Q2 2021 Western Midstream Partners LP Earnings Call
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I would now like to turn the conference over to Kristen Schwartz Senior Vice President Finance of communication. Please go ahead ma'am. Thank you I'm glad you could join US today for Western Midstream second 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 <unk>.
GAAP reconciliation.
Please reference Western midstream most recent form 10-K, and 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.
The France materials are posted on our website with me today are Michael <unk>, Our Chief Executive Officer, and Craig Collins, Our Chief operating Officer, I'll now turn the call over to Michael.
Thank you Kristen and good afternoon, everyone.
Yesterday, we reported second quarter 2021, net income of $226 million and adjusted EBITDA of $491 million, an 11% increase over prior quarters adjusted EBITDA.
With strong producer activity levels and winter storm, Yuri behind us, both the DJ and Delaware basins outperformed our second quarter expectations and generated increased throughput across all products in the portfolio.
We continue to generate significant free cash flow by remaining disciplined in our cost and capital spending for the second quarter, we generated $380 million of free cash flow and $247 million of free cash flow after distributions.
We also increased our second quarter distribution of 2.319 per unit, representing a 1.3% increase over the previous quarter, which is in line with our commitment to an annualized distribution growth of 5%.
In a few moments Craig will provide additional color on producer activity levels. We did however want to quickly comment on the second quarter impacts the drove higher than anticipated O&M expense and our thoughts on G&A going forward.
Related to O&M.
We incurred $6 million in additional utility charges that were invoiced by our providers related to winter storm Yuri.
The majority of these utility expenses are contractually passed through in gross margin and therefore had a minimal impact on adjusted EBITDA for the quarter.
We also recognized $4 million for a 1 time environmental liability recorded in June this relates to an incident that occurred several years ago and the asset has since been decommissioned as these charges subside, we expect O&M expense to normalize during the third quarter. Despite these 1 time events, our O&M as a percentage of <unk>.
<unk> gross margin decreased compared to the prior quarter. We also saw year over year increase in G&A for the 3 months ended June 30th 2021 from costs associated with contracting consulting primarily related to our it services and fees associated with the transition and transformation of our it infrastructure.
This increase was embedded in our 2021 guidance and we expect G&A to remain at this level as we fully absorb the cost of being a stand alone enterprise turning to the second half of the year, we're seeing increased producer activity specifically in the Delaware Basin and we've been successful in attracting incremental third party business to prepare for increased throughput.
We now expect to be at or above the high end of our 2020, 1 capex range of $275 million to $375 million.
We've reduced our cost structure and enhanced our operational efficiencies and we expect increased capital spend to be dedicated to gathering these incremental volumes. While we expect these capital efficient dollars to generate a modest increase in 2020.1 adjusted EBITDA. This uptick in activity gives us optimism on 2022 throughput levels and thus 2020.
2 EBITDA, coupled with our second quarter outperformance, we now expect to be near the high end of our 2021 adjusted EBITDA range of $1.825 to $1.9 billion to $5 billion. Despite the $30 million of adjusted EBITDA impact of Winter storm Yuri during the first quarter, we are still fully committed to maintaining our leverage target.
At or below 4.0 times at the end of this year and at or below 3.5 times at year end 2022.
By retiring near term maturities and generating incremental EBITDA, we can more quickly reach these targets, allowing us greater optionality and flexibility to adapt to evolving market conditions.
Our performance through the first half of the year has enabled us to enhance stakeholder value to recap as of today. We have already retired the entire $431 million senior notes due in 2021 through.
Through the unit buyback program and Anadarko note exchange, we have repurchased 30.134 million units, which represents over 7% of our outstanding units.
We intend to Opportunistically employ our previously authorized $250 million unit repurchase program of which we have approximately $200 million remaining along with our planned increase to our quarterly distribution. We look forward to using these multiple paths to return value to stakeholders as conditions dictate.
With that I'll turn the call over to Craig to discuss our operations in the second quarter, Greg. Thank you Michael before we get into this quarter's operational performance I would like to take a moment to discuss the Crestone deal announced in our earnings release.
During the second quarter, we executed a long term gas gathering and processing agreement with Crestone peak resources.
As part of the deal Crestone dedicated approximately 74000 acres in the Watkins area located in Adams, Arapahoe, and Elbert counties in Colorado to us as well as up to 148000 additional acres that may be acquired and connected to its gas gathering system in the future.
I want to thank our operations engineering and commercial teams for their continued dedication and success in growing our third party business. The deal demonstrates our ability to remain competitive by leveraging our experience of backbone infrastructure and focusing on cost and operational efficiencies.
The competitive advantages we provide the producers like Crestone is only made possible by our dedication to safe sustainable inefficient operations. We're excited about our partnership with Crestone and look forward to supporting their development plans and the D. J basin for years to come turning back to the second quarter, our throughput increase across all products.
As we experienced the full quarter with strong producer activity and without the market disruptions from the winter storm here in the first quarter as a result, our gas oil and water throughput in the Delaware basin increased by about 10%, 14% and 16% respectively from the prior quarter and the D J basin our gas in.
The oil throughput outperformed our expectations in the quarter, increasing about 5% and 20% respectively from the prior quarter.
The increase in rig activity early in the year, coupled with the continued completion of DUC inventory resulted in producer of outperformance during the second quarter and led to record gas throughput of 1 point for 3 billion cubic feet per day in May.
We expect D J throughput levels to decrease in the third quarter as fewer wells are expected to come online in the back half of the year. However, we expect the recently announced Crestone deal to help offset these declines beginning in 2022 across the portfolio gas throughput increased by about 5% or 220 million cubic feet per day.
On a sequential quarter basis, our water throughput increased by about 93000 barrels per day, representing a 16% sequential quarter of inquiries.
Throughput from our crude oil and natural gas liquids assets were up about 14% or approximately 83000 barrels per day from the previous quarter.
Our per Mcf adjusted natural gas gross margin increased by 2 cents on a sequential quarter basis to $1.21, due to increased throughput and a higher average gathering fee in the DJ basin our per barrel adjusted gross margin for crude oil and NGL assets decreased by 5 cents on a sequential quarter basis.
The $2.40, as a result of lower gross margin contributions from equity investments looking ahead as Michael said earlier the spike in commodity prices has helped to increase our producers' activity and we're seeing this more so than the Delaware. Most of this movement is from a private producers in fact based on our current Delaware Basin forecast we have.
Expect private producers to account for approximately 58% of our non affiliate gas throughput in 2022 as compared to 50% of our non affiliate gas throughput in 2021.
Our public producers continue to spend capital relatively in line with the original 2021 budgets Permian and specifically the Delaware Basin, where we operate continues to see the highest activity levels. Among the U S basins and as a result of our top tier position in the basin. We expect these companies private and public to continue.
The devote large portions of their capital programs to our acreage. These are strong tailwind for our business and they are the reasons that we're optimistic regarding the rest of 2021 and looking forward for 2022.
At the beginning of the year, we expected to exit 2021, with the relatively flat gas throughput of.
The percentage increase in oil by high single digits and water rates by low double digits versus 2020 exit rates.
Today, we expect similar oil exit rates of high single digits, but now have higher expectations for gas to increase by the mid single digits and water to increase by the high teens.
I'll now turn it back over to Michael for closing remarks, Thanks, Craig as we've stated in our prior calls our staff continues its hard work towards our goals and safety asset integrity and being strong stewards of our environments for minimizing our environmental footprint. We look forward to issuing our second ESG report ahead of our third quarter call, where we'll highlight.
Right the tremendous progress we've made in the first 18 months as a standalone company and discuss our embedded ESG goals for the future.
1 of the close by expressing my thanks to our employees and contractors they spend our first 6 quarters as a standalone company, establishing the foundation for Wes enhancing safety and protecting the environment, creating sustainable cost efficiencies and ensuring the reliability and performance of our system.
We again see the fruits of our labor with the Crestone deal on our ability to facilitate the accelerated producer activity. We see today with our talented work force an upper trend in the commodity environment I'm proud of the tremendous potential we have at west as we enter the second half of the year with that we'll open the line for questions.
Thank you we will now begin the question and answer session.
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Today's first question comes from Kyle.
Please go ahead.
Hey, good afternoon, everyone.
I was wondering.
I was wondering if we could.
By talking a little bit more about the crestone dedication and see if you could give us a sense of when those volumes will be additive and maybe the potential size of the volume contribution.
Yes, Thanks Scott.
So the way the we expect that to impact us as we will have.
The minimal capital in 2021 with with the volume as early to hit our system starting in 2022, so the biggest impact.
From a cash flow standpoint, starting in 2022 and beyond.
Got it okay. That's helpful.
And previously I believe you had suggested that Capex in 2022 would be similar to the budget for 2021 now that you're looking to be near the upper end of the guidance range. This year can you give us any preliminary thoughts about the budget for next year.
Yes, I wouldn't I wouldn't draw conclusions as it relates to 2022 as it relates to the expected increase in capital for 2021.
We saw in 2021 was with an increase in activity levels for the back half of this year and into 2022.
So as we think about capital.
For the back half of this year wouldn't deem it as indicative of what we might expect an IND in 2022.
All of that will be a little bit dependent on what the activity levels are expected to be going into 2023 and beyond.
But what we saw and the reason for the increases.
Additional well connects hookups and directly production oriented capital that will.
Drilling into the system ended into 2022, so we will come back with the expectations on capital for 2020 would not read into the.
This increase is being indicative of what we might expect into future periods.
Got it okay. That's helpful. Thanks, Michael.
Okay.
And our next question today comes from Jeremy Tonet with J P. Morgan. Please go ahead.
Hi, good afternoon.
I just wanted to start off I guess on capital allocation philosophy I was wondering if we could peel back the onion, maybe a little bit more.
When it comes to the 5% distribution growth versus deleveraging versus our unit repurchases just wanted to see if you might be if there might be anything more specific as far as how you think about you know where to allocate capital of any kind of rules of thumb or any other thoughts you could share on how the you guys are thinking about cash.
<unk> allocation for the specific specifically going forward at this point.
Yes, it's great question. So primary focus is that we want to exit this year again at or below 4 times and exited 2022 out of below 3.5 times. So that's the.
The primary focus for us related to that is the near term maturity. That's coming due first part of 2022 that we're going to pay off using free cash flow as well as the maturity in 2023 that we're going to utilize paying out of free cash flow. So as a result of those being the first major tenants for us in the <unk>.
Use of that capital.
Plan to continue to opportunistic.
<unk> look for buyback opportunities and as it relates to the distribution.
At least for the period referenced when we increased the distribution and the annual target range. It was really in relation to the amount of savings that we were able to achieve from the buyback of units as well as the debt reduction.
We start seeing the fruits of our labors and overall leverage reduction then we'll revisit that mix, but primarily for now is focused on getting us to a leveraged level of that.
The we feel is putting us in an optimal place to be able to return capital to stakeholders and give us greater certainty as to the sustainability of the business going forward.
Got it that's helpful. Thanks for that and then looking forward to 2022, I know you talked a bit about producer activities, but just wondering what we might be able to extrapolate at this point with commodity prices moving up a bit higher here.
They've reported recently, but just what you see for producer activity into 'twenty 2 because it takes 6 to 9 months plus for Capex to materialize into production just wondering if theres any kind of sensitivities.
If you could provide us for kind of half of next year could shake out at this point relative to this year.
Yes, I would just.
Direct a couple of comments related to that so as we came into 2021.
We were on a downward slope as it relates to volume so headwinds coming into the year.
What we're now pointing to a tailwind exiting the year.
Pretty high growth overall across the portfolio as it relates to exit to exit 2021 over 2020 over 2020.
And in addition to that the increase in capital if you actually look at where that is being directed towards.
Connecting volumes.
The direct production oriented capital I E well connects material increase relative to what we were expecting in the first quarter. So that is to bring on volumes that we're going to reap the rewards of really into 2022, So again youre exiting the year with tailwind relative to 2020 exit.
And the increase in capital is so that we can get volumes online.
2 to really reap the rewards of that in 2022.
So all very positive is as we think about.
The impact on on volumes and what we're seeing in the business.
Got it I'll leave it there thank you.
And our next question today comes from Derek Walker of Bank of America. Please go ahead.
Hey, good afternoon guys.
Maybe just the 2 quick ones for me.
Craig I think you've talked about.
The contribution from from Privates, I think relative to this year next year increasing.
Can you just kind of elaborate sort of how that compares to some of them.
Archie commentary from its earnings call, where I think it's ex.
Similar production profile to 2021, so I guess the D.
You see.
Private continues the increase in does that does that the.
Commentary.
The commentary that you alluded to in 2022 factor and oxy of commentary. Thanks.
Yes.
I think what we've.
Outlined is that the mix of our non affiliate volume is.
Increasing amongst the privates relative to our public producers.
Through the uptick in activity that we've seen throughout 2021.
As for what to expect in 2022 and beyond particularly from the public.
The companies that we have tied into our system.
We're really going to need to take a look and see where they come out with their budgets for 2022, we continue to have dialogue with them and stay.
In those conversations.
We've got pretty good line of sight for a number of the private producers out of <unk>.
The increase in activity thus the.
The.
The acceleration of capital as Michael alluded to on well connects in.
With some compression the included in that as well.
Get ready for that net growth in 2022 volume.
But as for what that mix will be in 2022 and beyond.
We really just need to see and see how the 'twenty 2 budgets.
It worked out for the rest of our producers.
I appreciate the loyalty.
I'm sorry.
1 additional comment on that as the Oxy, obviously has a very attractive and vast portfolio of assets and really only a fraction of that and so when.
You need to take into consideration when they are making comments as it relates to the totality of the portfolio that we're just a fraction.
Of that.
And and so.
So when you see the impact on us it's more specific to where they are directing that capital as opposed to of the total portfolio.
I appreciate that Mike and Greg maybe just a quick.
The ball here just on the.
On the margin commentary you talked about oil being down relative to the higher contribution from equity investments of then on the gas margin and I think there was just the increased due to the D. J shall we.
How should we think about the margin going forward on margin per barrel going forward.
You have the the deal in the Colorado, They just announced the should we expect that to be a similar margin.
On the gas side.
On the oil side would you expect that similar to Q2 run rate.
Yes, so as it relates to the margin actually.
Pretty limited variability frankly, when you look out of quarter on quarter. So Q1 for natural gas was dollars 1920, and second quarter of $1.21 crude.
Crude oil and NGL of $2.45, and then $2.40 for second quarter and 92.
For for water quarter on quarter for both quarter, So actually I'm pretty limited variability when you look at it and you're always going to see a little bit of that variance depending on the contribution from equity method investments as well as where the volumes are coming from within our contract portfolio, where there are of different rates associated with it.
As it relates to credit strong again, we don't actually give the specifics.
Related to contracts, but the the.
The expectation of 1 of those volumes are going to come online is really more 2022 and beyond so wouldn't drive the derive any indication as to what that.
It might mean for gross margin in 2021.
And I would just add that.
And from 1 year to the Max the.
The cost of service rate resets can have an impact on what the gross margins look like so I wouldn't necessarily extrapolate too far out for the future, but in the near term.
Yes don't expect a whole lot of the variability.
Great. Thanks, Blake Thanks, Greg I appreciate all of them there.
Q.
And our next question today comes from sort of Christian.
Yes. Please go ahead.
Hi, good afternoon, everyone.
Just a few follow ups to some of the answers that you gave previously.
Maybe to start on the capital allocation question.
I fully understand that the distribution increase in 'twenty, 1 what's the sort of a function of the amount of units you would reduce through the buyback program and that the priority is the next maturity in the tower, but I was kind of wondering like what are the other options that youre thinking about and I guess, it's kind of a high class problem, but it sort of seems like youll end.
For the sub optimal leverage ratio of towards the end of next year do you consider something similar to like 1 of your peers recently did with our buyback from the sponsor as well as like a onetime special step up in the distribution.
Yes, sure it's of Great question and the.
The highlights the opportunity that we have as we get into the more attractive leverage levels I definitely would concur that.
Certain leverage point the utility of additional.
Net reduction actually has reduced certainly in and thankfully, we're getting to a place where.
The leverages of.
A very attractive level, where those other opportunities are available and open to us and so.
The answer is yes, we're we're definitely open to considering.
The best ways in which we'd be able to return incremental capital to to stakeholders.
Orders in.
The good part of that there are a lot of opportunities available to us at that point primary focus for us.
The near term. However is the is to get to that ideal.
Leverage level.
And we can assess those options and thats been our focus up to this point.
Great appreciate the color there and maybe the follow up on the Capex side for 'twenty 2.
Can you sort of share with us what you're thinking about or what the makeup with the I understand you can't give us the final number at this point.
Are there.
To build the new processing plant or do you have plenty of capital light options as well as well connect capital of that really is the majority of the weight of the makeup of of how youre thinking about spend for 2002.
Yes, it's a great question. So so for US we're currently expecting the mix to be pretty similar to the way that you've seen it in in 2021.
As we mentioned before.
We would first look if we have needs outside of our 100% owned assets to look for off loads of other arrangements. So that we can utilize the capacity that exists in the areas in which we operate.
So our current expectation for 2022 would be a similar mix of capital.
So what we see today very.
Quick cycle volume oriented capex that that we would expect from 'twenty 2 relative to 2021.
So just to clarify some of it given that you are expecting a similar type of mix than the.
The.
The Delta I should just really be more a function of what your expected volumes are for 'twenty, 1 versus your expected volumes for 'twenty, 2 and sort of kind of adjusted that way is that kind of the good roadmap.
Yes, very very activity dependent type structure exactly share.
Perfect Alright. Thank you very much really appreciate the color today.
And our next question today comes from Robert Moskow with Mizuho. Please go ahead.
Hi, everyone. Thanks for taking my questions. Just wondering if you of any early indications of how cost of service adjustments could shake out for.
In the fourth quarter, maybe relative to 2020, you've probably towards the the higher end of the Capex range.
And somewhat delivered of investing that volume growth can be more of a 'twenty..2 features of just curious if the activity in capex.
So as stated with that growth to be captured in your rates for for this year's adjustment or possibly exit share.
Yes, a couple of things to consider we don't have an indication.
It's too early to tell.
Definitely be reflective on what activity levels are expected at the <unk>.
That those.
That those assessments do take place but.
A couple of comments is that as Craig mentioned.
The percentage of affiliate gas for example.
As of.
Increasing so therefore sort of non affiliate of gas is increasing therefore more third party oriented and so as we think about the increase in capital I wouldn't necessarily derive the conclusion that it is all specific to cost of service type contracts.
So at this point, we don't have an assessment of of what they might look like but would not exactly draw a straight line as it relates to the increase in capital and the impact on cost of service rates that might occur at the end of the year because of.
A fair amount of that might be activity levels that are not related to the cost of service oriented contract.
Okay, Great. That's helpful color and then in your prepared remarks, I think you said that the Crestone deal.
Should offset some G. P. J day class from 'twenty, 2 I'm not sure if I heard that right, but just wondering if your base case expectation on the DJ for next year is declining legacy acreage such as you could.
Provide more color there that'd be helpful.
Okay.
Greg you want to comment on that.
Yes.
Actually.
Our.
Volume is up in the DJ for next year.
Because of this year, we see as being relatively flat from where we are going to exit this year and thats due in large part to the incremental volume growth that we'll see from the <unk> deal.
To help offset the other.
Otherwise the natural declines.
Okay got it.
That's all I have from it.
And ladies and gentlemen, as a reminder, if you'd like to ask the question. Please press Star then the 1 today's next question comes from Sunil Sibal Seaport Securities. Please go ahead.
Yeah, Hi, good afternoon, everybody and thanks for all of the color on the call.
So since the start of the year.
This is done at fairly decent job of manner.
The index maturities and also kind of the holiday.
For the introduction.
I'm just curious you know how your discussions with rating agencies have been on that front and then do you think.
Get some credit from them for the actions that you've taken so far.
Yes, it's a great that's of great question, so as it relates to the to the credit agencies, we maintain a very constant dialogue with them.
Obviously, the the positive results that we've seen the debt reduction overall.
<unk> has received very positively, especially as it relates to actual debt reduction not just EBITDA growth being the.
The improvement overall in those in those metrics.
As it relates to ratings. However, they have been pretty open with us that there will be.
Some connection.
Being degrees, depending on the agency the you referred to.
<unk>.
With Occidental and their ratings and so.
We would expect that that would continue despite all of the positive.
Debt reduction activities that we've engaged in so.
I think that's really where it comes out I look at us as being very much investment grade in our metrics today.
View it as.
And the indication of the positive elements of our business. The way that we have been able to reduce debt over time and put ourselves in a very attractive position from a leverage standpoint.
But from a rating perspective, it will be somewhat dependent on.
Our largest customer akshay.
Got it kind of related to that.
Could you give us a sense of.
Third part the kind of cash flows would end up in a ballpark the number would end up in 2021 and it seems like wanted to the.
The kind of the uptick in the third party numbers of contributions.
It would not of anything additional to disclose the other than what we disclosed in the in the 10-K.
As it relates to.
Affiliate versus non affiliate the volumes, which is the.
Of the 60 odd percent range from an affiliate.
Revenue perspective.
So I assume that you still expect to be in that ballpark for the next couple of years or should we just kind of have to wait out to see how that.
All of those numbers come out.
Yes, we don't actually provide any specific.
Rejection of our guidance as it relates to where that.
The ratio will go over time.
Got it.
Thanks for that and then last question from me was on the M&A front.
You know there has been from some transactions in the midstream space.
Other kind of curious you know how do you view.
Asset positioning in and.
The things that might be of a libertad.
You guys are.
Yes, I think that's of Great question. So a couple of comments as it relates to that we have seen an uptick and an improvement in terms of the attractiveness of assets like our portfolio.
So as we think about non core assets that puts us in a great position to be able to.
To find opportunities for them as they do exist from the sales perspective as it relates to acquisition targets part of the the element of us getting ourselves into the best place from a leverage standpoint is that we would be able to opportunistically look out for those.
M&A opportunities that would be accretive overall to our operational footprint into our financial footprint as we look forward and so.
We can we can definitely see with our strong asset base strong customer relations and customer base to be able to achieve some synergies. If we if we see opportunities in around of our assets might might set.
And from a leverage standpoint, putting ourselves in the best position to be able to execute on that as has been our goal up to this point and will continue to be until we get to that optimal range.
Okay. Thanks, Mike.
Yeah.
And ladies and gentlemen, this concludes our question and answer session I'd like to turn the conference back over to the management team for the final remarks.
Thank you very much for joining us for this quarters call very positive performance by the team on I'd like to thank the the entire employee base for all of their efforts up to this point and look forward to what we can deliver in the future. Thank you all for joining.
And thank you Sir This concludes today's conference call. Thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.
Okay.