Western Midstream Partners LP (WES) 2021 Q1 法說會逐字稿

Welcome to our first quarter 2021 post earnings chat with Michael Ure, CEO of Western Midstream. Thanks for joining us today.

Let's start off with a question about Winter Storm Uri. Can you break down the $30 million of lost EBITDA from Winter Storm Uri as it relates to throughput or increased costs?

Sure. The majority relates to the Delaware. About half of that lost EBITDA is due to production declines associated with the period when wells were down during the winter storm. And then about half of it relates to OpEx, primarily in utilities. The other amount was related to the blizzards that happened in the DJ Basin shortly thereafter.

Are there any long-term effects from Winter Storm Uri?

No long-term effects. In fact, our -- we feel like our assets and our people performed extremely well during that period, got our assets back online in a very efficient manner. And up to this point, we don't have any lasting effects.

Looking at your first quarter financial results, there was an increase in G&A. What does that relate to?

Sure. So G&A increased by about $7.8 million. $6.9 million of that really related to more onetime-oriented costs related to employee vacation accruals and increased bonus-related contributions under our employee savings plan.

Have your producers' assumptions around activity for the remainder of the year changed since you initially issued guidance?

Not really. So when we actually spent a lot of time with our customers going back into the back half of 2020, there was an indication that activity levels would pick up for 2021 at that time. They established their budgets, and for the most part, have been pretty well in line with what our expectations were at the time.

What we actually saw was that the private producers were being a little bit more aggressive in terms of activity levels relative to the public producers. And despite the improvement in commodity prices, for the most part, everyone has stayed relatively consistent with what those expectations were at the back half of '20, which were the basis of our guidance that we put out at that time.

What's the cadence of EBITDA for 2021?

In light of the fact that we lost some volumes and had an impact of about $30 million of EBITDA, we were actually expecting that there would be a decline in volumes and cash flows that would be staved off around the middle of the year. From that, we would return to growth since the first quarter resulted in those lost volumes and that lost EBITDA, what we're now expecting is actually a quarter or a sequential increase in cash flow and volumes for the remainder of 2021 and into 2022.

With all the work you've been doing around ESG lately, what should we expect you to pursue in the short term? What about the long term?

This is something that we're really passionate about. I'm really passionate about all of the efforts that we've undertaken. There's a lot in ESG. So we're going to talk a little bit about each of those items.

On the E front, our main focus has been that we want to be the most efficient that we possibly can on our existing assets. That includes electric-driven compression, that includes the methane emissions reductions that we're trying to undertake and have undertaken within our existing asset footprint. That includes the high vapor pressure oil system that we have as it sits today. We established the ESG committee to focus primarily on our existing assets and trying to minimize the environmental footprint that those operations actually have. That is our first and foremost focus. We think that there's still some more ground to cover in that regard, some additional improvements that we can make as we focus more on being the greatest stewards overall of our existing asset base.

On the S front, we've actually made some really significant efforts that I'm really proud of that I'm really passionate about as it relates to our community involvement improvement efforts. We established goals that specifically relate to safety. Again, 2 years in a row where we won the GPA Safety Award in the highest category in terms of total volume of hours worked. Very proud of the efforts out there. We know that as we're safer, we improve the lives of the community and the employees that work out there, particularly in the field. We have established goals around safety, both a TRIR and a DART goal, as we highlighted in our call.

In addition to that, we established environmental oriented goals in our total volumetric spill rate category. And then we also added another category to our corporate goals related to social involvement and volunteer work. Thus far, starting from literally ground 0, we have 18% of our population that has already provided some volunteer hours over 1,000 hours across our entire employee workforce. The focus of that involvement is at the local level, so the people will spend time doing work that is specifically related to the communities in which they are involved in. And we feel like that's having a pretty material impact on our people and them feeling good about the improvements that they're making in the lives of the communities that they associate with as well as the communities themselves.

In addition to the social and environmental efforts, we've also made very significant modifications on our governance structure, including the establishment of WES as a stand-alone company. The targets and corporate goals that are specifically related to WES, which weren't in existence before, the overall interaction at the Board level through the various committees that have been created and really a governance framework that I would say is functioning best-in-class in terms of looking out for the best interest of WES overall. So all 3 of these efforts have been significant initiatives that we've started, we're passionate about and expect to continue to make improvements on all of those efforts going forward.

In the prospectus and in the 10-Q, there's conversation around a dispute with Oxy on DJ cost of service rates. Can you provide additional details, including materiality levels?

Yes. We just refer you to the disclosure in the 10-Q as it relates to that. It's a commercial matter that we believe will be resolved and we don't expect that there will be any impact as it relates to that currently -- current dispute.

At the time of the secondary offering, why didn't you guys purchase Oxy shares from them?

Yes, it's a great question. So we have this outstanding buyback program, which we have utilized about $50 million of the $250 million authorized. For us to get Oxy down below their stated goal of 50%, that actually require us to buy double the amount of units that Oxy would have to sell or close to double the amount of units that Oxy would have to sell out in the marketplace because you would reduce both the numerator and the denominator if we were the purchaser of those units.

In light of the fact that we only had about $200 million left remaining under that buyback program and by virtue of the fact that we paid off $431 million of notes during the period, it would have required us to go both above the authorized buyback program amount and require us to draw on the revolver in order to buy back those units. And so for us, the timing just didn't make sense to participate overall. We're actually really pleased in the fantastic unitholders that bought into that program and that our great unitholders to have in our register, and so very pleased about the results of that. But for us, while we obviously have the goal of being opportunistic on our buyback program, the timing related to it and our discipline related to our overall debt targets that we have established from a leverage standpoint, just didn't make sense for us to do that.

If you just do the math on it, as Oxy indicated in their first quarter call, they sold $200 million worth of units in WES. Again, for WES to have the same effect in terms of the percentage reduction of overall ownership for Oxy, it would require $400 million in that range in order to do so. So that would have been $831 million of cash outlay in 1 quarter, would require us to draw on the revolver and would have been a couple of hundred million dollars in excess of what our authorized buyback amount would be.

It doesn't look like you've repurchased any additional units since the year-end call. Will you continue to utilize the program?

We do still think that there is value associated with the buyback program. We previously were executing that under a programmatic structure. As we sit here today, we actually plan to utilize that program on a more opportunistic basis, particularly if we see that there's potential dislocations overall in the marketplace. So we definitely still see that there's value there. We're just -- we're going to focus on it being a more opportunistic program as opposed to a programmatic structure.

For us, it's now a question of what adds more value, accelerating additional debt repurchases or potentially accelerating the buyback purchases in a more opportunistic basis. And so those are levers that we plan on pulling throughout the remainder of the year and likely into the future as well.

In the press release, you mentioned your ability to get to 3x leverage by 2025, increase the distribution by 5% annually and pay off all maturities through 2025. Is 3x leverage your new long-term target?

It's not actually our long-term target. I really look at 4x as our threshold level. We have set out what we expect the targets to be or potential levels to be under the different scenarios. And so for us, it's 4x by year-end 2021, 3.5x by year-end 2022. And then again, an indication that we could get to 3x in 2025. That, by the way, including a 5% annual distribution growth rate and paying off all of our maturities between now and then, the totality of those maturities is over $2 billion of debt to pay off during that period.

And so what this does is this allows us greater flexibility to enhance the overall return profile to our stakeholders as a whole by being materially below 4x. So if we look at 4x as a bit of a threshold level for us, as you get down to 3.5 and 3x, then that just provides enhanced opportunities to be able to provide additional return opportunities to our stakeholders as we get down lower in those levels.

That, by the way, in addition to, again, providing -- were that the path that we go down, a 5% distribution growth over that period of time. Again, that's all subject to Board approval and we'll continue to have an active dialogue with the Board as it relates to both the distribution growth rate going forward as whether as the -- as well as the utilization of additional debt repurchases and unit buybacks or capital outlays that will enhance the overall return profile of the business. But we have now that flexibility to be able to offer all of those alternatives as we get lower and lower into the leverage spectrum.

Should we conclude that if nothing materially negative happens, you'll be looking to grow the distribution by 5% a year?

What we actually have done through the disciplined program that we started out in the beginning of 2020 around debt reduction and improvement in operational efficiencies of the business, reduction of capital, repaying the debt, buying back units. What we've done is we've been able to provide sufficient -- additional capacity under our free cash flow after distribution level to be able to offer up 5% over the next 3 years and not actually change the overall free cash flow after distribution levels materially.

And so as we looked at being able to deliver that back to unitholders in light of that discipline, it just makes sense, it made sense to us to deliver it back to unitholders because of our ability to enhance the free cash flow levels through those methods. As we get much further than that, it will continue to be a Board-level decision as to whether or not that will be the capacity that we will be able to enhance the return to our stakeholders as a whole or if there are through other means. But it is at a great place to be to have already repurchased enough units, pay off enough debt and expect to pay off additional debt to be able to deliver that return to the unitholders without actually materially increasing our free cash flow after distributions. That doesn't even give effect to, again, the free cash flow generation of the company that has been materially improved since we began in 2020.

So we just think that over the next 3 years, the ability to deliver on that because of what we've done makes all the sense in the world. Anything in addition to that or outside of that period, it will be a decision that we'll make together with the Board.

Thanks, Michael, for joining us for today's call. Any closing remarks?

Congratulations, Kristen, on your promotion.

Thank you. And thank you for joining us for our post earnings chat with Michael Ure. If you have any additional questions or would like to speak to Abby Dempsey or myself, please reach out via e-mail or phone. Our contact information is on our website at www.westernmidstream.com. Thank you.