Q4 2019 Earnings Call

Thank you, Abby. And good afternoon. Everyone 2019 was a historic year for Wes the partnership completed the simplification transaction and related asset Acquisitions from Anadarko Petroleum who was acquired by Occidental in August. We close the year with the execution of several agreements with Occidental that established West as a stand-alone Midstream company. We generated over one point seven billion dollars of adjusted ebitda distributed over 1.1 billion dollars of cash to unit holders and efficiently executed our Capital program coming in approximately a hundred million dollars below the 2019 guidance midpoint.

comparing full your

2018 two full year 2019. We saw a 9% increase in natural gas throughput and a 57% increase in liquids throughput we hi graded and expanding our asset portfolio in February 2019 with the acquisition of Delaware and DJ Basin assets, the complimented our existing asset portfolio. We also placed II Men tone not trained and first Latham train into service and acquired a 30% interest in Red Bluff Express, which transports residue gas from the Delaware Basin to the hub I'm extremely proud of the performance that we delivered in 2019 considering the significant transformation that has taken place during the year are February 2019 acquisition and simplification transactions provided addition to our backbone infrastructure in our key basis of operation and create a capital structure alignment with the elimination of General partner incentive distribution rights the value of these transactions. Yep.

further enhanced by our entry into

New service operating and governance agreements with Occidental which positioned Wes as a stand-alone Midstream operation and provided are unaffiliated unit holders with improved governance right off. These unit holder friendly actions were accomplished with steadfast support from Occidental as our largest unit holder on customer and recognizing the pressure facing Midstream MLPs our Prime objective of creating long-term value for our unit holders hasn't changed since our IPO. And as we enter twenty-twenty our unit holders remain a top priority along with sustaining. Our investment-grade credit profile are forecasted 30 to 35% decline in capital expenditures is accompanied by a 13% increase to adjusted ebitda, which demonstrates our commitment to Capital efficient organic grass-fed. All of our stakeholders are well positioned to benefit from Wes's ability to operate as a stand-alone investment-grade Midstream Enterprise with that. I'll turn the call over to Mike who will discuss our 2019.

Financial results. Thanks, Mike.

Cool yesterday afternoon. We reported an outperforming quarter with adjusted ebitda $447 distributable cash flow of $345 million dollars any coverage ratio of one point two or three times the 9% sequential quarter increase in adjusted ebitda resulting from increased throughput across all products in the Delaware and DJ basins for full year 2019. We generated adjusted ebitda of 1.7 to billion dollars distributable cash flow of one point three billion dollars and an annual coverage of 1.18 * our wage increase 17% from full year 2018 and our full year 2019 coverage ratio was above guidance total 2019 Capital expenditures were one point two five billion dollars, which was approximately $100 million dollars below our 2019 guidance midpoint of 1.35 billion dollars optimize planning and continued focus on Capital discipline birth.

During the second half of 2019.

Allowed us to deliver totally year Capital expenditures well below our initial expectations in January. We priced a 3.5 billion dollar for senior notes offering the issuance was 6.8 times oversubscribed on an upsized and tightly priced offering with more than $21 billion dollars of demand this unequivocally successful offering which included an investor requested thirty-year debt trench demonstrates. The Market's long-term and fundamental support for West reduces. Wes's average cost of long-term debt and extends the average maturity of the Same by now. We'll turn the call over to Craig to discuss fourth-quarter of operations.

Thanks, Mike operationally gas throughput increased by approximately 120 million cubic feet per day quarter-on-quarter. This increase was primarily driven by higher throughput from our DJ Thursday and complex as a result of third-quarter Downstream constraints that did not impact fourth-quarter operations, excluding the effects of this Downstream constraint from third-quarter results are DJ Basin complex through put off by approximately sixty million cubic feet per day quarter-on-quarter full year 2019 total natural gas throughput average 4.2 billion cubic feet per day representing a 9% increase from full year 2018. We added approximately four hundred fifty million cubic feet per day of compression capacity for the year and increase our processing capacity by four hundred million cubic feet per day turning to liquid zark wage increase by approximately 187000 barrels per day.

This growth was driven by.

5% throughput increase from our dbm water assets where we brought two additional salt water disposal facilities online and saw an aggregate 8% throughput increase from our Delaware and DJ Basin crude oil Gathering wage eating assets full year 2019 total liquids throughput averaged one point two million barrels per day representing a 57% increase from full year 2018 for 2019. We added over 230,000 barrels a day of produced water capacity from the addition of eight saltwater disposal facilities and continued strong liquids throughput from many of our Equity Investments as expected are liquids gross margin declined to a dollar sixty-nine per barrel for the quarter and a dollar seventy $7 per barrel for 2019 as a reminder as our water business continues to grow we expect our overall liquids. Margin to track lower. However, compared to crude the water business generates higher returns notwithstanding the associated lower per barrel margins are quarter-over-quarter gas gross margin increased to a dollar eight per mcf wage.

And increased $0.06 per mcf on a year.

Over a year basis in the DJ Basin our first Latham gas processing train was placed in the service during the fourth quarter of 2019. The second light them trained came online earlier this month additionally Loving Road of trained three was completed in the fourth quarter of 2019 and started up in January Loving Road of trained for is expected to be completed in the fourth quarter of 2020 in the first half of 2020. We expect the Front Range and Texas Express pipeline expansions to be placed into service. We also will experience a full year of contributions from Cactus to I will now turn the call back over to Michael for twenty twenty guidance discussion and concluding remarks. Thanks. Greg are previously communicated twenty-twenty Outlook of adjusted ebitda between 1.875 and 1.975 billion dollars and capital expenditures between $875 and $950 remains unchanged. We expect meaningful throughput growth from the south.

in Delaware basins in 2024

Gas throughput is expected to grow approximately 7% to 4.5 billion cubic feet per day underpinned by oxy Delaware Basin development plan and the mid 2020 commencement pack UPS delivery in to our Latham plant in the DJ Basin oil throughput is expected to grow approximately 18% to more than seven hundred and sixty five thousand barrels a day Prime driven by new oxy development. Well as in the Delaware Basin and full-year crude oil shipments on the cactus to pipeline where we own a 15% Equity interest water throughput is expected to increase by more than 20% to approximately 678000 barrels a day largely attributable to new oxy and third party connections aggregate increase throughput volumes off. All products is expected to drive adjusted ebitda growth of approximately 13% across the West portfolio.

We strongly believe that it was dedicated Workforce enhanced his employee Focus which intern positions and empowers employees to deliver improved customer service establishes, heightened accountability and choice of the realization of operational efficiencies that previously were more difficult to achieve with a dual purpose Workforce that split time tending to Shared Midstream and Upstream responsibilities month. We expect increased expenses associated with operating as a stand-alone business and our 2020 guidance fully reflects, the impact of these additional costs. We also expect that anticipated cost savings from realized operational and capital efficiencies will meaningfully exceed the incremental expense attributable to operating as a stand-alone Midstream Enterprise.

total Capital expense

Pictures plus Equity investment contributions are expected to decrease by approximately 30% from 2019 aggregate Capital spending of one point two five billion dollars. We expect invest approximately 64% of our total Capital spend in the Delaware Basin 26% in the DJ Basin and the remaining 10% on Equity Investments and other assets within Western polio total maintenance capital is expected to be between $125 and $135 billion dollars in line with previous years as approximately 7% of adjusted ebitda month.

The 2020 Delaware Basin Capital program is focused on continued build out of the oil gas and water infrastructure predominantly focused on Gathering facility capacity expansion pack including anticipated expansion work at eight operating CTS and new facilities on the gas system the start-up of a third train and the completion of 1/4 train at the North living wage providing an additional 60,000 barrels a day of additional throughput capacity and the addition of approximately 180000 barrels a day of additional saltwater disposal capacity in the Delaware Basin the capital program in the DJ Basin focuses on infill expansion of compression capacity Gathering pipelines and the completion of a second two hundred million cubic feet per day processing train at the page plant for the past twenty eight quarters. West has increased its distribution. We intend to continue quarterly distribution growth. However at a significantly more modest rate of approximately 1% off

Year-over-year. This is

Means consistent with our goals of lowering leverage and increasing distribution coverage to at least one point two five times before I conclude my prepared remarks. I would like to thank all of the West dedicated employees and contractors for their contributions dedication and continued focus on safety. We look forward to 20 20 and delivering the results that are stakeholders expect with that. I would like to open a line for questions.

Thank you. We will now begin the question-and-answer session to ask a question. You may press * then one on your telephone keypad. If you're using the speaker phone, we ask that you please pick up your handset before pressing keys to enjoy your question, please press Start into today's first question comes from Colton Bean Tudor Pickering Holt, please go ahead.

Afternoon, so just listening to the oxy call earlier. There are some references potentially letting production roll over if we were to remain at current crude prices one. I guess could you just confirm it the earnings guidance is predicated on the existing Upstream guide and then to kind of how you're thinking about the potential to mitigate any activity cuts.

Uh, thanks Colton. Yes, the current guidance that has been put out is reflective of the uh, budget and the guidance that is reflected in in Oxys current expectations home. I would I would note that while they do talk about a decline in production. I would just reference, you know, Vicky's commentary as it relates to the capital cuts. And more of those would likely come first and non productive capital and then secondarily in productive Capital. We as a whole feel very good about the position that you know, Wes has and the assets that underlie the position it gets underlying the best basins in in North America. And so definitely expect that even in light of the current commodity prices as temporary as it has been in nature that that there will be continued production going through it. When you look at our capital budget, the majority of that is with regards to servicing immediate production that wage

through our system and

So in in the event that there is a reduction overall in the expectation of that production, and obviously that Capital would would decline.

interested in just any order of magnitude senses to to what you could do on the Capitol Front to balance any any downside here on the earnings said

Again, it's hard to answer that question and and in a vacuum not knowing exactly what the resultant reduction in production or or Capital would be.

Just the final one just on the dividend increase mean understanding that it's it's 1% year-over-year, but just wanted to understand a little bit better than mindset in terms of continuing with growth of these levels off. So lessons continued has had a increase in its distribution for 28 straight quarters. We feel very good about that track record in the in the result that our unit holders have been able to count on over that. We feel very good about the business as we sit here today. And so what we are balancing there is a continued effort towards the success of that distribution growth coupled with renewed Focus around reducing overall leverage and increasing coverage.

Adam

system

I don't know next question today comes from Jeremy tunay of JPMorgan, please go ahead.

Hi, good afternoon. Just want to lead off here with regards to your efforts as transitioning to a stand-alone Midstream company and just wondering if you could provide a big change color on where you are in that process and I guess what changes you've seen the organization as a result of these efforts. German is a great question. So at the end of 2019, we entered into agreements with oxy that would provide for the leadership team of West to move over as employees of West prior to that. There were no actual impact is of West. So that is the Top Line leadership team that is now currently employed and receiving their paychecks from Wes during twenty-twenty and ideally the early part of 20,000. The remainder of the West dedicated Standalone employees will come over to be employed by Wes as it sits today those employees their Affairs their wage

You know the hiring and firing decisions.

Are all made by the West employees. However at the the point in time when they do come over as employees, they will get their paychecks directly from from West Palm the impact on that frankly think you've seen it a little bit in the fourth quarter results as we're able to reduce overall capital and improve operations as it relates to the revisions from an Outlook persists from third quarter to today are an expectation that is a stand-alone and Enterprise were able to motivate provide accountability and I focus the operations to achieve greater synergies and greater efficiencies overall through the system. So we believe it's a it's an excellent step in the efficiencies over all of West Palm as it relates to third-party customers. It's also an increased awareness and focus to to them to indicate that obviously their businesses is very important wage.

This clearly Oxys still our number one customer.

And important to the overall, uh health of of West but the third party business profile is able to be enhanced is that employee base is exclusively focused on Iraq and its success.

And Jeremy if I could this is Mike frog one other thing I'd add to that we've heard loud and clear throughout the years about the mismatch between incentive compensation. Not only just for management bulb or what we call now west identified employees and we've made the change. We're all West dedicated employees and management are now receiving Equity compensation in West that actually track Midstream targets and we're no longer tied to the targets of the EMP. And so we feel like that that fundamental shift in Focus will drive efficiencies through our business and and have employees folks where they need to be in terms of making less operations more efficient lining compensation with accountability and ultimate results of West absolutely.

That's that's good to see. Thanks.

And maybe just kind of turning to I guess how the the agencies of view these changes with with kind of the agreements with Oxi overall. Looks like Moody's I think might have placed you on a positive watch recently any updates. You can provide us there.

You nailed it. They did put us on on positive watch. We just recently visited all three agencies. I'd characterize the discussions as extremely productive as we as we look at the new Standalone know and talk about our plans into the future. I think all of the agencies are looking for us to to lower our leverage which we are we are Keen to do in my mind. That's that's job one is to get our leverage metrics back to what has been traditionally The Sweet Spot for West of three point five to four times as we exited 2019. We're roughing 4.5 times through organic growth of ebitda and also debt reduction by the end of the year. We expect to be much closer to 4 and then below for thereafter.

Great.

Stop there. Thanks for taking my questions. Thank you from Derek Walker Bank of America, please go ahead.

Good afternoon, guys, appreciate the time and grab the quarter. Maybe I can you follow up with that last question on The Leverage front, you know as far as getting down to four by the end of this year and month below low 421 it mostly just from an you know, naturally doing it through an ebitda growth or are you looking to do potentially asset sales to help accelerate that process if so sort of how you looking at? The the non-core assets side of things? Yeah, but thanks for the question. It's going it's going to be both and I know your your attentions immediately going to turn to what it is non corporate said and that will that will depend on a few few things. I guess the threshold is are you in D J or Delaware? And at the answer is yes, then it's likely core aside from that wage determining what's non-core will also depend on the price Discovery associated with what whatever we might be looking at the best thing of but the goal is to look at the portfolio and rational.

To the extent it makes sense taken into account what we can get in terms of proceeds and then dedicating this proceeds to restoring the balance sheet.

Got it. And then maybe this will follow up on Jeremy's question the same little piece any updated thoughts on Secor conversion this point are you guys still kind of working through, you know some of the latest agreements here and shooting employees over? Yeah. We we actually looked at that back in February when we did the simplification transactions of she'll she'll to that to see you know, what what was West looked like an hour before and coming out of simplification and and the acquisition from Anadarko. It's still something that I definitely analyzing one thing about going to see Corp is once you do it you can't go back and so we need a firm understanding of what we look like from a taxation perspective because once you become a sequel become taxable, they're when 21% of your distributable cash flow. So it's something we're going to be very thoughtful mindful of but we are definitely analyzing it.

Got it. Thank you very much.

No, next question today comes to speak to Denise Credit Suisse, please go ahead and after you guys want to go back to the third party business as well. Just trying to figure out how I feel about the maybe the capex impacts of those efforts, I guess in your peers right now. We're trenching a bit maybe moving towards maintenance capex mode. And so with your efforts to sort of increased that third-party Revenue line you feel like you can do both captured a third-party business and then keep capex on the lighter side.

Yes. This is Craig.

And and I'd like to to try and answer that for you. I mean when we look at the extensive infrastructure footprints that we have in the Delaware the DJ basins specifically home and and you know with the aerial extent of our systems. We we are very close to to several producers in and around our existing infrastructure. And so Monday, we're actually seeing very good progress and and discussions that were having with those producers in terms of getting getting incremental business brought online and we think we can do that pretty minimal Capital, you know going forward and and so I think that that really provides us a competitive Advantage as we continue to engage with these producers and the and this environment I think, you know, the competition also has Capital constraints as well. And so we we are looking forward to to continuing wage.

some of the

successes that we've had in this regard

understood and and then like just trying to reconcile some of your comments around this this excuse me successful refinancing and obviously the positive momentum from the ratings agencies, but the same time as you age you have a 20% yield on the equity and so it's trying to put those two together and I guess the extent that you believe that there is a large dislocation here in the equity you five acts have any space in your Capital allocation framework, even if you buy back from oxy on a go-forward basis. Yeah. That's a very good question. I don't you know, the units are yielding is if there's some problem with being able to pay the distribution which we firmly do not believe to be the case at the same time. I don't view this decision Point any different than exercising Capital discipline with respect to God on the Upstream side of prices go up. Do you dramatically change? What you planning to do? I don't I don't think that screams Capital discipline and the same thought processes is going on here. I would tell you.

in order for

West to be nimble in terms of being opportunistic whether it's on an acquisition side or anything else we might be looking at the balance sheet needs to be right size to to be able to be right.

Don't agree again. I reiterate that that the the balance sheet metrics are first and foremost, we're committed to being investment-grade. That's that's why we had such a successful Bond offering coming down the marketing related to that offering and it's something that we're we're absolutely dedicated to to being an investment-grade company.

Yep, makes sense. That's it for me exercise.

And our next question comes from Journey of UBS, please go ahead. Hi good afternoon. Everyone start off with sort of a combination of questions that have been asked to write what I think about Western gas and I think about the broad Midstream sector in general. I mean, you've been growing very quickly over the years and so forth and you're kind of it's interesting place where you're bringing all these employees on from oxy onto west and so forth how much effort has been made has been done to make sure that you're bringing on the right number of employees or can you use this as an opportunity to call, you know reduce costs in a pretty significant manner. Do you need 1100 to you or do you really need 900? Can you walk us through how you're thinking about that process to ensure that all right sizing the cost structure for the environment that we're actually in.

Sure, it's Michael. It's a great question. We actually went through a very extensive process coming up to the the point at the

Of the year in order to right-size the overall business choose the right employees overall for the company on a go-forward basis in light of the the trans the oxy Anadarko acquisition. There was a significant amount of work that was done to select the right employees that fit best on the oxide that fit best on the West Side Pub. And in that process find the optimal structure overall for Wes, so leading up to the deconsolidation at the end of or at the entering into those agreements at the end of the year there was months and months of work in order to get the business in the right place going forward for for where we said,

Okay, and then trying together I think your comments I think maybe it was two Spirits question about you know balance sheet comes first. And I think you got asked questions about the distribution a straight earlier and that you're you're proud of the history of of the distribution increases, but when I sort of look at where you're trading today and even not just this last week, but the week before the week before that it it clear that or it seems that the market is not valuing the distribution at this point light right now is that track record more of a nice to have versus wage? Why not accelerate down your leverage further or buyback units. Is that something that you've discussed with the board or does the desire for cash flow from some of your constituents sort of overwhelm? What could be a great buy back to me?

Yeah, I understand and again, you know the distribution.

Policy is something obviously that we that we sound and socialize with the board. I think that the recent dislocation we've seen in the broader market and in our own security, you know, it will have us thinking about exactly what you're alluding to her. I could actually talk about a unit buyback. But at the same time we need to get the balance sheet, right? Is it a nice to have in terms of a you know, 1% year-over-year distribution? I think that's exactly how I would characterize it. But again, I don't I also don't believe that that distribution increase of 1% is is Meaningful in terms of what we have lunch from from a balance sheet leverage perspective as well. As for many, you know, perspective or theoretical unit buyback. So it is it is character. It is a nice to have I I would actually agree with that. But then again if if if you know if we come out and we say, okay, well 0% distribution increased in the immediate question comes. Where are you looking at a distribution cut right and I don't think

We're prepared to say anything close to that. And so we're comfortable with the 1% year-over-year.

Okay, final question. Just when I think about your production forecasts versus oxes for Cavs. Should I also be thinking about the GD and that could create some differences to how I think about what oxy saying about what it's expected in versus what you're expecting because you get all the volume from the office versus in in that can create some sort of the differences and trying to understand what oxy saying versus your guidance. Is that the action the action or sorry? Sorry to say that you were done there. My apologies the the shell that Anadarko had with shell has actually expired. It's no longer in place. And so when when you do think about volumetric growth as it relates to wesa system, you do need to take into consideration that you know, Oxys guidance are on in corporate level as opposed to the specific a dog.

level where West is and then yes, you do need to think about it in terms of

Um, you know working interest percentages versus gross volumes, that would be flowing through our systems that answer your question. That definitely does really appreciate it. All right. Thank you very much. Enjoy the weekend.

And ladies and gentlemen, this concludes the question answer session. I'd like to turn the conference back over to Michael you over for any closing remarks. Thank you all for your participation on the call. I want to really thank the less employees on Thursday an excellent quarter in the fourth quarter, and and we as a whole are incredibly excited about the future of West as a standalone Enterprise. Thank everyone for participation and everyone. Please be safe.

Thank you, sir. This includes today's conference call. We thank you all for attending today's presentation. You may not have met your lines and have a wonderful day.