Prepared remarks
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 include maintenance at LM4 and completing maintenance work that has shifted to the second half of the year. Complementing our operational execution, we continue to find efficiencies across our assets through 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, representing 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 terminaling, 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 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, with higher revenues and volumes 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.
Questions and answers
(Operator instructions) Our first question comes from Jeremy Tonet with JPMorgan.
It's Vrathan Reddy on for Jeremy Tonet. I appreciate the comments in the prepared remarks and the full year guide, but I'm curious if you could talk to some of the puts and takes that could drive the high end versus low end of the guidance? And then on the cost side, how do 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 is 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. On the downside, that would be the opposite: if we have weather interruptions or 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. 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 it's an absence of weather and maintenance-related headwinds, but is there anything else specifically given the bit of stronger third-party volumes we've seen on gas in particular?
It's Jonathan. Yes, I think in terms of the phasing of volume, 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 optimizes, you can have normal phasing in terms of wells coming online. In addition, of course, Chevron has talked about 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 planned and part of normal phasing. As Mike said, you can think about the year as 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 increase as we defer maintenance, with some activity toward the end of the third quarter. So that leads to EBITDA being flat with higher revenues and higher OpEx. Then in the fourth quarter, we expect higher revenue and OpEx to be at least flat or lower, which will drive higher EBITDA into the fourth quarter and keep our full-year guidance intact. So it's really phasing on the volume side—nothing extraordinary. Of course, we had good third-party volumes this quarter on the gas side; opportunities like that continue to exist, and that would be all 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 in terms of the efficiency gains they are seeing in the basin. Anything you can walk us through about what you're seeing on the ground and, to the extent that you're starting to see initial results, any commentary you can share about how to frame up the production growth outlook from here?
Sure. Yes. Look, I think anything on production growth is really more a question for Chevron. What I can say from the midstream side is that those efficiencies are helping in terms of maintaining production. Chevron did mention this even at a lower rig count: they can maintain production. That volume expectation of approximately 200,000 barrels of oil equivalent per day underpins our guidance going forward. We've talked about how they are drilling longer laterals, so you have fewer wells required to achieve similar volumes. That helps us in terms of our CapEx. We're highly capital efficient, leveraging historical investment and now delivering even more capital efficiency to handle the same volume throughput. Looking forward, we're not necessarily expecting significant production growth per se, consistent with what Chevron has talked about. A lot of our guidance is driven by inflation escalation as you go forward, as well as some OpEx savings. We are continuing to see synergies from the acquisition, and we're seeing those come through, which contributes to OpEx savings as well. I'd say it's still early days—we're about a year into the merger/acquisition of Hess into Chevron—but from the midstream side, we're seeing the ability to maintain production even at lower rig counts, and completion efficiencies are becoming less critical as Chevron can maintain those production levels going forward.
I appreciate that real answer. I want to ask one follow-up, and I understand there's probably not a ton you can say here, but they also made a point of mentioning on their call a review of their broader midstream strategy in the basin. Is there any context or perspective that you guys are able to share at this point?
Sure. No, I think that comment was really mentioned in the context of the Bakken and the production efficiencies and optimization we just discussed. From our side, we're focused on execution of our plan, leveraging our invested infrastructure to drive free cash flow generation and produce results like we saw this quarter. Beyond that, we remain focused on reliable operations and delivering shareholder returns; any broader strategic commentary is something that Chevron would address on their side.
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 I realize there are probably some one-time cost benefits this quarter. But if I look back, it's been quite some time since you've even been below 80%. 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 85% 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. The main driver, as I mentioned in my earlier remarks, is phasing of OpEx that shifted across to Q3 and Q4. While we continue a trend in excess of 80%, we're comfortable maintaining our 75% margin target as a long-term expectation. 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 I'm curious how you're thinking about buybacks versus debt paydown and if you have an ultimate target of where you expect to trend relative to that roughly 3x long-term leverage range you've talked about?
Yes. No change to the financial plan we issued in December. We will use some of the excess adjusted free cash flow to pay down debt as well as return capital to shareholders. You saw that in March with the $60 million share repurchase from the public and our sponsor, and in this quarter we paid down $87 million against the revolver. We've guided approximately $280 million of excess adjusted free cash flow for this year as a target. So we have capacity left to do further shareholder returns or debt paydown. The Board evaluates the mix of paydown and returns throughout the year, and that's part of their consideration when they make decisions. We have done multiple share buybacks or returns of equity per year in the past, but ultimately it's a Board decision. With regards to our longer-term view on leverage, right now we're at about 3x leverage, and we expect that to go lower. We're not using new debt to fund share returns or buybacks; debt in absolute terms will stay the same, and as we use excess adjusted free cash flow to pay down debt, the ratio will drift lower. We're guiding an increase in EBITDA, so the trend will be lower leverage. By 2028, the guidance indicates getting down to around 2.5x. We don't expect to go much lower than that, and there's no absolute single debt level we're trying to achieve, but we do expect the ratio to decline from current levels.
I'm not showing any further questions at this time. As such, this does conclude today's presentation. We thank you for your participation. You may now disconnect, and have a wonderful day.