Q2 2022 Western Midstream Partners LP Earnings Call

<unk> 22, Western Midstream partners earnings Conference call.

On mute to prevent any background noise. After the Speakers' remarks, there will be a question and answer session if you'd like to ask the question.

During this time simply press star followed by the number one on your telephone keypad.

If you would like to withdraw your question Press Star one once again.

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I would now like to turn the conference over to Daniel Jenkins Director of Investor Relations. Please go ahead. Thank you I'm.

Glad you could join us today for West Conference call.

I'd like to run them.

Turning slide deck and last night's earnings.

Disclosures regarding forward looking statements and non-GAAP reconciliation.

Midstream <unk> most recent form 10.

In 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 referenced.

With me today are Michael <unk>, our Chief Executive Officer Christi Shaw.

Craig Collins, our Chief operating Officer, I'll, now turn the call over to Michael.

Thank you Daniel and good afternoon, everyone.

Yesterday, we reported another.

Financial performance at Western Midstream.

Our second quarter financial success was primarily driven by increased throughput across them.

All three products in the Delaware basin, and higher distributions from equity investments partially offset.

For gas throughput in the Delaware Basin.

Of gas per day.

Right.

Record produced water throughput in the Delaware Basin gathering 864.

Barrels per day and record adjusted EBITDA for the second straight quarter generating substantial free cash flow rates of return of capital to our stakeholders specifically.

Through July 29, we have repurchased.

It's approximately $7 1 billion units in the open market and 10 million units from us.

Millions of units at an average price.

Price of approximately $24 85 per unit.

Additionally, through our unit buyback programs and including the tired 59 million units.

Or approximately 13, 2% of the unaffected common unit count since becoming.

Plenty.

We also right.

Senior notes during the quarter.

Inclusive of the previously mentioned unit repurchases, we have reduced our debt to trailing 12 months.

Threshold of three four times.

And we have now retired just over $1 65 billion of senior notes or 20%.

The aggregate debt balance since our January 2020 senior notes issuance.

As of July 29 on a per unit basis, we have now returned $6 53 through debt retirement and repurchases and $3 97, a distributions for a total of two since our January 2020 senior.

Notes issuance, which excludes any market driven appreciation in our current enterprise.

We are.

Very pleased with our recent efforts to accelerate the return of capital to our stakeholders through debt retirement.

Freddie below our year end net leverage threshold.

Fell to three four times gives us financial flexibility to evaluate.

Capital to our unit holders whether.

Its distribution the decision to pay off.

Our financial performance in the second half of 'twenty.

2022. Additionally.

Additionally.

So as with revolver borrowings or if we refinance those borrowings with more permanent debt capital those trends.

These actions would be excluded from the computation to potentially paying enhance distributions, we only intend for permanent reductions in outstanding debt and equity in the aggregate to be considered in the enhanced.

Distribution calculation.

Turning to ESG, we released our.

The report details how we are working.

Focus on people and operate responses.

I believe we are very proud of the unique culture. We have built at Wes our people have worked tirelessly to focus on minimizing our environmental footprint and to work with others.

Just to find creative solutions to sell of today's energy and climate challenges.

This approach to advancing energy and our expertise in handling and transporting natural gas are reasons why we feel we are playing a key role.

Health of our balance sheet and our strong.

Strong operational execution, all give us confidence that west is well positioned for continued success even in light of the recent market volatility and economic concerns.

Over the past few years the midstream.

Capacity prudent capital outlay.

Location and improving the health of its respective balance sheets.

This discipline has made our sector increasingly more attractive to investors west.

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The leader amongst our peers by being the first in the industry to focus on free cash flow meaningfully de risking the enterprise and creating value for our unit holders through the return of capital.

The accurate dynamics and to continue returning capital to our stakeholders with that I will now turn christen.

Thank you Michael and good afternoon, everyone. During the second quarter, we generated net income available to women.

And another record breaking quarter.

Adjusted EBITDA totaled $548 million.

The sequential quarter.

Our increase in adjusted EBITDA was driven by increased adjusted gross margin, partially offset by increased operation and maintenance expense.

Our adjusted gross margin increased by approximately $51 million.

<unk> from equity investments also increased on a sequential quarter basis, which we do not expect to reoccur in the third quarter.

Kelly our strong plant performance.

This has resulted in incremental growth.

In fact, our fixed recovery contracts.

Our operation and maintenance expense.

The increased by approximately $39 million on a sequential quarter basis, primarily theater with higher.

Higher utility expenses.

We expect O&M to further increase.

In the third quarter as we perform expected plant maintenance and complete a one time $10 million field level project as part of our transformation efforts.

After the third quarter, we expect O&M expense to be more in line with our second quarter results.

While utility cost should decrease as prices and usage declines during the winter months, we expect to incur additional surface use fees as our produced water throughput increases turning to cash flow, our second quarter cash flow from operations totaled $467 million, which was a material increase compared to the prior quarter.

Of course, the business free.

Free cash flow totaled $372 million and free cash flow after the increase.

Okay totaled approximately 100.

Finally, we recently declared a second.

Quarter cash distribution of <unk> 50 per unit payable on August 12.

It does.

Looking to the second.

And half of the year, we expect throughput to continue.

Penny to increase throughout the year and into 2023 due to continued strong producer activities in the Delaware Basin, we expect to.

Experienced slight compression in our naturals.

Gas adjusted gross margin per Mcf as we further utilize our rates.

Despite the headwinds associates.

Data with expected lower distributions from equity investments and higher O&M expense.

We remain comfortable with our previously announced 2022 guidance ranges for adjusted EBITDA and free cash flow.

Finally, our remaining capital budget focuses on the organic expansion of our existing asset base and the construction of Menton train III.

We can provide flow assurance for our customers volumes in 2023 and beyond.

In the meantime, we're utilizing excess capacity in the Delaware basin through offload arrangements that will bridge us to the expected completion of the Craig to discuss our operational performance Craig.

Thank you Kristen.

On a sequential quarter basis natural gas throughput increased by 5%. This increase was primarily driven by increased volumes in the Delaware basin.

Our crude oil in that.

So gas liquids throughput decreased by one.

1% compared to the prior quarter.

As expected declines in the DJ basin introduced liquid throughput from our equity investments were partially offset by increased throughput in the Delaware basin.

Produced water throughput increased by 15% compared to the prior quarter due to increased volumes at the DBM water system.

Our per Mcf adjusted gross margin for our natural gas assets increased by <unk> <unk> compared to the prior quarter, primarily due to changes in our contract mix and increased throughput at our West, Texas complex, which has a higher per mcf margin as compared to our other natural gas assets. In addition continued strong plant performance coupled with.

Higher commodity prices benefited our margin in the second quarter.

Our per barrel adjusted gross margin for our crude oil and natural gas liquids assets increased by 13.

Compared to the prior quarter.

This was primarily driven by gross margin as compared to our other crude oil and NGL assets.

And higher distributions, despite lower throughput from equity.

The investments are per barrel adjusted gross margin for our produced water assets decreased by <unk> <unk> compared to the prior quarter, primarily due to decreased deficiency fees and changes in our contract mix is throughput increase.

We expect that the anticipated increase in throughput in the Delaware basin in the back half of the year will be partially offset by expected volume declines in the DJ basin, regardless, we're maintaining our previous 2022 throughput exit rate expectations of mid single digit percentage growth in natural gas volumes low single digit growth in crude oil.

NGL volumes and low twenties percentage growth and produced water volumes.

In the Delaware, We expect 202 wells to come online in the basin. During the second half of this year, which is approximately 65% of the total 2022 expected well count.

In the DJ we expect our natural gas decline rate to slowdown as we enter into 2023 as legacy wells and are a more mature phase of the production type curve third party onload volumes continuing to flow onto our system and through continued activity in the Watkins area of the basin from an oil standpoint, we would expect the current decline rate.

To continue until additional rigs returned to the acreage that we service. We're also encouraged by some positive momentum in the permitting process with the Seo GCC for optimism is growing as a gain.

Clarity on the permit approval process.

Finally from a supply chain and inflation standpoint prices for most parts.

So we will benefit from pre ordering a large.

A portion of the steel pipe needed for organic expansion and well connects but we have seen price increases for steel and other major items, such as chemicals and lubricants. Despite these recent challenges we continue to actively manage our supply.

Our revised 2022 guidance from last quarter I'll now turn the call back over to Michael.

Thanks, Craig.

We released our annual sustainability report this week I will highlight a few of our achievements here, but I encourage you to.

It takes some time to read the report we are very proud of our accomplishments addressing ESG issues since becoming a standalone organization. This year. These achievements include.

Apologies to enhanced leak detection effort.

And expand electrical compression in the future.

Field the.

The expansion of our <unk>.

Hertz, which include 56.

Percentage of our senior leadership and 30% of other managers who are <unk>.

Female or racial or ethnic minorities and an extremely successful first year of our volunteer program, which saw 62%.

None of our employees volunteer in the community and donations to nearly 200 causes for such a young organization. The heart of our people is such an awesome quality of less one of which I'm personally most proud. Thank.

Thank you to all of our dedicated employees, who have played such an integral role in reducing emissions and giving back to the community. Our track record in under three years of operating as a Standalone organization is further evidence of our commitment to reducing our building on this momentum in the years ahead as we continue to advance energy by enhancing the sustainability of our operations.

To recap, we're very confident that worsen.

Financial track record of prudent capital outlook.

Patients operational efficiency.

And strong returns to unitholders I'm also proud to say that west has been a leader.

One of the lowest debt to EBITDA leverage ratio.

Geos and continues to be a leader in proportional debt reduction in total units repurchased since early 2020 relative to our publicly traded midstream peers, we will post an updated slide deck.

Which we believe will continue to demonstrate west.

This was comparative leadership in these regards.

Thanks to the hard work of our employees and contractors, our operational and financial performance through the first half of the year has been excellent and we look forward.

Forward to what's ahead in the second half of 2022 with that we'll open the line for questions.

At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.

The funds for just a moment to compile the Q&A roster.

Your first question comes from the line of Gabe Moreen. Your line is open.

Hey, good afternoon, everyone.

Hi, Craig followed personally I have a follow up question just in terms of the unit repurchases it seems like you're pretty aggressive and opportunistic around.

Can you just talk about kind of I guess, what you feel like your gating factor is at this point I, particularly close to three two on an LTM.

Basis, right now I just wanted to confirm.

But you still you feel you are going to be opportunistic for the rest of the year, considering kind of where your leverage targets out right now.

We definitely.

We will continue to utilize that program.

And as we see opportunities to do so.

Again, as we think about the leverage target is it related.

Thanks to an enhanced distribution the construct for that was whether or not we had other opportunities to utilize that excess free cash flow and to try and do that in a prudent way, we still have a half a billion dollars laps are a little over half a billion dollars left in the buyback program and if there's a.

Opportunities to do that then we will intentionally utilize the buyback program in order to too.

Repurchase units.

Opportunistically in that regard.

We certainly like to be in a place to be able to pay that.

Enhanced distribution, but if there is there are other opportunities, including other opportunities to buyback. Additional units. Then we will continue to utilize that program for sure.

Thanks, Michael and then maybe if I can ask a follow up to that I'm, just curious to what extent getting that one getting taiji is quite a bit out of your control.

But I was just curious Tom.

From a capital return standpoint, how you balance those homes.

As it relates to leverage we're certainly from a metric standpoint.

Well within the ranges that have been established from the agencies or to be an investment grade territory.

Frankly, a fair amount of leeway relative to the metrics provided in so.

We would still have a comfort level to be able to do that from.

From a from a rating agency perspective, as you noted the constraint from that standpoint, and then isn't necessarily the metrics that we're currently working under Chris If there's anything else to add there no I think in general the conversation with the rating agencies.

Finally, our balance sheet.

I don't see anything changing.

Some of your O&M commentary just.

I understand here exactly what is.

Seasonal versus structural versus maybe inflationary if that all makes sense to me. If you can just kind of recap.

What youre seeing on Illinois, and what sounds like it's growing a little bit higher but could scaling Doc also little bit in <unk> and beyond.

That's great.

And just to take a step back our Q1 O&M was a little bit lower or there is some seasonality on the utility side, we get more from a planning perspective during the summer months. We've also seen increased pricing on the utility side. So that's coming out in the second quarter and we expect that the third.

Sorry.

Yes.

The second quarter is.

Probably a better run rate going forward with the question that in the third quarter, we're expecting to spend around.

$10 million on a philosophical project, but working with our transformation.

Allowing us to be Martha Shannon proactive maintenance and repair side, so expect a little bit of an uptick in the third quarter and then returning back to the second quarter high level, when we get into Q4.

Great. Thank you.

Your next.

Question comes from the line of Jeremy Tonet. Your line is open.

Hi, good afternoon.

Hey, Jeremy how are you good.

Good good just wanted to slice the buyback question slightly differently, if I could and I was just wondering when you guys think think about.

Repurchases.

Is it more driven by kind of unit price at a point in time or balance sheet capacity or other considerations such as trying to maximize hit a certain level of free cash flow return to unit holders.

Jamie all of those factors come into consideration as we execute on the buyback program.

Again, so when we talk about opportunistic those are definitely many of the factors that are under consideration are we seeing weakness.

Out there and.

Therefore, we see an opportunity to be able to repurchase.

Balance sheet free cash flow and ability to potentially pay and enhanced distribution. All of those certainly are factors and we definitely saw in the second and into the third quarter.

Meaningful opportunity in that regard to be able to utilize that program.

Got it thanks for that.

And then just wanted to touch base on the Ccs side Oxy, obviously has big plans there and just wondering your thoughts Jeff IRA.

It changes things a bit and is there a role for west to play here alongside Oxy in these initiatives.

Yes, it's a great question.

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Yeah.

It is currently being proposed obviously does provide.

The incremental opportunities for everyone out there.

Clearly a leader in that regard and so.

Well.

Our close relationship with them.

Results in frequent and active dialogue around ways that less and be able to participate.

Got it that's helpful I'll leave it there thanks, Thanks Jeremy.

Your next.

Comes from the line of Neel Mitra Your line is open.

Hi, Thanks for taking my question.

Wanted to Puds.

The guidance range given on the last quarter and where we are now so maybe what's changed.

Regarding O&M.

First one is when you put out the guidance in Q1.

As expected in <unk>.

Unexpected going forward.

Structural versus inflation and then second.

It was mentioned that the G&P rates.

We will decline going forward as you.

These offtake agreements.

Was that anticipated and how long that process will be to maintain three comes online.

Yes, so a couple of pieces in there when we announce.

Alright.

Everything that you are seeing in Q2, and so we're maintaining that.

CMP rates that you are discussing.

Gross margin for unit and Thats as expected and was part of that revised guidance itself sure today, the O&M expense.

We are seeing that was also part of that and expect that as well. So I think that's it.

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We're expecting from an inflation standpoint.

Cat activity standpoint.

Standpoint.

Right in line, where we're seeing actual right now and when we're looking into the second half of 2020 here.

Okay, Great and then as a follow up.

Just with the activity from the E&ps in the Delaware and.

The announcements of new processing capacity by your peers.

Are you looking past Menton three and when do you think you would need a new processing plant beyond that Kevin.

Just the increasing volumes.

In the Delaware and then on the other side.

How do you see DJ volumes trending over the next year or so.

Yes, so we are absolutely constantly monitoring.

Growth is additional capacity necessary from our standpoint.

That way when into consideration of authorizing the the incrementals.

Full capacity event last quarter.

It's been frankly.

<unk> to be just as positive if not stronger in terms of expectations going forward.

I'd probably.

Keith on the announcement that Oxy mentioned yesterday with regards to the controlled JV.

And that will be transitioning onto us acreage.

That will likely increase activity levels.

Meaningful way for us going into 2023 and beyond and so we.

We need to take into consideration as we look at potential incremental capacity because it sits right now there is.

There is nothing that we look at and see would be required.

As we sit here today I don't know if you want.

To reiterate the commentary on DJ as it relates to volumes or anything to add there.

The capacity side.

Yes.

Obviously continues.

I have more than sufficient capacity in the DJ.

Done a really good job I think of bringing additional gas onto the system both from producers as well as from some of our peers and we will continue to look for those opportunities.

Yes.

Start to flatten out a lot more than where it's been just based on the.

Where the production the base production is on the type curves up there and so we see that starting to.

Slowdown in terms of the rate of decline going forward, but still be on decline.

And continuing to look for opportunities out there in the DJ.

Nothing nothing further to add to Michael's comments on the Delaware I think summed it up well.

Okay, great. Thank you very much.

Yes.

Your next question comes from the line of Michael Cusimano. Your line is open.

Hi, good afternoon, everyone.

How much of your margin goes through the cost of service adjustments at year end.

Maybe hoping like you can.

Commodity because we've just we've gotten feedback where some investors assume all of your fee go through that adjustment.

Okay.

I think you've broken it out somewhat before in the past.

Yes, so we actually talk about the percentage of our contracts that are.

Around the.

Q1 percent 96%.

Oil and 100% water.

From that perspective, we don't actually break breakout what proportion of that is cost of service versus.

So a volume commitment but to be to be.

There is definitely a portion of that is fixed fee oriented and not all is.

Cost to serve.

With us.

Got it okay.

Does it depend by commodity.

Great.

We do have.

We do have a cough.

Concentrate sales contracts on all three commodities.

Oil and water again different proportions.

Each of those but there are costs.

Okay.

And then just follow up on that I believe into into this year.

The DJ rates had some downward pressure because.

Okay.

May not materialize with some of the permit issues that oxy has made.

Is it wrong to think that DJ rates could possibly improve year over year with that not materializing.

Yes.

Yes, it's too early to tell at this stage, it's a great question, but it's too early to tell what the.

Yes.

Cancel impact on rates are going to be.

As Craig mentioned in his prepared remarks.

We're starting to feel a little bit more optimistic.

To achieve permits.

And on.

What are what our rates will be an expectation of when and at what time in.

And to what extent volumes would come through the system out in the DJ.

Okay.

There are no further questions at this time.

Okay.

Thank you everyone.

Forward to the future I appreciate.

Take your time.

This concludes today's conference call you may now disconnect.

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