Western Midstream Partners LP (WES) 2022 Q1 法說會逐字稿

Welcome to Western Midstream's First Quarter 2022 Post Earnings Fireside Chat. I'm Daniel Jenkins, Director of Investor Relations of Western Midstream. And with me today is our newly appointed Chief Financial Officer, Kristen Shults; and our Chief Operating Officer, Craig Collins. Kristen, let's dive right into it. First of all, congratulations on your new appointment to CFO.

Thanks, Daniel.

Obviously, a very strong quarter financially. Strong EBITDA performance despite sequential throughput declining slightly. Can you elaborate a little more on some of the drivers behind WES' strong financial performance during the first quarter.

Of course. One thing to remember when you're looking at our quarter-over-quarter EBITDA variance, our fourth quarter had an unfavorable adjustment of $26 million related to the cost of service redeterminations and the revenue recognition impacts from those redeterminations. So that $26 million unfavorable adjustment did not reoccur in the first quarter. We also saw declining volumes across the portfolio, but our contract structure, specifically the minimum volume commitments that we have and the associated deficiency payments helped support the gross margin for the quarter. Our O&M was substantially lower than fourth quarter. Lower utilities, which is very typical for the first quarter, lower equipment rental expense and reduced land costs all helped to reduce the O&M for the quarter. I will say, on a go-forward basis, I would expect that O&M to increase as we're seeing increased throughput throughout the year.

We also saw G&A slightly lower than it was in fourth quarter. And we also entered in and converted some of our natural gas processing agreements from actual recoveries to fixed recoveries during the quarter. When we converted to fixed recoveries to the extent that we are recovering more NGLs than what's contractually required, we take those NGLs and those are subject to commodity price exposure and help the gross margin. So a little bit more commodity price exposure than we're used to during the quarter and helped to benefit the gross margin overall. But yes, very strong quarter. We're really happy with the results, and I think setting us up very nicely for the rest of 2022.

Okay. Craig, I'm going to pivot to you now. Obviously, a huge quarter regarding operational and commercial achievements. Can you talk about the new amendments or agreements with Occidental and ConocoPhillips, maybe some of the nuances of those agreements, the production runway or time line associated with these announcements, and finally, how they factored into WES' increased volume growth rates and financial guidance for 2022?

Thanks, Daniel. Yes, I'd love to talk about these new agreements that we put in place in the first quarter. We're really excited about those agreements and what it does for us going forward and really over a longer period of time. The Conoco agreement is an agreement that we've been working with them on for some time now, and we're excited to have that finalized. And the great thing about that agreement is we're going to be seeing volumes from that agreement here very soon in 2022. So we'll see the effects and the impacts of that and to grow over time. Is that dedication is up to 150 million cubic feet a day of gas. And so we're excited by that new opportunity that we have.

And then on the Occidental side, clearly, OXY recognizes the quality of the resource that they have in the Delaware Basin. And as they continue to grow their development plans, the way those volumes will grow, that will start to be ratcheted in, in 2022, and then throughout 2023, so that by the time we get to the end of 2023, we should see the full impact of that volume commitment from OXY. But these are both great contracts, very meaningful to our business. They provided the underpinnings that were needed in order to sanction the expansion at Mentone.

Speaking of Mentone III, the sanctioning of the new train, obviously, a huge announcement this quarter. Talk about the general thought process behind the sanctioning of the new train at Mentone. Also some of the market factors that were part of this decision that are at play out in West Texas. Can you also comment on how offload agreements play a role in the overall processing story?

Anytime we make a decision to expand one of our gas processing plants, it's a fairly significant amount of capital. And so we want to be very thoughtful around those investment decisions and make sure that we have the underlying commitments that are necessary to support those projects and meeting our target hurdle rates for capital investments, and this does that in a big way. And so as we've thought about what the timing needed to be for this plant expansion, as we've previously articulated to the market, we were first interested in looking for offload agreements in order to defer any of that incremental capital. And we've been successful in securing some processing offload arrangements. Up until here of late, there's been a fair amount of spare processing capacity in the basin. And that really will help bridge that time period during construction of Mentone III, so that by the time we get the plant brought online, we effectively think it's going to be running, if not full, close to full in the early days of operation.

What about the time line to completion? Talk about the current inflationary cost environment and how that is going to affect this project. It seems many investors are focused on the impact that inflation is having on the energy sector.

We anticipate that the plant expansion will be completed and started up by the fourth quarter of 2023. And so that's from where we sit today, roughly an 18-month time frame, and we're very confident in our ability to meet that time frame even despite a lot of the current supply chain challenges that we see out in the market. We've been working with our major equipment vendors and our EPC contractors laying the groundwork for the project and project time line and getting major equipment ordered, which we're in that initial phase right now.

And so as we compare what we're looking at in terms of total project costs relative to, say, the last time we expanded Mentone, which was a few years ago, the costs are up relative to that time period. Obviously, steel prices have trended upward over the last 18 months in a fairly significant way. We do install electric compression at our gas plants. And so this new expansion will be running on electric compression as well. And so with that, there's a lot of electric cabling that's utilized, and the copper and power cabling has moved up quite a bit in price over the last 1.5 years, 2 years.

And then on top of that, I think looking at the labor market, it's starting to tighten up on the construction side. It probably hasn't moved near as quickly as the materials and commodities themselves, but that's also a factor. And based on the contracts that we have in place across the portfolio and the expected volumes that this plant will serve, it exceeded our mid-teen hurdle rate for capital investment.

Okay. We've talked a lot about the Delaware Basin. Let's shift to the DJ Basin for a minute. Talk about the onload announcement with DCP. Maybe some of the benefits to both WES and DCP. How does this affect the general macro environment in the DJ as a whole? And maybe a little update on the overall operating environment in the DJ?

Great question. DJ is a very important part of our portfolio, and we feel like we've got some outstanding assets up there. We are running along with spare capacity at this point given the relative lack of upstream development over the last couple of years. But we felt like in the interim, we have something very valuable to offer, and our neighbors in the basin needed additional processing capacity. We had some spare processing capacity. And we've done business with DCP up in the basin before. And so it just made sense for us to take an additional tranche from them as they had a need, and we had space in our system to be able to handle it. So we're excited by that. It's a firm commitment with a minimum volume commitment underpinning that on a multiyear basis. And so we're excited to roll that into our overall DJ portfolio.

More importantly, we're optimistic that as the permitting process begins to kind of work itself out and producers, operators get the permits that they're looking for from the state, that we're going to see an uptick in activity going forward. And it's going to be really capital efficient activity for us because we have pipe, we have compression, we have processing capacity that's ready to roll, and it's probably just going to be a little bit of well connect capital in order to handle that new volume that we expect to see.

Okay, Kris, I'm going to turn it back to you to wrap it up for us today. One of the real strengths of the quarter in my mind was increased year-over-year exit rate throughput guidance that is clearly helping to drive increased EBITDA and free cash flow guidance for the year. Why don't you talk about some of the drivers behind the higher production guidance and how that positions WES favorably for the second quarter and for the rest of the year and into 2023?

Sure. I think the largest driver that we have behind the revised EBITDA guidance and moving that up $200 million to $2.125 billion to $2.225 billion really relates to activity. We're seeing increased activity on the acreage that we service, both from the public side and the private side. Commodity prices are really helping on that indirect exposure there? And then on the direct exposure side, we obviously, just from prior conversations, have some commodity price exposure in that portfolio as well. So that's also helping. The team remains incredibly focused on cost and working to remain as efficient as we can during this inflationary period, and I think that's going to help from the O&M side as well.

Capital expenditures, we increased by $150 million from prior guidance to $500 million to $600 million (sic - see slide 9, "$550 million to $600 million"). That $150 million delta includes additional well connects for all this producer activity that we're seeing, and really helping to set us up for 2023. We, obviously, when we issued the original guidance, talked about how it was a little higher than expected because we were setting up for 2023. This is just adding incremental to that thought process.

Finally, on the free cash flow, just the delta between the 2, raising the free cash flow guidance up to $1.25 billion to $1.35 billion, showing that $50 million increase to prior guidance.

Distribution guidance is of at least $2 per unit. That remains unchanged. And I think that with the conversation around the enhanced distribution is really where you potentially could see that growth and getting above that $2 per unit. Just seeing how this year plays out as it relates to additional buybacks and where we fall on the free cash flow guidance range.

Thank you, Kristen and Craig, for joining us today. If you have any additional questions, please feel free to reach out to us. Our contact information is on our website at westernmidstream.com. Thanks for joining us.