Western Midstream Partners LP (WES) 2022 Q3 法說會逐字稿

Welcome to Western Midstream's post third quarter fireside check. With us today, we have our CFO, Kristen Shults; and our VP of Corporate Development, Jon Greenberg.

Okay, Kristen. So why are we expecting to be at the low end of our previously disclosed 2022 adjusted EBITDA guidance range?

As we look towards the fourth quarter, we expect throughput to increase sequentially across all our 3 products, but at a slightly reduced rate compared to what we saw last quarter. There are some supply chain issues and human capital constraints that our producers are experiencing out in the field. It's not specific to just the private or just the public or the integrated. It is something that we're seeing across the board. But those supply chain and human capital constraints have caused delays in wells coming online. In general, those wells are still coming. It's just at a slightly slower pace. And so it's pushing those wells out to the right just a little bit.

What were the primary drivers of our gross margin per unit in the third quarter? And what are our expectations for the fourth quarter?

Our per Mcf adjusted gross margin for natural gas decreased by $0.03 for the quarter. This was primarily due to decrease in distributions from our equity investments and lower excess natural gas liquid volumes under our fixed recovery contracts in combination with lower natural gas liquids pricing. If you remember earlier in the year, we entered into and converted some of our actual recovery contracts to fixed recovery contracts.

Because of that, to the extent that our plants outperform those fixed recovery percentages, we get to keep those excess volumes and then sell them in the market at whatever commodity prices are relevant at that time. So when we see some of these commodity price increases and decreases, it's going to impact that gross margin uplift that we've been seeing from entering into those fixed recovery contracts. And so that's part of the reason that you saw that decrease per Mcf was fixed recovery contracts in combination with the lower pricing.

This was all partially offset by an increase in the product-based service revenues associated with some utility expense in the Delaware Basin. About 50% of our utility expense, we actually pass back to our producers, and that's portfolio-wide. A portion of that and just depends on the contract is actually included within our adjusted gross margin. And so it funnels into the adjusted gross margin per Mcf metric that we have. As we're looking towards the fourth quarter, I'm expecting that adjusted gross margin per Mcf to decrease for natural gas, partially because of the utility reimbursements we just discussed, we expect in general for our utility expense to come down in the fourth quarter as it gets to be a little bit cooler and pricing is coming down. That will then filter back up into the adjusted gross margin like we just discussed.

Additionally, as we're increasing volumes in the Delaware Basin, we're going to see some increased offload fees. We are predicting at least at this point, forecasting lower commodity prices associated with those fixed recovery contracts. In Q4, I think we'll see some higher distributions from our EMIs still lower than on a full year basis than what we had in 2021, but higher just in the fourth quarter. That plus the decline in the DJ that we've been experiencing and some additional deficiency revenues there. I think we'll see that oil margin creep back up to what we saw really between the second and third quarter.

On the water margin, we saw that rise by $0.04 on a sequential quarter basis. This had a lot to do with contract mix and deficiency revenue. I don't expect that deficiency revenue to continue into the fourth quarter as we're seeing volumes continue to increase in the Delaware. And so I expect that rate to be more in line with what we saw in second quarter and just historically, more of that $0.90 per barrel rate.

Why was O&M materially higher in the third quarter? And what are our expectations for the fourth quarter?

Our O&M expense increased by approximately $22 million in the third quarter. This was because of field level disclosed project costs that are supporting our transformation efforts. We actually talked about this during our second quarter call. We expected this to happen in third quarter. It was about $10 million for that. Our utility costs also increased quarter-over-quarter. From a range perspective, our utilities are about 20% to 30% of our OpEx cost. And so when we saw natural gas prices increase along with just the usage during the summer months, that led to an uptick in the utility costs that we paid.

As we're going into the fourth quarter, I expect that utility cost to decrease, again, more in line with what we had in the second quarter, and the type of transformation costs that we had shouldn't be reoccurring in the fourth quarter. And so I expect it to be more in line with O&M that we saw in the second quarter. With the one exception of as we continue to see increased volumes on our water side, that we'll continue to pay additional surface land use fees. And so that's a variable component that's going into the OpEx that would increase with increased water volumes.

What are our preliminary thoughts and expectations regarding 2023?

As we're looking towards 2023, we expect our current producer forecast to be coming in within the next few months. But overall, we think throughput exit rates are going to grow year-over-year. We're actively managing our supply chain and the impact of inflationary costs, but those cost pressures still look like they're going to be high in 2023, which will play into our OpEx. We're going to receive final budgets over the next few months, we're going to be calculating the annual cost of service rate redeterminations. So that will also impact our 2023 forecast and guidance.

All right, Jon. Obviously, Ranch Westex is a great transaction for WES, in line with our prior messaging regarding our M&A strategy. Tell us a little bit about how the deal came about.

Sure. Thanks, Daniel. The Ranch Westex deal is really a great strategic bolt-on for us that fulfills an immediate need for gas processing capacity in the Delaware so that we can service our customers growth in a really capital-efficient way. And we found that this one was really ideal from a number of perspectives. We've been JV partners with Energy Transfer in this plan for quite some time, and the plant is already connected to our gathering system. So we were already very familiar with the plant.

And through this deal, we really get access to the full capacity of the plant of 125 million cubic feet a day despite the fact that we only paid for 50% of the plant, fully controlling the plant and taking over operatorship versus participating as a nonoperated JV partner really allows us to optimize that processing capacity and to integrate the plant into the rest of our Westex' complex.

Why don't you talk to us a little bit about valuation?

Sure. As far as valuation, we think we were able to purchase the interest for an attractive price that we estimate would be below the cost to build a comparable new plant. And as an added benefit, we get this capacity right away versus having the lead time associated with constructing a new plant. So overall, we think this deal really checks a lot of boxes for us from both a strategic and a valuation perspective.

Obviously, the Cactus deal was well received. How do you view our M&A strategy on our noncore assets on a go-forward basis?

I think our noncore asset strategy is really just consistent going forward. On those assets, we're looking for any ways we can to optimize value, whether it be a sale or other strategic alternative we're flexible. So long as we feel like it's going to deliver value for our unitholders. Within our noncore asset footprint, we still have a significant portfolio of nonoperated JV pipelines. These are very high-quality assets. They're highly contracted, stable assets with very low capital requirements. And so with this portfolio, we tend to look for opportunities to monetize at a favorable valuation that is consistent with the high quality of these assets, and that's what we think we've achieved here on Cactus II.

Specifically with regard to the Cactus transaction, tell us about the background on the deal, how it came about and a little bit about valuation.

Yes. In terms of background, we spoke with our JV partners to see if they would have an interest in purchasing our stake, and they did. And this really seems like a win-win deal for all parties. We think we've gotten an attractive valuation for our interest, which we can then redeploy into other capital opportunities. On valuation, as we would for any transaction, we did a thorough analysis using multiple methodologies, net present value analysis, precedent transactions, public company valuations, and we thought that the valuation screened attractive on all those fronts. And for Plains and Enbridge, they have complementary assets in terms of long-haul pipelines and other infrastructure on the Gulf Coast, where acquiring our interest is beneficial to them and in furtherance of their strategy. So overall, we're really pleased with the deal, and we think it adds a lot of value to our unitholders.

Kristen and Jon, thank you for joining us today. For our listeners, if you have any additional questions, please feel free to reach out to us. Our contact information is located in the Investor Relations section of our website at www.westernmidstream.com.