Q1 2021 Western Midstream Partners LP Earnings Call
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Good day and welcome to the Western Midstream partners first quarter 2021 earnings Conference call.
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I would now like to turn the conference over to Kristen Shults, Vice President Investor Relations and Communications. Please go ahead ma'am. Thank you I'm glad you could join US today for Western Midstream first quarter 2021 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 form 10-K from 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 <unk>, our Chief Executive Officer, and Craig Collins, Our Chief operating Officer, I will now turn the call over to Michael.
Thank you Kristen and good afternoon, everyone.
Yesterday, we reported first quarter 2021 adjusted EBITDA of $443 million.
The impacts of winter storm, Uri and the Colorado Blizzard decreased adjusted EBITDA by approximately $30 million for the quarter.
While these winter storms caused throughput to decrease and operating costs to increase for a short period of time the impact was temporary with no long term infrastructure supply issues.
We expect throughput and adjusted EBITDA to now increase throughout the year, especially in the second half and we remain comfortable and our ability to meet our previously communicated 2021 guidance of adjusted EBITDA between 1.8 to five and $1 $90 billion to $5 billion.
Furthermore, while capital expenditures have been pushed out slightly we still expect to fall within our previously communicated capex guidance range of 275 and $375 million, we remain focused on identifying innovative ways to reduce our cost structure and work more efficiently.
Despite the winter storms, we generated $214 million of free cash flow and $83 million of free cash flow after distributions during the first quarter.
Our focus on free cash flow generation since 2020 has enabled us to repay our 2021 debt maturity in March for total debt reduction this year of $431 million and Furthermore, we expect to generate free cash flow after distributions sufficient to allow us to repay our $821 million of near term maturities as they can.
Come due over the next two years using free cash flow.
This will maintain leverage at or below four times at year end 2021, and further reduce leverage at or below three and a half times by year end 2022.
We also implemented a 1.3% increase and our first quarter 2021 per unit distribution versus the prior quarter's distribution, which aligns with a targeted annualized distribution growth of 5%.
Over the past year, we've completed a number of transactions to support this distribution increase in September 2020, we completed the $255 million Anadarko note exchange for units owned by Occidental and November 'twenty 'twenty, Our board authorized and we initiated a $250 million unit buyback program.
We repurchased $218 million of debt and 2020 and recently retired $431 million of 2021 maturities.
These transactions have increased our annualized free cash flow after distributions by $54 million.
This increase and annualized free cash flow more than offsets and annualized 5% distribution growth target for nearly two years. Furthermore, current forecast support a pay down of our 2020 two debt maturity of $581 million, which would increase our free cash flow and additional $23 million and almost offset and.
And all year of 5% distribution growth.
We expect a significant organizational and operational improvements achieved during 'twenty 'twenty to continue to generate incremental free cash flow and further support our ability to increase the distribution as.
As recently commented and producer activity levels remain consistent with 2021 levels over the next five years. We believe we will have the ability to internally fund, our core business and generate sufficient excess cash to repay all debt maturities through 2025 target at least a 5% annual distribution growth rate and achieve a.
Net debt to trailing 12 month, adjusted EBITDA ratio at or below three point out times.
While the board will continue to evaluate our distribution level each quarter based on business needs and we're optimistic that the fundamental changes we've implemented at west will enable us to confidently sustain a reasonable distribution growth rate, while still allowing for meaningful free cash flow for other stakeholder enhancing opportunities.
At the end of the first quarter, we have repurchased a total of $49 million of units through our previously announced common unit buyback program, which is currently authorized through December 31 2021, we.
We continue to see the value and the buyback program, which we will execute opportunistically through the unit buyback program and Anadarko Note exchange, we have repurchased 31.34 million units to date, which represents over 7% of our outstanding unit count as of the filing of our second quarter 2020 10-Q.
By repurchasing debt in 'twenty, and 'twenty and retiring our 2021 maturity, we continue to prove our commitment to reducing leverage. Furthermore, through further debt repayments cash distribution growth and unit buybacks, we remain flexible and opportunistic and how we return value to stakeholders with that I will turn the call over to Craig to discuss our first quarter operations.
Thank you Michael.
First I would like to congratulate our team for its recognition by the GPA Midstream Association for outstanding safety performance and 2020.
For the second consecutive year, we were awarded first place and the division one category for companies with greater than $1 million reported man hours I.
And I'm incredibly proud of our team their attention to safety and their concern for one another a sincere. Thank you to all of you.
Operationally gas throughput increased by approximately 2% or 74 million cubic feet per day on a sequential quarter basis, while winter storm, Uri and the Colorado Blizzard negatively impacted first quarter throughput for all products and additional third party connection to away from two at the DJ Basin complex beginning January one 'twenty.
'twenty, one helped to support our gas volumes.
Our water throughput decreased by approximately 62000 barrels per day, representing a 9% sequential quarter decrease as a result of lower producer throughput and the Delaware basin, including the effects of winter storm Yuri throughput.
Throughput from our crude oil and natural gas liquid assets was down about 2% or about 15000 barrels per day from the previous quarter, primarily due to decreased throughput at our Delaware basin facilities.
Our gross margin for crude oil and natural gas liquids decreased by 24 cents on a sequential quarter basis to $2 45 per barrel.
As previously mentioned our fourth quarter gross margins were positively impacted by our annual cost of service rate Redetermination.
As Michael said earlier, we expect EBITDA to increase throughout the balance of the year and volumes to follow for the remaining three quarters. We expect about 130, new wells to come online and the Delaware and 115 and the D. J.
These expectations are supported by increases and various producers' activity levels and the Delaware basin, coupled with incremental new business developed by our commercial team now.
Now I'll turn it back over to Michael at this time.
Thanks, Craig and moving on from our first quarter performance I'd like to take some time to provide and update on our 2021 objectives of enhancing customer service and operational excellence and minimizing our environmental footprint to increase our internal focus on these areas. We recently added employee environmental and community metrics to our performance targets.
First while the industry standard safety metric of T. R. I are representing total recordable incident rate has always been and performance target for the west team. We further emphasize safety by including and additional safety target that is a better measure for the severity of our incidents through the implementation of a days away restricted.
<unk> or transferred metric, commonly referred to as dart to demonstrate our commitment to environmental protection. We added a target metric for total volumetric spill rate or T. V. S. R. As we continue to assess our environmental footprint, specifically, our emissions data I expect us to further expand our targets expanding these H S. S E <unk>.
Rex and aligning employee and management compensation with these targets more appropriately demonstrates how much we value the safety of our people and protection of our environment.
Giving back is at the heart of what it means to be part of the west family.
So our internal performance metrics now include a voluntary target this target places value in our community investment programs and encourages our employees to actively spend time assisting their communities since January approximately 18% of our employees have collectively spent over 1000 hours actively volunteering across the <unk>.
Tree from sorting cans and food banks to planting trees for Earth day, our employees are sharing their passion for helping others and the communities, where we live and work while strengthening our culture based on servant leadership too.
Turning back to the environment, we continue to evaluate sources of methane and C. O two emissions across our portfolio and the feasibility of various reduction projects. We recently met with our newly formed a board level ESG Committee to review, our environmental footprint existing emission minimizing methods and potential long term projects as <unk>.
Our thoughts and actions around long term initiatives evolve, we will keep our stakeholders apprised of our progress.
In 2020, one we are minimizing our emissions through thoughtful design and construction of our assets and by collaborating with third parties to find the best solutions to today's climate related challenges.
Throughout the past several years West is employed new technology and design systems to reduce carbon emissions for west and our customers.
Our high vapor pressure oil gathering systems, and the DJ and Delaware basins are examples of west taking a leadership role and reducing emissions. Beginning this year. We are taking best emissions controls practices found out west and throughout industry and incorporating them into our standard compressor station designs.
Going forward all compressor stations planned for construction will utilize methane, reducing technologies and lesser deemed not feasible for regulatory logistical or safety reasons.
These stations will utilize instrument air systems, instead of natural gas systems to drive pneumatic like control devices and assistant engine startup. We're also installing piping to route vented gasses from pipeline and compressor engine maintenance activities back to low pressure gas systems to reduce associated emissions. These types of projects help.
US minimize our existing greenhouse gas footprint, while adding capacity to our systems. We're also participating and various research projects with third parties that are focused on methane reduction as one example, we plan to participate in a study with Colorado State University to jointly evaluate methane emissions from air and ground levels and the D. J basin. The study will also utilize.
<unk> computer modeling to improve our emissions inventory and test various methane detection technologies. We're excited to participate in this study to further drive innovation and change and our space before we and our prepared remarks I'd like to provide an update regarding organizational changes at west.
We have performed extremely well because of the strength and talent of the people within the organization, who have continued to step up and provide valuable leadership, we have not and at present do not feel the need to replace the CFO position.
And Lula filling that role will be promoting three individuals who will take on key responsibilities within the organization.
Catherine Green, our current Chief Accounting Officer has been promoted to SVP and Chief Accounting Officer Christian Shults has been promoted to SVP of finance and communications and Crystal sled has been promoted to SVP of human capital management and diversity equity and inclusion with their help we will continue to focus on optimizing the business per.
Assuming social investment initiatives and delivering value to stakeholders to.
To close the winter storms and the first quarter provided us with a small speed bump, but the decline of the pandemic and the U S and stability of the commodity pricing environment is fueling our optimism for the remainder of 2021 and beyond for the last 14 months, our employees and contractors have worked long hours to ensure that Westwood would be well positioned as a premier midstream.
And provider when we came out of the pandemic.
And the board and entire management team appreciate their collective effort to get west to where we are today, there where it gives us great confidence that we're on our way to accomplishing the objectives. We laid out at the end of last year with that I would like to open the line for questions.
Thank you we will now begin the question and answer session.
To ask a question you May press Star then one on <unk>.
And if youre using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
Your first question comes from Shneur <unk> with UBS. Please go ahead.
Hi, good afternoon, everyone.
And maybe I'll start off with the question you made an interesting comment in the prepared remarks, you were talking about the fact that you reduced your units outstanding by 9% and net increase in the distribution was only five per cent.
And some of the goal at least in the near term organic.
And the new Chairman day next year will true is the idea to sort of keep the actual cash out flow kind of under the plan of 140 level that you were at let's say and the third quarter of last year and you would be raising the distribution in line to match the unit count drops so that the cash outflow doesn't actually.
Is that kind of the strategy or is it just credit by happenstance and Thats working out this way.
Yes, Shneur, it's a great question. So just one one small correction the.
The number of units that have been repurchase amounts to 7% of the per.
Pre unit Reaper.
Our repurchase unit count so if you looked at it second quarter of 2020.
The 30 134 million units.
Over that unit count at the time was about 7% of of the market cap, which is a which is an enormous number overall.
And that combined with the reduction and distributions as a result of that unit repurchase program as a whole as well as the debt reduction initiatives that we started in 2028.
And into 2020, two 'twenty, sorry in 2000, and 'twenty, one 2020, two and 2023.
Provide the ability for us to be able to deliver on a 5%.
Distribution growth without actually increasing.
The free cash flow.
Burden overall, and sustaining and free cash flow after distributions and that would've been in place had those.
Retirements, whether it's on the unit count side of the debt side actually not occurred. So it is it was definitely our plan and our strategy.
And rewarding our unitholders overall or.
Some of the initiatives that were undertaken starting in 2020 to reduce our overall debt count and our unit count as a whole.
Great No that makes perfect sense, and just wanted to clarify that.
And then secondly, just wondering if I can talk about the guidance assumptions that were presented earlier this year and kind of where they stand today.
And with me your guidance for 'twenty, one was premised on kind of a given level of activity.
Discussions with your producer customers.
Can you share with US two things first of all where are the activity levels today.
By producers and hidden line with where you would where the previous guidance was that and then secondly.
And given your original guidance.
With the volume range established at the time and a certain commodity price deck.
And is there a potential for given where prices are today that if day rates activity you could see a change in your guidance and assumptions as well.
Yes, another great question.
So what we're actually seeing overall as it relates to activity levels was very much in line from the communications that we had received.
Going back to the back half of 2020 at the time that we initially released expectations from a performance level for 2021, and so overall, we were we were experiencing a little bit faster pick up on the private side, a little bit more discipline on the public side and that is actually born out overall.
And as it relates to the performance thus far.
And if there were.
Material increase overall and activity levels, let's say that that picked up over the next couple of months or so we would more likely actually see that impact 2022 at this point.
And as opposed to 2021, given the lag time that it would take to stand up a rig drill it and then ultimately get onto our system.
So overall, however, as we sit here today very much in line with what we were expecting at the end of 2020 and first part of 2021.
Perfect. Thank you very much I appreciate all the color today. Thank you.
And that's Washington Today comes from Derek Walker with Bank of America. Please go ahead.
Good afternoon, everyone.
I'll start off with a quick one clarification and one I think and form a mark you talked about.
And 130 wells is that poor and this is in the Delaware and I think at 115, and DJ and was that from.
And the entire year or is that from <unk>, one word for and rest of the year, that's going to make sure I understood. Those numbers and then I guess a follow up to that and just how do you expect the cadence of those wells to come online.
And I guess, how does that where lay into the capex guidance is that kind of in line with the midpoint or because the.
Well connects and bring into the lower and higher Ed.
Yes, Eric it's Craig and just to recap and the Delaware. The the 130, well that those are new wells expected and the second third and fourth quarter. So for the balance of the year post first quarter.
And then up and the DJ Basin, we're expecting an incremental 115 new wells.
Following the first quarter of this year.
In terms of cadence.
It's going to be particularly in the Delaware pretty pretty ratable throughout the year, we expect and and actually on the on the DJ side I think the activity levels are probably a little skewed to the front half of 2021.
But in terms of impact on our capital program. This is that pretty much in line with how we lined out our capital estimate for the year and so.
And we feel like.
Uh huh.
And what we're seeing in terms of new wells coming on between now and the end of the year.
Pretty well in line with what we originally expected when we put out our capital program. So.
And.
Our capital and the first quarter was a little bit lighter than we had expected.
I think last time, we had spoken but.
You know what what we've seen is there are some opportunities and projects out there.
The capital wasn't at front end loaded.
This year, we originally had anticipated, but we see that.
Being pretty ratable through the rest of the year.
Thanks, Greg.
And my view.
Follow up on your remarks around ESG.
And I appreciate the color around sort of the sort of internal targets or metrics that you are setting you mentioned.
Opportunities around further compression to reduce methane.
And you also kind of participating some studies and.
Idea of when some of these opportunities.
To come to fruition, what do you expect some of these studies to wrap up and.
How big of an opportunity set and you think this could be thanks.
Yes, it's a great question.
We would expect to be able to provide some additional details likely the latter half of this year as it relates to some of those initiatives that that we can undertake within our business you may recall from the last call.
Call that we had we already commented around.
The enormous impact and we've had on making a lot of our compression electric.
Overall, and the amount of <unk> reductions that have come as a result of that and this is just a further ends of that mentality of us trying to.
Again reduce our footprint overall on some of the studies that we are undertaking and some of the engineering efforts that that we are performing today to try and improve overall on the on that footprint and so the hope is that we'll be able to.
Highlights some of the the results of those efforts and.
And potentially the latter part of this year.
Great I appreciate the color thanks, guys.
And our next question today comes from Jeremy Tonet with JP Morgan. Please go ahead.
Hi, good afternoon.
Hey, Jeremy.
Good good thanks.
Just wanted to touch on the DJ per minute here, we've seen a lot of consolidation over the years here continued M&A and just wondering how you think that could impact out west and as volumes both in the near term and the long term.
Yes, Jeremy its a good question I would say that we don't really look at that as potentially impacting overall, we feel like we've got a great footprint, there and feel we've got great relationships with.
Any of the Counterparties that may engage and consolidation overall, and the DJ or the Delaware basin as a whole and so.
Really the way that we look at it as we want to be the best in class provider across the board and so and as much as there is consolidation and there is a potential selection to be made of the providers that they're going to go with now and the new form our goal is to make sure that we have the best relationships. We have the best service offering that we can compete from a cost per.
<unk> and <unk>.
What we use.
<unk> seen in terms of consolidation and it doesn't give us any any pause with regards to that mentality. So.
And as much as there is an increase and activity levels, obviously, it would provide additional opportunities.
If it is just going to be a combination of the two and activity levels remain constant and I would say that we don't really expect.
And a material impact other than just highlights the importance of the efforts that we've undertaken to try and be best in class and therefore, the selection of choice.
After that consolidation occurs.
Got it that's helpful. Thanks.
And then oxi seems to have noted.
Several carbon reduction goals and just wondering if there's a role for west to play and in achieving that so just any thoughts on that in general.
Yes, Joe when we do we do think that there are opportunities for us to work together with oxy and.
Part of that effort was in the formation of the ESG Committee, where two of the three members are current oxy employees and.
And the point around that was for us and try and facilitate and piggyback off of a lot of the incredible efforts that theyre doing to see if there are ways that sorry, the worst would be able to participate.
Overall it needs to ensure that we can provide an adequate return and goes along with what our core competencies are.
And we definitely think that there will be opportunities and the future and would look to work together with them in that regard.
Got it that's helpful. Thanks, and just one last one if I could.
It seemed and some of the filings there was a there.
Some dispute between oxy with one of the contracts. There just wondering if you might be able provide a bit more color what was happening there and just kind of any potential range of outcomes.
Yes, I would call it.
And just kind of regular way normal course types of.
Of interactions overall between producer and midstream provider.
We disclosed it particularly with regards to the secondary offering so that we can ensure that there was a full and complete information out into the marketplace. As we sit here today currently we don't expect any impact from a financial perspective.
Got it I'll leave it there thank you.
Hugh.
And ladies and gentlemen, and I as a reminder to ask a question. Please press Star then one day.
Next question comes from some real small with Seaport Global Securities. Please go ahead.
Yes, hi, good afternoon, guys and thanks for the clarity just one follow up from the previous discussion on ESG.
I think that it has been.
You brought up and industrial discussion on carbon capture and opportunities at our processing plants.
Kind of curious is that something you guys are also looking at.
And.
Considering the Capex and volumes and that's like investments you know how should we be thinking about.
Funding these opportunities if these are true moorhead.
Yes, so it's a great question, yes, we definitely are looking at.
Capture opportunities and in particular at many of our gas plants actual the amount of capital.
For those at least just the capture side of it is relatively minimal what I would say, though and it's great.
Question is that the efforts that we have undertaken since the beginning of 2020 to reduce our leverage and enhance our overall free cash flow profile is and part so that we would be and are positioned to be able to.
And we found the right projects and the returns associated with them where we.
Were acceptable that we would be and are positioned to be able to fund those types of projects and so a lot of the effort that we've undertaken is in part to put us in a position to do that.
But as it relates to carbon capture and definitely.
Looking at that and.
C C opportunities, therefore, and again from a financial perspective.
Great.
And a great place with a free cash flow generation of the business and the leverage reduction to be able to fund those types of projects.
And that's good.
And then on M&A, obviously, you did a small.
Contraction.
Last year.
How should we be thinking about.
That and the context of the fact that Joe and.
But all.
Equity investments and a number of assets is that kind of the first place for you to go to four.
Being opportunistic and M&A market.
Yes, no. It's a great question so.
And the answer is that.
Yes, we've got a wear and a great place from the standpoint that.
We don't need to execute anything on the M&A side to be able to achieve the targets and objectives that we put out there and.
And we can be opportunistic and looking at whether it's.
Enhancing our business through acquisition or whether it's through divestitures and some noncore assets.
It would only be in the event that we believe it would be enhancing to the targets and goals that we have out there, but it's not necessary for us to achieve them.
A little bit better M&A environment today than we were a year ago.
But our perspective and strategy around and it has actually been the same.
And since we've been a standalone company so.
And we continue to look at opportunities to enhance our business whether that's through.
Asset divestitures or potential acquisitions, but it is not necessary for us to do it to be able to achieve the goals that we set forward.
Understood and then one last one you know with regard to your discussions with rating agencies. So you obviously.
Kind of delivered on paying down the debt and ultimately they'll get back for further deleveraging.
I was just curious.
And your recent discussions with rating agencies.
Hi.
What would it take.
More and that ratings and.
And no explicit goals with regard to the customer concentration.
Kind of and.
And their expectations are.
And kind of view that you need to meet to for them to make certain moves on.
Things.
Yes, so we maintain a very active dialogue with the rating agencies.
Meet with them on a very regular basis.
We feel as if we're at investment grade from a from a metric standpoint, as we sit here today.
And so our focus is on making sure that we can continue to maintain those overall metrics.
And totality, so that so that.
And an opportunity to be able to move up to the investment grade credit rating scale as you mentioned they.
They do take into consideration customer concentration.
There's no specific target necessarily with regards to that.
But from our perspective, we don't have a target either right. So our goal is to to grow the pie as opposed to how it is the deposits split up so we want to make sure that were growing the amount of volume going through the system growing the cash flow free cash flow overall and.
And so we don't really have that target even if it were that the rating agency put one out there, which they haven't so for us. It's just about maintaining the metrics that we have today and if and when it comes and we welcome welcome the chance to get back up to investment grade, but our focus is on maintaining and doing what we can which is reducing.
Leverage overall.
Got it thanks for the color and congratulations to everybody who was promoted thank you.
You.
And ladies and gentlemen, this concludes the question and answer session and I'd like to turn the call back over to the management team for any final remarks.
Thank you everyone for your participation on the call I. Appreciate your time, we look forward to speaking to you and three month's time.
Thank you Sir This concludes today's conference call. We thank you also attending today's presentation. You may now disconnect your lines and have a wonderful day.
Okay.
Okay.