Q4 2023 Western Midstream Partners LP Earnings Call
Okay.
Good afternoon. My name is joelle and I will be your conference operator today at this time I would like to welcome everyone to the Western Midstream partners fourth quarter and full year 2023 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 followed by the number one on your telephone keypad.
We would like to withdraw your question. Please press star two.
Q 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 fourth quarter 2023 conference call.
I would like to remind you that today's call the accompanying slide deck and last night's earnings release contain important disclosures regarding forward looking statements and non-GAAP reconciliations.
These reference Western midstream is most recent Form 10-K, 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.
Additionally, I am pleased to inform you that the western midstream partners K, one will be available via our website beginning March eight hard copies will be mailed out. The following week with me today are Michael <unk>, Our Chief Executive Officer, and Christian Shults, Our Chief Financial Officer, I'll now turn the call over to Michael Thank you Daniel.
And good afternoon, everyone.
Before we discuss our fourth quarter and full year 2023 operational and financial results I'm excited to announce that we recently executed a series of agreements to divest of West is remaining interests in several non core non operated assets for $790 million.
This includes west as interest in the White Thorn, Paul NOLA and saddle Horn pipelines, the Mont Belvieu joint venture and the Marcellus gathering system in Pennsylvania.
The proceeds from these transactions, which in the aggregate represent an attractive accretive multiple of approximately 9.6 times. Our 2023 adjusted EBIDTA will provide liquidity to further strengthen our balance sheet and accelerate the return of capital to our unit holders in 2024 for the past few years, we have successfully executed our strategy of diverse.
<unk> legacy noncore assets and reallocating capital into our core asset base with the goal of generating incremental business and accelerating capital return to our unit holders. Furthermore, by coupling divestitures with strategic M&A, such as the Meritage Midstream acquisition, we've been able to cost efficiently grow and further diversify.
Our operated asset footprint. Additionally, as a result of west is meaningful net leverage reduction reduced unit count and significant sustainable free cash flow generation management plans to recommend a base distribution increase of 52% starting in the first quarter of 'twenty, 'twenty, four which equates to 87 five.
Five cents per unit on a quarterly basis and $3.50 per unit on an annualized basis management's confidence in the sustainability of our free cash flow generation underpins, our recommendation to increase the base distribution rather than pay a material enhanced distribution in future years, while the enhanced distribution.
Houston is a critical component of our capital allocation framework, we believe aligning the base distribution with the expected baseline cash generation of the business generates maximum unit holder value and allows the enhanced distribution to provide for incremental returns to unitholders when the business outperforms since becoming a standalone enterprise in 'twenty 'twenty.
We are also focused on growing our third party business maximizing our partnership with Occidental, and operating our existing assets efficiently and safely.
As of year end 2023, we have grown our adjusted gross margin, 22% relative to year end 2019. Additionally, by focusing on capital efficient growth and capital discipline, we've been able to grow our free cash flow from $37 million at year end 2019, two unexpected 1.15 billion.
At the midpoint based on our 'twenty 'twenty four free cash flow guidance. Furthermore, throughout this period, we have continued to return more value to stakeholders through our diversified transparent capital return framework. Since January 2020, we have repurchased 15% of our unaffected unit count outstanding inclusive of the.
Dissipated quarterly 30 cent per unit increase this will have resulted in an expected $500 million cumulative reduction in total distribution burden through year end 2020 for the reduction in unit count at the three dollar and 50 cents per unit annualized amount also equates to roughly $230 million of reduced.
<unk> that can be reallocated to existing unitholders starting in 2025, thus equating to such a significant per unit distribution growth rate. Additionally, we also allocated meaningful cash flow to retiring in repurchasing debt, which materially reduced leverage from west is 20th 19 high watermark of 4.6 times.
Two unexpected 3.0 times by year end 'twenty 'twenty four all of these actions have put our partnership at a position of strength, which has ultimately resulted in our ability to accelerate the return of capital to our unit holders and target an increase to our quarterly base distribution of 41% relative to our pre pandemic quarterly distribution level.
Even with an increase of this magnitude. We believe we will still have room to target additional base distribution increases in future years as the business performs and free cash flow generation continues to grow.
Turning to our 2023 results 20 twenty-three was a successful and pivotal year for west as we achieved another year of record throughput growth across all three products further diversified our asset and customer base through commercial successes and accretive M&A and returned $1.1 billion to unit holders through.
Our capital return framework.
Our ability to continue capturing throughput growth from our core basins, while maintaining cost and capital discipline has positioned west on solid financial and operational footing as we enter 2024. This is reflected in our strong 'twenty 'twenty four guidance that we announced in yesterday's press release, which anticipates continued throughput growth in 2020 four.
And into 2020 five and includes the capital investment necessary to complete the construction of Menton three and the majority of the North loving plant. Our guidance also includes the impact of our announced noncore asset divestitures from yesterday.
Before we discuss our fourth quarter results in more detail I would like to highlight several accomplishments in 2023 that help position west for growth and success in 2024 and beyond.
Focusing on the Delaware Basin. This was an extremely successful year for west is throughput increased across all three products, resulting in record throughput from the basin. We also experienced tremendous commercial success and further diversified our customer base by adding 12, New third party customers across both our natural gas and produced water business.
Says since late 2021 we've executed multiple long term agreements with Occidental and other third party customers that provide up to 950 million cubic feet per day of firm processing commitments and our commercial team has materially increased third party volumes on our system. These commercial successes were the primary drivers behind the sanctioning of both.
Menton, three and the north loving plant, which will increase our total processing capacity in the basin by 34% and maintained west is position as one of the top five natural gas processors in the Delaware Basin. These accomplishments have also helped west grow its third party natural gas throughput at more than double the rate of the basin since early 2021.
In the DJ basin throughput declines subsided in the second half of 2023, and we experienced sequential quarter crude oil and NGL throughput growth starting in the third quarter for the first time since late 2021 in.
In the powder River Basin, we closed the Meritage acquisition early in the fourth quarter, which is the second largest unaffiliated corporate level M&A transaction in West is history, and our first significant acquisition since becoming a standalone partnership in 'twenty 'twenty. Our M&A strategy remains focused on accretive deals that optimize the value of our existing asset base and enable us to leverage.
Our operational expertise to generate incremental value for our unit holders since closing the merits of the transaction and working to integrated into our business. We've been pleased with its performance relative to our baseline expectations and we've identified another $6 million of operational cost savings that we believe are achievable by the end of 'twenty 'twenty four. Furthermore.
We have identified at least $6 million of incremental cost savings that can be realized from certain field level efficiencies with that said we are off to a strong start and plan to make substantial progress capturing expected cost savings and implementing operational efficiencies throughout 'twenty 'twenty four.
As we discussed on prior earnings calls, we strive to maintain a strong balance sheet and investment grade credit rating with the goal of ultimately driving leverage down towards our long term leverage thresholds in order to accelerate additional capital return to our unit holders in 2023 West bought back $135 million of common units as well as increased our base distribution.
Twice during the year to $2.30 per unit on an annualized basis, representing a 15% year over year increase. Additionally in may of 2023 we paid our first enhanced distribution of 35.6 cents per unit or $140 million based on our 20 twenty-two financial performance in total.
We paid $978 million to unitholders in 2023 in the form of distributions an increase of 33% compared to distributions paid in 2022 <unk>.
Inclusive of yesterday's announced asset divestitures, and our expected 'twenty 'twenty four guidance ranges, we expect to reduce net leverage to approximately three times by year end 'twenty 'twenty four cut.
Coupled with free cash flow growth and the reduction in our overall unit count. These divestitures allow us to accelerate the return of capital to unit holders through the anticipated distribution increase of 52% with that I will turn the call over to Kristin to discuss our operational and financial performance.
Thank you Michael and good afternoon, everyone, our fourth quarter natural gas throughput increased by 9% on a sequential quarter basis. This was almost entirely due to increased throughput in the powder River basin, resulting from the Meritage acquisition that closed in early October.
Our crude oil and Ngls to repay it increased by 5% on a sequential quarter basis also due to increased throughput in the powder River basin from the Meritage acquisition and increased throughput from the DJ Basin. We also experienced slightly higher throughput from the Delaware basin quarter over quarter.
Produced water throughput decreased by 2% on a sequential quarter basis due to temporary volume curtailments associated with activities to support its adjacent producer development, our fourth quarter currency adjusted gross margin for natural gas assets increased by <unk> <unk> compared to the prior quarter. This increase was primarily driven by increased throughput from operated assets include.
<unk>, Delaware, DJ and the powder River basin increased distributions from our equity investments and the favorable revenue recognition cumulative adjustment recorded in the fourth quarter associated with the higher cost of service rate pertaining to our south Texas assets. Please.
We expect our first quarter per Mcf adjusted gross margin to be flat with the fourth quarter, primarily due to higher go forward rates associated with the cost of service rate Redetermination that are offset by the loss of volumes from the recently divested Marcellus gathering system in Pennsylvania, our fourth quarter per barrel adjusted gross margin for our crude oil and NGL assets increased by.
<unk> 16 cents compared to the prior quarter, primarily due to a favorable revenue recognition cumulative adjustment recorded in the fourth quarter associated with the higher cost of service rates at our DJ Basin, and South Texas oil system.
We expect our first quarter per barrel adjusted gross margin to increase by approximately 5% relative to the fourth quarter, mostly due to the loss of volumes associated with the sale of the white Thorn pipeline and the Mont Belvieu JV, both of which closed last week. Additionally, we expect our per barrel adjusted gross margin to increase another 15%.
In the second quarter once the saddle Horn Antonella pipeline asset sales closed our fourth quarter per barrel adjusted gross margin for produced water assets increased by two cents compared to the prior quarter, mostly due to contract mix and increased efficiency fee revenue, we expect our first quarter per barrel adjusted gross margin to increase modestly relative to the fourth quarter.
Mostly due to the cost of service rate Redetermination that became effective on January 1st during the fourth quarter. We generated net income attributable to limited partners of $282 million and adjusted EBITDA of $571 million rare.
Relative to the third quarter, our adjusted gross margin increased by $77 million. This increase was mostly driven by the gross margin contribution from the Meritage acquisition and their recording of $20 million at favorable revenue recognition cumulative adjustments associated with re determined cost of service rates on certain contracts associated with our assets in south.
Texas, and our DJ Basin oil system.
Turning to expenses inclusive of two and a half months of Meritage activity, our operations and maintenance expense decreased slightly quarter over quarter, mostly due to lower utilities expense.
As we look to the future we expect our 2020 for operation and maintenance expense to trend modestly higher than 2023, as a result of increased throughput and our expanded asset base.
As a reminder, we expect seasonality associated with our utility expense in the summer months due to higher overall electricity pricing and greater energy usage in conjunction with increased 30, turning to cash flow our fourth quarter cash flow from operating activities totaled $473 million generating free cash flow of $282 million.
Free cash flow after our November distribution payment with $59 million, our fourth quarter 2023 cash base distribution at $57.05 per unit with unchanged relative to the prior quarter's distribution and was paid on February 13th to unitholders as of February 1st.
Turning to our full year results average throughput across all three products increased year over year, excluding the sale of cactus to which impacted our crude oil and NGL volumes in 2022 for full year 2023, natural gas throughput averaged 4.4 billion cubic feet per day, representing a 5% year over year increase full year 2023 crude oil.
And NGL throughput averaged 652000 barrels per day, a 7% year over year increase this excludes an average of approximately 65000 barrels per day of throughput in 2022 associated with the sale of cactus too and includes approximately 5000 barrels per day of throughput associated with Meritage assets in the fourth quarter of 2023.
Full year 2023 produced water throughput averaged just over 1 million barrels per day, an increase of 21% compared to full year 2022 for our full year financial performance. We recorded just under $1 billion of net income attributable to limited partners generating two point of $7 billion of adjusted EBITDA slightly.
Exceeding the top end of our revised 2023, adjusted EBITDA guidance range of $2.05 billion. Our adjusted EBIT performance was primarily driven by increased throughput from all three products in the Delaware Basin and the addition of two and a half months of throughput and the associated financial contribution from Meritage during the fourth quarter.
This growth position west to deliver another year of strong operating cash flow, which totaled approximately $1 $7 billion for 2023.
Our capital expenditures totaled $739 million in 2023 and consisted of predominantly expansion capital largely associated with the construction of mental and three to support the growing needs of our customers. Our capital spend was toward the low end of our revised 2023 guidance range, resulting largely from several expansion projects shifting.
Into early 2024 are.
Our free cash flow generation totaled $964 million in 2023 within our revised guidance range. Our performance highlights the profitable nature of our asset base and our disciplined approach towards managing both operational cost and capital spending.
Finally, west declared base distributions that totaled $2 in 'twenty, one for 2023 including our recent fourth quarter base distribution of <unk> 57, and a half cents per unit.
This amount exceeded our full year 2023 base distribution guidance of $2 18, and three quarter cents per unit. Additionally, we paid an enhanced distribution of 35.6 cents per unit in May of 2023, turning our attention to 2024, we expect our portfolio wide average year over year throughput to increase by.
Low to mid teens percentage for natural gas upper single digits percentage for crude oil and Ngls and a low to mid teens percentage for produced water or 2020 for throughput guidance takes into account the noncore asset sales, we announced yesterday and excludes those volumes from our 2023 reported results for year over year comparative.
Purposes.
In the Delaware Basin, we expect average year over year throughput to increase for natural gas and crude oil and Ngls at growth rates similar to or better than 2023, we expect to see a slight decline in produced water volumes relative to 2023. This.
This is mostly due to continued strong producer activity levels and a steady number of wells coming online throughout 2024, while the forecasted number of wells expected to come to market. In 2024 is flat relative to 2023 producer driven efficiencies such as multi well pad drilling and longer laterals per well are expected to result in higher throughput across our asset.
In the DJ Basin, we expect average year over year throughput to increase for both natural gas and crude oil and Ngls, we expect the positive trends in the second half of 2023 to continue into 2024, namely strong producer activity levels and steady on loan activity that resulted in throughput increases in the second half of the year as of our latest.
Forecast, we expect to see consistent throughput growth in 2024 from approximately double the new well count in 2024 relative to 2023. In addition to steady on load activity keep in mind that increases in crude oil and NGL throughput in 'twenty 'twenty four will have a minimal impact on our adjusted EBITDA in the near term due to the current structure of <unk>.
Demand fee revenue finally, we expect meaningful throughput growth from the powder River basin in 'twenty 'twenty four for both natural gas and crude oil and Ngls, primarily due to the full year's contribution for Meritage and steady throughput growth from customers in the basin turning to our 2024 financial guidance, we expect our adjusted EBITDA to range between 2.2.
$2 billion to $2.4 billion for the year, implying a midpoint of $2.3 billion, which represents growth of more than 11% year over year at the midpoint, even after giving effect to the noncore asset sales announced yesterday.
Focusing on 2020 for the overall distribution of adjusted EBITDA will change slightly compared to 2023, primarily due to the Meritage acquisition and our noncore asset sales announcement.
However, we estimate that the Delaware basin will remain our largest contributor at 51%, while the DJ and the powder River basin are expected to contribute 32% and 7% of our overall 2024 adjusted EBITDA respectively.
The sale of noncore assets and the acquisition of Meritage has allowed us to generate incremental adjusted EBITDA and expand our operated asset base, while reducing leverage we expect our 2024, our capital expenditure guidance to range between 700 and $850 million, implying a midpoint of $775 million, which also includes the <unk>.
Pact of yesterday's noncore asset sale announcement lease.
We expect 81% of our capital budget to be spent in the Delaware basin. The majority of our capital spend will be expansion capital pertaining to the construction of the north loving plant the completion of Montana, three and additional system expansion in our core operating basins due to continued commercial success from both new and existing customers.
We still plan to enter the commissioning and startup phase for Minto and three in the second half of March and expect to begin benefiting financially from menton early in the second quarter of 2024. We also expect to have higher overall, well connect capital due to an increased number of total wells coming to market and higher overall maintenance capital, mostly due to the needs of our produced water business.
And our expanded asset base focusing on the Meritage transaction since taking ownership of the assets. Our team has better refined the powder River basin capital assumptions and in combination with some of those operational efficiencies. We are implementing we were able to reduce our initial expansion capital assumptions in this basin for 2020 for taking both of our adjusted EBITDA and capital expenditure.
Guidance ranges into account, we expect to generate free cash flow between 1.15, and one point to $5 billion in 2024, implying a midpoint of $1.15 billion, which includes the impact of yesterday's noncore asset sale announcement and represents growth of 19% year over year at the midpoint, including our expected increase.
We are guiding to a full year base distribution of at least $3.20 per unit as Michael mentioned 87, five cents per quarter at 41% higher than west as 2019 pre Covid quarterly distribution level, we will continue to evaluate the base distribution on a quarterly basis and we believe we will have room to target additional base distribution increases in fee.
Your years based on the health and growth trajectory of our business any potential enhanced distribution payment in 2025 will be based on our full year 2024 financial performance governed by our year end 2024 leverage threshold of three times and subject to the board's discretion.
Now I'll turn the call back over to Michael.
Thank you Kristen before we open it up for Q&A I would like to reiterate our excitement regarding the partnerships current financial and operational position and our 'twenty 'twenty four outlook significant effort has been invested by our people to put our partnership into the position of strength that we are on today in early 'twenty 'twenty, we had more than 450 million units outstanding.
Net leverage of approximately 4.6 times and we faced a monumental task and building the workforce culture and back office infrastructure necessary to establish ourselves as a standalone entity.
When the pandemic hit and Twenty-twenty West was downgraded below investment grade and we immediately took significant steps to materially reduce leverage and improve the health of the balance sheet.
Since that time, we assembled a dedicated employee base focused on generating incremental business from existing customers and attracting new customers onto our system. We also adopted an entrepreneurial mentality and reexamine every aspect of our operations to identify incremental cost savings opportunities and to pursue efficiencies to improve our profitability.
We've also implemented new technologies and processes to increase operational efficiencies enhance employee development and safety and to minimize our environmental footprint. We were the first midstream MLP to pivot and focus on free cash flow as a financial performance indicator as opposed to the conventional MLP standard metrics of distributable cash flow and distribution coverage.
The shift of free cash flow generation has led to strong results, including repurchasing 15% of our unaffected unit count and reducing our expected year end net leverage by more than one and a half turns since the end of 2019, when taking into account the noncore asset divestitures and 'twenty 'twenty four financial guidance, we announced yesterday, we also re.
Gained our investment grade credit rating and our ability to meaningfully improve the balance sheet put us in a position to debt finance the Meritage midstream acquisition and transform our powder River basin footprint in the second half of 2023. Additionally, we've returned to growth mode sanctioning Menton train three in 2022, and the north loving plant in 2023.
Both of which were underwritten by long term contracts backed by minimum volume commitments and further demonstrates our commitment to capital discipline. These actions coupled with the recent noncore asset divestitures have ultimately resulted in our ability to accelerate the return of capital to our unit holders and position us to recommend a 52% increase to the base.
<unk> at 87, and a half cent per unit quarterly our target 2024 base distribution represents a 41% increase relative to our pre pandemic distribution level, which should make west one of the highest if not the highest yielding investment grade midstream entities when compared to other midstream companies in the Russell 3000 index in fab.
<unk> West has already been one of the leaders over the past several quarters, even before our most recent 52% base distribution increase without a doubt all of our efforts over the past few years have greatly improved west as balance sheet and free cash flow generation and have provided significant flexibility to be able to return more capital to unit holders.
West leads its peer group in total capital return yield and has a higher yield than the S&P energy sector and the S&P 500 Index. We've also returned a higher percentage of our enterprise value back to unit holders than other midstream companies and we continued to be top tier and return on total capital employed finally, we are excited about their trajectory.
<unk> of our business in 2020 for the financial outlook for West remains strong as we transition into 'twenty 'twenty, four which we expect will be driven by another year of throughput growth that generates an 11% increase in adjusted EBITDA and a 19% increase in free cash flow at the midpoint.
I would like to close the call by thanking the entire Westwork force for all of their hard work and dedication throughout our company's history, our People's hard work and dedication to west as foundational principles and core values enabled us to make landmark achievements for the organization and create sustainable value for our stakeholders.
I look forward to updating you on our progress toward our 'twenty 'twenty four goals on our first quarter call in May with that we will 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, we'll pause for just a moment to compile the Q&A roster.
Your first question comes from Spiro <unk> with Citi. Please go ahead.
Thanks, operator afternoon team.
Maybe to pick up on the distribution, if we could I wanted to go through some of the implications.
And what this new <unk>.
Higher payout means.
It sounds like you guys got a lot of thought to the sustainability of it and the ability to grow it I guess in the near term here. It does seem to consume a lot of your free cash flow, maybe perhaps over the next two years or so but I guess, what's implicit in that is that there seems to be some level of sort of self restraint on capex and I think some of our numbers imply spin.
<unk> kind of below 700 million for the next few years to continue to rapidly grow. This this distribution. So one or are we sort of reading that correctly that there is a presumption here. The capex does decline as some sort of normalized level and then too.
Think about what that level is what does that mean for the growth rate from here how much do you think you can grow with lower capex.
Yes, Hey, Spiro thanks for the question.
I think a couple of comments, yes, we do see 2023, and 2024 as higher expected capital periods relative to go forward rate and really the reasons behind that or because of the two new plants that we're building.
We believe we're going to be able to sustain the growth level that we're expecting into the future and so as you look at 2025 and beyond all things considered based on our current expectations. We would expect that that capital would actually be reduced relative to the higher levels that we've seen in 2023 and 2024.
Got it and as far as what that reduced level is.
Don't know if you guys have a sort of a longer term growth trajectory out there. Obviously your plan is still to grow the distribution.
You have a stated goal yet to sort of grow mid single digits anything we could add sort of penciled in.
Yes, I would just look from a capital perspective, I would probably turn into 2022, which was a period of growth for us but did not include the significant capital associated with building new plants is.
An indicative amount of capital what it might look like on a sustainable basis going forward. We still again believe that thats going to result in and positive outcomes for free cash flow generation point of view going forward, which is.
To your point the incident or the commentary that we made around the sustainability of the distribution and at that level and even the potential for increased distributions going forward.
Yeah.
Got it that's helpful. Michael Thank you and second question quickly just to touch on the asset sales that.
That was something that was not on our radar great or maybe it should have been but just curious I guess, how would you describe your appetite here continue to sell more assets.
It is what you've got left with now this one screen as court.
Yes, we've actually always held the perspective that those assets were non core to us that obviously, we see great value in them, but they are not core to us and so should someone sees more value in those assets than we do then and we would divest of them similar to what we did at the end of.
2022, as well and so we do have.
Some equity method investments that we've retained.
We maintain the same perspective around those that they have great value to us, but shouldnt someone else see greater value than what we do then we would look to divest them in the future.
Understood helpful. As always thanks, thanks, Thanks Darryl.
Your next question comes from Jeremy Tonet with J P. Morgan.
Your line of high there.
Hey, John Hey, good afternoon, Jeremy Tonet from Jpmorgan.
Just wanted to.
Maybe pick up a little bit with what.
Spiro was asking there and just wanted to refresh view as you guys think about the current portfolio in front of you. How do you guys think about I guess it is.
A question and answer but the capital needed to kind of sustain the earnings power of the business at this point as we kind of think about.
Think about that going forward.
Yes, so I would reiterate again the comment that I would I would probably turn into 2022 is the best sort of indicative levels for us.
Think about a sustaining.
Sustaining with even.
Lean towards growth.
In terms of the amount of capital necessary and that's call. It about a half a billion dollars of capital range. So.
The best guidance that I think we can give to you as it relates to what we would expect.
For a sustained level to be in the absence of some of the chunkier sort of capital projects like the two plants that we are building right now.
Got it that's very helpful. So when we think about this.
Distribution increase as it were that you announced today.
Kind of looking at that level of Capex is determining the right level of an increased 52% versus something higher or lower or just trying to see I guess.
Going forward, whether it's that or whether it's kind of.
Free cash flow.
Yes, so a couple of things that went into that and we did a lot of analysis together with our board to take a look at it and.
Really it.
It focused on number one we put out a target a couple of years ago, where we would like to be from a leverage standpoint at the end of 2024 and that was at three times to three times level, We think is.
On the lower end, but gives us the flexibility to be able to continue to grow our business and even offers opportunity for us to do.
<unk>.
Buyback units Opportunistically and continue to support and sustain the business as it relates to inorganic opportunities on the M&A side and so as we took a look at the health of the business. We took a look at the asset divestitures and targeted where we might be able to achieve a three times leverage level exiting 2024.
Or.
Where we came out of the $3 50 level, then we sensitize that on a go forward basis relative to expectations and have confidence that that is a sustained level going forward and frankly, even provides an opportunity for us to grow that even further into the future.
Got it.
That's helpful.
And then just one quick last one if I could amidst this period of kind of consolidation as we see it in the midstream industry. Just curious how you think west his role in that progress is going forward at this point.
Yes, I think I'd, probably point you to the recent past in that regard I think from our standpoint, we have incredible confidence in the culture. The team our operational capabilities to be able to go out there and.
Acquire bolt on acquisitions in areas in which we operate that we can enhance our existing position drive synergies through the system and then increase our free cash flow going forward. So.
Obviously were.
Constantly scouring the landscape to be to be able to be <unk>.
<unk> two opportunities, where we can continue to do that similar to what we saw on the Meritage acquisition.
Got it that's very helpful I'll leave it there thanks.
Okay.
Again, if you would like to ask a question Press Star then the number one on your telephone keypad.
Your next question comes from Brian Murdo Reynolds with UBS. Your line is open.
Hi, good afternoon, everyone.
Maybe just a.
Follow up on some of the Delaware activity as I remember, you're offloading kind of a significant amount of volumes for the north loving and Menton plant come on so can you just remind us how much volumes are being offloaded currently.
Kind of.
Following on some of the growth comments like could we see another need for another plant at north loving.
The $25 26 timeframe, just given the growth trajectory, particularly in the Delaware.
Yes, Thanks, Brian.
We would expect that once <unk> comes online that that plant is largely full so I think that should give you a pretty good sense for.
And offload volumes awful lot volume perspective, as we sit here today, we actually believe that with.
North loving and train one coming online that were sufficient to be able to handle the growth that we're projecting and expecting going forward. So between mentioned III coming online shortly and then.
North loving train one we think that that sets us up nicely to be able to to handle the growth that we're seeing in our asset base.
Great appreciate that and maybe to.
Touch on the recent announcements of oxy as potential divestment.
West appreciate the release that you guys announced by ongoing sale process for <unk>, but perhaps could you just remind us about how youre an independent board you know kind of separates west from the oxy sale process ultimately with the board structure. If you could just remind us there. Thanks.
Good question, Brian So our board has set up we have three oxy appoint teeth that are on the board and then the remaining five of the eight.
Our non oxy.
Employees, including myself.
Great. Thanks, I appreciate it.
Thanks, Brian.
Your next question comes from Zach <unk> with P. P. H. Your line is now open.
Hey, guys. Thanks for taking my question.
Just one on the DJ I know you noted that you're still below MVC levels on the crude oil side of things can you remind us if you're below or above some of the N. B C. As you have on the processing side there.
Yeah, we've got a good mix of different customers on the gas side in the DJ and so it just depends on a contract by contract basis, what that looks like from an MPC perspective.
Okay. Thanks, as the year's going on and we're increasing from a volumetric side on the gas side that you are seeing an increase on the EBIT side as well.
Okay that makes sense and then following up on a previous question with Delaware growth once north loving us on do you imagine offloading some of your volumes into the future. If you do grow beyond the capacity of the two new plants.
Yes, we don't we don't currently foresee the need to be doing offloads after north loving one.
Is completed we believe that the.
The capacity that we'll have we'll be able to.
To handle the growth and volumes that were currently expecting.
Perfect. That's all I had thanks guys. Thank.
Thank you.
Your next question comes from Gabriel Moreen with Mizuho. Your line is now open.
Hi, everyone. This is.
Rob on for Gabe I'm wondering if you could speak to the cost of service payments that you received in <unk> is that being driven by a closer scrutiny of these contracts or has this been unexpected from the onset of 23 and are you expecting similar payments as cost of service redetermination occur throughout the year.
Yes so.
The revenue recognition that was an impact to EBIDTA in the fourth quarter is actually a noncash item. So that is just trying to align the expected revenues that should have been booked based on expectations.
And Werent and so that's.
That's actually a noncash adjustment that occurs with any of our cost of service contracts that have demand payments. So no cash associated with that.
Chris anything else you'd add on that yeah, and then those are only booked in the fourth quarter. The ones that you see in the fourth quarter of 2023, we do that same exercise every year and would only be coming in the fourth quarter.
Got it understood.
And maybe on the enhanced distribution is the right way to think about it now that you don't really want to see big payouts with that year on year round.
Wanted to ensure it is being capitalized.
Your base distributions being capitalized.
Kind of in accordance with this run rate Capex would you expect how do you manage to that long term three times leverage target.
Yes, so the way that the enhanced distribution framework was intended was to set a distribution level that we believe is sustainable going forward and now that.
The business has continued to perform and we expect it to perform that's where we're expecting to recommend that to the $3 50 level on an annualized basis.
<unk> enhanced distribution was intended to be where if the business does outperform and we can't find another use for that capital that we were going to return it back to our investors and so I think your question and your comment there.
Accurately accurately captures the way that we're thinking about it so.
So we take an assessment on a quarterly basis to be able to take a look at the health of the business and what it is that we believe that we can sustain going forward should it outperformed relative to that and should we not find another use for that capital. That's when we would pay the enhanced distribution on an annual determination.
Got it I appreciate the time everyone.
Thank you.
Your next question comes from the line of Keith Stanley with Wolfe Research. Your line is open.
Hi, Thank you.
I just wanted to follow up sorry for the multipart question on distribution.
But a couple of things there just any comments you can make on how comfortable you are as a policy to have distributions above free cash flow over over the long term.
How did you consider buybacks as part of this analysis, just because youre getting $800 million of cash in the door.
As an alternative to the large base distribution.
Increase and then lastly, any any comment you can make on conversations with the general partner on capital return strategy and how it fits with their objectives.
Yes, So first first comment there as it relates to the comfortably.
I would just correct you know maybe one item there and that is that we don't expect that the base distribution encompasses greater than our free cash flow generation on a go forward basis.
And so that's part of the level of comfort.
The board and the management team has in recommending that level is that we do expect that our free cash flow generation throughout the projected period actually does exceed the distribution level for this year, you did point out the $790 million coming in the door and what that really did is it allowed us to get down to a leveraged <unk>.
Level, when combined with the expected growth from EBITDA and free cash flow for the year to exit 2024 at or around three times and so that's really more.
In light of the Meritage acquisition. This is a way for us to effectively recycle that capital that we spent on meritage by selling.
Our equity method investments that are non operated and sold at a much higher multiple to bring down that leverage to where we could get to a more sustainable leverage level and then pay distribution that we believe is commensurate with a free cash flow generation of the business plus the ability to be able to lever other Paul.
The other levers as it relates to growth capital M&A and buybacks as a whole.
As it relates to the GP I would say, it's a very.
Interactive.
A level that we have with all of our board members that just the GP as it relates to the health of the business as it relates to what it is that we think is in the best interest of West We've had great support and bolt from all from all of our board members both.
Non oxy and Oxy board members as it relates to trying to drive value overall for west as a whole.
And this is definitely a decision that was driven exclusively with the purpose of trying to drive value to our our unit holders collectively in light of the incredible performance of the business in and.
The leverage reduction that occurred as a result of the sell down of the assets.
Okay. Thanks, a lot for the detailed answer.
Second one just wanted to follow up on the <unk>.
Processing plant strategy. So you said off loads Menton three will basically.
Up all the off loads that youre doing today, you're going to have volume growth.
Through this year and so when north loving comes out in the beginning of 2025, presumably you wouldn't need to offload anymore and you'd have some space left on north loving.
But can you just walk through why.
Given how fast your systems growing in the Permian why you Wouldnt have a need for another plant in the 2026 type of timeframe.
Yes.
As we projected today.
There you are right in that.
We will have menton three that will largely be full when it when it opens up there will still be some offloads as a bridge to when we get north loving.
Out there and then according to our our projections with the inclusion of North loving we believe today as it relates to the volume forecast that we have that that should be sufficient for us for from a processing standpoint should obviously, we get incremental commitments incremental growth.
Additional need for us to build a plant, but as we look at it today, we don't we don't forget we don't need that.
Thank you.
Yes.
Your next question comes from Selman <unk> with Stifel. Your line is open.
Just a real quick one for me.
Going up to the PRP and you said it was going to be growth for 2024, obviously foot alone for the full year, but I think you also referenced sort of growth within the basin and I'm, just curious as to what kind of growth youre seeing out of that basin.
We are we are projecting you would even if you look at it on a annualized full annual 2023 basis compared.
Compared to 2024, we actually do still project growth.
In the powder River basin in 2024 on 2023.
As it relates to both volume growth as well as EBITDA, because we highlighted in there some of the synergies that we were able to achieve already for that acquisition and an incremental opportunities that we believe may be available to us going forward. So from an EBITDA or free cash flow growth theres, even better growth than what you.
Might expect just from a throughput standpoint.
Thank you very much.
Thanks Aman.
Your next question comes from Ned <unk> with Wells Fargo.
Your line is.
Hi, good afternoon. Thanks for taking the questions on this last point are the additional meritage cost savings and efficiencies you noted in your prepared remarks.
Reflecting the roughly five times post synergy acquisition multiple or are these incremental items that could potentially further lower the multiple.
Those are incremental so those were synergies, though we did not take into account.
And when we recorded the multiple and all of those and anything else, we find with Nova slower net Paul.
Got it.
And then it seems every few years, we have to talk about permitting and risks to future development in Colorado. What are you. What are you hearing on this front end and on the most recent draft Bill is there anything thats different this time around.
Yes, I would just actually highlight the fourth quarter last year was actually the most successful quarter I think since those new rules came into play as it relates to the number of new permits that were achieved in so.
I think that there is increased confidence in the process that it would take we always expected that there would be a little bit of time for <unk>.
For companies to get familiar with what it is that it was going to take to get those approvals through and actually the fourth quarter of last year. I think there was a lot of positivity in light of the fact that there was the most that were that were achieved in any other period.
Okay.
Got it thanks for the time Thats, all I had thanks.
Thanks, Dan.
Your next question comes from Neel Mitra with Bank of America. Your line is open.
Alright, thanks for taking my questions.
Neel Mitra: I wanted to.
Maybe isolate the Delaware growth and understand the drivers behind it it's very strong obviously.
Our C said basin wide that they were going to be flat. So.
First can you maybe talked about how that affects you I understand that it's a portfolio basis. So every system is different but any other drivers.
That are helping drive the growth in 'twenty, four and the Delaware system.
Yes, so a couple of comments on that you're right in that the commentary from oxy as a portfolio wide or a basin wide.
Expectation not just specific to the areas in which.
S operates in as partners with Oxy Theres, a couple of comments I would make around it first of all the well performance as we highlighted has been very strong under the assets that that West services. In addition, 2023 was really the first year, where they had the elevated level of activities. If you actually go back.
At the beginning of 2022.
It was roughly half of the activity.
<unk> got stepped up around mid year of 2022, and so you have the full year now of 2023 of that increased higher activity levels, while youre seeing obviously, an exit rate we exited much higher than we than we entered 2023 and so those tailwind along with that continued to expected activity as part of the reasons why you're seeing a lot of the.
The growth coming.
Coming out of the Delaware Basin I would also highlight when we mentioned it.
In the prepared remarks that we've added a pretty meaningful amount of third party business coming into it and so as we take a look at our third party business has actually grown.
The volumes on the third party side have actually grown at double the pace of the Permian as a whole over the past couple of years and so for US what it is that we're doing to focus on growing the pie as a whole for all customers and then emphasizing what it is that we can do that we're really unique in terms of our offering our customer service focus as a <unk>.
<unk> had a new third party volumes that is accelerating that growth profile relative to what you might expect from a basin wide perspective.
Got it and then when you think about the distribution in 2024.
Stand that the Delaware DJ and Chirpy are all growing this year.
How do you look at the PRP in the DJ in 'twenty five plus.
Under oil price environment kind of where we are right now do you expect continued growth or.
Flatlining just understanding the expectations tend to underwrite to distribute issue correct.
Yes, so a couple of things actually for 2024, we're really expecting.
Growth across all of our operated assets irrespective of Aerie, our basin and so.
We're quite optimistic as it relates to the performance of those assets not only for 2024, as we look into future periods as well and so that's part of the reason why there is great confidence in the sustainability at this stage for the distribution increase of $3 50.
Why we think that there may even be incremental opportunities to increase that further into the future.
Great. Thank you very much thanks.
Thanks Neil.
There are no further questions at this time, Mr. <unk> I'll turn the call back over to you.
Thank you all for joining the call I want to again express my appreciation for all of the west employees for their extra strong effort to put us in the position that we are today and we look forward to.
Speaking with you three months from now to discuss this.
Results of our first quarter 2024 performance. Thank you all.
This concludes today's conference call you may now disconnect.
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