Yahoo Finance

Jonathan Stein

Thanks, John, and good afternoon, everyone. We continue to execute a financial strategy that prioritizes return of capital to shareholders with a demonstrated track record of differentiated shareholder returns. Since the beginning of 2021, we have returned $1.95 billion to shareholders through accretive repurchases. In addition, through the combination of our 5% targeted annual distribution growth and 10 distribution level increases following each repurchase, we have increased our distribution per Class A share by approximately 57% since 2021. As a result, our total shareholder return yield is one of the highest of our midstream peers.
Furthermore, our leverage of approximately 3.1 times adjusted EBITDA is one of the lowest among our peers, highlighting our differentiated ability to deliver significant shareholder returns while also maintaining balance sheet strength. In January, we announced that we expect to generate greater than $1.25 billion of financial flexibility through 2027 for incremental shareholder returns, including the potential for multiple unit repurchases per year over this period.
We have also announced that we are targeting annual distribution per Class A share growth of at least 5% through 2027, which is supported by existing MVCs. This week, we announced our first quarter distribution increase that is consistent with this targeted 5% annual growth per Class A share.
Turning to our results. For the first quarter of 2025, net income was $161 million compared to $172 million for the fourth quarter of 2024. Adjusted EBITDA for the first quarter of 2025 was $292 million compared to $298 million for the fourth quarter of 2024. As guided in January, adjusted EBITDA decreased relative to the fourth quarter of 2024 as was primarily attributable to low volumes and revenues, partially offset by lower costs and the annual increase in rates due to inflation.
Total revenues, excluding pass-through revenues decreased by approximately $13 million, primarily driven by lower throughput volumes from severe winter weather during the first quarter as John described, resulting in segment revenue changes as follows: processing revenues decreased by approximately $7 million, and gathering revenues decreased by approximately $6 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 third-party processing fees and lower G&A allocations under our omnibus and employee secondment agreements, resulting in adjusted EBITDA for the first quarter of 2025 of $292 million.
Our gross adjusted EBITDA margin for the first quarter was maintained at approximately 80%, above our 75% target, highlighting our continued strong operating leverage. First quarter capital expenditures were approximately $50 million. And net interest, excluding amortization of deferred finance costs, was approximately $51 million, resulting in adjusted free cash flow of approximately $191 million. We had a drawn balance of $128 million on our revolving credit facility at quarter end.
Turning to guidance. For the second quarter of 2025, we expect net income to be approximately $170 million to $180 million and adjusted EBITDA to be approximately $300 million to $310 million, reflecting higher volumes and revenues, partially offset by seasonally higher maintenance costs. We also expect CapEx to increase in the second and third quarters, consistent with seasonally higher activity levels.
For the full year 2025, we are reaffirming all previously announced guidance and expect net income of $715 million to $765 million and adjusted EBITDA of $1,235,000,000 to $1,285,000,000. With total expected capital expenditures of approximately $300 million, we expect to generate adjusted free cash flow of $735 million to $785 million. With distributions per Class A share targeted to grow at least 5% annually, we expect excess adjusted free cash flow of approximately $135 million after fully funding our targeted growing distributions.
For the remainder of 2025, we expect growing adjusted EBITDA in each quarter, consistent with increasing volumes. As implied by the midpoints in our guidance, we anticipate adjusted EBITDA in the second half of the year to be approximately 11% higher relative to the first half.
In summary, we are very pleased to have delivered additional incremental return of capital to Hess Midstream shareholders and look forward to a visible trajectory of growth in our operational and financial metrics that underpin our unique and differentiated financial strategy with a focus on consistent and ongoing return of capital to our shareholders. This concludes my remarks. We'll be happy to answer any questions. I will now turn the call over to the operator.

Question and Answer Session

Operator

(Operator Instructions) Jeremy Tonet, JPMorgan.

Elias Jossen

This is Eli Jossen on for Jeremy. Just wanted to start on the Bakken outlook in light of ongoing macroeconomic volatility. Can you just help frame some of the sensitivities for the business and how we should be monitoring those throughout the year, recognizing MVCs are likely playing a role here?

John Gatling

Sure. Yes, I'll touch on it and then I can hand it over to Jonathan. Obviously, in the basin itself, it's very operator dependent. It's going to -- there's a lot of moving parts to the basin. There's a lot of different ways that the programs are being managed by the different operators. From Hess perspective, we've not really seen any change in activity. Hess just reaffirmed the plans to run four rigs for the rest of this year.
We're well above MVC levels. And I would say that from a growth trajectory, we really haven't seen a step change in activity, and we're really not anticipating it in the near term. We do, as you mentioned, we do have MVCs that are established through 2027. We'll also be setting our '28 MVCs later in the fall and early next year. So again, that provides protections. But from our perspective, the activity is still there. And in fact, we're continuing to see the same level of activity in our third-party business as well. So both Hess and third parties remain fairly active. I don't know, Jonathan, if there was anything you wanted to add there.

Jonathan Stein

John, thanks. That was -- what I'd just add is, I think, as a reminder, that one of the hallmarks of Hess Midstream has really been our proven track record of stability and visibility even through volatile periods. That includes, of course, underpinning that is our contracts that have no direct commodity price exposure, that generate our toll boat type revenue include inflation escalators and our operating model, which gives us a 75% EBITDA margin.
Remember, our CapEx spend is relatively low, so only $125 million of ongoing CapEx in our CapEx program. Of course, our low leverage at 3 times EBITDA, one of the lowest in the sector and no near-term maturities. And as John mentioned, of course, our MVCs set through 2027, which was set based on a 4-rig program. And our 5% targeted distribution growth could be delivered even at MVC levels. So we're well positioned for the growth, as John said. No change there. We're well positioned to capture that growth, but we're also well positioned for stability during a volatile period.

Elias Jossen

Got it. That's great color from both. And then I guess just thinking about the volumes in excess of the MVCs, just maybe the split there, third parties, where you see those volumes right now? And any color you can provide on performance against the MVCs would be great.

John Gatling

Yes. And just as a reminder, the MVCs are set at approximately 80% of the nomination. So we're much closer to the nomination and continue to expect to see the volume growth over the longer term. As far as Hess versus third parties, we do expect, over the long term, third parties to represent approximately 10% of our total volume. So if Hess is continuing to grow by proxy, the third parties are growing essentially at the same rate since we kind of expect that to be in that 10% range.
We're constantly looking for opportunities to capture more volumes. I think with our strategic footprint, we're able to capture offset well pads that may be operated by others. Those are always things that enable us to actually bring additional volumes in the system. And in fact, in the first quarter, oil outpaced our gas slightly, and it was a result of those kind of offset well pads where we were actually able to capture third-party volumes that were recently brought on in the first quarter.
So that's -- it's a nice way to kind of mitigate the portfolio of production that we've got between Hess and third parties, but Hess still represents the lion's share of our production.

Operator

Naomi Marfatia, UBS.

Naomi Marfatia

My first question is on basin rig count. Hess has reaffirmed its 4-rig. But do you think the oil rig decline overall, given the current macro environment? So just kind of curious on your thoughts on how should we think about any rig reduction at this point. And if you could perhaps discuss how Hess rig levels are contemplated and has it changed 2025, 2026 to 2027 outlook at this point?

John Gatling

Yes. I mean, I think as Hess has always done, and I think the midstream does it the same way is we look past short-term volatility, and we're looking for longer-term supply/demand. And we see the Bakken as a premier basin in the US that provides a lot of oil, both domestically and internationally. And so from our perspective, we're continuing to see the rig plan that we've got in place.
As we mentioned, both I mentioned and Jonathan mentioned about our MVCs, we have those protections in place through the contract structure, but we are continuing to expect at a relatively consistent activity level, continue to expect to see oil volumes continuing to grow and then obviously, gas volumes continuing to grow as well with slight increase in GOR.
So overall, I think we're feeling pretty good about the activity. There's obviously some uncertainty in the market right now. But from our perspective, we're seeing stability, both for the Hess-operated production but also the third parties that we're supporting. We're continuing to see approximately the same level of activity going on. The basin rig count floats around quite a lot. It can depend on maintenance activities. It can depend on rig moves. So I wouldn't necessarily, in the short term, read too much into that, but just keep looking at the longer term, and that's kind of how we're looking at it.

Jonathan Stein

Yes. And I would just highlight, just really underpinning what John said is that we did reaffirm all of our guidance for 2025. And of course, that also means we're also reaffirming our forward guidance in terms of growth to '26 and '27, which is all underpinned by the MVCs, which is, again, as I said, can support our 5% targeted distribution growth.

Naomi Marfatia

That's helpful. Maybe another one on buybacks and secondaries. We saw a buyback in January, which was a 4Q push. And I've not heard about any additional buybacks for this quarter. So kind of just curious if there was any change in cadence as it relates to buybacks or secondaries now that GIP is less than 10% of Hess.

Jonathan Stein

Sure, yes. In terms of -- let me hit secondaries first. In terms of secondaries, as we've always said, there's no plan for secondaries. Those are investor demand-driven. To the extent that investors -- there's demand for secondary GIP, we'll evaluate that demand relative to their own disciplined view of value. And then if there is a match, then obviously, they would execute a secondary, but there's no specific plan or cadence for those.
In terms of the repurchases, as we announced in January, we have more than, and as I said in my remarks, more than $1.25 billion of financial flexibility through 2027 and expect to do multiple repurchases a year as we've done in the past. There's no change to that guidance.
Over the past couple of years, we have done about $100 million a quarter generally, but that's not necessarily set in stone. Really, that may vary from time to time, but no change in terms of multiple repurchases per year. And we expect to continue to do that through the rest of this year going forward.

Operator

Praneeth Satish, Wells Fargo.

Praneeth Satish

So Q1, the gas processing volumes were 424 MMcf per day versus the guidance of 455 to 465 due to the weather challenges in January. Can you maybe just share where processing volumes are at currently into April? Have volumes kind of recovered into the range that you're forecasting for the year of 455 to 465? Just trying to understand the cadence.

John Gatling

Yes. I mean, I think the way to look at the volumes, and yes, January and February were very difficult weather challenges. Two things were occurring in that period of time. And we kind of anticipated this in late January, that this was going to be something that was going to affect first quarter performance.
Temperatures were lower for longer. They didn't hit those extreme temperatures that we've seen in the past, but they were sub-zero, minus 20, minus 30 degrees, but the wind played a significant impact in the weather. And that had a direct impact on Hess volumes and ultimately, the throughputs that came through our system.
As far as what we're seeing now, we've seen a very strong recovery. And I think you can, without giving specific second quarter guidance, you kind of know what our reaffirmed guidance is for 2025. You look at where we exited in '24, and you kind of see a trajectory there where there's a nice smooth transition into Q2. So we're feeling really good about coming out of March really strong.
I think the team up in North Dakota has done a great job, both on the upstream and the midstream side to manage that. And well performance has been strong, well delivery has been strong. So overall, I think we're extremely optimistic about the volumes coming into the system and continuing the trajectory that we'll meet our guidance for the year.

Praneeth Satish

Got it. And then secondly, I just wanted to -- I know this isn't the kind of the base case now, but I'm just trying to understand at what oil price would Hess consider shifting down to a three-rig program? It doesn't seem like that's the case, but at the same time, we are seeing oil prices continue to weaken and OPEC taking action here. So just trying to understand how much cushion there is on that 4-rig count.

John Gatling

Yes. I mean, I think maybe I'll hit it and then Jonathan could add any additional context. From our perspective, we're looking past the short-term volatility. And I think Hess has done that over the long term. I mean, Hess Midstream obviously ready to prepare in any kind of extreme price environments. But from our perspective, we're trying to really look through the short-term price volatility.
And again, we do see there being need for the production. We're seeing activity levels remain relatively consistent in the basin. There are some fluctuations for smaller operators. But as we talk to Hess and as we anticipate the development, the economics of these wells just keep getting better, and we're -- Hess is drilling 3- and 4-mile laterals. It's brought on its first two 4-mile laterals. They're very, very strong producing wells.
These lower the breakevens for both 3- and 4-mile wells. So when you start talking about some of the price sensitivity, the ability to execute those efficient longer laterals are lowering that breakeven, which takes some of the relief, some of the pressure off of the price. And again, I think both Hess and Hess Midstream look past short-term volatility to try and maintain that consistent activity level. I don't know, Jonathan, if there's anything else you wanted to add.

Jonathan Stein

No, that was great. I think as you said, we're positioned for growth. There's no change right now and Hess continue to be a firm four rigs, as John said, and all the factors you said. And then as I highlighted earlier, we also have a proven track record of getting through volatile periods as well. So nothing to add.

Operator

Doug Irwin, Citi.

Douglas Irwin

Maybe just one more macro question for the Bakken just in the context of rising GORs. I realize it's still early days and you're focused on the long term here. But just curious if you have a view on what gas growth would look like in the basin, a scenario where you're potentially seeing flat crude production near term.

John Gatling

Yes. I mean, I think the -- when you talk -- relates to the North Dakota pipeline, Justin Kringstad kind of often talks about flatter oil but growing gas. We do see that in our production. I mean, when you look at Hess, we do anticipate oil growth so it's a little bit different than the basin. But on the GOR side, the question you asked about GORs, we do anticipate GORs to increase over time as those wells mature and as the kind of gas makes its way through the production system.
So from our perspective, I think going from about 3, 3.5 Bcf of total gas, growing to the 5 to 6 Bcf of gas in the basin for the macro, which, again, is coming from the North Dakota Pipeline Authority, we see a similar trajectory as it relates to gas growth versus oil. So as the wells mature, we do anticipate GORs increase over time. This is all predicted and something that we've been talking about for quite some time. So we do expect gas volumes to continue to increase over time.

Douglas Irwin

Got it. That's helpful. And then a follow-up just on capital allocation. Can you maybe remind us how much of that $1.25 billion of flexibility you talked about is driven by leverage capacity versus excess cash flow? And I think in the past, you've shown at least a bit of an appetite to temporarily move above 3 times leverage to buy back shares. Just curious how you're thinking about that target today in the context of capital allocation.

Jonathan Stein

Sure. So in terms of the $1.25 billion, it's about half. We've talked about our leverage falling below 2.5 times by the end of 2026 and then through 2027, that gives you about half a turn. So if you work out the growth on our EBITDA based on the guidance we've given through -- trajectory through 2027, you can get about half of the $1.25 billion. And then as our free cash flow grows quicker than our 5% target growth, that also gives us excess free cash flow, and that gives you about the other half. So about half in terms of leverage capacity and the other half in terms of cash.

Operator

John Mackay, Goldman Sachs.

John Mackay

Two quick ones for me. Just first, you mentioned the increasing 4-mile laterals that Hess, as that becomes kind of more of the overall well mix, does that change the CapEx intensity for HESM going forward if we think about CapEx per incremental barrel or something like that?

John Gatling

No, not particularly. Most of the well pad locations, the surface locations are generally set. We are still building some greenfield sites. But I would say, generally speaking, the 3- and 4-mile laterals get placed close to the same approximate location as the 2-mile laterals were. What it ends up doing is it ends up making some of those areas that were a little more marginal, a little more economic. So it may shift the sequence of when wells are drilled.
But as Jonathan mentioned, we're in that $100 million to $125 million of ongoing capital that's related to well tie-ins and we really don't anticipate that being materially different as a result of the longer lateral drilling by Hess.

John Mackay

That's helpful. Second quick one, just going to gas growth in the basin and egress. There's a new residue pipeline kind of proposed out there. Curious, just any thoughts you can share on that? And then maybe just broadly kind of the state of egress across the basin overall on the gas side.

John Gatling

Sure. And when you're talking about the -- are you talking about the Bison takeaway systems?

John Mackay

No, think about the intensity one but curious, Bison's coming sooner, I guess.

John Gatling

Yes. I think Bison is a bit more kind of focused on the residue gas export. I think overall, we obviously work very closely with Hess to make sure that flow assurance is there. We've got all the commitments we need to make sure that we've got plenty of capacity out of the basin.
I do think as gas continues to grow, I think others that maybe haven't been as focused on flow assurance, there could be some additional challenges for them. But as we think about Hess's and Hess Midstream's volumes, we feel like we've got that well taken care of through the export agreements we've got in place. And for the new expansions that are in place, Bison as an example, Hess is a shipper on the Bison express system, and that just adds some additional flexibility to Northern Border and the ONEOK system.

Operator

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