Western Midstream Partners LP (WES) 2023 Q2 法說會逐字稿

Welcome to Western Midstream's Second Quarter 2023 Post Earnings Call Fireside Chat with our Chief Financial Officer, Kristen Shults; and our Senior Vice President of Operations, Danny Holderman. Let's get started today.

Kristen, can you talk about what WES saw from a throughput perspective during the second quarter? How did this compare to our initial expectations?

Sure. So in the second quarter, we saw an increase portfolio-wide for neutral gas and our crude oil and NGLs. If you remember, during the first quarter, we had inclement weather in Utah and Wyoming. And so that impacted both the natural gas and the crude oil volumes in Q1. So we saw a bounce back of those volumes. And we also saw our equity investments contribute more for the natural gas and the crude oil and the increases in the Delaware Basin as well.

The only stream we actually didn't see an increase in was water, and that was just because of some curtailments that we did working with producers as they were going through their D&C activities. When we dig further into the increases that we saw for second quarter, though, the Delaware Basin was less than what we were initially expecting. The water, as I mentioned, actually decreased by the 1% and the gas and the oil both increased, but not quite as much as we were originally thinking.

Danny, you want to provide a little bit of additional color there?

Sure thing, Kristen. There were a few different challenges that our customers faced during the second quarter that resulted in lower throughput than our initial expectations, primarily delays in wells coming to market, unplanned maintenance and then some base well performance issues that materialized in the second quarter.

With regard to our produced water business in the Delaware Basin, we experienced some extended operational curtailments on certain of our SWDs as a result of producers completing D&C activities in the area. With these situations, WES can elect to proactively shut in nearby SWDs with the goal of avoiding interference with D&C activities. This is a common industry practice, and we take this producer-driven shut-in activity into account when forecasting our produced water volumes for annual guidance. However, during the first and second quarters of 2023, we had some producer-driven shut-ins that lasted longer than our forecasted expectations. While we expect additional routine shut-ins, we do not expect D&C issues causing this level of downtime to persist.

Additionally, we have sanctioned additional SWD capacity that underpinned by MVCs with our customers to give us flexibility around these D&C issues going into 2024.

During the second quarter, several highly productive new wells turned to sales outperformed relative to initial expectations. This is a significant positive development for the acreage that we support and bodes well for the long-term throughput outlook for our assets. However, in the near term, this led to pressure challenges upstream of our assets that negatively impacted base production, which kept us from realizing the full benefit of this well outperformance.

WES continues to provide the highest level of system reliability and will continue to work hand-in-hand with our producers to provide flow assurance and together optimize field productivity. Providing superior customer service is a core value of WES and our ability to maintain reliable flow assurance has been a driving factor behind the successful addition of multiple new customers over the last few years. In fact, we have been able to effectively manage our system and provide higher levels of system operability in the second quarter compared to the first quarter of this year, even with the extreme heat we've experienced in the West Texas summer.

Kristen, can you provide an update on our outlook for the remainder of 2023?

So taking into consideration everything Danny was just talking about and some of the volumes coming in a little bit short of our expectations for second quarter, we also went back, talked to our producers and looked at their revised forecast. And so many of the challenges Danny was speaking of, taking a look at our throughput growth that we were expecting for the year, we now expect that to be more modest than what we had originally thought it would be.

In fact, we're expecting our natural gas throughput to be low single digits growth. It was previously mid-single digits growth. On the produced-water side, it was mid-20s, and now it's going to be upper teens percentage growth. The crude oil and NGLs growth is still low single digits, and that's unchanged from what it was before, but the mix of that is a little bit different. So if you get into that growth, you're going to have more from South Texas and more from our equity investments and less from the Delaware Basin than we were originally anticipating.

Just remember that, that growth I'm speaking to on the crude oil and NGL side, that excludes Cactus II since we divested of Cactus II at the end of last year. So those throughput changes that we've seen are rolling through, and those are really why we changed our guidance ranges, specifically adjusted EBITDA and free cash flow. Our 2023 adjusted EBITDA guidance range is now $1.95 billion to $2.05 billion. That's a decrease of approximately 5% to the midpoint. The free cash flow guidance range has decreased as well. That's now $900 million to $1 billion.

As we talked about when we did the press release for the North Loving plant, our capital guidance range for the year of $700 million to $800 million. And with the recent distribution increase of 12.5%, we've increased our distribution guidance for the year as well. And so that distribution guidance is now $2.1875 for the year.

How do these changes in 2023 impact volumes and adjusted EBITDA in 2024?

A couple of thoughts here without getting too far ahead into 2024, but obviously since our expectations for throughput growth are going down for the year, we expect to end at a lower throughput than where we were originally expecting at the beginning of this year. So when you're heading into 2024, just think through that of starting at a slightly lower position than we were before.

Cost of service rates, though, that will be redetermined at the end of the year. As a reminder, those cost of service rates we take into account actuals for the year as it relates to volumes and capital and OpEx as well as the budgeted volumes, capital and OpEx for the remaining life of the contract. And so all else being equal, if nothing else changed in that equation, you would expect that since the actual throughput we're seeing for 2023 is less than our initial expectations that, that would provide an increase in the cost of service rates for 2024. Those cost of service rates come into effect on January 1, 2024, so you have the interplay between a reduction in the volumes that you're coming into 2024 with, but potentially all else being equal, an increase in the cost of service rates.

What are your gross margin per unit expectations going into the third quarter?

So for gas, from Q1 to Q2, we saw a decrease in our gross margin per unit. You can see this once you start getting into where are the volumes actually coming from. So we saw an increase in volumes from our Utah and Wyoming assets, as I previously mentioned. Those have a lower than average gross margin per Mcf as compared to our other natural gas assets.

As we're getting into Q3, I expect that per unit margin to decrease again. We're going to have more gas volumes coming from South Texas as well as equity investments and those also have a lower-than-average per Mcf margin. It's the Delaware Basin, the DJ assets specifically, that have those higher than average per Mcf margin.

On oil, a similar type of story. We saw Utah pick up again in Q2. And so we saw a little bit of a decrease in the oil gross margin per barrel from Q1 to Q2. I'm expecting that to decrease again as we go into Q3. We'll get more volumes from Utah and South Texas and the equity investment. And then at the same time, we're going to be losing a little bit of deficiencies in the Delaware and the DJ, too. Water should be in line with second quarter right around that $0.83 that you saw in the second quarter.

Why did management decide that the second quarter was the right time to increase the base distribution? Can we expect WES to set an annual increased target for the base distribution going forward?

So we take a look at the base distribution every quarter. And right after Q1, we had signed that agreement with Oxy for the 300 MMcf a day of firm processing space. And over the last year, we've signed over 950 MMcf a day of firm processing commitments. And so when you're looking at just what the business has been able to do over the past year as well as where we've gotten the balance sheet too, how low our leverage is, we took all these things into consideration when considering the base distribution.

It's important to us that the base distribution is sustainable over the long term. And these type of fundamental changes in the business give us comfort that raising base distribution is the right thing to do. Even taking into consideration the sliding of EBITDA that we're seeing this quarter, that doesn't change our outlook and our investment thesis as it relates to WES and where we're operating. So we went ahead and increased the base distribution because of the confidence we have in the underlying business.

Switching to operations, Danny, how is the construction progressing on Mentone Train III?

Mentone III is slightly behind schedule due to the supply chain delays, but it is on budget. We have experienced issues with our vendors, either missing or indicating that they will miss delivery dates due to upstream challenges with their sub-vendors. We anticipate being able to make up some of these timing delays during the construction phase and have plant commissioned and in-service by the end of the first quarter of 2024.

We announced the new North Loving plant in May of 2023. Can you tell us about the need for the new plant and when we expect it to be put into service?

Well, the biggest driver of the North Loving plant announcement was the fact that our commercial team has generated substantial value for our partnership by executing multiple long-term agreements that provide up to 950 million cubic feet per day of firm process commitments, which includes our last firm processing commitment from Occidental that added up to 300 million cubic feet a day of incremental processing capacity for future volumes. Even though we are already benefiting from some of this throughput, the vast majority of it will come on to our system over the coming years.

When Mentone III comes online in early 2024, we expect it to be full. We're using offloads to bridge us to the in-service date of this plant. And when the North Loving plant comes, we expect it to be mostly full as well. As we have worked to firm up the construction schedule for the North Loving plant, we have seen the in-service date moved slightly from the tail end of 2024 to early 2025. We do not expect any change in capital for the overall project.

Kristen and Danny, 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 corporate website at westernmidstream.com.