes.

Consistent with our annual guidance, we continue to expect volumes to grow through the rest of the year, excluding the impact of planned maintenance at TGP 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's capital program. In the first quarter, we safely brought online the second of 2 new compressor stations after completing it in the fourth quarter of 2025. In the first quarter, capital expenditures were $10 million, seasonally lower than the fourth quarter of 2025 and 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 long laterals, which reduces well connect CapEx for Hess Midstream, we have now reduced our 2026 estimated capital expenditure by 1/3 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 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 easily provide returns to our shareholders through growing distribution and incremental share repurchases, while simultaneously continuing to reduce our debt leverage.

With that, I'll hand the call over to Mike to review our financial performance for the first quarter and guidance.

Thanks, Jonathan, and good morning, everyone. Today, I'll 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 cost 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 of 2026 capital expenditures were approximately $10 million, significantly lower than in the fourth quarter of 2025, a severe winter weather limited activity. Net interest, excluding amortization of deferred finance costs, was approximately $53 million, resulting in adjusted free cash flow of approximately $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 2026, we expect net income to be approximately $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 in 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 in 2026, approximately flat at the midpoint compared with 2025. As Jonathan mentioned, our cash position is strong and notable among our peers 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. So this concludes my remarks. We will be happy to answer any questions. I will now turn the call over to the operator.

[Operator Instructions] Our first question comes from Jeremy Tonet with JP Morgan Securities.

This is Francine on for Jeremy. 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 year-end or into 2027 that we can derive from this.

Look, if you look at what's been happening with CapEx for us, really since the end of last year, we've really been reducing CapEx as we are approaching the end of our infrastructure build-out, which has been really years in the making, as we continue to build out our strategic footprint in the Bakken. CapEx was low in the first quarter. That was really, as I mentioned, due to really restricted activity due to the weather as well as seasonal dynamics that's 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 really nothing in terms of changing strategically, the kind of downsizing, if you will, of our guidance this year from $150 million to approximately $100 million is really rightsizing our CapEx to account for things like upstream efficiencies like longer laterals, which as I discussed, can have the effect of reducing well connect CapEx for us. So that's very positive. And really, if you reflect on that, it's really just an extraordinary business model. That with the lower CapEx that we are spending, we're really going to make significant free cash flow that supports, of course, our 5% targeted distribution growth as well as incremental returns of capital to our shareholders, like the shareholder the share repurchase we did this quarter as well as simultaneously being able to do debt repayment?

That's helpful. And I would just like to touch a bit on kind of the third-party outlook here and whether you've had any changes to that since the Middle East conflict has been ensuing.

Sure. In terms of third parties, I mean nothing, I would say, in terms of major macro changes. We did have some additional third-party volume in the first quarter, as I mentioned, that was really some additional throughput from other midstream providers. And that really highlights, as we said in the past, optionality that we have in our system that allows flexibility for others to be able to utilize it during operational challenges that they have.

We're still targeting 10% third-party volumes, and that's incorporated into our guidance and any additional third-party volumes would be upside, not seeing anything dramatic, just a normal, like I said, third parties coming to you utilize optionality in our system, but nothing -- no major changes due to macro environment at this point.

One more before our next question. Our next question comes from John Mackay with Goldman Sachs.

Last call, you guys spent some time talking about a little bit of evolution on the balance sheet side, thinking about lower leverage over time. I'm just wondering, were a quarter later now, if you've had some time to kind of refine that and be able to kind of longer-term leverage target you want to put out there relative to the kind of distribution growth and maybe some buyback cadence you've talked about?

Yes. No, I can talk to that. And there's -- and thanks, John, for the question. There's no change read to our return of capital approach that we outlined in our December guidance now or as we talked about and our Q4 call in February. So we do plan to use a portion of our free cash flow, as we said then, after distributions to pay down debt. And it's a conservative financial strategy that's consistent with the volume profile and -- target for about 200,000 barrels of oil equivalent per day plateau production in the Bakken.

So we'll still have a balanced strategy though. That includes an incremental return of capital beyond our 5% annual distribution growth and we plan to have a stronger balance sheet as a result. So all of that is underpinned, obviously, by the MVCs that we have out to 2028, and they continue to provide some significant downside protection. And we're still aiming for about $1 billion of free cash flow after distributions through 2028. And as I said, we'll use that. Obviously, every distribution or every share buyback is approved by our Board, and that will be set by our Board, but we plan to use that for incremental return of capital and paying down our debt. So no change there really.

All right. I appreciate that. Second one, I apologize, it's a little bit in the weeds, but terminals revenue was really strong in the quarter. Just wondering if there's any kind of one-off in there or this new kind of implied rate is the go forward we should think of?

Yes. I think you're reading that right. There is an element of implied rates in there in the terminals. And that's -- as you recall, it's a cost of service rate that gets adjusted every year for our expectation of OpEx, CapEx and any volumes that drives a targeted return on that. So that's part of the reason why you're seeing better stronger performance there is just a tariff adjustment.

Do you mind just reminding us kind of the structure of that contract going forward?

So that goes through to 2033, and it's rebalanced every year as part of a calculation that aims to return a specific like mid-teen return, and it will be based on what we anticipate as the actual volumes, CapEx, OpEx in order to serve that and to generate that return. So the tariffs reflect up and down accordingly. So if we have lower volumes anticipated, then the tariff will go up. And if we have lower CapEx, for example, then the tariff will go down and that's through to 2023.

One moment for our next question. Our next question comes from Doug Irwin with Citi.

I just wanted 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 maybe just talk about some of the drivers you see contributing to that growth in the second half and where there might be some risk to the upside or downside from here?

Sure. Let me just -- let me start. I mean, on the volume side, really, as we said, Q1 is, I'd say, really the low point in terms of volume, would you have planned maintenance in TGP in the second quarter. So that takes out 5 million to 10 million cubic feet per day. Absent that, we would have seen some additional growth into Q2. And then as the year really progresses, obviously, better weather. Chevron continues to do longer laterals, so you'll start to see that pick up as those completions get completed later in the year and more wells come online. So that will also drive some additional volumes as well as we continue to grow through the year.

So no change to our overall guidance. And yes, that's about 8% on the EBITDA basis increase in the second half and really it's going to be driven by just really the flow of cadence, if you will, of volumes as we kind of come off this low point related to weather, get through this maintenance in second quarter and then continued volume growth from there?

Understood. And then my second, just maybe on the broader growth outlook beyond '26. I mean we have Chevron gene to plateau in volumes in the Bakken around that 200,000 barrels of equivalent level. But you seem to kind of keep squeezing out more free cash flow from the business. I'm just curious if there's any appetite to pursue inorganic opportunities or maybe any other ways to kind of put some of that free cash flow to work from here? Or should we really just kind of expect the buybacks and debt repayment to be the primary focus from here?

Sure. Let me start, I'll then turn it over to Mike. You can talk a little bit about capital allocation. But I think it's a good opportunity to really reflect that if you kind of look around -- there's been a lot of changes around us for the past year or 2. And here we are 9 to 10 months after the acquisition of Hess by Chevron. And really, I think so much at Hess Midstream remains the same. In terms of where we are now, as you mentioned, Chevron targeting approximately 200,000 barrels of oil equivalent per day while continuing to optimize the development plan -- that really -- that development plan underpins our volume guidance and EBITDA growth. And remember with that EBITDA growth, really driven by inflation escalates and reduction in CapEx.

While also Chevron continues to bring lessons from other basins to the Bakken, like longer laterals, workover optimization and increased chemicals to improve productivity, we're also benefiting from that along the lateral, for example, obviously, make the wells economics by decreasing the breakeven. But also, as I talked about, impact has been given a positive way by reducing our well connect capital requirements as less wells are needed and that's really the driver of that free cash flow.

So our financial strategy continues to be the same, 5% distribution growth can be achieved even at MVC levels and significant obviously, free cash flow. So with all the things that have changed around us, we continue to have all the elements of visibility, consistency, shareholder returns and balance sheet strength. They've always been our hallmark. And so with so much changing around this, we're continuing to execute our strategy, focused on operating our assets safely and reliably and executing our financial strategy.

So all that says a lot remains the same in terms of looking at bolt-on opportunities, we've always said that we'll look at those, but the bar remains high relative to our existing business model, which continues to be really differentiated relative to others in the sector. Maybe I'll turn it over to Mike, you can talk a little bit about with this higher free cash flow, really a lot of the same in terms of our capital allocation strategy as well.

Yes. No, thanks, Jonathan. I think you summarized it pretty well. I think what I'd add to that is, obviously, as we think about our that EBITDA leverage target. We don't have a specific target in mind, but we will naturally see our 3x current debt leverage drop as we continue to grow EBITDA without increasing the absolute level of debt. And as we -- that will naturally delever us, but with some portion of our free cash flow after distributions that we'll use for debt payment, we'll see that delever even further.

But what I would say is that with our current guidance out 2028 and with the ambition to continue to do some shareholder return of capital, then the math would not support us getting really done far below 2.5x leverage by 2028. So that gives you a bit of a range as to where we're expecting our leverage to sit in the longer term through 2028. But as Jonathan said, it's steady as she goes. We are pretty good from a cash position. And we look forward to rolling out the next 3 years with some good coverage with our MVCs and with transparency to our volume throughput driven by Chevron's targeted 200,000 barrels of oil per day planned production.

One for our next question. Our next question comes from Praneeth Satish with Wells Fargo.

So beyond the drilling and completion efficiencies that Chevron has highlighted in the Bakken, are there any other longer-term costs or structural opportunities or changes that you and Chevron are working towards that could show up in your business. Maybe put differently, as your capital intensity comes down, are there scenarios where some of those savings kind of flow back to Chevron through alternative commercial structures or anything like that?

Well, what I would say is, look, in terms of efficiencies and optimization, those are all really win-wins. I gave an example of a lot of the laterals, which reduced the breakeven, obviously, increased number of wells available economic to drill and then also, as I said, reduces our capital and makes it just all efficient, all around. In terms of the contract structure, if that's what you're kind of alluding to there, look, just a reminder, 85% of revenues are fixed fee. That continues together with the cost of services, Mike mentioned on the terminaling and water gathering that continues through the end of 2033.

So really including this year, another 8 years, that contract structure provides Hess Midstream with visibility and consistency. As I mentioned, 2 of our hallmarks of what we've always been part of. So look, before the 2033, there's no contractual mechanism to change the task to renegotiate the contract. There's also governance guardrails including the need for special approval, including at least one of the independent directors to prevent any notable action by Chevron. Initially, of course, they're just normal conflicts committee process for any proposed contract changes. So look, right now, we're focused on working with Chevron in terms of optimizing operationally to really continue to help develop the Bakken in just the most optimized way possible.

Got you. Now that makes sense. It seems like a win-win here. Maybe just a clarifying question on terminals. So you mentioned it's a cost of service contract. It stepped up this quarter. It was quite a large step-up, I guess, when we kind of translate that to EBITDA. And so just to be clear, is this kind of the Q1 run rate? Is that something that we can assume for the balance of the year kind of going forward?

Yes. I think it will be -- it is based on both the tariffs and also what throughputs we had now Q1 I'd say, was a little bit of an impacted quarter because of the weather. And so we'll see how that plays out when we get into more stable territory in Q2, Q3 and the rest of the year. But yes, I think a part of that is obviously the step-up in the tariffs because of the cost of service formula. And so I wouldn't say that I would extrapolate completely on the Q1, but definitely, that's going to be a factor.

Yes. Look, the only thing I would just say on terminaling also, as Mike explained the rates not you to repeat that. But you do see more third parties terminaling one-off, can have some variation quarter-to-quarter because that's a place where people can just come up and do short-term terminaling kind of lockup, so to speak, or short-term arrangements.

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

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2025 Hess Midstream Conference Call. My name is Gigi, and I'll be your operator for today. [Operator Instructions] 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.

Thank you, Gigi. Good morning, everyone, and thank you for participating in our fourth quarter earnings conference call. Our earnings release was issued this morning and appears on our website, 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; and Mike Chadwick, Chief Financial Officer. I'll now turn the call over to 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 financials.

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. For 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 returns 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 the first quarter of 2026, we expect lower volumes across our systems as severe winter weather has continued through January and into the start of 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 Bakken, we continue to expect 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 million 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 returns 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.

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 seasonable 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. And 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 the first quarter of 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 the first quarter of 2026 to increase relative to the fourth quarter of 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 $1 billion 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 Instructions]

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

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 3x leverage being the optimal level for Hess M. I'm just curious, is that still the right way to think about it? 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?

Can I take that one, Jonathan? So we plan to use a portion of our future 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 3x leverage, so we will expect to naturally delever below the 3x in the next few years. Our EBITDA will grow, but 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 3. As we said in our December guidance release, we're also funding incremental shareholder returns from 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 will enable both the paydown of debt and further distributions back to shareholders. I don't know, Jonathan, if you want to add anything there?

I don't. That's great.

Understood. 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 as the impact to Hess M 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 barrels of 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 just based on the discussions you've had with them?

Sure. Okay. So on the third party, really no change to our outlook there, still expecting 10% on average across oil and gas. Of course, quarter-to-quarter, that could have some variability. 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 were able to provide additional optionality for third parties to be able to additional routes, alternative routes to get to Northern Border as well as optionality for other takeaway. So from time to time, we may see a little bit more, sometimes a little bit less. But on average, we expect to continue to see 10% third parties 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 barrels 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 through 2028 as well as reduced capital spending that supports our free cash flow growth over this period is also consistent with that plan. So no change there expected, and we're continuing to work with Chevron to work through the optimized development program and optimize our volumes as well.

Our next question comes from the line of Jeremy Tonet from JPMorgan Securities.

This is Elias on for Jeremy. Just 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?

Sure. Let me just start and say that 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 has laid out. That growth in terms of EBITDA is really driven by -- we have 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 the result in reduced capital as we go from our -- 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 '27, '28. So those are really the drivers of the growth. And I think it's important as we think about this long term and the business plan 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 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's driving that 10% free cash flow growth through 2028. We have distributions that have continued to target to grow at 5% per share annually, fully funded by free cash flow and able to achieve that growth even at MVC levels. And we have significant free cash flow distributions -- free cash flow after distributions 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 continued opportunities for optimization as well as 95% MVC revenue protection this year in 2026 and 90% MVC revenue protection in 2027. So we've talked a lot about changes as a result of the transition, but I think it's important to highlight that we continue to have the elements 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.

Got it. That's great color. 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 how low that could get.

Mike, do you want to start?

Yes, sure. So in the first quarter, we're expecting CapEx, as I said in my remarks, to be lower than the fourth quarter. And we've guided $150 million for 2026 and $25 million of that is for completing the compression and gathering pipeline build-out. And then we've got about another $125 million for the gathering systems and well connects and maintenance. We've guided that in 2027 and 2028, we expect to be about $75 million, if not lower. And this is a trend that is following the reset that we said earlier about 2026 following the rigs coming down from 4 to 3 from Chevron, and it's consistent with that plan. Jonathan, I don't know if you want to add any further color around that.

Yes. The one thing I would just add is 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, 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 -- has allowed us to optimize our upstream and midstream investments. So we don't overbuild and overinvest. And that -- 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 one of the things, just as an example, 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 not only make the wells more economic, so significantly increasing the breakeven, but also, in general, produce essentially the same volume, but with less wells, reducing our well connect capital requirements. So also a very positive effect there.

So all that means that 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.

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

I think a lot of them have been answered. I want to just zoom in a little bit more on the weather piece, though. 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 some of the issues we've seen in past years with power down, et cetera? Or once the weather starts 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.

Sure. Yes. I don't think this is -- you think back a few years ago where we had the significant power lines down across the state, and that really went on for the first half of the year. We're really just seeing significantly extreme cold weather, some snow, but really the cold, which has an impact on our system across the board and so particularly on the gas side. So that, I think, as we do start to see improving weather, certainly, that would be helpful and that 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 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. We have continued contingencies in our forecast and our guidance for the rest of the winter. But certainly, as we come out of the winter, we 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, do you want to just talk about the thing the rest of the year?

Yes. I think as Jonathan said in his opening remarks that we're going to see the first half of the year's volumes lower than the second half. So there will 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. If production were to be lower, we've got 95% covered with MVCs. And that translates into 2027 as well at 90% before getting to 80% in 2028. So there's good protection for any downside. In terms of phasing, as Jonathan described, first quarter, we've been 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.

That's great. I appreciate all the color. Super quick second one for me, just following up on Doug's question, and 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 say, hey, we expect to kind of put some more cash towards that over time and delever as EBITDA grows? I'm just trying to think if you have a new target.

Yes. I think what we're planning to do over the next 3 years with our free cash flow after distributions is just use that to both strengthen the balance sheet by delevering, by paying down debt and including that as part of our fundamental incremental shareholder returns. So it's not a designed level that we want to get to. It's just going to naturally occur that as EBITDA starts to build back up as we don't increase the absolute level of debt and as we include some free cash flow towards paying down debt, our 3% -- our 3x leverage is naturally going to delever.

But there's no specific target we're going to get to. One of the key things that Jonathan has highlighted, obviously, is the free cash flow that we expect to generate over the next 3 years. And that's going to 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 over the next few years, supported by our strong MVC position. Thank you.

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

Good day, ladies and gentlemen, and welcome to the Third Quarter 2025 Hess Midstream Conference Call. My name is Gigi, and I'll be your operator for today. [Operator Instructions].

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.

Thank you, Gigi. Good morning, everyone, and thank you for participating in our third quarter earnings conference call. Our earnings release was issued this morning and appears on our website, 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; and Mike Chadwick, Chief Financial Officer. I'll now turn the call over to Jonathan Stein.

Thanks, Jennifer. Welcome, everyone, to our third quarter 2025 earnings call. Today, I have some brief opening comments and will review our operations, and then I'll hand the call over to Mike to review our financials. In the third quarter, we continued to execute our operational priorities and deliver our financial strategy that prioritizes return of capital to shareholders. We delivered strong operational performance, with gas throughputs increasing from the second quarter despite the impact of localized flooding in August.

Third quarter results benefited from an increase in third-party volumes as our customers navigated Northern Border pipeline maintenance towards the end of the quarter. This provides upside to our results and is a good reminder of the strategic nature of our midstream assets in the Bakken, we also executed a $100 million share and unit repurchase in the third quarter and increased our distribution by 2.4% and or approximately 10% on an annualized basis for Class A share. That included our targeted 5% annual increase for Class A share and a distribution level increase following repurchase that we obtained our total distributed cash on a lower share and unit count.

During the quarter, throughput volumes averaged 462 million cubic feet per day of gas processing, 130,000 barrels of oil per day for crude terminaling and 137,000 barrels of water per day for water gathering. Throughput increased approximately 3% in gas gathering and processing compared with the second quarter. We expect fourth quarter volumes to be relatively flat with the third quarter on lower expected third-party volumes as announced in our September guidance update into law for winter weather contingency and planned maintenance at the Little Missouri 4 gas plant.

Turning to Hess Midstream's capital program. In the third quarter, we safely completed and brought online the first of 2 new compressor stations for the year and expect completion of the second compressor station in the fourth quarter. As announced in September, we have suspended activities on the Capa gas plant and we move the projects from our forward plans. As a result, full year 2025 capital expenditures are now expected to total approximately $270 million. We remain committed to our ongoing strategy, which prioritizes ongoing return of capital to our shareholders, but both excess free cash flow after distribution and leverage capacity relative to our long-term leverage target of 3x adjusted EBITDA.

As we noted in our recent guidance update with the removal of the Capa gas plant from our forward plan, we expect significantly lower capital going forward providing additional free cash flow to support our return on capital framework. Looking forward, we will release guidance for 2026 and our 2028 MVCs after our budget process concludes in December.

With that, I'll hand the call over to Mike to review our financial performance for the third quarter and guidance for the fourth quarter.

Thanks, Jonathan, and good morning, everyone. Today, I'm going to review our results for the third quarter and our financial guidance, and then we will open the call for questions. For the third quarter of 2025, net income was $176 million compared to $180 million for the second quarter. Adjusted EBITDA for the third quarter of 2025 was $321 million compared to $316 million for the second quarter.

The increase in adjusted EBITDA relative to the second quarter was primarily attributable to the following: Total revenues, excluding pass-through revenues, increased by approximately $7 million, driven by higher third-party gas gathering and processing throughput volumes, resulting in segment revenue changes as follows: Gathering revenues increased by approximately $4 million; processing revenues increased by approximately $3 million; total cost and expenses, excluding depreciation and amortization; pass-through costs and net of our proportional share of Little Missouri 4 earnings increased by approximately $2 million, primarily from higher seasonal maintenance and employee costs.

That resulted in adjusted EBITDA for the third quarter of 2025 of $321 million. Our gross adjusted EBITDA margin for the third quarter was maintained at approximately 80%, above our 75% target highlighting our continued strong operating leverage. Third quarter capital expenditures were approximately $80 million and net interest, excluding amortization of deferred finance costs, was approximately $54 million, resulting in adjusted free cash flow of approximately $187 million. We had a drawn balance of $356 million on our revolving credit facility at quarter end. In January, we announced we are targeting annual distribution per Class A share growth of at least 5% through 2027, which is supported by our existing MVCs.

Last week, we announced our third 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 $100 million share repurchase completed in the third quarter. Turning to guidance. For the fourth quarter of we expect net income to be approximately $170 million to $180 million and adjusted EBITDA to be approximately $315 million to $325 million, reflecting scheduled maintenance and lower third-party volumes as discussed in our September guidance release. We are narrowing our full year guidance for net income to $685 million to $695 million and for adjusted EBITDA to $1.245 billion to $1.255 billion, implying EBITDA growth of approximately 10% year-on-year at the midpoint of the guidance range.

Consistent with the suspension of the Kappa gas plants and the removal of the project from our forward plans, we now expect capital expenditures of approximately $270 million and adjusted free cash flow of approximately $760 million to $770 million. With distributions per Class A share targeted to grow at least 5% annually from the higher distribution level, we now expect excess adjusted free cash flow of approximately $140 million after fully funding our targeted growing distributions. We expect continued adjusted free cash flow growth through 2027 to support our targeted annual distribution per Class A share growth of at least 5% through 2027. And financial flexibility for incremental return of capital, including potential share repurchases.

As Jonathan mentioned, we will release guidance for 2026 and our 2028 MVCs after completing our budget process in December. We remain committed to our ongoing strategy, which prioritizes return of capital to shareholders. This concludes my remarks. We will be happy to answer any questions. I'll now turn the call over to the operator.

[Operator Instructions]. Our first question comes from the line of Jeremy Tonet from JPMorgan Securities LLC.

Hi. Good morning. Just wanted to dive in a little bit more on, I guess, Bakken trends here. And just wondering if you could talk a bit on how GORs are trending over time and how you think that projects going forward at this point impacting your business?

Okay, sure. As you know, in historically, has not had increasing GORs because they've had a very active program Chevron now operating 3 rigs, certainly, as an active program that tends to keep lower than in the program where you have less rigs and less activity. But in general, as we've talked about, our expectation is based on the new guidance that we gave out 3 rigs that Chevron is running, we expect to maintain oil to plateau and then gas to increase over time, and that basically is driven by GORs.

Because at this point, we're really at almost full gas capture. So really the trend in gas is really going to be GR driven. So with that, that will really continue to drive growth for Hess Midstream over the long term as gas represents 75% of our revenues.

Got it. That's helpful. And then given that backdrop and not to get too far ahead of ourselves here, I was just wondering if you could provide any thoughts into 2020 beyond how MVCs might be shaping up expectations there, given Chevron moving to 3 rigs as you described there.

Yes. I'd say, look, we're going to finish our development planning here with Chevron, will approve our budget in December, and then we'll give our guidance, including 2026 guidance, but also our 2020 MVC. So we'll just wait until then, it's not too far away.

Got it. Just the last one for me. We've seen some volatility in the share price here. Just wondering if you could provide any thoughts, I guess, on the cadence or approach to buybacks in the future?

Yes, I can talk to that one. And I think as we can see at the moment, our leverage is at 3x. And we guided in September that we would have flat EBITDA in 2026 and then we'd return to growth in 2027. However, we would have significantly lower CapEx, as Jonathan mentioned, that will be an assist to our free cash flow. And then we'll also be able to have our 5% growth on distributions continue. And so we feel very comfortable that we'll have the financial flexibility through 2027 and to continue with our capital repurchase or capital returns policy and any share -- potential share repurchases.

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

Maybe to start on the CapEx outlook. You've talked about kind of expecting significantly lower CapEx over the next couple of years, and I know we're about to get guidance in a month or I think in the past, you've put out $125 million is kind of what you view as more of a base level they'll connect to run rate going forward. Is that kind of the right way to think about the starting point for '26? Or are there maybe still some additional discrete growth projects in the backlog that we should be looking at next year as well.

Sure. Let me start, and then I'll hand over to Mike. I mean, I think in general, as we said, historically, $125 million is our expected ongoing capital. That includes well connects, as you mentioned as well as maintaining third parties at about 10% of our volumes. I think certainly, we said we're going to be significantly lower than the original guidance we had of $250 million to $300 million for '26 and '27.

I think we do have some small growth projects, so it might be slightly above that 125, but somewhere between that $125 million and significantly below the $250 million to $300 million, again, we'll give guidance coming up here. once we complete the business plan, but that gives you at least some kind of a range to think about.

Let me turn it over to Mike. Just anything you want to add there?

Yes. Thanks, Jonathan. And just like I said, just now, I'd just say that the lower capital expenditure that we're expecting that will drive continued growth in our free cash flow will support financial flexibility for incremental return of capital and that includes any potential buybacks.

And just to underline that, that already starts next year, right? So we had expected, as I said, $250 million to $300 million previously in 2026. So next year already, we'll already see the benefit of that lower capital. And so while we had talked about EBITDA being flat, relatively flat next year, and again, we'll give more details in the upcoming guidance but do you expect next year to see growth in free cash flow, and that will provide the flexibility for return on capital as early as next year.

Got it. That's helpful. And then maybe just a higher level one, given some of the changes that the sponsor here. And I realize you can't speak to Chevron, but just wondering if you could comment on how that relationship has evolved now that you've had a few quarters under your belt working with them as your sponsor. And more specifically, just any updated thoughts on how Hess Midstream kind of fits with them their broader strategy here moving forward and how that maybe feeds into your growth outlook and capital allocation from here.

Sure. I'll leave the last part to Chevron. But in terms of how is it going, we're working our way through now integration and it's gone very well. The board -- new board with the new Chevron Board Directors has met obviously several times, and we've approved 2 distribution increases. I think both our base targeted 5% annual increase as well as 2 distribution level increases, 1 this week following repurchase we also approved the share repurchase that we did there in the third quarter. So going really well, really at the Board level, continuing to execute on plan. We're focused on running Hess safely and efficiently focused on capital discipline and continue to execute our capital framework for our shareholders.

So also I would say that as we announced the May were underway for the search for a fourth independent Board member. So going very well, working very well with Chevron. It's a natural fit for us and looking forward to continuing.

One moment for our next question. Our next question comes from the line of Praneeth Satish from Wells Fargo.

Maybe just first, starting on 2026. So you kind of mentioned that it's going to be flat with 2026 EBITDA is going to be flat with 2025. So I guess the first question is, why would it be flat if we're seeing rising gas volumes? Is there something there kind of offsetting that. And then as a follow-up to that, Chevron is reducing the rig count, but I think potentially moving towards longer laterals than what Hess did. So is that kind of baked into that outlook for '26 and '27 kind of moving to longer laterals? Or would you consider that upside?

Sure. I can -- I'll kind of answer both those together. Really early guidance that we gave out recently was really designed to provide a shape for our guidance based on our current expectations after we complete the business plan process in December, we'll provide more detailed guidance for 2026, and that's going to include, of course, a range for volumes as well as EBITDA and other financial metrics as we always do. Of course, that final EBITDA range is going to be a combination of oil and gas volumes rates, including our inflation escalator, OpEx expectations.

And of course, the business plan -- development plan that we get from Chevron will incorporate their expectations in terms of increased efficiencies and productivities, including things like longer laterals, as you said. I think critically, I think I just want to reemphasize what I just said earlier there that we expect continued growth in free cash flow as a capital plan reduces with the removal of the gas plant. So still under any scenario, expecting that continued growth in free cash flow. And again, we'll give more details in a range of outcomes when we give out our EBITDA guidance and our annual guidance after the budget is completed and we finished Board approval in December. Mike, anything you want to add on to that?

No, I think you summarized it well, Jonathan. And I think we will obviously provide the updated guidance after the finalization of the plan in December. But I think, no, we've got a good runway with financial flexibility towards 2027 at the very least, and we'll update when we get the 2028 MVCs.

Got you. No, that's helpful. And then I guess based on your discussions, recent discussions here with Chevron, they move to a 3-rig program. Are there any indications that they might further reduce the rig activity and go to 2-rigs? Is that kind of in some of the conversations you're having? And then just conceptually, if that were to happen, should we roughly think about oil maybe declining a bit and gas volumes to be flat with rising GORs? I understand maybe that's not your base case, but just trying to frame downside risk.

Sure. I mean I think let's just start with the base case. As you said, currently, shares running 4 rigs as they said they expect to release the rig in the fourth quarter. As we've said, 3 rigs, again, oil plateau in 2026 and gas will continue to grow at least 2027 and then we'll give again more update when we give out our guidance for 2016 and then through I think it's important to note, Chevron, just last week, you announced and said in the call that their goal is to maintain a plateau at 200,000 barrels of oil equivalent per day for the foreseeable future. That model works really well for the Hess Midstream model where we're focused on long-term execution.

And at that level, 200,000 barrels oil per day that provides ongoing free cash flow generation and ongoing financial flexibility. Also would highlight, of course, as we've always said, the 5% dividend growth can be delivered even at MVC levels. So in terms of our return of capital program, that's always kind of at the base and that's well protected. And above and beyond that, we at 200,000 barrels of oil equivalent per day, we expect ongoing free cash flow that can generate incremental financial flexibility on that. So I don't want to speculate beyond that. And -- but again, we'll give more details on our current plan and expectations when we finish our budget and development plan here in December.

One moment for our next question. Our next question comes from the line of John McKay from Goldman Sachs.

I want to pick up on that last question a little bit. Can you just -- I know you guys go through this every year, but can you just remind us how the 2028 MVCs will be set again effectively what kind of plan does Chevron kind of need to walk you through and it's just interesting because it's going to be our first time doing it with them. Just curious if that's going to differ at all from the Hess process before.

Yes. There's no change to the process. The process is really baked into the commercial agreements that we have now with Chevron. And the process is essentially they deliver to us their development plan through the end of the term of the contract. We develop a system plan, which is really the infrastructure required to develop that plan. And then essentially, the MVC is set at 80% of the third year of that development plan. So that's really no change. It's a very mechanical type process. Obviously, we work together to put together that development plan and system plan together with the goal of optimizing the Bakken, that's a win-win and in everyone's best interest. But in terms of the process of the mechanics of a MVC, that's really the process that's defined in the commercial agreements, and that hasn't changed at all.

That's helpful. And then maybe just one clarification. I think if we go through what you guys have been talking about before, you guys are pretty comfortable, I think, arguing that the 200 a day run rate that Chevron wants to flow. That can be hit on the 3-rig program. So the 4 would have put you, I guess, decently about that. Is that the implication?

Yes. I think what I would say is, and you could see that in our previous guidance before we updated it. That was based on a 4-rig program, and we had growth in both oil and gas and the gas being a function of the oil growth and obviously associated gas you're going to have growth in gas plus then just GOR is increasing as well. So then now under the current plan, you're really seeing oil plateau and gas continue to grow. So yes, the implication there is that previously in 4 rigs because of the efficiencies and productivities that has now, Chevron has been able to achieve, they were able to achieve what they're able to get historically at 4-rigs, they were able to now get a 3-rig and continuing to run at 4-rigs would have really taken you above that goal of plateauing a 200,000 BOE per day.

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