Western Midstream Partners LP (WES) 2021 Q3 法說會逐字稿

Welcome to our third quarter post-earnings fireside chat with Michael Ure. I'm Kristen Shults, our SVP of Finance and Communications here at Western Midstream. And I've got Michael, our Chief Executive Officer.

Michael, let's get started. Great third quarter results. What do you attribute the third quarter beat to?

Thanks, Kristen. The beat was due to a couple of different factors. The first, as we mentioned on the call and in that release, was a $19 million revenue recognition cumulative adjustment that we took during the quarter. In addition to that, however, outside of that onetime adjustment, our O&M expense was $13 million better than it was in the second quarter. We also saw solid volumes across our Delaware Basin that really drove a lot of our outperformance for the quarter.

So even outside the onetime item, we continue to see the incredible benefits of the cost reduction initiatives that we started in 2020. And we continued to perform very well with regards to volumes through our system and being able to generate free cash flow as a result of that.

Can you elaborate on the $19 million reversal of constrained revenue? You said that it's a onetime event. Was it considered in your 2021 guidance?

Yes. So starting at the end of 2020 under GAAP revenue recognition standards, we had to constrain some revenue associated with a third-party contract where there was some uncertainty as to the way that, that contract was going to look going forward. Once we get greater certainty as it relates to that specific contract, which occurred during the third quarter, we actually recognized the cumulative revenue from the start of 2020 through the third quarter of 2021 associated with just that limited amount of uncertainty that existed in the contract.

At the time that we issued our guidance for 2021, obviously that certainty did exist. And so we would not have taken into consideration the likelihood that there would be a resolution during the year, because that was not certain at the time.

Why did volume throughput for gas and crude oil and natural gas liquids decrease for the third quarter relative to the second quarter?

Yes. On the gas side, we eliminated the volumes associated with the Bison treating facility, as we had indicated that divestiture earlier on in the second quarter. And that resulted in about a half of a decline overall in our system. In addition, we had mentioned on the second quarter call that we were expecting to have declines at DJ Basin, which we did see in the third quarter.

On the crude and NGL side, the volumes declined primarily associated with again the DJ Basin declines, which we had mentioned before, as well as reduced volumes in our equity method investments.

On the water side, in light of the fact that, that business is exclusively in the Delaware Basin, we actually did see a meaningful growth rate overall, which just highlights the activity levels and the strong position that we have in the Delaware Basin.

WES made significant progress regarding its unit buyback program during the third quarter. Do you expect to complete this program? And additionally as you continue the program, do you talk to Oxy about their participation in it?

Yes, our dialogue with Oxy is frequent and positive, and definitely we have continued conversations with them. As it sits today, we have about $113 million approximately left on that buyback program.

We're agnostic as to whom we buy back the units from. Ultimately, it's Oxy's decision how and in what way they would like to participate overall. But for us, the important part is about returning capital to unitholders through that buyback.

You've mentioned that you now expect to be above the high end of your EBITDA guidance of $1.825 billion to $1.925 billion, and below the high end of your capital guidance of $275 million to $375 million. Those are both moving in a positive direction relative to your Q2 commentary. What's the reasoning behind this change?

Yes. First, it's strong outperformance throughout the year across our portfolio on the EBITDA side. The team has done an excellent job to put us in this position. And again, that's all despite the fact that we had about a $30 million impact as it relates to Winter Storm Uri early in the year. So I feel really good about our performance thus far this year in that regard.

There's a little bit of capital that's pushing now into 2022. This is really, again if it slides a month or 2, then the resultant impact on that as we get later in the year is that it potentially goes into -- bleeds into '22. And that's what we're seeing on the capital side.

Overall, however, that we've seen a significant positive impact as it relates to our cost efficiencies, both on the EBITDA as well as the capital side. And we're really continuing to realize those benefits in 2021.

With some CapEx pushing into 2022 because of producer activity shifting into 2022, what does this mean regarding the volume expectations?

We're not expecting to have any real impact as it relates to volumes as a result of some of these projects slipping a month or 2. We're always trying to stay ahead of the volumes as much as possible. And so as it relates to the capital, again if it gets pushed back a month or 2, then we shouldn't expect that there is a material impact on the volume side.

How do you expect the cost of service rate redeterminations to impact your gross margin and your gross margin per unit for Q4?

It's too early to tell. As is the case and has been the case since the revenue recognition rules come into play for us, that impact we won't really know until the rate itself is actually finalized. And that usually happens near the end of the year and the first part of next year. So at this point, we don't actually have any specific details or guidance we can give on what we expect that to look like.

As you near your leverage targets, what's the plan for capital allocation? Additional buybacks in 2022? Is there a step change to the distribution?

Yes. All of those are on the table in light of the fact that we have made significant progress on our leverage targets, which is our primary objective. We now have the opportunity to proportionally increase in accordance with the best way that we think we're going to be able to deliver value to our unitholders, whether it's a step-up in distribution, whether it's a step-up in aggregate levels of unit repurchase.

We do have 2 notes that are coming due, so $500 million in the first part of 2022 and about $215 million in 2023. Those, we intend to use free cash flow for. So by definition, we're going to continue to do debt paydowns over the next couple of years. And then the other levers and the degrees at which we pull those levers is definitely a topic that we intend to engage with the Board on as we look to roll out our 2022 guidance in the first part of next year.

Can you provide any more details on 2022? Expectations of where EBITDA would trend, volumes, or even just basin-level expectations?

We don't have any specific guidance that we're comfortable giving at this point, but definitely look forward to providing specific details as we get into the first part of next year. Obviously, you've seen strong activity levels in the Delaware Basin throughout 2021. And so we're on the upswing overall exiting 2021 compared to where we were coming into 2021. So that's obviously a positive in that regard. But the degree to which that is impacting our results and the specific guidance related to that, we look forward to giving you more specific details first part of next year.

Terrific. Thanks for joining us, Michael.

Thank you.

We've got a special [guest] here today. Our Chief Commercial Officer here at WES, Bob Bourne, is going to join us. Bob, do you want to give yourself a little introduction?

I am the Chief Commercial Officer, and I've been at WES for a little over 2 years. And my responsibility includes commercial activities, corporate development, the non-operated JV assets that we have, commercial scheduling. I've been in the industry over 40 years in the midstream and marketing side of the business, and I focus mostly on producer relations and midstream business development.

Well, great to have you here today. Give us a feel for how impactful our commercial team has had.

Thanks for the question, Kristen. Unlike an upstream organization, which I've been in as well, that grows their business through the drill bit or through acquisitions, WES is a midstream provider to these upstream operators. We must have a successful commercial and corporate development team to sustain and grow our business.

To give you a general idea of our commercial success to date, -- by the way, which is supported by all the departments within the organization. The West Texas commercial team alone has added 6 new customers in 2021. And the water team in West Texas as well has added additional 3 third-party customers.

I want to mention the DJ. The DJ commercial team was successful in landing the most important third-party opportunity in the DJ in all of 2021. This was Crestone which is now Civitas, a combination of 3 previous operators in the DJ.

Bob, what's contributing to all the success your team is having?

Well, first of all, I inherited a great group of highly talented individuals. It's a young group, but they energize me. I think that's a good start with any commercial success.

However, it was up to the leadership team to set us on the right path for success. So we started with our separation from Oxy as a stand-alone entity, whereby we now can focus on providing premium service to third-party producers.

Being a stand-alone company by itself is not enough for success. In my opinion, we needed a cultural change. Whereby before, we prioritized our sponsor over third-party business. We can continue to provide high-level service to Oxy and at the same time provide equal importance of service to third-party producers. It's very important for [me] to secure third-party volumes to diversify and increase our producer mix.

The commercial employee talent and energy as well as the assets, great assets, I might add, that we have in place were needed to compete with other midstream companies to grow our business. I believe we have created a competitive culture in the commercial group, and this competitive culture is now spreading throughout the organization. I believe the leadership team would agree with me that the [transformative] competitive company is happening. We need to continue this momentum.

The financial results speak to this progress. WES is in the most competitive basin in the U.S. So we need to be great in every department. Prices go up, prices go down. We need to be very, very streamlined.

Additionally, an important reason for WES' commercial success is our great asset footprint and our competitive advantage of being able to offer third-party [producers] multi-commodity options that's both gas and water. I will say that's very different from most of our competitors. We can leverage one against the other, and we can get both businesses or just one of those.

What excites you the most about WES being a stand-alone company?

Again, I'm very happy with the great people that we have here. I've been in many cultures over 40 years. And I can tell you, it's a high-energy group and a very talented group. This group, really they inspire me, and with -- I have 40 years in the business, and that's very difficult to inspire an 40-year-old guy. But I love seeing all the department's contribution to our strong commercial success.

To give you an example of the great work being done at WES and why we're having commercial success, as I've seen in the engineering and operations groups as well as others. The continued strides of improving our costs, our asset runtimes as well as improving our [efficiency] in the field; without this effort, we could not be winning at this time with the very stiff competition in this area. Because of these competitive areas, effective communication between departments and willingness to improve our cost, processes, asset runtimes as well as optimum commodity price netbacks are critical to compete.

Our third-party producers weigh all these essential variables when selecting a midstream provider. So a great job of improving our netbacks, and we need to continue to improve those netbacks and cost in the field and the efficiencies in the field.

You discussed how we've been able to be more competitive on netback pricing. Can you explain that a little bit more? What do you mean by that?

In this highly hyper-competitive environment with midstream companies with excess gathering capacity; processing capacity; fees, fees have got very low. So netbacks are really, really important to maximize.

And let me give you an idea what netbacks consists of, and I could miss a couple of things. But principally, it's a fee. It's a processing and gathering fee. It's the residue price, what we get on the residue price, which can be very different from one midstream company to the other. The T&F rate, which is transportation and fractionation of the

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is a huge component right now.

And so those are the components that I see in the netbacks. So in a competitive environment, it's incredibly essential to get the best netbacks and grow as a company to compete.

Thanks for joining us today, Bob.

Thank you. I've enjoyed it.

Thanks for joining us for our third quarter post-earnings call. You can find more information about Western Midstream on our website at www.westernmidstream.com, including our contact information at Contact Us. Thank you.