Western Midstream Partners LP (WES) 2020 Q2 法說會逐字稿

Thanks for joining us today. My name is Kristen Shults, the Vice President of Investor Relations and Communications here at Western Midstream. With me, I have Michael Ure, our Chief Executive Officer and President.

With Q2 earnings behind us, we thought it'd be helpful to investors to walk through a few of the questions we've received thus far.

So with that, I'd like to turn it over to Michael for his thoughts on the second quarter.

Thanks, Kristen. WES delivered an excellent outperforming second quarter. Adjusted EBITDA of $514 million, free cash flow of $209 million and we reduced our leverage down to 4.2x. Additionally, we increased our EBITDA guidance to $1.85 billion to $1.9 billion, a $100 million increase from the previously issued guidance. And we reduced capital guidance to $400 million to $450 million.

Where we attribute the success of the second quarter and how we look at the future going forward is, number one, we didn't see as many curtailments as we were expecting at the beginning of Q2. The more constructive commodity price environment as the quarter progressed, as well as the efforts that the team made on the third-party side to incentivize parties to keep volumes on the system allowed us to keep those volumes flowing at a higher rate than what we were expecting. In addition, we greatly benefited from Occidental's outperformance on its Delaware Basin, legacy Anadarko acreage. Furthermore, we have continued to cut costs, specifically OpEx, and realized the benefits of standing WES up as a stand-alone entity. So these factors all contributed to an increase overall in EBITDA guidance.

For the remainder of the year, we do expect there to be a decline overall in volumes going into the back half of the year. Several of our producers, however, has started to indicate that they're going to be completing DUCs on our system. Currently, we expect about 100 of the 250 DUCs to be completed, about half of them coming from third parties, and about 80% of those actually coming from the DJ Basin versus the Delaware Basin.

We're currently working on future periods in terms of activity levels with our producers, as they firm up their 2021 capital plans. We're optimistic and are starting to see some green shoots overall that those activity levels are expected to be higher than what we saw in 2020.

In addition to the EBITDA guidance, we actually provided capital reduction of $75 million overall. And the way that we were able to achieve these capital synergies have included modified and standardized facilities, improved internal collaboration within a midstream-centric workforce, and a focus on capital efficiency and investment lead time overall.

For example, we undertook a facility redesign and procedure review that allowed for a 2- to 3-week improvement of -- in time for West Texas saltwater-disposal wells and compressor stations, and that yielded a 20% cost savings. So we are expecting to be able to achieve similar capital plans with a lot less money.

I appreciate the thoughts on the second quarter. Let's talk a little bit more about the future. Taking into account second quarter results and revised guidance, have you considered increasing the distribution?

That's a Board decision. The Board will -- evaluates on a quarterly basis. We're just 1 quarter out from the distribution cut. We have seen an uptick in activity and are optimistic about the prospects going forward. But it's premature at this stage to be thinking about changes in the distribution policy as we sit here right now. We are focused on the financial flexibility of the company that will be coming from the reduced distribution cut and our ability to pay down debt to get down below the target levels of leverage that we've indicated, which is 4.5x by the end of 2020 and 4x at the end of 2021.

Oxy commented during their call that they plan to maintain Q4 2020 production levels into 2021. Additionally, they are currently running 1 rig and 1 frac crew in the Permian and intend to bring 35 to 45 wells online in the DJ this year. How does this activity level impact WES? Should we expect to see a drop-off in EBITDA for 2020 and further into 2021?

First, we're only a portion of Oxy's overall portfolio. Their declines in the comments that were given were on a corporate level as opposed to an asset-specific level. So when we look at our acreage position, we do not necessarily point to the overall corporate rates for how it might look in our legacy Anadarko acreage positions in the Delaware and the DJ. As you can see from our 2020 EBITDA guidance, we do expect to trend down through the remainder of the year. However, we are now starting to see some DUCs that are going to be completed, again, 100 this year of the 250 that we have backing up to our system. As we sit here today, we do expect activity levels to increase as we go into 2021.

It's important to remember also that 40% of our revenue is generated by third parties, third parties that we've worked very close to find commercial solutions that keep their volumes on our systems overall. In fact, of the 100 DUCs that I referenced earlier, about 50% of those are coming from third parties.

Additionally, Occidental's capital-efficient drilling program on legacy Anadarko Delaware acreage and enhanced collaboration with WES generates much improved cash flow lead times for both parties. And so we're actually seeing, despite the reduced overall high level activity levels, improvements in the volumes that have gone through our system and the lead times necessary in order to get volumes on the system. 65% of our gas throughput and 78% of our liquids throughput is protected by cost of service contracts or minimum volume commitments. And in addition to that, 93% of our gas contracts are fee-based and 100% of our liquids are fee-based, not subject to direct commodity price exposure.

I appreciate that you haven't provided guidance yet for 2021. But what are your views on capital for 2021 relative to 2020?

We don't have formal guidance yet for 2021. We're still in the process of working together with our producer customers, as they develop their budgets and drilling plans going into 2021, which capital budget will be dependent upon. As we look, however, at the third and fourth quarter of 2020, we do view that as being a little bit more representative in a normalized steady state environment for the type of capital spend that we might experience in that environment. We expect to spend around $200 million for the third and fourth quarter combined, which would be an annualized $400 million, which, again, in a normalized steady state environment would be indicative of what we might expect to spend.

Great insight. Let's talk a little bit about leverage now. Are you still targeting leverage of 4.5x by year-end and 4x by year-end 2021?

Yes. We are. All of the actions that we've taken thus far in terms of the debt buybacks that we've made, the allocation of free cash flow to those debt buybacks are in line with the strategy of us trying to reduce our leverage overall. Right now, we sit at 4.2x for WES, which compares favorably to our target of 4.5x for 2020. And we are still working towards that target leverage of 4x as we get through 2021. These targets are necessarily aspirational and are subject to the duration, severity of any downturn that we might experience. Our investment-grade credit rating is important to us, and we believe that we'll be able to achieve those targets despite being aspirational through operational means and continuing efforts around reducing our capital and operating costs overall through the system.

Once you get leverage to your target, what's the plan after that? Do you continue to delever, buy back units, increase the distribution?

I look forward to that time very much. And obviously, it will be a decision for the Board as it relates to the distribution. However, the focus now is on getting us to that point where we would have the financial flexibility to be able to undertake those actions that would be able to accrue to the benefit of our unitholders through accretive actions such as distribution increase, potential consolidation in the industry, et cetera.

Do you still intend to pursue asset sales to aid in reducing leverage? If so, what assets would be considered?

We're still hopeful that we can get to our leverage targets organically. Again, our focus is on being able to achieve that from an operational perspective as opposed to through strategic one. The first 2 quarters of the year are very helpful in that regard. Given the outperformance that we have had thus far this year, it allows us to be a little bit more patient as it relates to asset sales. And so as we look at portfolio optimization within the system, it's going to be very value dependent for us because we're trying to get to the appropriate leverage levels without those. The types of assets that we would potentially look at divesting would be some of the equity interest that we have. And again, that's going to be very value dependent because they likely trade at a premium, and also not owning those interests will allow us to continue to prosecute our business without having impact overall in the customer relationships that we have.

Let's talk a little bit more about the sector in general. How do you feel about consolidation in the industry going forward?

We feel that it's very likely for there to be consolidation within the midstream space. However, we feel as if that consolidation is likely to happen after the dynamic around who their customers are going to ultimately be within that midstream competitor universe, it gets a little bit greater clarity. So any of the consolidation that's likely to happen on the upstream side, as we have seen a little bit of activity in that more recently as well as any of the existing and future bankruptcies that may play out, we believe that, that needs to happen through the system first before you're going to see meaningful consolidation in the midstream space. And the reason is that at that point, the midstream acquirers can have a little bit greater comfort and clarity on who their customer base is going to be related to that acquisition.

November is rapidly approaching. Let's talk about what that can mean for Western Midstream? How much of your throughput is coming from federal lands?

We don't have any oil or water business in New Mexico currently. Around low single digits of our total gas throughput actually comes from New Mexico federal lands, and that's the only area where we have a meaningful amount of exposure to federal lands. Our level of exposure in the DJ and the Rockies, frankly, as a whole, is immaterial. We recently put out in our presentation maps that show where our federal land exposure might be, so you can see in a little bit greater detail where that exposure might come out.

Future development and exposure, obviously, depends on the individual producer and any permits that they have in those areas of operation. But for us, the amount of exposure, again, is just on the gas side, and it is in the low single digits in terms of current exposure.

Thank you, Michael. I really appreciate the time today. Do you have any closing comments?

I do. Thank you, Kristen. I would just like to reiterate how pleased that we are overall with the incredible effort that the employee base has been able to achieve in reducing costs overall through the system and the efficiencies that we've been able to gain by becoming a stand-alone business. The first 2 quarters, it can't be stated enough, the best 2 quarters in the history of the company. The improvements that we've been able to see, the opportunities that we've been able to achieve on the third-party side have been very much above expectations. We're very optimistic that the dynamics that we were able to achieve in the first couple of quarters are going to accrue to WES' benefit very long into the future. We're optimistic overall in terms of activity levels picking up in our areas of operation. There are, in my view, no 2 better areas in terms of subsurface than the DJ Basin where our current assets sit, and the Delaware Basin as well. And so we're optimistic that despite the challenges and headwinds that we've seen as an industry, that WES will be successful as we go forward.

Thank you, Michael, and thanks for joining us today. We hope this conversation provided a little bit more clarity into our business. If you have any further questions, don't hesitate to reach out. My contact information is on our website at westernmidstream.com. Have a great day.