Western Midstream Partners LP (WES) 2024 Q2 法說會逐字稿

Good afternoon. My name is Ludi, and I will be your conference operator today. At this time, I would like to welcome everyone to the Western Midstream Partners Second Quarter 2024 Earnings Conference Call. (Operator Instructions) I would now like to turn the conference over to Daniel Jenkins, Director of Investor Relations. Please go ahead.

Thank you. I'm glad you could join us today for Western Midstream's Second Quarter 2024 conference call. I'd like to remind you that today's call, the accompanying slide deck and last night's earnings release contain important disclosures regarding forward-looking statements and non-GAAP reconciliations. Please reference Western Midstream's most recent Form 10-Q and other public filings for a description of risk factors that could cause actual results to differ materially from what we discuss today. Relevant reference materials are posted on our website.

With me today are Michael Ure, our Chief Executive Officer; and Kristen Shults, our Chief Financial Officer. I'll now turn the call over to Michael.

Thank you, Daniel, and good afternoon, everyone. Yesterday afternoon, we reported another strong operational quarter for WES. Our sequential quarter throughput growth was driven by our robust system operability. And as a result, we experienced throughput records from both natural gas and crude oil and NGLs in the Delaware Basin for the fifth consecutive quarter. Taking these results into consideration, we still expect our throughput to steadily grow for the remainder of the year and for WES to be towards the high end of our 2024 adjusted EBITDA and free cash flow guidance ranges.

The second quarter was also very successful from a commercial perspective.as we executed numerous agreements with both new and existing customers in several of our most active basins. First, in the Delaware Basin, we signed several new agreements with both public and private customers for natural gas and produced water services that will positively benefit WES starting in the third quarter and to an even greater extent in 2025.

Second, in the DJ Basin, we executed an amendment to DCP Midstream's now Phillips 66 natural gas processing agreement in the DJ Basin to extend the original firm processing capacity of 175 million cubic feet per day from 2027 to 2029 on a 100% take-or-pay basis.

Additionally, this multiyear amendment provides Phillips 66 with an incremental 200 million cubic feet per day of firm processing capacity, primarily supported by minimum volume commitments starting in 2026. If fully utilized, these agreements could fill up the remaining capacity across our DJ Basin complex over the coming years.

Third, and just after quarter end, in Utah, we executed a multi-year natural gas processing agreement with Kinder Morgan in support of their Altamont Green River pipeline project, providing for up to 150 million cubic feet per day of firm processing capacity at our Chipeta facility in the Uinta Basin, which is expected to be in-service by mid-2025.

Finally, we executed agreements with several customers supporting Williams Companies MountainWest pipeline expansion to provide up to 110 million cubic feet per day of natural gas processing capacity at our Chipeta facility. We have already begun to receive a portion of these volumes and we expect incremental volumes in the months ahead. Taking all these agreements into account, we believe our existing cryogenic capacity at Chipeta of 550 million cubic feet per day may be fully utilized by the second half of 2025.

Turning to the balance sheet, the sale of non-core assets throughout the first quarter and early in the second quarter enabled us to achieve our trailing 12 months net leverage ratio threshold of three times earlier than anticipated. In this leverage environment, we will continue to look for the most efficient ways to allocate capital to generate the best returns for our unitholders over time. Those options include investing capital to prudently expand the business. In order to bring more throughput onto our systems, we will continue to allocate capital to organic growth projects that grow volumes and meet our strict return thresholds with the goal of driving adjusted EBITDA and free cash flow higher and enhancing our return on assets over time.

Second, allocating capital towards accretive M&A. We continue to evaluate strategic opportunities that will ultimately enhance the value of our existing asset base, such as the Meritage Midstream acquisition that closed in the fourth quarter of 2023. And finally, increasing the base distribution. As our business grows and we generate incremental free cash flow, management and the Board will continue to look at opportunities to grow the base distribution in line with the overall growth in our business. If our business outperforms relative to our initial expectations in a given year, we also have the enhanced distribution framework in place to (inaudible) unitholders. We will remain opportunistic regarding unit buybacks and additional debt retirement. However, based on current market conditions and our net leverage ratio of three times, we do not expect these options to be the most efficient ways to allocate capital.

With that, I will turn the call over to Kristen to discuss our operational and financial performance.

Thank you, Michael, and good afternoon, everyone. Our reported second quarter natural gas throughput was relatively flat on a sequential quarter basis, primarily due to strong throughput growth in the Delaware, DJ and Powder River Basins, offset by decreased throughput from the sale of the Marcellus gathering system early in the second quarter.

Our natural gas throughput from our operated assets increased by 3% on a sequential quarter basis. While our reported crude oil and NGLs throughput declined by 9% on a sequential quarter basis as a result of equity investment divestitures completed during the first quarter, our crude oil and NGLs throughput from our operated assets increased by 6% on a sequential quarter basis due to strong throughput growth in the Delaware, DJ and Powder River Basin. Produced water throughput decreased by 4% on a sequential quarter basis due to fluctuations in produced water used for recycling activities, upstream operations of our producers.

Our second quarter per McF adjusted gross margin for natural gas assets was relatively flat quarter-over-quarter, and we expect our third quarter per McF adjusted gross margin to be in line with the second quarter.

Our second quarter per barrel adjusted gross margin for our crude oil and NGL assets increased by $0.04 compared to the prior quarter. This was primarily due to the sale of our interest in the Whitethorn and Saddlehorn pipelines in the first quarter, both of which had a lower than average per unit margins as compared to our other crude oil and NGL assets and increased throughput in the Delaware Basin. We expect our third quarter per-barrel adjusted gross margin to be in line with the second quarter.

Our second quarter per barrel adjusted gross margin for our produced water assets was also relatively flat quarter-over-quarter, and we expect our third quarter per barrel adjusted gross margin to be in line with the second quarter.

During the second quarter, we generated net income attributable to limited partners of $370 million and adjusted EBITDA of $578 million. Relative to the first quarter, our adjusted gross margin decreased by $9 million. This decrease was mostly driven by the sale of the Marcellus gathering system and the equity investments, partially offset by higher throughput and profitability from the Delaware, DJ and Powder River Basin.

Our adjusted EBITDA decreased sequentially by 5% or $30 million due to the decrease in adjusted gross margin that I just mentioned, increased operation and maintenance expense and more normalized property and other taxes if you recall, in the first quarter, we benefited from lower than anticipated costs, which resulted in higher than expected adjusted EBITDA. Going forward, we expect our operation and maintenance expense to trend modestly higher in the third quarter, primarily driven by increased throughput and seasonally higher utility costs and increased asset maintenance and repair expense. As a reminder, we expect seasonality associated with our utility expense in the summer months due to higher estimated electricity pricing and greater energy usage in conjunction with increased throughput.

Turning to cash flow, our second quarter cash flow from operating activities totaled $631 million, generating free cash flow of $425 million. Free cash flow off our first quarter 2020 for distribution payment in May was 84 million.

From a capital markets perspective, as previously announced in the second quarter, we opportunistically repurchased $135 million of senior notes through open market transactions, which has resulted in $150 million of total debt repurchases year to date all at approximately 96% of par.

Finally, in July, we declared a base distribution of $0.875 per unit, which was unchanged relative to our previous announcement in April and is payable on August 14th to unitholders of record as of August first, based on our operated throughput performance to date and continued strong producer activity levels, we still expect average year-over-year throughput growth for all products in the Delaware Basin. Dj Basin and Powder River Basin. We still expect our portfolio-wide average year-over-year throughput to increase by mid to upper 10s percentage for natural gas, low 10s percentage for crude oil and NGLs and mid to upper-teens percentage for produced water.

Focusing on our financial guidance with the throughput growth I just described, we still expect to be towards the high end of our previously disclosed adjusted EBITDA and free cash flow guidance ranges of $2.2 billion to $2.4 billion and $1.05 billion to $1.25 billion for the year respectively. Additionally, we still expect our 2024 capital expenditure guidance to range between $700 million and $850 million, applying a midpoint of $775 million. We continue to expect just over 80% of our capital budget to be spent in the Delaware Basin, the majority of which is expansion capital for the North Loving plant construction, an additional system expansion to facilitate continued throughput growth. As previously mentioned, we expect to allocate incremental capital to the Powder River, DJ and Uinta Basin to facilitate throughput growth over the next 18 months in the Powder River Basin, several existing customers planned to accelerate completion activities as we exit 2024 as we are allocating incremental capital in 2024 and 2025 to expand existing compression facilities and to account for incremental well connects in the DJ Basin. We expect to invest incremental capital in 2025 to support the new and extended agreements with Phillips 66 and in the Uinta Basin. Based on our commercial success connecting Kinder Morgan's Altamont pipeline and with the shippers on Williams Mountain West pipeline expansion. We are allocating incremental capital predominantly in 2025 to expand pipeline connections, increase existing compression capacity and to expand crude oil stabilization capacity at the facility. Our full year base distribution guidance of at least $3.20 per unit remains unchanged. We will continue to evaluate the base distribution on a quarterly basis influenced by the health and growth trajectory of our business. As a reminder, any potential enhanced distribution payment in 2025 will be based on our full year 2024 financial performance governed by our year end 2024 leverage threshold of three times and subject to the Board's discretion.

I'll now turn the call back over to Michael Ure.

Thank you, Kristen.

I would like to highlight that we will be releasing our annual sustainability report in the coming weeks, which will detail our 2023 sustainability accomplishments. This report highlights our successful attainment of our 2023 sustainability goals, which included targeting and implementing systems and processes to monitor our GHG emissions, safety culture and community volunteering efforts, as well as additional details on all of our environmental, social and governance practices once available, I encourage you to read more about our 2023 accomplishments in the report, and we look forward to building on this momentum in the years ahead as we continue to advance energy by enhancing the sustainability of our operations.

Before we open it up for Q&A, I would like to highlight a few key points and reiterate why West remains a differentiated and attractive investment opportunity since becoming a standalone organization, we have worked hard to grow the business while greatly improving the financial position of the partnership. We have achieved record operated throughput for several quarters, which has been driven by our increasing asset operability and continued strong activity levels from our producing customers. These strong throughput numbers are expected to result in record adjusted EBITDA and free cash flow this year. And these improving trends over the past few years have put us in a position to reduce leverage and to return even more capital to stakeholders. We did this while maintaining strict returns thresholds for expansion capital spending, which drove increases in return on assets to upper double-digit territory compared to an average of approximately 13% for our midstream peers. We accomplished all of this while paying approximately $3.5 billion in base and enhanced distributions, reducing $943 million of net debt and repurchasing just over $1.1 billion of WES units or approximately 15% of the unaffected unit count all since early 2020. This combination of efforts has culminated in leading unitholder returns and total capital return yield for WES unitholders relative to our midstream peers, the S&P 500 Index and the S&P 500 Energy Index.

Focusing on the distribution yield West still offers a very compelling investment opportunity when comparing its yield to the average yield of all subsectors within the S&P 500. In fact, WES offers more than double the average yield of any sector within the S&P 500 index and WES continues to maintain the highest distribution yield amongst our midstream peers. Clearly, WES continues to provide one of the strongest tax-deferred investment opportunities, not only within the midstream space, but relative to all subsectors of the S&P 500.

Finally, from a valuation perspective, the current average MLP valuations still trades at approximately 8.5 times a discount of just over five times compared to the average MLP valuation from 2011 through 2016. Meanwhile, balance sheets continue to strengthen. Free cash flow continues to grow and the future business prospects of the industry remain strong. Also, the average current distribution yield remains just over 9% compared to the average MLP distribution yield of just under 7% from 2011 through 2016, a time when midstream MLPs generated negative free cash flow and leverage was increasing. We continue to argue that the new MLP model is deserving of a valuation rerate, especially when you take into account corporate tax burden that Citicorp's in the midstream space and other sectors of the economy will face over the coming years. There is no doubt that as net operating losses are exhausted, the current tax burden faced by sea curbs will result in less capital available for unitholder returns, which continues to present a very compelling investment opportunity for West and the MLP space to close, I would like to thank the entire West workforce for all of their hard work and dedication. I would also like to thank all of the teams within our organization that are working to finalize our 2023 sustainability report. The year is off to a strong start, and I look forward to updating you on our third quarter results in November.

With that, we will open the line for questions.

(Operator Instructions) Your first question comes from the line of Gabe Moreen at Mizuho. Your line is now open.

Hey, good afternoon, everyone.

I just wanted to ask about the growth that you're seeing in the DJ and the Uinta, and it sounds like weather, medium term or long term using up the rest of your slack capacity there how do you think about potentially growing beyond using up that capacity?

Is that something that you're planning for right now and just managing growth just in those basins where I don't think investors were expected to see that six to 12 months ago?

Yes, Gabe. This is Michael. We're incredibly excited about the new volumes that we're expecting to come onto the system both in the DJ and the Uinta Basins. We were always big believers in those basins historically and definitely feel that way today, as we look at it now, no expectations or plans in terms of broad expansions within those areas. And obviously, we'll we will continue to have capital expenditures as it relates to maintenance and compression well connects, but but currently not projecting to have any major projects in those areas for us about utilization of existing assets and capacity out there, which are really excited to we able to service our customers in those areas.

Thanks, Michael.

And then maybe if I can sort of follow-up to that question on secondary basins and what you're seeing out there.

As far as M&A, are you able to get amortized at a really nice multiple. Are you still seeing that differential out there?

I guess cash for assets outside the Permian, is that of interest, particularly now that you've seen, I guess, some perking up in growth in some other basins?

Yes.

For us, our focus really hasn't changed from an M&A standpoint. We're really looking at ways in which we can acquire assets that we can differentiate what it is that is already happening within those assets. And so that primarily means that they're in and around areas where we currently operate and so as we think about M&A, it's about enhancing. Typically, it's about enhancing areas in which we currently operate and can provide us it differentiated. But it's a set of synergies related to the the opportunity itself.

Great. And then just if I could squeeze one last one in. You mentioned some additional MVCs in the Delaware. Could you maybe quantify some of that? And also within the bigger picture of kind of where you stand third-party business versus OXY, what those MVCs and how they shift things for you?

Yes. So um, we are able to get MBCs that relates to contracts that they were getting and that's irrespective of the counterparty. And so for us, again, where we're really some focus on returns overall, we want to make sure that we're going to spend any capital that we're able to do that to a level that satisfies those return returns thresholds where the MBCs come into play. And so as you've seen in the transactions that are the new commercial deals that we've announced have we been able to do that with MBCs really across the board and those are not with related parties.

Okay. Thanks very much.

Thanks you.

Thank you.

Your next question comes from the line of Keith Stanley at Wolfe Research. Your line is now open.

Hi, good afternoon. So just touching back on, I guess, CapEx in the past, you've talked about a meaningful year-over-year decline in 2025 CapEx. Any updated comments you'd make there given the need to invest some in growth in the DJPRB. and Uinta basins? And then separately, any any progress on contracting for a new plant in the Permian? Or is there still a lot to do on that before moving forward?

Yes. So we would expect that there will be as a step down there would be a step down in capital for 2025. Obviously, we're excited about the new commercial agreements, which will require a little bit of capital in order to satisfy those agreements and make our customers happy as it relates to new plants in the Permian, no plans to increase plant capacity in the Permian as we see it today. So no change from previous comments that we made on increasing capacity there.

Thanks for that. Second question. So leverage you got to your three times target now, does that impact how you think about the timing for another distribution increase? Or is that more tied to growth in free cash flow in the business yet?

Yes,it's a little bit of both. Obviously, we're really excited to be able to get to that level earlier than expectations as we as we think about Tom Mason distribution, the base distribution itself, we're really trying to tie that towards the free cash flow generation of the business and then what it is that we can and should be using that capital for now that we are at the three times leverage level as I mentioned in my in my prepared remarks, yes, that really opens up the possibility for us to be able to use that capital without having the need to focus as much on buybacks, whether they're debt or equity around distribution growth based distribution growth, so.

Thank you.

Thank you.

Thank you.

Your next question comes from the line of Jeremy Tonet at JPMorgan Chase. Your line is now open.

Hi, good afternoon.

Hi, Jeremy.

I just wanted to come back to the Uinta, if I could. And as it relates to Chipeta, just wondering how much we in processing capacity. Is there right now? I'm just trying to think through, I guess, how runway there and how much runway there is before there would need to be more investment we do.

We do have sufficient capacity as it relates today to be able to satisfy all of the needs with these incremental new commercial agreements that we've been able to achieve. So I wouldn't expect that that would require any plant expansion to be able to satisfy that, that growth that we're expecting and have contracted to them to bring on the system.

Got it. That's helpful. And then you listed an string of commercial wins here. And just kind of curious how capital intensive, I guess these initiatives are or is this just kind of a very accretive filling up open capacity for the most part.

Yes, highly accretive from that standpoint, Tom, there is some capital, but it's far far more limited capital to be able to satisfy these commercial agreements. So we're really excited to be able to utilize some of the latent capacity that we had in those areas.

Like I said, we were always believers that those of those volumes would come. And now we're seeing some of that progress. We're really, really happy with the operational efficiencies that we've been able to drive and obviously focus on our customers, which is which is why we believe in part these new new deals, we're able to come onto the system. So but for the most part, you know, highly accretive, minimal capital to be able to satisfy these of these new agreements.

Got it.

Very helpful.

And just last one, if I could real quick here. I mean, we haven't seen I can't recall this number of commercial wins in one quarter. Anything that kind of fed into it now? Do you see more opportunities like this? Just trying to get a better view of the backdrop here.

It comes a little bit in WES. Obviously, the team I can tell you is as energized now as they've ever been about getting new transactions coming online. So I would say the hope is that you can sort of replicate some of these successes every quarter. But as it happens, you know, the the transactions themselves take some time to bring on to our system. So again, a lot of energy around it, a lot of excitement. We have a phenomenal commercial team that's out there trying to look for transactions all the time. But I should certainly expect this number of commercial deals every quarter. I would hope for it, but I shouldn't -- we shouldn't expect that got it.

That's helpful. I'll leave it there. Thanks.

Thanks, Jeremy

Thank you. Next question comes from the line of Spiro Dounis at Citi. Your line is now open.

Thanks, operator.

Afternoon team. I just wanted to start maybe with the DJ, if we could. I guess as we understand it obviously has been pretty active there so far this year, but I think is the way it works with MBCs. We're maybe not seeing it show up on your side as much. And so you can I'm just curious any sense of how close you are to seeing the torque from that volume ramp?

Yes. As it relates to crude in particular, we wouldn't expect that we'll exceed those MVCs for 2024. But to your point, they've they've been active out there. They've seen some incredibly positive results. That's part of the reason why we're seeing some of the real overperformance there in addition to the commercial agreements. But particularly as it relates to the oil side, still below MVC levels expectations out through 2024.

Got it. Okay. So we'll wait on that second question, just going to the guidance. And sorry, if I'm splitting hairs here a little bit, but you reaffirmed the top end of the range again. And it would seem as though some of these new agreements that you signed do have a benefit for 2024. So I guess I'm just curious, were these agreements contemplated in that guide and getting to that top end or does this actually create a scenario where maybe outperform the high end?

Yes, these are these will have some impact in 2024. But actually, the vast majority of the impact is in future periods. And so while there are incremental hadn't been planned within our forecasts, it really doesn't change where we sit.

As it relates to the guidance on a quarter-on-quarter basis. What it really does, though, is it gives us some some really strong tailwinds as it relates to future periods, particularly in assets that we had some latent capacity out there so really excited about what it does for us in future periods with with less of an impact in 2024.

Yes, I'll leave it there. Thanks, Michael.

Thanks, Spiro.

Thank you. And your next question comes from the line of Manav Gupta, UBS. Your line is open.

Have a good afternoon.

I basically wanted to discuss.

So the agreements you're doing with PSX looks like you amended the agreement with DCP, which is now PSX and then looks like there is a disparity there, you know, incremental volumes coming probably in 2026. So can you talk about, you know, the opportunities as DCP PSX and PSXP have all become PSX. Are there more opportunities to do business at this company?

Yes. So actually, this is -- we're really, really proud of the relationship that we've had historically with both DCP as well as P66, so I would say that this relationship has been something that we've had really for a long time. In fact, the extension one of these agreements is one that we entered into about 5 years ago. And so I haven't really seen or I wouldn't attribute any of these new agreements to a changeover in ownership. It's just been a strong relationship we've had for some time.

Perfect. And how should we think about volumes and margins that in our main countries and service them and what caused them not loving plant looking like? Thank you.

Yes, North Loving still expecting to be on time and on budget for Q1 2025. As we look to margins for the third quarter, we would expect margins for the third quarter to be relatively in line with that with the second quarter.

Thank you.

Thank you. The next question comes from the line of Neel Mitra at Bank of America. Your line is now open.

Hi.

Thanks for taking my question. And wanted to understand the processing needs past North Loving on understand there's a lot of interruptible volumes that you're offloading there. So when you think about offloading versus processing needs, could you maybe quantify how much capacity for offloads or timing of when those contracts? And then would you build a new processing plant if you had enough interruptible volumes that you think can underwrite the plan?

Yes. Thanks, Neal. Good question. So the way that we think about some interruptible volumes, generally speaking is that we if we don't have existing capacity available, then that's when we'll trying to use offloads to pay to take some of that interruptible volume when it is that we do receive commitments. That's when we tried to tie our long-term capital with the long-term commitments of our customers, and that helps us get much more comfortable with the investment itself. As we sit here today, we do have some offloads, and that's really bridging are those interruptible volumes similar to when we get our North Loving online, what stores North Loving comes online that will bring those onto our system. I guess it depends a little bit Integrys and confidence level on the interruptible side, if we had significant excess interruptible volumes that would justify a plant under the the conservative assumptions that we might apply to those volumes coming through our system and then it could justify it. But historically, that's not been the way that we've done it. We've done it more to align our long-term capital with the long-term commitments of our of our customers.

Okay, perfect. Thanks for the answer. The second question pertains to the commercial ones that you our had in the Delaware for the quarter. Could you maybe walk through your offering in gas gathering, crude gathering and water? If you are able to bundle some services, please me and I gave you an advantage in procuring some of these contracts?

Yes.

So these contracts actually come or not necessarily related to our two bond when they're just a one product set of contracts that we were able to achieve in these particular areas. We do see, however, in the Permian, in particular, a great value in us being able to gain new customers on either the water and the gas side. And that has enabled us to differentiate the way that we operate and as and customers get much more comfortable with our area. Our manner of operating than it has resulted in incremental new volume streams onto the system. So in West, Texas has definitely been employed as it relates to these new customer contracts. For the most part, these are just some single product contracts we've entered into data and certainly appreciate the color.

Thank you.

Yes, thanks, them.

(Operator Instructions) Our next question comes from the line of Zach Nelson at TPH. Your line is now open.

Hey, guys. Thanks for taking my question. Maybe just a quick one on the contract extension with PSX or DCP, was that at the same rate?

No, is just the length extension or was there any changes to the fixed rate there?

Yes, we typically thanks for the question, Zack, particularly downtown. We don't talk about contract on specific items as it relates to any contract we enter into for various reasons. What I would say, though, is again, this highlights, the wonderful partnership that we have with them, we think a lot of them overall. And obviously, this series of agreements highlights that the strong manner in which we've been able to work together.

Yes, that makes sense.

And then maybe a bit of a hypothetical one here. But on M&A, you know, with CSX going through a bit of a transition, if those DCP assets were ever to hit the market, are you guys would that be too high of a concentration?

Maybe Jay, as far as FTC risk or do you think that's something that they would allow obviously very hypothetical, but just looking at location and opportunity and how much contracts you already have with them?

I'm very hypothetical but very specific, I can't actually comment on any specific transaction, hypothetical or otherwise as it relates to M&A and just reiterate kind of what our position is, which is we're looking for ways that we can add some accretive opportunities to us to contribute, continue to emphasize what it is that we believe that we do differently from a customer service standpoint and allow those types of transactions to enhance the returns to the enterprise, which we've been really focused on for the very from the very beginning of becoming a standalone enterprise server.

I appreciate that.

Thanks, guys.

Thank you.

Thank you. There are no further questions at this time. Mr. Ure, I turn the call back over to you.

Thank you very much. Thanks, everyone for joining. This marks the 5-year anniversary of my appointment to this role. And so proud of what this organization has been able to achieve the incredible benefits and some abilities that we've been able to demonstrate to the market, the debt reduction, the repurchase of units, the increase in the distribution, the new customer wins, our focus on our customer has been remarkable But overall, I'd like to once you also congratulate Daniel Goldman on the appointment as Chief Operating Officer. Danny is an excellent leader, and we really look forward to what he'll continue to do as we focus on operational excellence and excellence and customer service. I want to thank the West people for their continued efforts in the pursuit of excellence overall. And with that we thank you all for joining.

Concludes today's conference call. You may now disconnect.