Western Midstream Partners LP (WES) 2023 Q1 法說會逐字稿

Welcome to Western Midstream's First Quarter 2023 Post Earnings Call Fireside Chat with our Chief Financial Officer, Kristen Shults.

Kristen, can you talk about what we saw from a throughput perspective during the first quarter? Was this in line with our original expectations?

Thanks, Daniel. It was in line with our original expectations. We had just a little bit of variations from what we were forecasting, specifically on the gas side in our other category. Wyoming and Utah had a pretty rough winter, lots of snow, very cold. And so the gas throughput, you'll see is down over about [100] a day quarter-over-quarter. Overall, Delaware Basin has been doing really well, increased throughput on the gas side, on the crude oil side and on the water side relative to fourth quarter.

The DJ is still declining relative to fourth quarter. We expect this to continue. And really, there'll be an inflection point in the back half of this year, let's call it, around third quarter where we'll see this stop at that point. On the crude oil side, the other big difference between fourth quarter and first was Cactus II was sold during the fourth quarter, and so those oil volumes are not in our first quarter throughput numbers.

When we're looking at it from a quarter-over-quarter perspective, what drove the decline in EBITDA?

So on EBITDA, the biggest difference that we have between fourth quarter and first was Cactus II not being in there. So during the fourth quarter, we received $11 million of distributions from Cactus II. And so you just saw basically a step change between Q4 and Q1 as we reset that kind of baseline EBITDA. There was a little bit of margin loss from South Texas, as we discussed last quarter. Also, the weather that we had in Wyoming and Utah, just some reduced throughput and gross margin from those assets as well.

As we look more on the cost side, OpEx was slightly higher, around $7 million quarter-over-quarter. We saw that some of our personnel expenses were a little higher. Maintenance and repairs were a little bit higher. As we head into second quarter and definitely in third quarter, I'm expecting O&M to trend higher, just like it did last year as our utility expenses increase.

Additionally, as we are processing and just moving more volumes from a throughput perspective in the Delaware, that's also going to have an impact on OpEx as well. The other piece that changed quarter-over-quarter was our taxes. The line for ad valorem taxes went down pretty substantially relative to fourth quarter. We reduced the accrual that we had related to 2022 ad valorem taxes because we reached a settlement with the state on those. And so the reduction of that accrual led to a pretty large adjustment for Q1. I would not expect the tax number that you see in the financials for this quarter to be a good run rate going forward. The Q4 number is a much better run rate because of that.

What are our gross margin per unit expectations going into the second quarter?

So as we head into the second quarter, I'm expecting on the gas side for our gross margin per unit to actually trend down some, just as we continue to utilize the offloads in the Delaware Basin, and we're waiting for Mentone III to come online.

On the oil side, I expect that to trend upward just as we are heading into Q2, we'll get some more DJ fees and then as Delaware Basin throughput is growing, that will also lead to a higher gross margin per barrel. On the water side, there was a pretty significant drop from Q4 to Q1. We are increasing the water throughput substantially in the Delaware Basin. As a result of that, we are not recognizing the deficiency revenue like we used to as well as the cost of service rate impact goes into effect on January 1 of the year. And so that actually moved slightly lower this year. You saw the drop between the $0.92 and $0.81. I expect as we go into second quarter for that to tick up slightly just as a result of some changing contract mix in the Delaware Basin.

Okay. Focusing on operations, we announced an additional firm processing commitment from Occidental. Are those newly announced incremental volumes with Oxy additive? And how could they impact our 2023 guidance that was announced last quarter?

Yes. So don't expect any impact from those from a volumetric perspective in 2023 or from an EBITDA perspective in 2023. Those were volumes that we previously saw as interruptible and now they've been moved to firm, and they've also been supported by minimum volume commitments. So it gives us more security and certainty around the future and what that looks like. And then it gives Oxy more certainty that there's a home for those volumes. But it's not a 2023 impact as it relates to volumes or EBITDA.

What it may impact and what we're taking a look at right now is our capital and our free cash flow guidance for the year. We're looking at the processing stack. We're looking at what's available and what are the different options for that, and we'll get back to everyone in due time around processing needs and then the capital requirements and obviously, the free cash flow impact from that too.

Do you expect Oxy to need additional firm capacity above this level in addition to the 800 million a day that they've already committed to in the past year? If so, would that drive an additional plant?

It's a great question. So this answer is really just going to depend on what the future tightness of the Basin looks like. I mean as you can tell with all of our commentary, Mentone III, we're still expecting that to come online at the end of this year, and it's going to be pretty full as soon as we bring it online.

So our system is obviously running pretty tight. The Permian in general is pretty tight. When you see producers sign up for firm capacity like this, they want to make sure that they've got a home for their volumes because of that tightness on individual systems and in the Basin itself. And so as you look out into the forecast and really just as forecast change, that's when you'll see producers possibly change how much firm capacity that they need and take on additional capacity. So it's something where you just have to let a little bit of time play out. And we obviously have had great commercial success right now, and we hope that continues into the future.

Focusing on the balance sheet and returning capital to stakeholders, we executed several capital markets transactions in the quarter that increased our liquidity position and improved our debt maturity profile. Can you elaborate on those transactions a bit?

Yes. This was a terrific quarter for us from a finance perspective. We returned back to investment grade with the upgrade from Moody's. In March, we had a bond offering of $750 million and at the same time, extended our revolver out to 2028 with $2 billion of capacity on that revolver. In fact, we used some of the bond proceeds to pay off the balance that was on the revolver itself. So really proud of what the finance and treasury team has done this quarter to shore up liquidity for the company and keep us in great financial health as we're looking into the future.

We executed fewer unit repurchases in the first quarter. Is that something investors should expect to continue on a go-forward basis?

So as we've discussed in the past, we view our buyback program, utilizing that in an opportunistic fashion. And so I think what you've seen us do is in periods where it makes sense for us to use some of that $1.25 billion program that we have outstanding when we see market conditions that present themselves that look favorable for us to go out there and buy some of those units, we've really kicked it into high gear and other times where we've been a little bit slower on that. And so I think that's what you've seen over Q1. That's what we're going to continue to do with that program. As I just mentioned, we've got about $750 million left on that. That runs until the end of 2024.

Kristen, 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, westernmidstream.com.