Q3 2024 Western Midstream Partners LP Earnings Call
Good afternoon, my name is Joanna and I will be your conference operator today. At this time, I would like to welcome everyone to the Western Midstream Partners 3rd Quarter 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise.
After the speaker's 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 1 on your telephone keypad. If you would like to withdraw your question, press star followed by 2.
Speaker Change: Thank you. I will now turn the conference over to Daniel Jenkins, Director of Investor Relations. Please go ahead.
Daniel Jenkins: Thank you. I'm glad you could join us today for Western Midstream's third quarter 2024 conference call. I'd like to remind you that today's call, the accompanying slide deck, and last night's earnings release contain important disclosures regarding forward-looking statements and non-GAAP reconciliations.
Daniel Jenkins: Please reference Western Midstream's 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.
Speaker Change: Relevant reference materials are posted on our website. With me today include our newly appointed Chief Executive Officer, Oscar Brown, Danny Holderman, our Chief Operating Officer, and Kristen Shults, our Chief Financial Officer. I'll now turn the call over to Oscar.
Oscar Brown: Thank you, Daniel, and good afternoon, everyone. Let me first take a moment to say how thrilled I am to be here today as the new CEO of Western Midstream.
Oscar Brown: As a member of the board since 2019, I am intimately familiar with and have been supportive of the partnership's mission, vision, and strategy.
Speaker Change: I would like to thank Michael Ure for all his outstanding contributions that have made WEST the best-in-class midstream partnership that it is today. Under Michael's leadership, WEST has undergone an impressive transformation, including standing up the partnership as an independent business.
Speaker Change: Significant growth in the Delaware Basin, the acquisition of Meritage Midstream in the Powder River Basin, operational improvements and cost reductions,
Speaker Change: and the return of $4.6 billion to unit holders through distributions and unit repurchases.
Speaker Change: all while significantly lowering leverage for five times, but just under three times today. As we close out this chapter of the WES story, I'm extremely honored to have been chosen by the board to lead WES on the next chapter of growth and development.
Speaker Change: Now, turning to third quarter earnings, yesterday we reported another operationally successful quarter for Wes.
Speaker Change: Marked by strong customer service and continued flow assurance for our producers and operability above 98% despite elevated plant turnaround activity. Our natural gas throughput increased sequentially due to robust throughput growth in the Powder River Basin and our seventh consecutive quarter of record natural gas throughput in the Delaware Basin.
Speaker Change: Our produced water volumes also increased quarter over quarter, despite continued elevated levels of recycling activity used in the upstream operations of our producers.
Speaker Change: which Danny will comment on shortly. While we still expect to be at the high end of our guidance range for the year, our adjusted EBITDA declined relative to the second quarter as a result of decreased natural gas liquids volume under our fixed recovery contracts coupled with lower commodity pricing.
Speaker Change: lower distributions from our equity investments and higher seasonally driven operations and maintenance expense. As we focus on the fourth quarter, we expect our adjusted EBITDA to increase due to higher throughput, primarily from the Delaware Basin.
Speaker Change: Our expectations of higher throughput are supported by short-term forecasts and consultation with our customers.
including well connection activity through UREND.
Speaker Change: In addition, we expect lower operating and maintenance expense in the fourth quarter.
Speaker Change: Turning to commercial developments and subsequent to quarter end, we executed new agreements pertaining to our MiVida joint venture to realign the commercial structure tied to the facility. These new agreements provide WES with 100 million cubic feet per day of dedicated natural gas processing capacity at the plant starting in mid-2025.
Speaker Change: This will enable us to provide incremental flow assurance for our customers in the Delaware Basin. In mid-August, we issued $800 million of new senior notes, the proceeds of which we will use to retire debt maturing in February and June of next year and for general partnership purposes.
Speaker Change: Our trailing 12-month net leverage ratio has comfortably reached our year-end 2024 threshold of three times, and we continue to look for the most efficient ways to allocate capital to generate the best returns for our unit holders over time.
Speaker Change: As discussed last quarter, these options include, first, investing capital to prudently expand the business. We will allocate capital towards organic growth projects that grow our volumes over time, with reasonable payback periods, and that meet our returns thresholds. This is usually our lowest risk, highest potential return option.
Speaker Change: Second, allocating capital towards a creative M&A. We will evaluate strategic opportunities that enhance the value of our existing asset base, such as the Meritage Midstream Acquisition.
Speaker Change: Keep in mind that we will hold any potential acquisition to a very high standard, as it must meet our risk-adjusted returns thresholds relative to organic growth opportunities, and finally, increasing the base distribution.
Speaker Change: As our business grows and we generate incremental free cash flow, management and the board will continue to evaluate opportunities to grow the base distribution in line with the overall growth of our business.
Speaker Change: Additionally, if our business outperforms relative to our initial expectations in a given year, and we have exhausted other higher return opportunities, we also have the enhanced distribution framework in place to return incremental capital to unit holders.
Speaker Change: With that, I will turn the call over to our Chief Operating Officer, Danny Holderman, to discuss our operational performance in the quarter.
Danny Holderman: Thank you, Oscar. Good afternoon, everyone. Our third quarter natural gas throughput increased by 1% on a sequential quarter basis as a result of strong throughput growth in the Powder River and Delaware Basins and at our Chapita Complex in Utah. These increases were partially offset by lower volumes in the DJ Basin and in South Texas.
Danny Holderman: due to plant turnaround activities, and from our other assets, including the sale of our merciless assets in the second quarter.
Danny Holderman: Our total crude oil and NGLs throughput declined by 2% on a sequential quarter basis, primarily due to decreased throughput in the DJ Basin, the sale of the Wamsutter oil pipeline in Wyoming, and lower volumes associated with our equity investments.
Danny Holderman: These declines were partially offset by record volumes in the Delaware and Powder River basins. Our produced water throughput increased by 2% on a sequential quarter basis despite elevated levels of recycling activities by our producers.
Danny Holderman: While water recycling is a growing practice and impacting near-term throughput, we expect those volumes to cycle into our system in future periods.
Danny Holderman: Our third quarter per MCF adjusted gross margin for our natural gas assets decreased by four cents compared to the prior quarter.
Danny Holderman: This decrease was primarily driven by lower natural gas liquids recoveries under our fixed recovery contracts, coupled with lower overall commodity pricing. Additionally, we experienced increased throughput at the Powder River Basin Complex, which has a lower per MCF margin as compared to our other natural gas assets.
Danny Holderman: Going forward, we expect our fourth quarter per MCF adjusted gross margin to be in line with the third quarter.
Danny Holderman: Our third quarter per barrel adjusted gross margin for our crude oil and NGL assets decreased by 8 cents compared to the prior quarter, primarily due to the timing of distribution payments associated with our equity investments.
Danny Holderman: We expect our fourth quarter per barrel adjusted gross margin to be modestly higher relative to the third quarter due to the timing of distribution payments associated with our equity investments.
Speaker Change: Our third quarter per barrel adjusted gross margin for our produced water assets remained relatively flat quarter over quarter, and we expect our fourth quarter per barrel adjusted gross margin to be in line with the third quarter.
Speaker Change: Turning our attention to the remainder of the year. Based on our operated throughput performance to date and our current expectations for the fourth quarter, we now expect our average year-over-year throughput to increase by low double digits percentage growth for crude oil and NGLs.
Speaker Change: This increase is slightly less relative to our initial expectations as a result of lower throughput expectations in the Delaware Basin, partially offset by slightly higher throughput growth in the Powder River and DJ Basins.
Speaker Change: Additionally, we now expect our average year-over-year throughput to increase by low double digits percentage growth for produced water due to continued levels of water recycling for upstream operations from certain of our producing customers.
Speaker Change: However, these barrels will eventually flow onto our systems as they are dedicated to WES, and this near-term reduction is not an indication of inferior wells or poor rock quality in the basin.
Speaker Change: Finally, our average year-over-year throughput expectation for natural gas remains unchanged at mid-to-upper teens percentage growth, which continues to be supported by strong year-over-year throughput growth in the Delaware, DJ, and Powder River basins.
Speaker Change: With that, I will turn the call over to Kristen to discuss our financial performance during the quarter.
Kristen Shults: Thank you, Dani, and good afternoon, everyone. During the third quarter, we generated net income attributable to limited partners of $282 million and adjusted EBITDA of $567 million.
Kristen Shults: Relative to the second quarter, our adjusted growth margin decreased by $8 million. As Oscar mentioned, this decrease was primarily driven by lower natural gas liquids recoveries under our fixed recovery contracts, coupled with lower commodity prices and decreased distributions from our equity investments.
Speaker Change: As expected, we experienced a sequential quarter increase in our operation and maintenance expense, which was primarily driven by increased maintenance and repair expense.
Speaker Change: Our utility costs decreased slightly in the third quarter due to lower ERCOT pricing that we benefited from in the second half of the quarter.
Speaker Change: Going forward, we would expect our operation and maintenance expense to trend modestly lower in the fourth quarter, mostly due to lower maintenance and repair expense, especially since the major plant turnaround activity is behind us for the year.
Speaker Change: Our property and other tax expense decreased on a sequential quarter basis from a reduction in the ad valorem property tax accrual related to lower property values in Colorado. Going forward, we would expect our property and other taxes to be slightly higher but lower than second quarter levels.
Speaker Change: Earning a cash flow, our third quarter cash flow from operating activities totaled $551 million, generating free cash flow of $365 million. Free cash flow after our second quarter 2024 distribution payment in August was $24 million.
Speaker Change: As previously announced, we issued $800 million of 5.45% senior notes due in 2034 that will be used to retire upcoming notes maturities in 2025 and for general partnership purposes.
Speaker Change: We were pleased with how well the issuance was received by the market as the order book was more than four times oversubscribed.
Speaker Change: and the deal ultimately priced at 155 basis points above the 10-year Treasury rate, which was the best 10-year credit spread in WESA's history.
Speaker Change: In October, we declared a base distribution of 87.5 cents per unit, which was unchanged relative to our prior quarter distribution paid in August and is payable on November 14th to unit holders of record as of November 1st.
Speaker Change: Focusing on our 2024 financial guidance, despite reducing our throughput expectations for crude oil and NGLs and produced water, we still expect to be towards the high end of our previously disclosed adjusted EBITDA and free cash flow guidance ranges of $2.2 to $2.4 billion
and $1.05 to $1.25 billion for the year, respectively.
Speaker Change: Our Full Year Capital Expenditure Guidance Range remains unchanged at $700 to $850 million.
Speaker Change: implying a midpoint of $775 million for 2024. Even though we still expect to spend approximately 80% of our capital budget in the Delaware Basin, we've begun to allocate incremental capital towards the Powder River and Uinta Basins to facilitate throughput growth next year.
Speaker Change: Based on our third quarter distribution announcement, we have now achieved our full year base distribution guidance of at least $3.20 per unit to be paid in calendar year 2024.
Speaker Change: Focusing on 2025, after a strong year of organic throughput growth in both the Delaware and D.J. basins, we expect our overall throughput growth rates for all products to moderate in 2025 relative to 2024.
Speaker Change: It's important to remember that our 2025 throughput will not include approximately 23,000 barrels per day of crude oil and NGLs and 38 million cubic feet per day of natural gas throughput associated with several non-core asset sales that closed in the first half of this year.
Speaker Change: The volumes lost from these asset sales represent approximately $26 million of adjusted EBITDA in 2024 that will not repeat in 2025.
Speaker Change: With that said, we are still working through the budgeting process with all of our producing customers and we will provide our 2025 throughput expectations and financial guidance when we report our fourth quarter earnings in late February. With that, I will now turn the call back over to Oscar.
Oscar Brown: Thanks, Kristen. Before we open it up for Q&A, I would like to highlight a few key points on why West continues to be very well positioned.
Oscar Brown: First, West remains a very attractive investment opportunity and continues to offer one of the most compelling distribution yields relative to the average yield of all the subsectors of the S&P 500.
Speaker Change: Additionally, the 52% increase in the base distribution that was implemented in the first quarter of this year has enabled West to maintain the highest distribution yield amongst the midstream MLPs and all other midstream companies.
Speaker Change: Furthermore, when you compare WES and the several midstream peers to all companies within the Russell 3000 Index, WES now ranks number one in terms of distribution yield for entities with an investment-grade credit rating.
Speaker Change: Second, MLPs continue to trade at a low valuation of approximately 8.7 times on an enterprise value to EBITDA basis.
Speaker Change: A discount of five times compared to the average MLP valuation from 2011 through 2016.
Speaker Change: This continues to represent one of the lowest valuations in the history of the MLP space, despite the fact that the sector is extremely well-positioned for the future growth due to strong balance sheets, increased free cash flow generation, and supportive contract structures.
Speaker Change: Third, these positive aspects of the sector are all characteristics of the new MOP model.
Speaker Change: We continue to argue that the new MLP model is deserving of a valuation re-rate, even though the valuation gap between the MLPs and all other midstream companies has recently widened considerably.
Speaker Change: This valuation discount continues to defy expectations, especially when you take into account the corporate tax burden that C-Corps in the midstream space and other sectors of the economy will face over the coming years.
Speaker Change: The combination of strong free cash flow generation and the fact that MLPs offer one of the most advantaged differentiated tax structures continue to present a very compelling investment opportunity for WES and for the MLP space as a whole. And finally, I want to assure everyone that I will continue to advance WES's mission, vision and strategic initiatives.
Speaker Change: Wes has become a leader in the midstream space by focusing on providing superior customer service and leading the optimization of the new MLP model. We have a very strong financial and operational base, which provides this team with an excellent platform to lead Wes on its next chapter of growth and development.
Speaker Change: As a member of the board since 2019, I have played an important role in shaping the development of the partnership's goals and objectives.
Speaker Change: and I want to assure all of you that our capital allocation priorities of executing on high return organic expansion opportunities.
Speaker Change: opportunistically pursuing a creative M&A and growing the base distribution over time in line with the growth of our business all remain the same. We are committed to executing on these priorities while maintaining our strong investment grade balance sheet.
Speaker Change: To close, I am pleased to announce that we published our 2023 Sustainability Report yesterday, and I would encourage all of you to download a copy of the report and read about our accomplishments.
Speaker Change: I would also like to thank the entire West workforce for all of their continued hard work and dedication to our partnership. We have accomplished a lot this year, and I look forward to finishing 2024 on a high note and updating you on our fourth quarter results in late February.
With that, we'll open the line for questions.
Speaker Change: At this time, I would like to remind everyone, in order to ask a question, press star then the number 1 on your telephone keypad. We'll pause for just a moment to compile the Q&A roster.
Thank you.
Speaker Change: Your first question comes from the line of Jeremy Tonette at J.P. Morgan. Your line is open.
Hi, good afternoon.
Do you hear me?
Speaker Change: Hey, um, really just one question for me. I want to touch base on, you know, Oscar, the CEO transition here from
Speaker Change: This awesome the market side, you know, Mike had been with the company for some time was really the face of the company to many of us and the Transition just seemed pretty abrupt. And so I was just wondering if you could walk us through
Speaker Change: A bit more the process here, I guess, just, you know, it seemed a bit abrupt in timing. So if anything you could share with us would be helpful.
Speaker Change: Sure. Well, from my perspective, it's been pretty smooth, and it's been a pretty smooth
Speaker Change: A couple of weeks, I mean, recall I've worked with Michael since 2016, actually, in a number of capacities and consider him a friend. And so we've debated and thought about financial policy and operating policy and things like that all through the years.
Speaker Change: And so, importantly, you'll find my views on most of those things are the same. And to the extent, as we've said a couple of times, you know, anyone's concerned, you know, we are, you know, everything is the same as it's been in terms of our capital allocation policy and our goals for partnership.
Speaker Change: So, the last, you know, from the perspective of, you know, kind of the abruptness, number one, just for me.
Speaker Change: I think it's been great. Michael's going to focus on his faith. As you guys know, he's a religious guy in his family.
and this community.
Speaker Change: And from my perspective, given the familiarity with the leadership team and the board,
Speaker Change: I've been able to start in very quickly and really just focus the organization on moving forward. I've seen some long transitions in the past, and so
Speaker Change: with having two CEOs kind of in the building at once and all that with all of our constituents can get a little confusing and slow things down. So once we came to an agreement to move forward, we just wanted to move quickly and so that's where we are.
Speaker Change: Got it. So the transition was was mutual just to be clear.
Speaker Change: Well, absolutely, and there's no, as we saw in the 8K, there's no disagreement with Michael and the company on
Speaker Change: on any matter, so it's meant to be a smooth transition again. If you look back at the last five years, it's been quite a journey for the partnership, and the team's done a really fabulous job. I think the next five's going to look a little different in terms of focusing again from
Speaker Change: from standing up the business to where it is today and all that's been accomplished to regenerating organic growth and to really build the business.
Speaker Change: from where it is today, something like a $22 billion enterprise and hopefully grow that in a big way in the future. So it's just going to be a little bit different path and it felt like an opportune time to allow Michael to focus on the things he holds highest.
Got it. Understood. Thank you. That's it for me.
Thank you, Jeremy.
Speaker Change: Your next question comes from the line of Manav Gupta at UBS. Your line is open.
Manav Gupta: Good afternoon. My question is a little bit different. I'm not sure if you are aware of this, but there is currently more consolidation happening in the Basin and does West see itself as a consolidator in the Delaware Basin?
Speaker Change: Yeah, I think as you guys know, it's been a pretty robust M&A environment for the last little bit in the midstream space and really led by strategists. I think we were ahead of the curve on that.
Speaker Change: Going all the way back to 2023 with Veritage, what we've seen recently
Speaker Change: Given the strong balance sheets in the space, you know, it feels a lot more like the sellers have a little bit more advantage than the buyers.
Speaker Change: We'll continue to look at M&A as we always have, really focused on what we can bring to any set of assets that's incremental to others so we can drive real value.
Speaker Change: From our perspective, we're always looking, but we're also pretty disciplined on that front.
Speaker Change: You know, if we can do something organic, you know, organic probably wins in a tie.
Speaker Change: just because we can control the risk better. But in the Delaware, I think there are opportunities out there, and we see ourselves growing, so hopefully that answers your question.
Speaker Change: Absolutely. And second part is, some of your peers have already commented on this. Looks like a different government, different president. Do you see a more favorable regulatory outlook for oil and gas for the next four years?
Speaker Change: I'm going to give you a measured response, and the short answer is yes.
So, I do think that this administration, this new administration,
Speaker Change: It's very likely to be more friendly to oil and gas in general. I think it's a widely held view that at least what we've seen...
Speaker Change: Canal to market, that in particular the Midstream space should be one of the primary beneficiaries of that, so we'd anticipate our customers hopefully being able to move more quickly and and grow a little more quickly as well and that should find its way to us.
Speaker Change: Thank you so much for taking my questions. I'll turn it over.
Speaker Change: Your next question comes from the line of Keith Stanley at Wolf Research. Your line is open.
Keith Stanley: Hi, good afternoon. Wanted to follow up. I think Kristen at the end of prepared remarks indicated volume growth should moderate in 2025 across the products.
Speaker Change: Can you give a little more color on what's driving that and any further characterization you can give on the magnitude of how much volume growth might decelerate?
Speaker Change: Jackie, so we are currently in the process of putting our forecast, you know, more robust forecast together for 2025.
Speaker Change: I think when we take a step back and we look at the forecast that we've received thus far, we still expect growth across the portfolio, but the growth that you've seen within the Delaware and D.J. Basin in particular will be at a more relative pace.
Speaker Change: relatively more moderate pace than what you've seen in 23 and 24.
Speaker Change: We've had a few years of increased activity levels and incremental wells coming online, and while the activity is still very strong in those basins,
Speaker Change: That steady activity level is just leading to more moderate growth.
Speaker Change: Additionally, when we look at total portfolio growth, our average year-over-year throughput increase from 23 to 24, in part, was due to the acquisition of Veritage Midstream. And so in 24, we haven't had another acquisition such as this, in fact, we've been divesting assets. So overall, it's just some commentary around thinking through the differences between what we saw for 23 to 24, and then how we need to think about that from 24 to 25.
Speaker Change: Obviously, over the next few months, we'll be receiving updated forecasts from all of our producers. We'll continue to work through those as they're continuing to work through their budgets and then a new macro environment as well, and that'll allow us to provide further thoughts and guidance in February.
Speaker Change: That's helpful, thanks. The second question, can you just talk a little more to the NVIDIA contracting update, or is the new structure with your JV with energy transfer that you now have 100 million cubic feet a day of incremental
Speaker Change: processing capacity that you can use for your own customers? So you effectively just added half a plant, or how should we think about that?
Speaker Change: Yeah, on that one, I think it's just more of a restructuring of the commercial arrangement. It's sort of a plant-within-a-plant concept. So instead of simply being a 50-50 owner, we've taken basically half the capacity and have full access to that. So we see some incremental benefits to doing that, but it's not a step change. It's not a $100 million net add to our capacity down there.
Speaker Change: Again, if you would like to ask a question, press star then the number 1 on your telephone keypad.
Speaker Change: Your next question comes from the line of Zach Van Everen at TPH. Your line is open.
Speaker Change: Hey guys, thanks for taking my question. Just starting back on the, you know, kind of moderated growth, I think what you said all makes sense. Does this point to potentially higher rates with your cost of service contracts?
Speaker Change: Yeah, so that's probably a little early to give you an update on cost of service, mostly because it really does relate to the forecast that we're going to receive in the next few months.
Speaker Change: So we'll have to come back to that when we issue guidance in February as well.
Speaker Change: Gotcha, no worries. And then on the lower earnings you mentioned at the end there on the crude assets in the DJ and Eagleford, was that just related to contracts rolling off? Did you just provide a little bit more color there?
Speaker Change: Yeah, so that I think you're talking about deficiency revenues that we were talking about and we've been talking about this for the last few years like with South Texas and just some of the step changes that we have in this contracts from a rates perspective.
Speaker Change: What we tried to do was just look across the whole entire portfolio and give a little bit of clarity what that might look like in 2025.
there.
Speaker Change: Your next question comes from the line of Ned Baramoff at Wells Fargo. Your line is open.
Ned Baramoff: Hi, thanks. Just to follow up on the earlier questions regarding your tempered volume outlook for 2025, how do you think about the timing when volumes in the DGA exceed MVCs and in turn drive EBITDA growth?
Speaker Change: Yeah, so we've talked about on the oil side specifically in the DJ and the MVC levels there. Obviously that'll really depend on producers forecast and what we get in for 2025, but I would think about that more as you know a longer term breaking through that MVC level, something you know potentially even past 2025 there.
Speaker Change: That's helpful. Thank you. And then are there any plans to fill the vacated eighth board seat on the board of directors?
Speaker Change: I'll take that one. So for now we've set the board at seven but I would anticipate and I would certainly support and kind of expect we would add potentially another independent director. But it's really up to the full board and for now we're moving forward with seven and we'll look to see what happens.
Thanks, that's all I had.
Speaker Change: Your next question comes from the line of Indranil Mitra at Bank of America. Your line is open.
Indranil Mitra: Hi, first question, I know the Movida processing plant, it kind of just
All right.
Indranil Mitra: restructuring where it is in the oxy family or sorry the West family there but in terms of how that fits in with the super system it's not kind of a low capacity utilization plant or is it is it kind of core to what you run through your system
Speaker Change: I'll do my best to answer. I think I understood. You're just asking within the complex, is it our higher or lower utility areas? And it would be one of the lower utility areas. So the plants up to the north, etc., are where we flow most of the new growth right now, and then it spills over to the south.
Okay, great. The second question...
Yeah.
Speaker Change: potential processing plants beyond North Loving coming on in 1Q25 and what you would need to underwrite a new processing plant beyond that?
Oscar Brown: Yeah, I'll start. It's Oscar. You know, our philosophy on adding capacity in plants so that it's consistent.
Oscar Brown: which is, you know, we work with our customers to try to serve them and if we can come up with a good commercial arrangement to sort of underwrite those plants.
Oscar Brown: And so we don't see anything in the immediate future. But again, those development plans are constantly being updated by our customers. So if it makes sense to them and it's good returns for us, then of course.
Oscar Brown: Of course, we'll look at that. So nothing imminent today, but something that we always just work with our customers to look at.
It really depends on the growth of the basin.
What kind of contract structure we can underwrite?
Perfect.
Thank you.
Speaker Change: There are no further questions at this time. Mr. Oscar Brown, I turn the call back over to you.
Oscar Brown: Great. Well, thanks, everybody. Thanks again to the Full West team for all the hard work as we continue to grow the business. We look forward to 2025 and seeing – talking to everybody in February and hopefully seeing many of you on the road in between. Take care.
This concludes today's conference call. You may now disconnect.