Hess Midstream LP

NYSE:HESM

Earnings Call Analysis

Hess Midstream Posts Strong 2023, Eyes Growth and Shareholder Returns

In 2023, Hess Midstream Partners LP sustained robust performance, achieving 15% growth in gas processing volumes and a notable expansion of compression capacity by about 100 million cubic feet per day. They recorded full-year adjusted EBITDA of $1.022 billion and are maintaining a steady course with expectations of volume and EBITDA growth in 2024. Hess provided guidance for a 10% increase in yearly net income, adjusted EBITDA, and free cash flow through 2026, coupled with a commitment to capital returns. Capital expenditures for 2024 are projected to remain steady at $250-275 million, supporting infrastructure projects poised to meet future demands. Continuing their shareholder-friendly initiatives, Hess Midstream has returned $1.55 billion to shareholders since 2021 through repurchases and increased distributions, all while maintaining a strong balance sheet with low leverage at 3.2x adjusted EBITDA.

Steady Growth and Strong Execution in 2023

In 2023, Hess Midstream demonstrated robust operational performance, with gas processing volumes expanding by 15% year-over-year and compression capacity increasing by roughly 100 million cubic feet per day, boosting gas capture capabilities. The company signaled confidence in future growth with the establishment of minimum volume commitments through 2026, forecasting about 35% growth in gas volumes from 2023 to 2026 and upward revisions of 2025 commitments by an average of 5% across their oil and gas systems, thanks to successful operations and well performance. Aiding this performance, the Bakken net production showed a notable year-over-year increase of 18%, with full-year 2023 averages at 182,000 barrels of oil equivalent per day.

Projected Volume and EBITDA Growth for 2024

Hess Midstream expects a 10% growth in volumes across its oil and gas systems in 2024, primarily attributed to Hess' development activities. They're projecting 2024 gas processing volumes to average between 395 and 405 million cubic feet per day and crude terminaling volumes to range from 120,000 to 130,000 barrels of oil per day. Water gathering volumes are also anticipated to average between 105,000 and 115,000 barrels per day. Adjusted EBITDA for the full year 2024 is estimated to reach $1.125 billion to $1.175 billion, marking a midpoint increase of 12.5% compared to the full year 2023.

Capital Expenditure Strategy Through 2026

For the full year 2024, Hess Midstream plans to invest between $250 million and $275 million in capital expenditures. This investment will be split between ongoing expenses for system maintenance and project-based expansions, including the construction of new gas gathering pipelines and compressor stations. Anticipated to stay consistent through 2026, these capital expenditures are strategic investments intended to boost gas processing capacity by about 125 million cubic feet per day by mid-2027, ensuring the company's capacity meets anticipated volume growth demands.

Financial Outlook Through 2026: Aiming for Double-Digit Growth

In 2023, Hess Midstream posted a net income of $608 million and an adjusted EBITDA of $1.022 billion. Looking forward, the company projects at least a 10% annual growth in net income, adjusted EBITDA, and adjusted free cash flow through 2026. This optimistic forecast is driven by Hess' increasing activity in the Bakken region and buoyed by favorable minimum volume commitments.

Strong Shareholder Returns and Fiscal Responsibility

Hess Midstream underlines its shareholder-centric approach with its fourth unit repurchase transaction in 2023 valued at $100 million. This move not only decreased the total unit count by approximately 20% since 2021 but also led to 30% public ownership consolidation. The company further supported shareholder value by announcing a 1.5% immediate rise in quarterly distribution levels on top of a targeted 5% annual distribution increase per Class A share. Overall, from the beginning of 2021, the company has returned $1.55 billion to its shareholders, significantly enhancing the distribution per Class A share by approximately 40% over the same period. Despite these substantial returns, the company's year-end leverage remained relatively low at around 3.2x adjusted EBITDA, positioning it favorably compared to its peers.

Earnings Call Transcript 2023-Q4

[Operator]

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2023 Hess Midstream Conference Call. My name is Jonathan, and I will be your operator for today. [Operator Instructions] After the speakers' presentation, there will be a question-and-answer session. [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.

[Jennifer Gordon, executive]

Thank you, Jonathan. Good afternoon, 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, 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 non-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 John Gatling, President and Chief Operating Officer; and Jonathan Stein, Chief Financial Officer. I'll now turn the call over to John Gatling.

[John Gatling, executive]

Thanks, Jennifer. Good afternoon, everyone, and welcome to Hess Midstream's Fourth Quarter 2023 Conference Call. Today, I'll review our 2023 operating performance and highlights, provide details regarding Hess Midstream's 2024 plans and outlook through 2026. Jonathan will then review our financial results.

2023 was a year of continued strong performance and execution for Hess Midstream. We delivered significant volume and capacity growth, including 15% year-over-year growth in gas processing volumes, and expansion of our compression capacity by approximately 100 million cubic foot per day, further enhancing our gas capture capability.

As discussed in our guidance release, we've established our 2026 minimum volume commitments, which implies approximately 35% growth in gas volumes from 2023 through 2026. In addition, we've revised our 2025 MVCs upwards by an average of approximately 5% across our oil and gas systems, reflecting strong well performance and delivery by Hess and continued gas capture success.

Now turning to Hess Upstream highlights from their earnings release issued this morning. Bakken net production averaged 194,000 barrels of oil equivalent per day in the fourth quarter, which includes 19,000 barrels of oil equivalent per day from percent of proceeds volumes, which don't impact Hess Midstream throughputs. For full year 2023, Bakken net production averaged 182,000 barrels of oil equivalent per day, which was an increase of 18% year-over-year. Hess also reiterated their plans to continue to operate a 4-rig drilling program in 2024.

Now focusing on Hess Midstream's fourth quarter 2023 results. Gas processing volumes averaged 387 million cubic foot per day. Crude terminaling volumes averaged 120,000 barrels of oil per day and water gathering volumes averaged 113,000 barrels of water per day. During the fourth quarter, Hess volumes continue to grow, while third parties declined primarily driven by delays in new production coming online in the fourth quarter. Third parties remain approximately 10% in our fourth quarter, and we continue to expect them to make up approximately 10% of our volumes in the future. Also in the fourth quarter, with unseasonably good weather, we proactively took the opportunity to accelerate maintenance projects, including routine inspection, recertification of our railcars and construction projects primarily associated with future well connects.

For full year 2023, Hess Midstream's gas processing volumes averaged 367 million cubic foot per day. Crude terminaling volumes averaged 115,000 barrels of oil per day and water gathering volumes averaged 95,000 barrels of water per day, resulting in full year adjusted EBITDA of $1.022 billion.

Turning to Hess Midstream's guidance, in the first quarter of 2024, we expect volumes to be flat with the fourth quarter, reflecting the impact of extreme cold weather, including windchill temperatures below minus 60 degrees Fahrenheit that we experienced in January and to reflect that a significant part of winter is still ahead of us. For full year 2024, we expect volumes across our oil and gas systems to grow approximately 10% compared to 2023, primarily driven by Hess' development activity. We anticipate full year 2024 gas processing volumes to average between 395 million and 405 million cubic foot per day, crude terminaling volumes to average between 120,000 and 130,000 barrels of oil per day and water gathering volumes to average between 105,000 and 115,000 barrels of water per day. We project adjusted EBITDA for 2024 in the range of $1.125 billion to $1.175 billion, an increase of 12.5% at the midpoint compared to full year 2023. The adjusted EBITDA increase is primarily driven by physical volume growth from Hess' development activity.

Turning to Hess Midstream's 2024 capital program, for full year 2024, capital expenditures are expected to total between $250 million and $275 million. Approximately $125 million is allocated to ongoing capital expenditures for gathering system, well connects and maintenance, while approximately $125 million to $150 million is allocated to project-based capital expenditures, including gas gathering pipeline and compression expansions. The activity is focused on construction of multiyear projects, including approximately 40 miles of greenfield high-pressure gas gathering pipelines and 2 new compressor stations, which are expected to initially provide, in aggregate, an additional 85 million cubic foot per day of gas compression capacity when brought online in 2025 and expandable to approximately 140 million cubic foot per day.

Longer term, we anticipate keeping capital expenditures stable at approximately $250 million to $275 million through 2026. This amount includes our planned investment to add gas processing capacity of approximately 125 million cubic foot per day with the construction expected to start in 2025 and come online by mid-2027. The additional processing capacity is a disciplined investment that is underpinned by new MVC showing we'll be at capacity in 2026 and supports expected long-term growth for Hess Midstream from increasing Hess and third-party volumes in the Bakken.

In summary, we're continuing to execute our strategy of making focused low-risk investments to meet basin demands, delivering reliable operating performance and strong financial results. We're well positioned for substantial growth as implied by our guided 2026 MVCs, which are underpinned by Hess' planned development activity and our continued focus on gas capture, resulting in expected sustainable cash flow generation and the potential to continue to return additional capital to our shareholders.

I'll now turn the call over to Jonathan to read our financial results and guidance.

[Jonathan Stein, executive]

Thanks, John, and good afternoon, everyone. Today, I will summarize our financial highlights from 2023, discuss our recently completed nomination process with Hess and provide details on our 2024 guidance and outlook through 2026, including our continued prioritization of ongoing and incremental return of capital to shareholders.

For 2023, we delivered strong results with full year net income of $608 million and adjusted EBITDA of $1.022 billion. Looking forward, we have line of sight to at least 10% annual growth in net income, adjusted EBITDA and adjusted free cash flow through 2026, driven by Hess' growth in the Bakken and underpinned by our MVCs through 2026 that provide visibility to annualize growth in gas throughput volumes of approximately 10% from 2024 through 2026 and continued growth in oil throughput volumes of approximately 10% growth in 2025 and approximately 5% growth in 2026.

We continue to execute a unique and differentiated financial strategy, prioritizing consistent and ongoing return of capital to shareholders. In November, we completed our fourth unit repurchase transaction in 2023 of $100 million that was accretive on both a distributable cash flow per Class A share basis and an earnings per Class A share basis. Following the unit repurchase transaction, public ownership of Hess Midstream on a consolidated basis has now increased to approximately 30%.

Supported by the repurchase, we recently announced a further return of capital to our shareholders through an immediate 1.5% increase in our quarterly distribution level, in addition to our targeted 5% annual distribution per Class A share increase. As we have done in the past, with the reduced share count following the repurchase, this distribution level increase maintains our distributed cash flow at approximately the same amount as before the repurchase.

Since the beginning of 2021, we have returned $1.55 billion to shareholders through accretive repurchases that have reduced our total unit comp by approximately 20%. In addition to the combination of our targeted 5% annual distribution growth and 6 distribution level increases following each repurchase, we have increased our distribution per Class A share by approximately 40% over this period. As a result, our total shareholder return yield continues to be one of the highest of our midstream peers. Furthermore, our leverage at year-end of approximately 3.2x adjusted EBITDA is one of the lowest among our peers, highlighting our differentiated ability to deliver significant shareholder returns while also maintaining balance sheet growth strength.

As announced in our guidance release this morning, we are continuing to prioritize shareholder returns and a strong balance sheet. We have extended our annual distribution per Class A share growth target of at least 5% through 2026 and are expecting greater than $1.25 billion of financial flexibility through 2026 for capital allocation that includes prioritization of potential unit repurchases on an ongoing basis while maintaining our long-term leverage target of 3x adjusted EBITDA.

Turning to our results, for the fourth quarter, net income was $153 million compared to $165 million for the third quarter. Adjusted EBITDA for the fourth quarter was $264 million compared to $271 million for the third quarter. The change in adjusted EBITDA relative to the third quarter was primarily attributable to the following: Total revenues, excluding pass-through revenues, decreased by approximately $3 million, primarily driven by lower third-party throughput volumes offsetting higher Hess volumes, as John described, resulting in segment revenue changes as follows: Gathering revenues decreased by approximately $1 million. Processing revenues decreased by approximately $1 million, and terminaling revenues decreased by approximately $1 million.

Total cost and expenses, excluding depreciation and amortization, pass-through costs and net of our proportional share of LM4 earnings increased by approximately $4 million as follows: higher operating expenses of approximately $2 million, primarily from increased maintenance activity, taking advantage of unseasonably favorable weather, and higher G&A expenses of approximately $2 million, primarily from higher allocations under omnibus agreement, resulting in adjusted EBITDA for the fourth quarter of 2023 of $264 million. Our gross adjusted EBITDA margin for the fourth quarter was maintained at approximately 80%, highlighting our continued strong operating leverage. Fourth quarter capital expenditures were approximately $72 million, and net interest, excluding amortization of deferred finance costs, was approximately $45 million, resulting in adjusted free cash flow of approximately $147 million. We had a drawn balance of $340 million on our revolving credit facility at year-end.

In the fourth quarter of 2023 Hess announced that it entered into a definitive agreement to be acquired by Chevron Corporation. Hess Midstream expects upon consummation of the proposed transaction, Chevron will acquire Hess' 37.8% ownership at Hess Midstream, including its right to appoint 4 directors to the Board of Hess Midstream. Hess Midstream's contract structure remains in place.

Turning to our annual nomination process, as a reminder, 2023 was the final year of the annual rate redetermination process for the majority of our systems that represent approximately 85% of our revenues. The base rate for 2024 was set based on the average of the tariff rate from the year 2021 through 2023, adjusted for inflation. Rates will then be increased each year based on inflation escalator capped at 3%, resulting in steadily increasing rates through 2033. For our terminaling and water and gathering systems that represent approximately 15% of our revenues, we will continue to reset our rates through our annual rate redetermination process through 2033.

Across all systems, the 2024 TAF rates on average were higher than 2023 rates. For all of our systems, MVCs continue to be set at 80% of nominated volumes set 3 years in advance, providing downside protection through 2033. In our guidance release this morning, we provided MVCs for the year 2024 through 2026. As part of the nomination process, MVCs for 2024 and 2025 were reviewed and where required increased, while MVCs for 2026 were newly established based on 80% of the nominated volumes for each system in that year.

In 2024, our MVCs are expected to provide approximately 90% revenue coverage for oil and approximately 85% revenue coverage for gas. Our 2025 MVCs for oil and gas have been increased as part of the nomination process and therefore provide 80% revenue coverage. Our MVCs in 2026 provide line of sight to long-term growth in system throughput. For example, looking at gas processing, the 2026 MVC of 396 million cubic feet per day set at 80% of the nomination level of Hess' expected volumes of 495 million cubic feet per day implies approximately 35% growth in physical natural gas volumes from 2023 levels and utilization of our full processing capacity of 500 million cubic feet per day, supporting the need for potential continued investment in gas processing, as John described.

Turning to guidance for 2024, for the full year 2024, we expect net income of $670 million to $720 million and adjusted EBITDA of $1.125 billion to $1.175 billion. This adjusted EBITDA growth of approximately 12.5% at the midpoint of our range is supported by continued growing revenues from physical volumes growth across all gas, oil and water systems, as John described, as well as stable operating costs even as our system continues to expand, highlighting our strong operating leverage. We continue to target a gross adjusted EBITDA margin of approximately 75% in 2024.

For 2024, with total expected capital expenditures of between $250 million and $275 million, we expect to generate adjusted free cash flow of between $685 million and $735 million and excess adjusted free cash flow of approximately $115 million after fully funding our targeted growing distributions. With increasing adjusted EBITDA, we expect our leverage for 2024 to be below our 3x adjusted EBITDA target on a full year basis.

For the first quarter of 2024, we expect net income to be approximately $150 million to $160 million and adjusted EBITDA to be approximately $260 million to $270 million, including the impacts of extreme cold weather that we have experienced in January. For the remainder of 2024, we expect growing adjusted EBITDA, consistent with increasing volumes across oil, gas and water systems, with seasonally higher operating expenses in the second and third quarters of the year.

Looking beyond 2024, we have clear visibility to volume, adjusted EBITDA and adjusted free cash flow growth that supports our financial strategy. As described, our MVCs provide visibility to growth in oil throughput volumes of approximately 10% in 2025 and approximately 5% in 2026, as well as annualized gas throughput volumes growth of approximately 10% from 2024 through 2026 that represent approximately 75% of our expected revenues. Driven by these growing volumes, together with fees that are steadily increasing based on our annual inflation escalator and maintaining a targeted gross adjusted EBITDA margin of approximately 75%, we expect growth in adjusted EBITDA of greater than 10% per year in both 2025 and 2026. With growing adjusted EBITDA and capital expenditures are expected to remain stable with 2024 levels, we expect annual growth and adjusted free cash flow of greater than 10% through 2026.

In addition, we are continuing to prioritize shareholder returns with a return of capital framework. First, we are continuing to grow our base distribution by extending our targeted distribution growth of at least 5% annually per Class A share through 2026. Second, we have financial flexibility for potential significant incremental shareholder returns beyond our growing base distribution. With expected adjusted EBITDA and adjusted free cash flow growth of greater than 10% annually in excess of our targeted annual distribution growth of at least 5%, we expect to generate excess adjusted free cash flow beyond our distribution, and the leverage is expected to decline below 2.5x adjusted EBITDA by the end of 2025 and to continue below this level through 2026, providing leverage capacity relative to our long-term 3x adjusted EBITDA leverage target.

As a result, with a growing cash balance and significant leverage capacity, we expect to have greater than $1.25 billion in financial flexibility through 2026 for capital allocation that includes the potential for multiple unit repurchases per year through this period and the potential for incremental distribution level increases associated with these repurchases beyond our targeted at least 5% annual distribution per Class A share growth.

In summary, we are pleased to have delivered a strong 2023 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.

[Operator]

[Operator Instructions] And our first question comes from the line of Jeremy Tonet from JPMorgan.

[Jeremy Tonet, analyst]

I just want to start off, if I could, with the storm impact that you guys touched on or the cold weather impact, I should say, for 1Q. If you might be able to provide a little bit more color there on the impact. Is -- was it more on the gas or crude oil side? And I guess, how do you see the basin recovering or your volumes recovering over the course of the quarter, given the extreme temperatures there.

[John Gatling, executive]

Sure. When we have weather impacts like we did in January, it really impacts the entire system. So when you have to bring the wells down, you're impacting oil, gas and water coming off the pads. With the extreme cold temperatures, there were situations where it just wasn't safe to have personnel on the road.

So as an example, if you have to have trucking to get, say, water off of a pad, as an example, you have a situation where the trucks aren't running because it's not safe for the trucking companies to be out there in that -- in those conditions. And for safe operations, you have to just go ahead and shut the wells in. And then along with that, you also have freezing situations where you just have some liquids in the system that gets frozen when temperatures get as cold as it does. We do a lot of winterization as part of our preparation for winter activities. I mean as we all know, it gets cold every year in North Dakota. It snows, and we plan for that. I would say the issue with the January weather was it was extreme. It was very extreme temperatures -- well below -- ambients were well below minus 30 degrees with wind chills of lower than minus 60%. So again, what we've seen is from the Hess side, we've seen a resilient system, both on the upstream and the midstream side, and recovery has been good.

I can't really speak to the broader basin. I think Lynn Helms and Justin Kringstad are talking a little bit about what the broader impacts are across the basin as they may be looking at other operators. But from our perspective, we feel like that the recovery has been good. Having said that, and as I mentioned in my remarks in my script, we are -- we still have further winter ahead of us. So we're trying to be a bit cautious there. Weather has gotten good in North Dakota. It's warmed up quite a lot, and we're recovering from the winter storms, but we also have several months of winter ahead of us that we're still -- we'll still need to manage properly.

[Jeremy Tonet, analyst]

So would you say that your Hess Midstream is back to pre-storm levels? Or how do you see that unfolding at this point, absent further weather events?

[John Gatling, executive]

Yes. I would say that we're close to being back to pre-storm levels. I would say that, again, the recovery on the upstream and the midstream side has been very strong. There's a bit of a lagging effect to taking a system down like that, where you may have additional well work as a result of a storm like that. But overall, I would say the resiliency of the system has been outstanding. So both the upstream and midstream teams have been working very closely with one another, and it's -- the recovery has been strong.

[Jeremy Tonet, analyst]

And then just as far as the longer-dated outlook through '26, quite robust volume growth as you put out there, maybe ahead of what some people are expecting for the basin overall. Do you see this kind of -- Hess Midstream taking market share from others or just kind of specific to your serving Hess and their plants there, especially on the crude oil side, 5% growth through 2026. So curious about that.

And then also, I guess, egress from the basin, it seems like MBPL is kind of pretty full physically there. So wondering, I guess, how you think about gas egress risk and the impact to your forecast there?

[John Gatling, executive]

Yes. I'll address kind of those in 2 parts. So the first part was kind of what's the primary source of the growth. As we've said, we -- approximately 90% of our volume comes from Hess. 10% of our volume comes from third parties. We expect that ratio to stay about the same over the long term. So the bulk of the growth is coming from Hess and obviously, we have quite a lot of sight -- quite a lot of line of sight to the growth trajectory there, and our MVCs kind of demonstrate that, a 35% growth in gas over the 3 years, 10% annualized growth in volumes through the system, through the gas system. So we feel like we've got a good plan. It supports the outlook, and we're continuing to execute against that.

So again, I would say that from our perspective, Hess is planning to run the 4 rigs in 2024, we're going to continue to support that. And as I mentioned, that's including expanding our processing capacity going beyond 2025 and into 2027 when that capacity would become available. And we feel like that, that's necessary to support the development activity.

As far as the export goes, as our philosophy has been over the long term, it's always been ensuring that we have low assurance. And again, I can't really speak to the basin egress. But from Hess' perspective, we're always looking to carefully manage the flow assurance from that. So I would say that both on the crude and natural gas side, we're very focused on maintaining the ability to get the hydrocarbons out of the basin.

[Jonathan Stein, executive]

And Jeremy, I think just to underline a point that you made in your question, which is robust growth through 2026. And I think as John and I both pointed out, with the MVCs implying gas at 495 million cubic feet per day, really right at our capacity in 2026. And then you add 125 million cubic feet a day of incremental processing, that really implies that we really see robust growth, not only through 2026, but really, whatever your assumption is on volume growth after that, really through the rest of the decade. And that means that we're not only going to be able to continue the EBITDA growth and the volume growth and the free cash flow growth that we see through '26, but really have visibility to -- really that continuing well beyond 2026 and really through the rest of the decade. So really just a robust plan based on all the factors that John said.

[Operator]

And our next question comes from the line of Brian Reynolds from UBS.

[Brian Reynolds, analyst]

Appreciate the prepared remarks about the evolving situation at Hess Midstream sponsor level with the potential change of ownership to Chevron and also a GIP to Blackstone. While I know it's a little too early to probably assume broad assumptions of what the sponsors may or may not do, kind of just curious if you could talk about the implications to the Board around the change of sponsor control, and then perhaps through the lens of Hess Midstream's financial flexibility as outlined in the long-term outlook. Can you perhaps talk about the opportunity set to buy back from sponsors going forward as these deals close? Or if we should be thinking about anything outside of that in terms of M&A as it relates to financial flexibility as well.

[Jonathan Stein, executive]

I think in terms of the -- with regard to the Hess-Chevron pending merger, we don't have any additional information to share on the merger other than what I already said in my script, which is that Hess will have Hess' 37.8% ownership and the right to appoint their 4 Board seats. As a reminder, the total Board is 4 Hess, to be Chevron, 3 GIP and 3 independent directors. And as we said, Hess' contracts remain, in place as well as the dedication.

On the GIP side, there's no change to the fund that holds the Hess Midstream investment. There's also no changes expected to GIP's investment operating approach or even to the investment team involved with Hess Midstream. So we're not expecting any changes there as well.

[Brian Reynolds, analyst]

And then maybe just to follow up on kind of the long-term outlook in the Bakken. With the cost of service arrangement moving to fixed fee largely going forward and Hess Midstream being much more of a stand-alone midstream company relative to its inception. Can you talk about how Hess M is thinking about anything strategically different than in the past as whether it's pursuing third-party volumes? I think you alluded to the third party volume mix should stay roughly the same. Could that change over time?

And then when you approach these processing expansions, how do you approach them a little bit differently in 2027 than the past? Are you still getting kind of guaranteed MVCs to support those volumes? Anything there in terms of future capital investment would be helpful.

[John Gatling, executive]

Sure. I would say that from an overall operational perspective, we really -- our strategy remains unchanged. I mean I think we're -- our primary customer is Hess, and we're staying focused on that priority for sure. We're always looking to pick up additional incremental third-party volumes to fill any [ OLEG ] in our systems. We're going to continue to operate under those -- that kind of strategic direction.

As we add additional processing capacity, we are looking at what additional third-party volumes are available in the area. As you know, especially north of the river, so north of the Missouri River is kind of our stronghold, and that's where Hess has significant development remaining. We -- as we've done in the past, we're going to continue to build out kind of a standard modular philosophy tightly integrated with our system. A lot of the future development is in that kind of north of the river west area, and we have a really good understanding of that area and are well positioned to support Hess and third parties there.

So from an overall strategic perspective, really transitioning from cost of service to the fixed fee period, nothing really changes strategically from our perspective.

[Jonathan Stein, executive]

And I think as I really had highlighted there on the question before, I think the business model that we have and the financial strategy model that we have is really unchanged and really unique and differentiated as we go forward, in the sense that we have the volume growth that we've talked about, which is visible to our MVCs, as we talked about even beyond that, and all that growth really being captured with stable capital levels in the $250 million to $275 million level that includes the necessary investment to capture that growth. So that means with growing EBITDA and stable capital, that means we'll continue to grow our free cash flow and that free cash flow is growing greater than our targeted distribution level, which means we're also building free cash flow after distributions, as well as leverage capacity relative to our long-term target.

All that is supporting just through 2026, the $1.25 billion that we talked about, which gives us capacity for potential ongoing multiple repurchases per year for that period. And on a longer-term basis, you can see how that model really has the potential to just continue with the existing investments that we're making, really driving growth on stable capital, but with continued volume growth, continued EBITDA growth and therefore, continued free cash flow growth.

[John Gatling, executive]

And Brian, just to build on that a little bit. And you know Justin Kringstad has talked about this several times from the North Dakota Pipeline Authority. They are forecasting gas growth somewhere from the 3.5 Bcf growing up to near 6 Bcf by mid-2030. So as Jonathan mentioned in the prior response to the earlier question from Jeremy and then also kind of adding into this, there definitely is going to be opportunity for further growth and that will support the infrastructure, but also, as Jonathan mentioned, sets us up strong from a financial perspective as well.

[Operator]

And our next question comes from the line of Doug Erwin from Citi.

[Douglas Irwin, analyst]

My first one is just on capital allocation. We assume a similar size and cadence to the buybacks moving forward, even with the increased financial flexibility guidance you've given today. And then just curious if there's a point where it might make sense within your strategy to look at other potential uses of capital, whether that's more organic growth like some of the projects you've just talked about, or maybe even some potential M&A opportunities.

[Jonathan Stein, executive]

Sure. Well, in terms of the repurchase program, really, as we did this past year, we expect again to do multiple repurchases per year, as -- start -- including 2024 through 2026. So don't expect a change in that program utilizing the capacity, both the free cash flow after distribution -- so the building cash balance -- as well as the leverage capacity that we have. And so with those, as we've done in the past, we'd also expect the opportunity to increase our dividend level as well to be able to maintain the same distributed cash flow that we had prior to each of the repurchases. So no expected change in that.

As we go forward, I think one of the things in terms of the use of our capital allocation, obviously, part of our financial strategy, as we said, is continued prioritization of shareholder returns, including the ongoing 5% growth, but also incremental returns such as the repurchases and associated dividend distribution level increases. But I think we're in such a great position, as we just talked about, that with the existing investment that we have and really stable capital, we can really drive just through 2026, as we've talked about 10% growth in volumes, more than 10% growth in EBITDA, including 12.5% growth in 2024 alone. And then on that stable capital really driving more than 10% growth in free cash flow.

So, of course, we'll continue to evaluate, particularly assets and the like as we've done in the past, but the bar is very high because our existing plan already drives growth and doesn't require significant capital investment, really stable capital to really capture that growth.

[Douglas Irwin, analyst]

And my second question is just around the contract structure. We're into the second term here, which has 10 more years on it, but there's potentially some changes coming at the sponsor level on the Board. Just wondering how you're thinking about the potential for the contract terms to change or be renegotiated, something we received questions on a lot. So really just looking to better understand how you think about your contracted position moving forward.

[Jonathan Stein, executive]

Yes. There's really nothing really to say because, as I said before, there's no change in the contract. There's no mechanism to change the contract. So we don't expect any change in the contract going forward.

[Operator]

And our next question comes from the line of John Mackay from Goldman Sachs.

[John Mackay, analyst]

I want to go back to the growth outlook again and maybe put it -- take it from another angle. Are you guys expecting any higher underlying oil outlook than kind of last time you gave an update? Or is this really just, hey, getting a better sense of what the rising GORs look like, and that's what's driving most of this?

And then on a related note, is the underlying assumption of 200,000 barrels of oil equivalent for your sponsor still kind of the driving bogey there?

[John Gatling, executive]

Yes. So just on the oil versus the gas question. Overall, I would say the wells continue to perform very, very strongly. And I would say that it's not necessarily a new set from an oil perspective. It's just that continued growth in gas. And as I mentioned, you can see it across the basin that gas does tend to outpace on a slight basis, outpace oil. And we're just -- we're kind of looking at that longer term, and we're building that infrastructure that we feel like we need to kind of -- to set that up. So from an overall development perspective, the gas is coming.

As it relates to Hess' plans, we're close to -- I mean Hess, on a net BOE basis is close to 200,000 barrels a day now. So I mean, I think as we think about the 4 rigs for the balance of this year, we're really kind of knocking on that door already. So from our perspective, we're continuing to set ourselves up. We talked about the gas growth of 35% between -- approximately 35% between now and 2026, 10% annualized growth. And then, as Jonathan mentioned, our MVCs are showing 495 million cubic foot a day on an implied production basis, our capacity is 500 million, adding the 125 million a day of additional [ prostate ] capacity kind of gives you an indication of the longer-term outlook from a gas growth perspective.

So again, it's -- we see robust production coming from the wells. We do see gas outpacing oil a little bit, and that's driving a lot of the infrastructure that we're talking about.

[John Mackay, analyst]

And maybe just thinking about that processing plant and kind of cadence of decisions from here, you will -- will you have your 2027 MVCs kind of lock down signed up before you need to make the call on starting to invest in that plant?

[John Gatling, executive]

Yes. So essentially, this year is primarily engineering and 2025 will be when we start long lead purchases and some early construction activity. So as we go through our normal annual process, we'd be setting new MVCs through this upcoming plan cycle that will get walked down going into early next year. So I think the timing of this will set us up where that kind of 3-year rolling MVC will give us a chance to lock that in from a growth perspective.

[Operator]

And thank you, ladies and gentlemen, for your participation in today's conference. This concludes the question-and-answer session, as well as today's program. Everyone, have a great day.