Q4 2021 Western Midstream Partners LP Earnings Call
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. Additionally, I am pleased to inform you that the western midstream partners K ones will be available on our website beginning March 4th hard copies will be mailed out several days later.
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 were pleased to report another strong year of operational and financial performance at Western Midstream.
Despite the negative impacts from winter storm here that we experienced in the first half of the year.
We also announced our 2022 guidance and refined our corporate financial policies by establishing an annual enhanced distribution payable in conjunction with the first quarter base distribution starting in 2023, both of which I will discuss in more detail later in the call turning to the fourth quarter volumes across all three <unk>.
<unk> increased sequentially, primarily driven by continued outperformance from the Delaware basin and higher volumes on our equity investment assets.
As a result, we materially exceeded our year end exit rate throughput expectations for crude oil natural gas liquids and produced water and met our expectations for natural gas.
Adjusted EBITDA for the fourth quarter totaled approximately $481 million. This 10% sequential decline was due primarily to the following.
In the third quarter, we recorded a favorable onetime catch up revenue adjustment of $19 million associated with previously constrained revenue and $26 million of unfavorable revenue recognition cumulative adjustments recorded in the fourth quarter associated with lower cost of service rates predominantly.
<unk> at the DJ Basin oil system. These are noncash adjustments impacting adjusted EBITDA and net income attributable to limited partners, but do not impact free cash flow.
We also had a very strong quarter from a cash flow perspective cash flow from operations totaled $662 million, resulting in $577 million of free cash flow generation.
This material increase in free cash flow compared to the prior quarter was primarily due to increased throughput and favorable working capital changes.
Turning our attention to full year 2021, we are proud to have surpassed all of our financial metric expectations.
We recorded adjusted EBITDA of approximately 195 billion, which exceeded the high end of our $1 85 to $1 $95 billion guidance range.
This was primarily driven by producer outperformance of the Delaware basin stronger than expected commodity prices commercial success in adding third party customers and realized cost efficiencies across our business dispositions.
This positioned us to deliver operating cash flow of approximately $1 $77 billion in.
An increase of 8% year over year.
During the year, we remain focused on diligently allocating capital between our various pillars of capital return, while still fulfilling the needs of our organization.
In addition to certain projects pushing into 2022. Our teams also worked hard to enhance capital efficiencies as a result, our capital expenditures for the year totaled $324 million well within our $275 million to $375 million guidance range.
This continued focus on capital efficiency helped us generate approximately $1 5 billion of free cash flow and $956 million of free cash flow. After distributions, we used much of our free cash flow position to further reduce leverage meaningfully exceeding our year end 2021 leverage ratio target of $4 <unk>.
Times through the retirement of $431 million of senior notes due in 2021, and the tendering of $500 million of senior notes due 2022 through 2026.
These actions enabled us to achieve a year end leverage ratio of three six times or three five times on a net basis after taking into account the $202 million of cash on our balance sheet at year end, our continuous focus on diligently reducing leverage provides multiple benefits.
In January 2022, we received an upgrade for west operating as long term debt to triple B minus from standard and poors. The partnerships first investment grade rating since the pandemic German downgrades in 2020, which will increase the partnerships' access to debt capital markets under more favorable pricing structures going forward.
Increase the distribution, 5% year over year paying a $1 27 per unit cash distribution meeting our per unit cash distribution guidance of at least $1 24. Finally, we completed our $250 million unit repurchase program by repurchasing $13 6 million units in 2020.
2021 at an average unit price of $18 41.
An approximate 29% discount to our current unit price of $25 81 as of February 18th.
Since becoming a standalone midstream enterprise, we continue to make tremendous progress in strengthening our balance sheet and generating value for our unit holders.
Since January 2020 bond issuance, we have retired one $1 5 billion of our debt or 14% of the debt balance and $41 4 million units or approximately 9% of the unit count we.
We have also paid out approximately $1 2 billion and distributions to both are limited and general partners all of which have resulted in $2 9 billion of total capital returns are approximately 18% of our year end 2021 enterprise value generating substantial value for our unit holders.
On a per unit basis, we have now returned $4 <unk> through debt retirement and unit repurchases and $2 98 in distributions for a total of $7 return to unit holders since the onset of the pandemic, which excludes any market driven appreciation in our current unit price.
With that said, assuming our current unit price as of February 18th we repurchased the equivalent of $1 1 billion of our current market valuation.
Generating value and returning cash to our unit holders, while protecting the health of our balance sheet continues to be the top priority for our partnership.
With this in mind, we're excited to discuss our refined financial policy and enhanced distribution structure.
We believe our financial policy provides a clear path the details how we intend to create additional value for our stakeholders as we generate significant free cash flow over the coming years. We are proud of the value that we've already created and this policy is expected to further deleverage the enterprise and return additional capital to unit holders.
Our value generation will continue to revolve around our three core pillars of reducing leverage increasing the distribution and repurchasing units.
As such we anticipate taking the following actions.
First and foremost we expect to retire over $715 million of aggregate principal amount of senior notes with approximately $502 million due in 2022 and $213 million due in 2023 using free cash flow. In addition, we're incentivized to achieve year end <unk>.
Leverage of three four times in 2020, 232 times in 2023 and $3 <unk> in 2020 for on a net debt to trailing 12 month adjusted EBITDA basis as part of our refined financial policy.
We believe achieving an ultimate net leverage of three <unk> times will allow us to better navigate and opportunistically capitalize on future market dislocations.
Based on current market conditions and estimates we plan to declare a quarterly base distribution of <unk> 50 per unit effective with our first quarter 2022 distribution, which is an increase of approximately 53% compared to the distribution declared in the fourth quarter of 2021.
The new base distribution will result in an annualized cash distribution of $2 per unit.
Upon our multiyear forecast, we feel confident that the distribution increase is sustainable and allows for remaining free cash flow. After the distribution to be directed towards our other core pillars of capital return since we completed our previous repurchase program at the end of 2021, we plan to commence a new $1 billion.
Repurchase program that we intend to opportunistically execute through year end 2024.
We believe our new repurchase program will be an integral part of our financial policy, enabling us to generate additional value for our unit holders through varying market conditions. Finally, beginning in 2023, we have established a framework for paying an annual enhanced distribution in conjunction with the first quarter base distribution the target amount of this <unk>.
Distribution will be equivalent to free cash flow in the previous year. After subtracting the prior year's debt repayments based distributions and unit repurchases. It is also contingent on attaining the prior year and net leverage thresholds after taking the enhanced distribution for such prior year into effect of three four times in <unk>.
20, 232 times in 2023, and three times in 2024.
The enhanced distribution will be paid only if we reach our stated leverage threshold and generate excess free cash flow after taking into account. The previously mentioned items as always distributions are subject to the board's review and approval since becoming a publicly traded partnership we have consistently returned available cash back to our unit holders.
The enhanced distribution structure allows us to accelerate the return of capital to our unit holders keep leverage in the health of our balance sheet central and all decision, making and provide additional clarity to unit holders as we continue to generate significant annual free cash flow into the future.
To the extent leverage increases because of internal or external factors the excess free cash flow that would have been directed towards the enhanced distribution would be used to reduce leverage, thereby ensuring the sustainability of the enterprise.
Our ability to meaningfully increase the base distribution and establish an enhanced distribution structure as a direct result of our constant focus on reducing costs, increasing operational efficiencies and maintaining a disciplined approach to capital spending. This provides us a great foundation and positions us well to drive net leverage down to three <unk>.
<unk> by 2020 for the annual enhanced distribution structure strengthens our overall financial policy and demonstrates our strong commitment to maintaining balance sheet health and returning value to unit holders is a distinct competitive advantage for Wes and further differentiates us from our peers.
Turning to 2022.
Strong commodity prices continued to support private and public producer activity levels as we transition into the new year, we expect the Delaware basin to comprise 50% of our asset level EBITDA for 2022 as strong throughput continues.
In the DJ Basin, we remain optimistic regarding the permitting process for new wells, but the slow pace of approvals continues to be a headwind for activity levels and we currently expect the basin declines we experienced at the end of 2021 to continue into 2022, we expect the DJ basin to contribute approximately 30% of our asset level EBITDA.
In 2022.
We anticipate 2022, adjusted EBITDA to range between $1 95, and $2.0 billion to $5 billion.
Every year, Delaware basin throughput.
Lower cost of service rates across the portfolio estimates will partially offset the adjusted EBITDA uplift, we would expect to see as a result of increasing Delaware basin throughput.
As early.
Reminder, anticipated increase activity levels beginning in 2020.
<unk> and continued focus on cost and capital efficiencies drove cost of service rates lower across the portfolio effective January one 2022.
Additionally, we are seeing increasing operational expenses in line with the continued expansion of our Delaware basin asset footprint, and inflationary pressures, specifically for chemicals and maintenance and repair projects.
<unk> will focus on the details of our capital spending plans shortly but I want to express my excitement regarding expected future activity levels. The increase in 2022 capital requirements as a result of our preparation for these increased activity.
Levels, which we expect to begin in 2023.
Thus, we have set our 2022 capital at a range of 375 million to $475 million.
Taking both our adjusted EBITDA and capital spending guidance into account, we expect to generate free cash flow of one two to $1 $3 billion in 2022, which will provide more than enough liquidity to retire our 2022 debt obligations and fund our $2 per unit annualized base distribution I'll now turn the call over to Craig to discuss.
Our operational performance Craig.
Thank you Michael 2021 was a strong year operationally for Wes for the second consecutive year, we maintained system availability over 99% and our full year exit rates for all products met or surpassed our expectations, our natural gas crude oil and natural gas liquids and produce water exit.
Rates were 6%.
14% and 21%, respectively higher than our 2020 exit rates.
These exit rates were driven by continued outperformance in the Delaware Basin and we expect these activity levels from our producers in the basin to continue in 2022 feet per day on a sequential quarter basis full year 2021, natural gas throughput averaged 414 8 billion cubic feet per day.
Representing a 3% decrease from full year 2020.
This decrease was primarily due to the <unk> asset sale completed in the second quarter lower throughput in the first quarter as a result of winter storm Uri and production declines in our South, Texas and southwest Wyoming assets.
Our crude oil and natural gas liquids throughput increased by 10% on a sequential quarter basis or 61000 barrels per day, primarily due to outperformance in the Delaware basin and in our equity method investments.
Full year 2021 throughput for crude oil and natural gas liquids assets averaged 659 million barrels per day.
Presenting a 6% decrease from full year 2020. This was primarily due to lower production in the DJ Basin, and South, Texas oil system lower basin oil system as a result decreased throughput on our equity method.
But investments.
<unk> water throughput increased by 8% or 57000 barrels per day.
On a sequential quarter basis full year 2021 throughput for produced water assets averaged 703 million barrels per day a.
A 1% increase from full year 2020, due to higher production and commercial success in West Texas.
On a currency adjusted gross margin for natural gas assets increased by 7% year over year or <unk>.
Our 2021 average was $1 24, primarily due to higher average fees, resulting from cost of service rate Redetermination effective January one 2021, and the West, Texas complex and South Texas assets.
These increases were offset partially by decreased throughput on certain fee based contracts with the DJ Basin complex, which has a higher than average per mcf margin as compared to our other natural gas assets.
Decreased throughput on certain fee based contracts in the DJ Basin also led to a <unk> sequential quarter decline in our per Mcf adjusted gross margin.
Our per barrel adjusted gross margin for crude oil and natural gas liquids assets decreased by 26 year over year.
Our 2021 average was $2 28, driven by an annual cost of service rate adjustment made during the fourth quarter of 2021 at the DJ Basin oil system.
These decreases were offset partially by a higher cost of service rate effective January one 2021 at the Springfield system.
Additionally, the annual cost of service rate adjustment made at the DJ Basin oil system also contributed to a sequential quarter decrease of <unk> 74 per barrel.
Without this cost of service rate adjustment the per barrel adjusted gross margin for the fourth quarter would have been $2 25 per barrel versus a $1 78 per barrel.
Per barrel adjusted gross margin for produced water assets decreased by <unk> <unk> year over year.
2021 average was 93, primarily due to a lower average fee, resulting from our cost of service rate Redetermination effective January one 2021.
Before I discuss 2022 expectations regarding activity in capital requirements I want to take a minute to highlight our team's tremendous work in 2021 after persevering through the start of the pandemic and our transition as a stand alone midstream entity. In 2020, we started 2021 off with another significant hurdle winter storm Yuri.
Our operations engineering and commercial teams worked tirelessly to maintain safe operations communicate constantly with our producers and limit interruptions to service as much as possible quite often while dealing with storm related challenges at their own homes.
Our employees showed tremendous dedication commitment and resilience and their passion towards excellence continued throughout the year and played a significant role in our full year financial and operational results.
Actually the team created incremental value through their desire to expand the portfolio and our work in maintaining outstanding relationships with producers.
Throughout the year, we added six new customers to our gas portfolio and for new customers to our water business and bringing in approximately $30 million of adjusted EBITDA in 2021, and unexpected $74 million for 2022.
The long term gas gathering and processing agreement with Crestone peak resources now Civitas resources was the team's largest success whereby approximately 74000 acres in the Watkins area, we're dedicated to Wes.
As well as up to 148000 additional acres that may be acquired and connected to our gathering system in the future.
Operationally our teams exceeded our internal goal for system reliability for the second consecutive year, demonstrating our ability to consistently provide flow assurance for our customers and limit producer flaring. Additionally.
Additionally for the second consecutive year, the GPA Midstream Association awarded US first place for safety and a division of one category for companies with greater than $1 million reported man hours worked we continue to focus on safe sustainable operations and opportunities to further reduce our emissions and carbon footprint from.
From an engineering perspective, we continue to concentrate on disciplined project execution and increased cost savings.
Efforts led to creative and capital efficient solutions like the incremental capacity increase at our regional oil treating facilities that we highlighted during the third quarter.
This focus throughout the year largely contributed to our success in achieving capital expectations for 2021.
Turning to 2022.
We expect throughput levels in the Delaware basin to increase.
Across all product lines because of high producer activity levels continuing into 2022.
Both our private and public producers will continue into next year as of our latest forecast. We expect 280 wells. This year in the Delaware Basin, which is a meeting.
This will increase relative to the number of wells, we were expecting in 2021 at this time last year.
Therefore, as I'll discuss on the next slide we are employing additional capital to the basin services projected incremental volume and unexpected activity increase beginning in 2023, and the DJ Basin and we expect limited activity to continue throughout 2022 as producers have indicated a slower timeline then.
We anticipated with the new permitting process and regulations.
While producer sentiment remains optimistic on the approval of new permits.
Adjusted their forecast to better represent the extended timing of such approvals. Therefore, we now expect throughput levels to decline for the year for both natural gas and crude oil barring any acceleration by producers that may result from a change in permitting timelines portfolio wide. We expect 2022 year end exit rate throughput for water gas.
Gas and oil to grow by high teen low single digits and remain relatively flat, respectively as compared to 2021 exit rates as we assess the dynamic climate in Colorado around carbon emissions. We're pleased to report that our carbon emissions intensity ranked in the top quartile relative to our peers based on our reported.
Greenhouse gas combustion emissions per million cubic feet of gas transported by gathering and boosting sector operators.
This is a significant accomplishment and it's one of the largest midstream gathers in the state this low carbon intensity ratio highlights our focus on electric driven compression and far out.
Outperforms our peers.
We believe that with our proactive facility design tailored to reduce environmental impact that we are well positioned to adapt to any potential new emissions regulations in the state and have a significant competitive advantage over us.
Our peers across our portfolio, we continue to put sustainable operations, our social license to operate and carbon emissions at the forefront of our business to further showcase our commitment we've added a corporate goal to reduce methane emissions by 5% across our operations on an annualized basis by year.
And 2022, we expect this to be one of many actions taken this year to address ESG issues and strengthened sustainability.
Turning toward our 2022 capital guidance increase throughput in 2022 and higher producer activity levels anticipated for 2023 in the Delaware Basin have led us to increase our capital expectations relative to 2021, we expect that the majority of our capital spend about 70% will go to the Delaware.
Basin for additional infrastructure.
Across all of our systems to service a forecasted growth most of that capital is dedicated to well connects and system expansions, including saltwater disposal wells and natural gas compression. We're also dedicating over $44 million of capital to technologies necessary to transform west into a superior Standalone midstream organization.
These investments will help west transition away from systems. Initially designed for an E&P company to those suited for our midstream entity, allowing us to enhance employee development and safety increased operational efficiencies and minimize our environmental impact finally, we've allocated $29 million targeting sustained.
Ability projects designed to reduce emissions and support our new corporate goal. For example, we are completing modifications to compressor engines at our Wattenberg gas plant in Colorado to significantly reduce annual Nox emissions. In addition, we are allocating a portion of this capital toward projects, we have identified to reduce methane emissions across.
Our asset base with that I'd like to turn the call back over to Michael Michael.
Before we open it up for Q&A I would like to reiterate a few key points first we have a strong asset base that as well.
The strong commodity price environment, and our commercial track record positions us well for increased throughput in 2022.
Two and beyond second we expect to generate substantial free cash flow over the coming years.
And we plan to employ a balanced approach regarding capital allocation as illustrated by our refined financial policy as a result of our growing free cash flow profile, we expect to retire $715 million of debt and opportunistically execute upon our $1 billion unit buyback program through year end 2024. Additionally.
Based on current conditions and estimates we plan to increase the base distribution by over 50% as of first quarter of 2022, which will provide a competitive yield for unit holders.
Third we continue to strengthen our balance sheet as we materially exceeded our year end 2021 leverage target of four times and recently returned to investment grade with S&P Bye.
By establishing the annual enhance distribution structure, which is contingent upon meeting certain leverage thresholds. We are further incentivized to continue decreasing leverage to three times by year end 2024.
Finally, we continue to focus on prudent capital allocation and the use of multiple avenues towards value creation for all stakeholders.
A large part of our capital spending needs pertains to the expansion of our existing assets to prepare for increased activity in 2023.
To close I'd like to extend my thanks to our workforce for their performance in 2021, despite numerous headwinds with the pandemic and winter storm here their commitment to living our core values and to our foundational principles of operational excellence customer service and sustainable operations has provided tremendous momentum and sets us up for great success.
In 2022 with that we'll open the line for questions.
Thank you.
At this time I would like to shop.
Let me just ask a question. Please press Star then the number one.
At <unk>.
So just a moment.
Our first question comes from the line of spy by Dana <unk> from Credit Suisse Fireeye Pedro stage.
Thanks, operator, good afternoon guys.
I wanted to start off with the new capital allocation framework and really just trying to get a sense on how youre thinking about the decision points in any given year. When it comes time to allocate that capital at.
It sounds like sort of buying back stock or spending more on projects.
Sort of default to two that enhanced dividend.
But I guess before you get to that point.
Are you thinking about the metrics that are going to drive you to buy back I know you mentioned opportunistic, but I imagine you've got certain trigger points and so I'm. Just curious are those yield base price base or maybe some other metric and then when you think about capital spending.
And are looking to use that capital on growth are those projects is going to have a higher return threshold because that capital is now maybe competing a little bit more directly with shareholder returns.
Yes.
Great question.
Unfortunately, we're not able to disclose as it relates to the specific metrics that we use to opportunistically utilize the buyback program. However.
The point in the in the distribution the enhanced distribution program is that if we don't find those opportunities opportunities whether it be through additional growth capital.
And incidentally, we do think about the threshold for capital expenditures at the same level of pre and post the change in financial policy.
Which we believe to be a very competitive rate of return necessary for us to spend that capital regardless.
But if it is that we don't find opportunities to utilize the buyback program, we do still have.
Free cash flow then essentially what we're saying is if we couldnt find a better use for it during the year than.
This program allows for an enhanced distribution converting to give that money back to our unit holders.
Got it that's helpful. Thanks, Michael.
Second question, just gone to capital spending.
To your point it looks like it's going to be a little bit elevated here in 2022. Some of that is timing related from 2021, but it seems like really the driver. There is elevated activity as you as you noted in 2023.
And so as I think about going from 22% to 23 2022 EBITDA based on your guidance. It looks like it's sort of marginally higher it sounds like the Djs weighing on that a little bit.
As you get into 2023 and that activity picks up would it be your expectation that that growth rate will be sufficient so maybe even more so overcome any sort of declines you're seeing in the DJ just trying to get a sense of the magnitude for this activity that you expect in 2023.
Yes, it's a good question.
The capital budget is a great indicator as well as the reduction in our cost of service rates, both of which are great indicators as to the optimism that we have an expectation that we have as it relates to.
The increase in activity levels.
Ali in the Delaware Basin, and so as you pointed out a little bit of the capital is sliding from projects 21 into 'twenty, two but really the story is that we do expect meaningful.
Activity levels in <unk>.
'twenty three and beyond thereby.
The reduction in rates and the increase in the capital overall.
Anything else that you'd like to add to that.
No.
We've got our 2022 capital program aligned with what we need this year, but also positioning us.
For 2023 as Michael outlined so.
We feel pretty good about it I mean, obviously it includes some onetime capital.
Located with investments in technology and.
Some tools that we think are going to serve us well going into the future.
So that's capital that.
Its somewhat incremental in 2022 that wouldn't expect on a go forward basis.
I guess.
Respond more specifically at this point on.
Quantum again I would just.
Articulate that it is based off of an increased activity level in 2003 compared to 22.
Got it okay. That's that's helpful. That's all I had today guys. Thanks for the time.
Thanks, Bill Thank you.
Our next question comes from the line of co keeping from change of Pickering Holt <unk> co. Please go ahead.
Yes.
Afternoon.
Would love to start off on the base distribution, obviously, 53% is a pretty significant step up to any additional detail on how you arrived at that level, particularly in light of competing uses of capital.
Total life buybacks would be great.
Yes.
Yes, sure so first and foremost we wanted to set it to.
A level that we believed was sustainable going forward and that and provided for incremental free cash flow after distributions to use for items like debt reduction and the buyback as a whole so in conjunction with that increase obviously, we've highlighted the fact that we're going to continue to de lever from a debt perspective.
Give a little over $700 million over the next couple of years as well as utilize the buyback program with the $1 billion announcement that was that was highlighted there. So in light of the fact that we have.
Significantly exceeded our expectations as it relates to a leverage metric exiting the year at three five times net debt to EBITDA.
The upgrade from S&P, putting us on very solid footing ahead of schedule from that perspective.
We wanted to outline a structure that provided for what we believe is a sustainable level and then incremental free cash flow after distributions that allows us to.
To offer other pillars of return of capital through debt reduction and buyback as a whole. So we did come into the year with a couple hundred million dollars worth of cash.
As it relates to free cash flow for this year. Obviously, it's also based on the previously lower distribution in the first quarter of this year. So we believe that it provided at that level of $2 at providing for adequate capability in the near term to both pay off the near term notes provide opportunity for.
Opportunistic buybacks as.
As well as incentivize us to.
Two grow the free cash flow at appropriate.
Leverage levels going forward.
Great and then just following up on Spiro's question you understand this is permanently retiring capital via buybacks, but is there kind of a broader framework that would steer you to one of those decisions.
Versus the other.
Well actually what we provided within the structure is the ability to do all of the above.
And so one way to think about that $1 billion kind of today's market cap from a buyback perspective is roughly 20% of our public float right. So it is a it is a significant amount of.
Buyback availability for us.
And so what we're what we're providing for here is the flexibility and opportunity in light of the free cash flow generation that we expect for the next couple of years to be able to make a meaningful impact in difference on all three of those areas debt reduction buyback as well as increased distribution level.
Yes.
Hi, good afternoon, everyone.
Michael maybe following up just.
Enhanced distribution just just wondering.
The philosophical level.
In device strategy and in May.
Maybe talk about why <unk> decided to change its approach from the.
5% annual growth strategy.
Yeah.
Yes, a couple of things good question, Karl So first and foremost we.
We achieved the leverage metrics earlier than expected exiting.
I think 2021 and so.
Previously, we said that growth target. It was based on an expectation of where our leverage would be that we meaningfully.
Exceeded overall.
The new structure does provide is not only.
A great distribution level as a whole that we believe is sustainable.
The enhancements as it relates to a leverage metric utilized every year as to whether or not you pay out the enhanced distribution trying to provide additional security around the sustainability of that base distribution and then offer up opportunities to our unit holders that if we don't find a better use of our.
Capital during the year that it should rightfully come back to you in the form of the enhanced distribution. It also incentivizes.
Our largest customer and unit holder that additional activity levels that come into the west footprint and therefore enhance the free cash flow profile that it increases the likelihood that they will also.
From a base distributions.
To level the flexibility.
Need to utilize other means to return capital through debt.
Unit repurchases as well as to incentivize.
Our.
Customer and largest holder to continuing to.
Two.
Have activity levels on our acreage position.
Got it I appreciate the additional color there.
And then I know you typically don't talk about quarterly guidance from a volume perspective, but given the change in maybe the.
The forward look on the DJ Basin I'm, just wondering if you can maybe give us a better sense of how we should think about volumes trending through the year.
And then kind of coming back to your exit rate.
Volumes equated out.
And I think as a whole I'm talking about it in aggregate as a whole.
We would we would expect progressively growing volumes throughout the year.
Okay understood I appreciate the thought of that.
Thanks, Paul.
Our next question comes from the line of Jeremy Tonet from Jpmorgan Jeremy. Please go ahead.
Hi, good afternoon.
Good afternoon, Jeff.
Just wanted to kind of dig into the guidance a little bit more if I could.
With regard to.
Drivers to the high end versus low end of your guidance range, there and any thoughts I guess with regards to <unk>.
Certain commodity price outlook drilling activity.
It could go to the high end to low end and then I guess as a follow up it seems like you're priming for 'twenty three here with the Capex development does that mean youre kind of expecting a nice step up at this point just trying to gauge how that trajectory cookbook.
Yeah sure. So a couple of items that would drive outperformance at the higher end relative to the lower end.
Obviously increased commodity prices, while we do have.
Limited exposure it does impact as commodity prices continue to increase outperformance from a producer perspective, our increased activity levels. During the year would clearly have an impact a.
A couple of the items that are highlighted that before they're dragging us down a little bit.
22 relative to 'twenty one.
So if theres outperformance from an Eni perspective that would have an impact on our.
Forward looking 2022.
<unk>.
And then obviously on the cost side, which is something that we focus significantly on if we can continue to drive further efficiencies through the system and better costs.
Kris third party opportunities clearly drivers.
To the higher end of that range, if not outside of what we saw in 2021 was.
Third party success the cost reduction in commodity prices were all key drivers in us exceeding our guidance range for last year, and we would expect that to be the same types of drivers for 2022 and beyond.
Got it.
Thank you for that and then one I guess one last question here just.
Within the capital allocation framework wondering if there's any thoughts on M&A.
We've seen I guess, the private reasonably sell to a public and it doesn't seem like necessarily west is reserving anything to move in that direction, but just wondering if there's any thoughts you could share on that or consolidation in the industry in general.
Yes sure so.
This framework.
In our mind doesn't really impact our ability to do M&A. It also from an M&A perspective, obviously, we'd like to make sure that the financing structure, where in that M&A was employed.
Fits in frame is really well with with what this framework would detail.
But for us as it relates to.
<unk>.
Any M&A transaction, if it's accretive overall to our profile going forward.
That fits really well overall within the structure as it relates to the calculation itself.
Any M&A dollars would be outside of the free cash flow calculation other than whatever the incorporated free cash flow would be from that asset from the point at which it was acquired right. So that would flow into our free cash flow calculation.
The financing itself of M&A would be outside of that but obviously it would hopefully fit within the framework of the leverage targets that we've established overall.
We're constantly on the outlook as it looks to M&A opportunities for us. It's about what is it that can enhance our overall profile. We've been really successful on the third party side.
We've got great.
Great expectations as it relates to future volume growth in the system and so and as much as there is assets that would plug into that framework and provide us with an opportunity to.
To gather more of those volumes in a cost efficient way.
Push some of the cost savings and synergies that we've been able to achieve over the past couple of years.
That acquisition, we would absolutely take a look at it.
Got it got it and I guess do you have any expectations for I guess industry <unk>.
Consolidation at this point do you expect.
Mature phase where people come together or anything you're willing to share there.
Yes, nothing I would.
Thats really sure I do it does feel as if the the sentiment as it relates to.
The forward.
Positive fundamentals of our business is definitely.
Definitely improved a lot.
A years and feel very strong from that standpoint, so therefore, it would seem as if.
The sentiment would be justified as it relates to consolidation.
However, I don't I don't have any specific insight as it relates to whether or not there will be that occur. There are a lot of other factors that play into that.
Contract contract wise, social dynamics all of those things that are that are a little bit more difficult too.
To predict.
Got it I'll leave it there thank you.
Thank you.
Our next question comes from the line of Gabe Moreen from mid <unk> High <unk> Gate. Please proceed.
Hey, good afternoon, everyone I won't ask anything more on the enhanced distribution walnuts too.
A two pronged question on the Delaware, though one is with <unk>.
Extent youre going to be spending additional capital out there does any additional processing play into that capital spend eventually from a processing standpoint, and then sort of related to that in terms of gas takeaway.
You are producers may be situated and whether or not we can do.
Interest in potentially.
And participating in.
Takeaway solution there eventually.
Yes.
Okay.
Yes.
Craig and let me I guess first address your first question around the processing.
We don't anticipate incremental processing capacity within our own system in the near term.
We see opportunities there continued opportunities to explore off loads you.
And utilize existing processing capacity within the basin and so.
Our minds as we talked about previously.
We feel like that's the most capital efficient.
Option for us and quite frankly provides us the flexibility and runway to.
To differ a significant capital investment decision like the plant expansion until we really get comfortable with the long term need and viability of keeping keeping that capacity full and so we'll continue.
Continuing to work on those offload opportunities and have had some success in that arena and so for US that's just.
We concluded that the most capital efficient.
For us and economically is the best answer.
We see that as our near term solution, but we continue to evaluate when when a plant expansion may be needed.
There isn't right now.
As to your second question around downstream residue transport out of the basin.
We're continuing to monitor.
The supply and demand balance in that regard.
At this point we're not.
Particularly.
Keene so to speak on participating in one of those long term long haul takeaway solutions.
That's really a bit further downstream from where we are.
What our bread and butter is in the gathering and processing side, but we continue to work with our our producers to navigate.
Decision matrix around helping helping too.
To ensure that they have.
Outlets for their SD gas on a long term basis.
Yes.
As of right now no.
No immediate plans to.
Maybe any other potential projects that are being discussed.
Thanks, Craig and then if I can ask quickly on that $44 million.
We transitioned our system spend do you feel like once you get through that that'll sort of be.
Okay.
Transitional system spend and kind of what changed probably sort of a standalone organizational standpoint.
Yes.
Yes, that's a great question so.
Again, we actually look at this as we do.
Do any other project, which is that's capital that we're spending or is there is a return associated with it. So the team has been an awful lot of time, taking a look at the efficiencies that we can derive from an improvement overall in our in our system.
It's not mandatory it's optional and it's optional based on what we believe to be a great opportunity for us to get even better and what it is that we do it.
It is much more onetime in nature, obviously youre going to have continued system.
Spend as time goes on.
This is a lot of work that's happened over the past couple of years a lot of.
Discussion with each of our team members throughout the organization to try and find ways that we can be more efficient and what are the tools that we can utilize in order to make us more efficient and then does that result in a an acceptable rate of return.
So that the enterprise can dedicate the capital towards that so very much a 2022 levered capital item there will be some additional.
Capital as you would expect from a systems perspective, but it is also a very high returning project for us.
Thanks, Michael.
Mhm.
Our next question comes from the line of Gregg Brody from Bank of America. Greg. Please go ahead.
Hey, guys. This is Robert <unk> on for Greg just two quick ones here.
We've provided a lot of color around the enhanced distribution. Just wondering if you continue to expect to grow that base dividend at 53% increase in the first quarter toward that 5% number or if youre going to hold it there.
Yes, so we don't have any expectation of increasing the base distribution the growth in our distribution will be inherently based upon the free cash flow generation of the enterprise. So again that goes along with the largest that we have set it at a sustainable level and then try as much as possible to put guardrails around that.
Distributions such that it always stay a unit holders will be based off of the free cash flow generation of the enterprise going forward. So we don't have any expectation today that the the base level would increase and that the growth will really come towards the enhanced distribution structure.
Okay, perfect and just another kind of a technical one when youre going to look back at this year and Youre calculating your first enhanced dividend that you're going to assume the lower.
Dividend in the first quarter or are you going to assume that increased dividend for the full year.
Yes, we assume the lower ones for the quarter. So it is the calendar year distributions paid.
As it relates to that calculation. So that would include the most recent distribution that was paid.
Days ago.
Okay, great. Thanks, a lot guys.
Okay.
Thank you Sarah.
The questions at this time Ms Steel I can call back later today.
Okay.
Thank you everyone for joining the call I really want to thank all of our stakeholders and unit holders for the journey, we've been on for the past couple of years and the incredible progress that we've been able to see and then puts us in this really exciting position overall for our company. One again, thank our employees for the excellent effort through some pretty challenging.
<unk> three times over the past couple of years. Thank you all and look forward to speaking to you on our first quarter call in a couple of months.
This concludes today's call. Thank you for joining you may now disconnect your lines.
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Yes.
Yes.
Yes.
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