Executive Summary / Key Takeaways

• Hess Midstream LP operates a critical fee-based midstream infrastructure network in the core of the Bakken Shale, underpinned by long-term contracts with Hess Corporation (HES) and growing third-party volumes, providing stable and visible cash flows.
• Recent performance, including Q1 2025 results, demonstrates continued operational strength and volume growth across segments, translating into robust Adjusted EBITDA margins and strong cash flow generation despite seasonal weather impacts.
• The company is executing a strategic capital program focused on expanding gas gathering and processing capacity, including the new Capa Gas Plant, to support anticipated volume growth through 2027 and beyond, reinforcing its competitive position.
• HESM maintains a differentiated financial strategy prioritizing significant return of capital to shareholders through a growing base distribution (targeting at least 5% annually) and accretive unit repurchases, supported by substantial projected financial flexibility.
• While facing competition from larger, more diversified players, HESM leverages its regional expertise, operational control, and contractual framework to maintain a strong position and visible growth trajectory in its core operating area.

Setting the Scene: A Bakken Midstream Cornerstone

Hess Midstream LP occupies a strategic position within the energy value chain, operating essential midstream infrastructure primarily in the prolific Bakken and Three Forks shale plays of the Williston Basin in North Dakota. As a fee-based, growth-oriented limited partnership, HESM's core business involves gathering, compressing, and processing natural gas and NGLs, gathering and terminaling crude oil and NGLs, storing propane, and gathering and disposing of produced water.

The foundation of HESM's business model is a suite of long-term, fee-based commercial agreements with Hess Corporation, its primary sponsor and customer. These agreements, many of which were renewed effective January 1, 2024, for an additional 10-year term through December 31, 2033, include minimum volume commitments (MVCs) and, for most systems, an inflation-based fee structure capped at 3% annually. This contractual framework provides significant cash flow stability and downside protection, largely insulating HESM from direct commodity price volatility, a key differentiator in the often cyclical energy sector. While commodity prices can indirectly influence producer activity levels over the long term, the MVCs and fee structure offer a degree of predictability uncommon among some peers.

In the competitive landscape of Bakken midstream, HESM operates alongside larger, more diversified players such as Enterprise Products Partners (EPD), Plains All American Pipeline (PAA), Kinder Morgan (KMI), and MPLX LP (MPLX). While these competitors often boast greater scale and broader geographic footprints, HESM leverages its deep regional expertise and operational control within the core Bakken acreage. This focused approach, coupled with its integrated gathering and processing facilities, allows HESM to potentially offer faster project deployment and decision-making tailored to the specific needs of Bakken producers, particularly Hess. However, the smaller scale relative to giants like EPD and KMI can result in higher operating costs per unit compared to their large-scale, highly automated networks. HESM's fee-based model, while providing stability, may also result in higher costs in low-volume scenarios compared to competitors focused purely on volume-driven efficiency.

HESM's strategic positioning is further bolstered by its strong relationship with Hess Corporation, which dedicates substantially all of its existing and future owned or controlled Bakken production to HESM's systems. This close partnership ensures a baseline of volumes and aligns midstream development with upstream activity. The company is also actively pursuing strategic relationships with third-party producers and other midstream companies in the Bakken to maximize utilization rates and capture incremental volumes, aiming for third-party volumes to represent approximately 10% of its total throughput over the long term.

Operational Strength and Strategic Infrastructure Development

Hess Midstream's operational performance is critical to its success, translating throughput volumes into stable fee-based revenues. The company's assets are organized into three reportable segments: gathering, processing and storage, and terminaling and export.

In the first quarter of 2025, the company demonstrated solid operational performance despite challenging winter weather in January and February. Throughput volumes averaged 431 MMcfd for gas gathering, 117 MBbld for crude oil gathering, 424 MMcfd for gas processing, 125 MBbld for crude oil terminaling, and 126 MBbld for produced water gathering. While these volumes were impacted by weather compared to the prior quarter, management noted a strong recovery in March and reaffirmed full-year guidance, indicating confidence in the underlying operational capability and expected production rebound.

The gathering segment, the largest contributor to revenue, saw revenues of $203.6 million in Q1 2025, up from $188.1 million in Q1 2024, primarily driven by higher physical volumes and tariff rates. Operating and maintenance expenses in this segment increased to $50.4 million from $46.3 million, partly due to higher employee costs and depreciation from new assets.

The processing and storage segment generated revenues of $147.8 million in Q1 2025, compared to $139.1 million in the prior-year quarter, mainly due to higher gas processing volumes. This segment includes the LM4 joint venture, which contributed $3.4 million in income from equity investments in Q1 2025. Operating and maintenance expenses rose to $27.7 million from $25.2 million, influenced by higher third-party processing fees and pass-through costs.

The terminaling and export segment reported revenues of $30.6 million in Q1 2025, an increase from $28.4 million in Q1 2024, driven by higher physical volumes and tariff rates. Operating expenses remained relatively flat.

Across its operations, HESM consistently achieves a high gross Adjusted EBITDA margin, reported at approximately 80% in Q1 2025, exceeding its 75% target. This highlights strong operating leverage, where revenue increases driven by volume growth and tariff adjustments flow efficiently to the bottom line.

To support anticipated future volume growth, particularly the expected increase in gas production driven by higher gas-to-oil ratios (GORs) in the Bakken, HESM is undertaking significant strategic capital projects. These include the construction of two new compressor stations and associated gathering pipelines, expected to be placed in service in 2025, adding a combined 85 MMcf/d of gas compression capacity with potential for further expansion. Furthermore, civil construction is planned to start in 2025 on the previously announced 125 MMcf/d Capa Gas Plant, with the plant expected to be online in 2027. These investments are crucial for maintaining high gas capture rates and ensuring sufficient processing capacity to meet growing demand from Hess and third parties through the end of the decade.

While proprietary technological processes are not detailed, HESM's differentiation lies in its strategic investment in and efficient operation of this critical infrastructure. The focus on building out compression and processing capacity ahead of anticipated volume increases, coupled with high system availability and gas capture rates (exceeding 97% in Q2 2024), represents a key operational advantage. This proactive infrastructure development ensures flow assurance for producers, a tangible benefit that enhances HESM's value proposition compared to competitors who might face capacity constraints. The planned Capa plant, for instance, is a direct response to the expected need to exceed current processing capacity in 2027, demonstrating a clear roadmap to support growth.

Financial Performance and Outlook

Hess Midstream's financial performance reflects its stable fee-based model and growth investments. For the three months ended March 31, 2025, total revenues were $382.0 million, up from $355.6 million in the prior-year period, primarily driven by higher physical volumes and tariff rates across segments. Total operating costs and expenses increased to $144.6 million from $133.6 million, mainly due to higher employee costs, pass-through expenses, and depreciation.

Consolidated net income was $161.4 million in Q1 2025, relatively flat compared to $161.9 million in Q1 2024. Net income attributable to Hess Midstream LP, after accounting for noncontrolling interest, was $71.6 million, or $0.65 per Class A share, compared to $44.6 million, or $0.60 per Class A share, in the prior-year quarter. The increase in net income attributable to HESM was influenced by ownership changes following equity offering and unit repurchase transactions in 2024 and 2025, which increased HESM's ownership interest in the consolidated partnership.

Adjusted EBITDA, a key metric for management, increased to $292.3 million in Q1 2025 from $274.5 million in Q1 2024, demonstrating the underlying operational profitability growth. Net cash provided by operating activities was robust at $202.4 million in Q1 2025, up from $185.3 million in the same period of 2024.

Capital expenditures totaled $50.1 million in Q1 2025 on an accrual basis, primarily focused on the compression capacity and gas capture expansion program. This is part of the larger planned capital spending, with full-year 2025 capital expenditures expected to be approximately $300 million, including $125 million for ongoing expenditures and $175 million for project-based investments like the new compressor stations and the Capa Gas Plant. Management expects annual capital expenditures to remain in the range of approximately $250 million to $300 million through 2027, declining thereafter as major growth projects are completed.

Looking ahead, HESM has provided clear guidance and a visible growth trajectory. For the second quarter of 2025, net income is expected to be approximately $170 million to $180 million, and Adjusted EBITDA is projected at $300 million to $310 million, reflecting higher volumes offset by seasonally higher maintenance costs. Full-year 2025 guidance reaffirms net income of $715 million to $765 million and Adjusted EBITDA of $1,235 million to $1,285 million. This implies significant Adjusted EBITDA growth in the second half of 2025 compared to the first half, consistent with increasing volumes.

Volume growth is expected to continue through 2027, with gas volumes projected to grow by approximately 10% in 2026 and 5% in 2027 (including a temporary 10 MMcf/d impact from planned maintenance at the Tioga Gas Plant in 2027), and oil volumes expected to grow by approximately 5% annually over the same period. This volume growth, coupled with steadily increasing fees from inflation escalators and annual rate redeterminations, is expected to drive Adjusted EBITDA growth of greater than 10% in 2026 and greater than 5% in 2027.

With growing Adjusted EBITDA and capital expenditures expected to trend lower post-2027, HESM anticipates growing adjusted free cash flow not only through 2027 but visibly through the rest of the decade. This strong and growing cash flow generation underpins the company's commitment to shareholder returns.

Shareholder Returns and Financial Flexibility

A cornerstone of Hess Midstream's financial strategy is the prioritization of returning capital to shareholders. The company has a demonstrated track record of accretive unit repurchases, having returned $1.95 billion to shareholders since the beginning of 2021. These repurchases have reduced the total unit count and have been matched with distribution level increases, resulting in distribution growth per Class A share significantly exceeding the targeted annual growth rate.

HESM targets annual distribution growth of at least 5% per Class A share through 2027, a target supported by existing MVCs. For the first quarter of 2025, the company declared a cash distribution of $0.71 per Class A share, an increase of $0.0086 per share from the prior quarter, consistent with this targeted growth.

The company expects to generate greater than $1.25 billion of financial flexibility through 2027. This flexibility stems from a combination of leverage capacity relative to its conservative long-term target of 3 times Adjusted EBITDA (with leverage expected to fall below 2.5 times by the end of 2026) and excess adjusted free cash flow generated beyond the targeted distributions. This substantial capacity is intended to be utilized for potential multiple unit repurchases per year and associated incremental distribution increases, continuing the trend of differentiated shareholder returns.

Recent transactions highlight this strategy. In January 2025, the Partnership repurchased 2.57 million Class B Units from the Sponsors for $100 million. In May 2025, the Partnership agreed to purchase an additional 5.15 million Class B Units for approximately $190 million, expected to be funded by borrowings under the revolving credit facility. Simultaneously, HESM entered into an accelerated share repurchase (ASR) agreement to repurchase $10 million of publicly traded Class A Shares, also expected to be funded by revolving credit facility borrowings. These actions underscore the ongoing commitment to utilizing financial flexibility for accretive repurchases and returning capital.

Risks and Considerations

While HESM benefits from a stable fee-based model and visible growth, investors should consider potential risks. The primary risk remains the activity level of Hess Corporation and third-party producers in the Bakken, which is ultimately influenced by volatile commodity prices. Although MVCs provide downside protection, sustained low prices could impact volumes above MVC levels and future development plans.

Operational risks, such as severe weather (as seen in Q1 2025), planned or unplanned maintenance outages (like the Tioga Gas Plant maintenance in 2027), and environmental incidents (such as the produced water release in 2022), can temporarily impact throughput and costs. Regulatory changes, particularly those related to environmental protection and gas capture mandates, could also affect operations and require additional capital expenditures.

Competition in the Bakken, while managed through strategic positioning and contracts, could intensify, potentially impacting the ability to attract third-party volumes or necessitating competitive tariff adjustments. The ongoing proposed merger between Hess Corporation and Chevron Corporation (CVX) introduces uncertainty, although management has indicated confidence in the contractual framework remaining in place.

Financial risks include interest rate exposure on variable-rate debt (though a significant portion is fixed-rate) and the ability to access debt and equity markets on favorable terms, particularly if market conditions deteriorate.

Conclusion

Hess Midstream LP presents a compelling investment thesis grounded in its stable, fee-based business model and strategic positioning in the core Bakken. The company's long-term contracts with Hess Corporation, including MVCs and inflation escalators, provide a strong foundation of predictable cash flows. Operational execution, highlighted by high system availability and gas capture rates, supports consistent performance.

The visible growth trajectory, driven by Hess's sustained drilling program and increasing third-party volumes, is being actively supported by strategic capital investments in critical infrastructure like new compressor stations and the Capa Gas Plant. These projects are designed to ensure sufficient capacity to meet anticipated demand growth through the end of the decade, reinforcing HESM's competitive standing in its operating area.

Financially, HESM is generating robust cash flow and is committed to a differentiated strategy of returning capital to shareholders. The combination of targeted distribution growth and accretive unit repurchases, backed by significant projected financial flexibility and a conservative balance sheet, offers a compelling value proposition for income-focused investors seeking exposure to the Bakken's growth potential. While risks related to commodity prices, operations, and the Hess/Chevron merger warrant monitoring, HESM's contractual stability, strategic investments, and shareholder return focus position it as a noteworthy consideration in the midstream energy sector.