Q3 2022 Western Midstream Partners LP Earnings Call
Okay.
Good afternoon. My name is Dennis and I will be your conference operator today at this time I would like to welcome everyone to the Western Midstream partners third quarter 2022 earnings Conference call.
All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question. During this time simply press Star then the number one Andre telephone keypad to withdraw your question Press Star one again.
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 Western Midstream third quarter 2022 conference call.
To remind you that today's call the accompanying slide deck and last night's earnings release contain important disclosures regarding forward looking statements and non-GAAP reconciliations.
Please reference western midstream <unk>, most recent Form 10-Q, and other public filings for a description of risk factors that could cause actual results to differ materially from what we discussed today relevant reference materials are posted on our website with me today are Michael <unk>, Our Chief Executive Officer, and Christian Shults Archie.
Financial Officer, I will now turn the call over to Michael.
Thank you Daniel and good afternoon, everyone Yeah.
Yesterday, we reported another quarter of solid operational performance at Western midstream.
We continued to experience robust activity from the Delaware Basin as we achieved a record breaking throughput for both natural gas and produced water for the second consecutive quarter in the basin.
However, we experienced reduced excess natural gas liquids volumes in combination with lower natural gas liquids pricing.
Lower distributions from equity investments and higher operation and maintenance expense, which were the primary drivers behind the sequential quarter decrease in adjusted EBITDA.
From an M&A perspective, we are pleased to announce both the acquisition of the remaining interest in the ranch West Tex natural gas processing plant in the Delaware Basin.
And the divestiture of our cactus to equity investment these activities align with our M&A strategy that is focused on adding processing capacity in our core basins allocating capital efficiently and generating strong returns for our unit holders. Additionally, in conjunction with the cactus to divestiture. The board has also agreed to materially increase.
Kris our unit repurchase program, which Christian will discuss in more detail shortly.
Focusing on operations subsequent to quarter close we executed long term amendments to occidental's gas processing and oil gathering agreements in the Delaware Basin. These.
These amendments increase occidental's firm capacity on our infrastructure in the Delaware Basin and are supported by substantial minimum volume commitments. We also executed multiple new natural gas and condensate agreements with various customers and the Maverick basin before I turn the call over to Christine to discuss our financial results I wanted to express my enthusiasm regarding the <unk>.
Recently announced letter of intent with Occidental that we press released early in October disagreements signals, our desire to jointly pursue opportunities to deliver low carbon intensity oil and gas products to market through the development of carbon dioxide capture transportation utilization and sequestration opportunities in both the Delaware and DJ basins, we are pleased to.
Our long standing relationship with Occidental, and look for ways to partner with them on carbon capture activities and we are excited at the prospect of potentially expanding our service offerings in ways that would not only reduce our own carbon footprint, but potentially help other point source emitters reduce their carbon emissions as well.
With that I'll now turn the call over to Chris and discuss our third quarter financials Kristen. Thank you Michael and good afternoon, everyone. During the third quarter, we generated net income available to limited partners of $260 million and adjusted EBITDA of $525 million.
Relative to the second quarter, our third quarter adjusted gross margin decreased slightly as increased throughput across all three products in the Delaware basin was offset by lower distributions from equity investments and lower excess natural gas liquids volumes onto our fixed recovery contracts in combination with lower overall natural gas liquids pricing.
This was partially offset by increased product based service revenues associated with utility expenses in the Delaware Basin, our operation and maintenance expense increased by approximately $22 million in the third quarter, primarily due to previously disclosed field level project costs to support our transformation efforts our utility costs also increased quarter over quarter driven.
By higher natural gas prices and higher utility usage, which is typical during the summer months. However.
However, generally more than 50% of our electricity costs are reimbursed either through cash reimbursement of electricity costs are contribution of gas for reimbursement of electricity equivalent cost.
We expect O&M expense in the fourth quarter to decrease from our third quarter results and be slightly higher than our second quarter results driven by lower utility costs from reduced natural gas prices and usage declines that are typical during the winter months.
We expect these reductions to be partially offset by higher surface use fees as our produced water throughput increases throughout the fourth quarter.
Turning to cash flow, our third quarter cash flow from operations totaled $469 million generating free cash flow of $330 million free cash flow. After the second quarter distribution payment in August totaled approximately $133 million. Additionally, our continued focus on efficient capital allocation has enabled us to return more value to our.
Unit holders since we announced our unit buyback program in February we have now repurchased just over 18.5 million common units for aggregate consideration of $467 million.
Or an average price of $24.89 per unit. This includes the 10 million common units purchased from Oxy in July and all market activity through October 28. We also recently declared a third quarter cash distribution of <unk> 50 per unit payable on November 14th this distribution is equal to the prior quarter's distribution.
<unk> and is consistent with the previously announced annualized base distribution target of $2 per unit in conjunction with the divestiture of our cactus to equity investment. The board has approved a $250 million increase in our unit repurchase program to 1.25 billion. The program will continue to run through December 31, 2024, we.
<unk> committed to our financial policy, which includes our enhanced distribution framework.
As discussed last quarter, the decision to pay and enhance distribution is subject to the board's discretion and will partially depend on our financial performance for the remainder of the year. We expect the size of any enhanced distribution would be determined by the lesser of excess free cash flow or the amount of cash available for distribution that still allows west me, It's 3.4 times year end.
Leverage threshold.
If you recall any capital used to pay and enhance distribution must be considered when calculating west is compliance and achieving its year end leverage threshold.
Additionally, we consider borrowings under our revolver to be a component of our optimal capital structure.
Thus as it relates to 2022 the amount of debt, we ultimately pay off on the revolver at year end will impact the size of any potential enhanced distribution overall, we feel confident that our strong free cash flow generation profile and liquidity position provides us a great Foundation to continue returning capital to unitholders as we head into 2023 looking to the fourth.
Quarter, we expect throughput to increase sequentially across all three products in the Delaware basin, but at a reduced rate of growth relative to our prior expectations.
This is primarily due to supply chain and human capital constraints experienced by our producers across the Delaware basin portfolio that are driving delays and wells coming online.
Additionally, we now expect some fourth quarter wells to shift out of 2022 and into early 2023 relative to prior quarter expectations. We now expect this reduced rate of growth to have a slight negative impact on our portfolio wide 2022 throughput for crude oil and natural gas liquids volumes and produced water volumes as a result, when comparing <unk>.
Average fourth quarter 2021 throughput to expected average fourth quarter 2022 throughput, we now expect to crude oil and natural gas liquid growth to be relatively flat when comparing produced water and natural gas throughput over the same time period, we expect upper teens percentage growth for produced water and mid single digits percentage growths for natural gas throughput.
We expect these changes to result in west reaching the low end of our previously disclosed 2022 guidance range for adjusted EBITDA and depending on our working capital position at year end. The low end of our 2022 guidance range for free cash flow. We also expect to reach the low end of our previously disclosed capital expenditure guidance range for 2022, a certain capital expand.
Some projects and spending associated with the construction of Menton train three have moved into early 2023 by the long lead equipment has been ordered we expect the majority of costs associated with the expansion to be realized in 2023 with that said we remain on track to reach start up in the fourth quarter of next year, turning our attention to 2023 based on current.
Producer forecast, we expect our throughput exit rates to grow year over year across all three products as we discussed last quarter. We continue to actively manage our supply chains and the impact of inflationary cost pressures, but we expect these cost pressures to continue impacting our operation and maintenance expense next year and the coming months, we will receive final but.
Just from our producers and we will calculate the annual cost of service rate readjustments based on revised producer throughput forecast and our year end financials. We plan to provide further details when we announce 'twenty 'twenty three guidance with our fourth quarter and year end earnings I'll now turn the call back over to Michael to discuss our operational performance in the third quarter Michael.
Thank you Christian on a sequential quarter basis natural gas throughput remained flat as incremental throughput in the Delaware Basin was primarily offset by decreased throughput from our equity investments our per Mcf adjusted gross margin for our natural gas assets decreased by three cents compared to the prior quarter, primarily due to decreased does.
Abuse ins from our equity investments and lower excess natural gas liquids volumes under our fixed recovery contracts in combination with lower natural gas liquids pricing. This was partially offset by increased product based service revenues associated with utility expenses in the Delaware basin, our crude oil and natural gas liquids throughput in.
Creased by 7% compared to the prior quarter. This was primarily driven by increased throughput on our equity investments are per barrel adjusted gross margin for our crude oil and natural gas liquids assets decreased by 24 cents compared to the prior quarter, primarily due to expected lower distributions from our equity investments that we.
Highlighted on last quarter's call.
<unk> water throughput increased by 2% compared to the prior quarter due to increased volumes in the Delaware Basin.
<unk> per barrel adjusted gross margin for our produced water assets increased by four cents compared to the prior quarter due to increased deficiency fees and changes in contract mix.
As I mentioned earlier in the call. Our teams have created substantial value for Wes. The recent commercial success in M&A activity. Shortly after quarter end, we executed two long term contract amendments with Occidental first we executed an amendment to Occidental existing gas processing agreement in the Delaware basin to provide up.
Two 250 million cubic feet per day of peak additional firm processing capacity second we executed an amendment to occidental's existing oil gathering agreement in the Delaware basin to provide up to approximately 57000 barrels per day of peak additional firm treating capacity both amendments.
Supported by significant corresponding minimum volume commitments and reflect new firm commitments for volumes that were previously forecasted. These amendments also reflect occidental's commitment to growing throughput in the Delaware Basin, and we look forward to supporting their growth initiatives for years to come. We also executed multiple long term agreements after quarter end with several new.
Customers in the Maverick basin on our South, Texas assets, including New natural gas gathering condensate gathering and condensate stabilization agreements turning towards the D. J basin. We continued to be encouraged by the success producers are seeing with both the approvals of oil and gas development plans or O G D piece as well.
As large comprehensive area programs by the C. O G. C C, 50% of the total well count receiving permit approvals in O. G. D piece of this quarter are located on acreage, we service of which we predominantly expected to benefit from in 'twenty 'twenty four and beyond we will continue to keep a close eye on the permitting environment and producer forecasts.
As we head into 2023.
I'm, an M&A perspective, we closed on the acquisition of the remaining 50% interest in the ranch West Tex natural gas processing plant in the Delaware basin for $41 million, providing us immediate access to 125 million cubic feet per day of incremental operated processing capacity. This acquisition aligns with our focus on.
On efficiently growing our processing capacity in the Delaware basin through organic growth or strategic bolt on opportunities. Prior to this transaction ranch West Tex was in equity investment is and is now part of our West Texas complex effective September one. Additionally, subsequent to quarter end, we sold our 15% interest in our cactus II.
Equity investment for approximately $265 million, which includes approximately $2 million a pro rata distribution through closing this strategic divestiture will allow us to continue the flow of capital back to our unit holders as demonstrated by the increase of our previously announced a unit repurchase program turning back to capital returns I am very.
Proud that west continues to be a leader in returning capital to stakeholders not only amongst our midstream peers and large cap publicly traded midstream companies, but also relative to the S&P 500, and the S&P 500 energy index from a free cash flow yield perspective, West has maintained the highest free cash flow yield relative to our midstream peers.
Large cap publicly traded midstream companies, the S&P 500 energy index and by an even greater degree relative to the S&P 500. It is also interesting to note that Wes has outperformed the exploration and production dominated S&P 500 energy index. Despite the fact that those companies have benefited greatly from higher oil prices over.
The past several quarters, adding price to earnings ratios to the analysis you can see that west presents an attractive investment opportunity for new capital that migrates back to the midstream space. Additionally from a total capital return yield perspective, which focuses specifically on distributions and buybacks washes out performance relative to midstream peers and the market as a whole.
<unk> is even more profound.
<unk> is the only one of two enterprises that has generated a superior total capital return yield using a balanced approach between distribution increases and unit buybacks. In addition to the distributions and unit repurchases west significantly reduced debt through open market repurchases and retirements as notes came due this three pronged bal.
<unk> approach to returning capital stakeholders place west higher than all of our midstream peers in large cap midstream companies.
The main ways that west has been able to demonstrate this leadership is through our leading position in generating returns on capital employed I'm very pleased with our financial track record since becoming a standalone entity as we are focused on prudent capital allocation, creating operational efficiencies and generating strong returns for our stakeholders finally, as we turn our attention to the fee.
<unk> West is well positioned despite the current macroeconomic and commodity price volatility our resilient contract structures provide protection during periods of market volatility and our asset base is located amongst top tier acreage and core U S. Basins that continues to attract capital. We also maintain a healthy balance sheet with our debt to trailing 12 month adjusted EBITDA leverage ratio.
Oh below our year end threshold of 3.4 times going forward, we will continue to focus on all three pillars of our balanced capital allocation strategy, which positions Wes as a leader in generating substantial value for stakeholders in terms of total capital returned before we close the call I would like to take a minute to recognize our employees and contractors for the <unk>.
Continued hard work and dedication to Wes and exemplifying our partnerships core values every day.
Cause of your efforts west is well positioned to finish 2022 on a high note and achieve additional success in 'twenty 'twenty three with that we'll open the line for questions.
At this time I would like to remind everyone in order to ask a question simply press Star then the number one on your telephone keypad will pause for a moment to compile the Q&A roster.
And your first question is from the line of Neel Mitra with Bank of America. Please go ahead.
Hi, Good afternoon, I just wanted to.
Clarify a little bit more on the comment around producer activity.
And timing.
Are you seeing any pullback in activity or is stuff just being pushed to the right and if you could provide a little bit of detail around that how much in.
If it's the Supermajors the independents private.
Just just what youre seeing there.
Yes, Neal it's a great question.
Actually it's the latter not the former or in other words.
We're just seeing a little bit longer time to get the wells to market as a result of some of the supply chain and human capital challenges that you.
We're really everyone and.
In West, Texas is experiencing right now so it's really just a timing issue or a push to the right. If you will as it relates to two activity.
Not seeing any.
Any instances of folks desiring to pull back at all.
Got it and just for a follow up are you seeing any of your customers.
Maybe pulling.
Pulling back activity.
We're thinking about that in 'twenty three interest due to the natural gas egress.
Strength out of the Permian.
And what could be.
Big Aha basis blowouts in Christiana in third Q.
At this stage, we certainly havent seen any.
Any indications of any any pullback on activity levels on our position.
Okay, great. Thank you very much.
Got it got it thank you very much thanks Bill.
Your next question is from the line of Keith Stanley with Wolfe Research. Please go ahead.
Hi, good afternoon.
I guess first could you maybe talk to what drove the decision to try and monetize cactus to now versus previously and when you look at your portfolio or are there other jointly owned pipelines that possibly could make sense to divest as well.
Yes so.
We've always actually maintained a posture that for those equity investments that we would be.
Be interested in monetizing should the valuation actually meet.
Perspective, where we think it makes sense.
So.
Our perspective.
Really changed around it it was just a matter of.
Strategically we felt as if our partners or to a stage where were they desired to go ahead and own more of that interest and from our perspective.
We actually saw it as a really attractive opportunity for us to recycle those proceeds back into repurchasing more of Wes.
And so.
All of those stars aligned for us to execute on that today as it relates to our other interest we have the same posture around them.
If there is.
The evaluation that would make sense to monetize those then we would certainly consider doing that.
Thanks, and second question, just the ranch West Tex acquisition.
Do you still need to offload volumes in the Delaware right now or does that catch you up and just just an updated outlook for off loads through next year. Please.
Yes, great question. So we feel we feel comfortable today that with the existing offload arrangements that we have in some of those will continue into 2023 with the addition of ranch West Tex.
But we're comfortable with we are where we are from a total processing complex to bridge us to get to to Menton. Three so worked really well for us to bring that into our processing stack. So that we could operate it and direct volumes there.
Bridge us to one menton gets gets completed.
Thanks.
Once you get every one of you would like to ask a question simply press Star then the number one Andre telephone keypad.
Your next question is from the line of Jeremy Tonet with J P. Morgan. Please go ahead.
Yes.
Hi, good afternoon.
Hey, Jeremy.
So just wanted to follow up on cactus, a little bit more if I could we were going through some numbers here and it looks like it was 13 times trailing just wanted to see if that was kind of puts us. What you guys were seeing or are there other elements to think about in the in the economics. There. Just wondering are there any other opportunities for kind of very rich.
Recycling to drive up more buybacks there.
Yes, So I think the best thing that I can do there Jeremy would be to direct you to the distributions that we outlined in our filings.
For the last 12 months trailing those distribution distributions totaled about $24 $8 million. So I think.
That's the best thing I can do in terms of driving ultimate multiples.
We are constantly looking for opportunities, where we can monetize assets like this that obviously are very valuable, but where they might have greater value in someone else's ownership.
We can recycle into buying back more more western units, which as <unk> seen throughout the past couple of years and certainly this year that.
As a tool that we like to utilize to repurchase more of our own units out there.
Got it that's helpful. Thanks, and then just wanted to shift to the D. J a little bit more in kind of get a feeling for what youre seeing out there for activity.
With oxi seems like there might be some pickup there. So just wondering what you could what.
If you could share as far as outlook at this point.
Yes.
We're actually quite optimistic.
More approvals come through it seems as if.
There has been a better cadence as it relates to those approvals overall.
So as we talk to our customers in the DJ for the most part the 2023 drilling plans are largely approved already.
And a lot of the new approvals that are coming in.
Are making us very optimistic as it relates to 2024 and beyond.
So increasingly optimistic over overall as it relates to activity levels out there and as we mentioned on the call about half of those approvals are actually on <unk>.
Encourage the west services. So it's not only just getting approvals in the DJ It's also in <unk>.
Approval is in areas that we service so.
I'm starting to get a lot more optimistic that as things go through the system.
There can be a better cadence and more predictable activity level going forward out there.
Yeah.
Got it that's helpful. One last one if I could just as we think about supply chain issues as it impacts producers out there.
Any more color you could share with regards to timeline of how you see that might be getting cleaned up and is there much of a difference in the kind of the publics and privates.
As far as the issues they face there behind your system.
No I can't say that there is a real difference that we found.
<unk>.
It's sort of across the board when you were talking about availability of resources Frac crews frac equipment.
Inputs not just on the Frac side its across the board where.
Everyone is struggling.
Struggling overall to get again.
And the timing that was expected at the beginning of the year.
For the most part everyone is.
Still being able to get everything online, it's just taking a little bit longer than.
What have been the case I wish I could play into an exact time at which that will sort of alleviate.
It seems to be a bit of a global problem.
<unk> capital and supply chain issues.
And it is it's definitely finding its way in the Permian overall so.
The reason for the reset on the guidance side is just as a result of.
We do expect that we'll certainly trends through the end of the year.
And therefore, it will be a little bit longer before those wells will come online.
That's very helpful I'll leave it there thanks.
Thanks.
Your next question is from the line of Gabe Moreen with Mizuho. Please go ahead.
Hey, good afternoon, everyone.
Not quite sure how to ask this but the new agreements with oxy noticed that some of those volumes you have been previously forecasting can you just talk about what going to a firm commitment I guess means how does that change the economics at all in terms of your agreements there does it support the menton expansion.
And also is there any implications for any cost of service stuff. So maybe I'll just leave it at that.
Yes no.
Great question.
So these are all volumes that we expect it to come through the system. They were just on an interruptible basis.
And so.
In light of the tightness overall that we're seeing across our system and in light of the confidence that oxy fields with regards to the delivery of those volumes.
We went to a firm commitment level of service.
With regards to those volumes and so.
What that means is that on an interruptible basis that firm commitments get priority as it relates to processing and things that get tight.
If youre on a firm basis, then obviously, we have a commitment that we're going to go ahead and process those volumes and so.
As there was increasing confidence overall with with regards to the growth.
Oxy over there.
Long with the tightness that we're seeing overall in the system or in the complex in light of a lot of the recent.
Meaningful commercial successes that we've had out there.
Just made sense for both parties to actually change the level of service with regards to the volumes coming through the system.
In addition to that.
Sure.
They're signing up to minimum volume commitments overall to illustrate again.
And the commitment level that they are providing in order to get access to these to this firm commitment service that we're that we're offering up.
Thanks, Michael and then maybe just a quick one on these excess liquids recoveries is that strictly a function of ethane rejection or not or is there are there other things also going on there.
Yes, there is.
Again, it has a little bit to do with with pricing right. So again, what we saw in the third quarter was a little bit of an impact overall on pricing as well as the optimization through our system as a whole.
As we get into a lot of the warmer months, it just becomes a little bit more difficult to be able to optimize.
The recoveries overall so.
That's really what we saw in the third quarter Christian anything else that you had out there, yes, I think okay.
Touching on that we had talked earlier in the year that we had entered into in some of our contracts from OXXO to fix recovery for this dynamic is coming out.
We now have more gross margin upside as it relates to the retained volumes. Obviously the volumes are going to have commodity price sensitivity and so as we're seeing commodity prices change quarter over quarter, and then I was going to come out and then gross margin.
Thanks, and then if I could just ask one more on sort of the approach to Ccs and how.
And do you envision <unk> role within that business is it fair to say that you are.
Taking a midstream approach, where youre going to be concentrating on maybe transporting the seo to hurts Univision I guess, having other parts of the chain within Ccs.
Yes that is currently the thought right now is that it would be primarily focused on call. It the midstream oriented.
Transportation and infrastructure.
<unk> of of that obviously would also include some capture at our facilities to minimize the environmental footprint of our facilities as a whole.
And so that's the primary focus again, we're still.
In the stage right now to work out all the details of how that might look in a more fulsome in detailed manner, but conceptually that's certainly the way that.
We're looking at it.
Great. Thanks, guys.
Thank you.
There are no further questions at this time, Mr. <unk> I turn the call back over to you.
Thank you everyone for joining our third quarter call. We look forward to discussing our fourth quarter and year end call. The first part of next year.
Thanks, everyone.
This does conclude the western Midstream partners third quarter 2022 earnings Conference call. Thank you for your participation you may now disconnect.
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Please wait the conference will begin shortly.
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