Key Takeaways:
Hess Midstream LP boosted its full-year adjusted free cash flow forecast by 20 percent at the midpoint, signaling that operational efficiencies from its sponsor Chevron Corp. are allowing the company to reduce spending while accelerating shareholder returns.
"With the second compressor station online, and reflecting Chevron’s move to longer laterals, which reduces well connect CapEx for Hess Midstream LP, we have now reduced our 2026 estimated capital expenditures by a third to approximately $100 million," Jonathan Stein, Chief Executive Officer, said on the company's first-quarter earnings call. "Hess Midstream LP remains a leader in shareholder cash returns with one of the highest free cash flow yields across our peer set."
Despite a sequential decline in quarterly net income and revenue due to severe winter weather, the company generated adjusted free cash flow of $237 million, a 14 percent increase from the fourth quarter of 2025. First-quarter net income was $158 million and adjusted EBITDA was $300 million, both impacted by lower throughput volumes early in the quarter. The company's stock rose 3.67 percent on the news.
The improved outlook provides Hess Midstream with approximately $280 million in excess adjusted free cash flow for 2026 after funding its distribution growth. Management plans to use the excess cash for additional shareholder returns and debt repayment, projecting leverage will fall from roughly 3.0x today to near 2.5x by 2028.
The sharp reduction in the 2026 capital budget to about $100 million, down from an initial $150 million, is the primary driver of the revised cash flow guidance. Stein attributed the savings directly to upstream efficiencies, particularly Chevron's strategy of drilling longer laterals in the Bakken shale. This approach requires fewer well connections for the same level of production, directly lowering capital needs for Hess Midstream's gathering infrastructure.
The company's financial strategy now pairs a targeted 5 percent annual distribution growth with incremental capital returns. In March, Hess Midstream executed a $60 million share and unit repurchase. It also raised its distribution by 2 percent sequentially, which it said translates to an approximate 8 percent annualized increase for Class A shareholders.
Underpinning the company's financial stability is a contract structure where 85 percent of revenues are fixed-fee. For its terminaling and water gathering segments, cost-of-service contracts extend through 2033, providing long-term revenue predictability. These contracts feature annual tariff adjustments based on capital expenditures, operating expenses, and throughput projections, designed to deliver a mid-teen return.
"That goes through to 2033, and it is rebalanced every year as part of a calculation that aims to return a specific mid-teen return," said Michael J. Chadwick, Chief Financial Officer. This structure, combined with minimum volume commitments (MVCs) that extend to 2028, gives the company significant downside protection and clear visibility on its earnings trajectory, even as its parent company Chevron targets a production plateau in the Bakken.
This article is for informational purposes only and does not constitute investment advice.
