Western Midstream Partners, LP — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; unaudited. Western Midstream Partners, LP (WES) filed combined reports with its consolidated subsidiary, Western Midstream Operating, LP. Unless noted, amounts below are in millions of dollars.
Business context and results
WES operates midstream assets gathering, processing, and transporting natural gas, crude oil and NGLs, and gathering and disposing of produced water. Its assets span Texas, New Mexico, the Rocky Mountains, and north-central Pennsylvania. WES Operating is the borrower for the partnership’s debt.
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Total revenues and other | $675.0 | $774.3 |
| Operating income (loss) | $292.3 | $(214.9) |
| Net income (loss) attributable to WES | $185.8 | $(256.5) |
| Basic and diluted net income (loss) per common unit | $0.44 | $(0.57) |
| Adjusted EBITDA (non-GAAP) | $443.1 | $513.6 |
| Net cash provided by operating activities | $261.6 | $393.3 |
| Free cash flow (non-GAAP) | $213.8 | $214.6 |
Fee-based service revenue was $572.3 million, down 18% year over year; product-based service revenue rose 99% to $31.7 million, and product sales rose 25% to $70.8 million. The filing reports equity income from related-party investments of $52.2 million, down from $61.3 million. Adjusted gross margin, a non-GAAP measure, was $614.6 million, down 12% year over year. Adjusted EBITDA declined 14%.
Cash flow, debt, and liquidity
- Operating cash flow fell to $261.6 million from $393.3 million. Capital expenditures were $59.8 million, versus $172.8 million; free cash flow was nearly unchanged year over year.
- Cash and cash equivalents were $56.4 million at March 31, down from $444.9 million at year-end 2020. Current assets exceeded current liabilities by $120.9 million.
- Carrying value of debt was approximately $7.424 billion. WES Operating redeemed $431.1 million of 5.375% notes due 2021 at par. It reported no revolver borrowings at quarter-end and $2.0 billion of available borrowing capacity; it was in compliance with debt and revolver covenants.
- Cash distributions to WES unitholders were $131.3 million during the quarter. The board declared a Q1 distribution of $0.315 per unit, payable May 14, 2021. WES repurchased 1.12 million units for $16.2 million under its buyback program, with $201.2 million remaining authorized at quarter-end.
Material changes and unusual items
- Revenue declined year over year, while reported earnings turned positive. Q1 2020 results included $441.0 million of goodwill impairment and $155.8 million of long-lived asset and other impairments; Q1 2021 included $14.9 million of long-lived asset impairments, primarily for canceled DJ Basin projects.
- Throughput attributable to WES declined year over year: natural gas 9%, crude oil and NGLs 21%, and produced water 15%. Management cited producer declines and winter weather. Winter Storm Uri and a Colorado blizzard reduced estimated Q1 net income and Adjusted EBITDA by approximately $30 million, through lower volumes, commodity-price effects, and higher utility costs.
- Changes to Occidental affiliate marketing arrangements effective April 2020 shifted AESC from agent to customer. Management said the resulting revenue and cost-of-product presentation changes had no impact on operating income, net income, cash flows, or the cited non-GAAP metrics.
- In Q1, a commercial understanding with an Occidental affiliate reduced WES’s future usage fees in exchange for forgiveness of certain deficiency fees; the present value of reduced usage fees was $30.0 million. WES also recognized a $30.0 million operating-lease right-of-use asset related to amended agreements.
Outlook, risks, and contingencies
Management provided no specific numerical earnings or throughput guidance in the supplied filing text. It expects results to remain sensitive to commodity prices, customer activity and throughput, and producer drilling plans; it says capital spending will be adjusted to anticipated customer activity while maintaining liquidity. Management stated that available liquidity sources were expected to cover short- and long-term needs.
- Occidental is WES’s largest customer and owns its general partner. It accounted for $378.3 million of Q1 revenues and other; Occidental-attributable volumes represented 35% of natural-gas throughput, 88% of crude-oil and NGLs throughput, and 86% of produced-water throughput. Counterparty financial health and production are significant risks.
- WES is disputing Occidental’s calculation of cost-of-service rates under a DJ Basin oil-gathering contract. An adverse resolution could lower rates and cause a non-cash earnings charge. WES constrained revenue on certain cost-of-service agreements amid negotiations and legal dispute; future reversals are possible if outcomes differ from assumptions.
- In Sanchez’s bankruptcy, the court ruled in May 2021 that Springfield gathering agreements were rejected but that acreage dedication covenants survived. WES said it would continue defending its rights; the ultimate impact remains uncertain. The filing also describes a Mont Belvieu JV revenue-allocation lawsuit and a Colorado Clean Air Act enforcement action for which management could not estimate the outcome.
- Further asset impairments remain possible due to commodity-price declines, producer activity changes, or bankruptcies. The filing identifies inflation, COVID-19, severe weather, regulatory and tax changes, and reliance on Occidental among other risks.
Most important facts for investors to verify
- Whether Occidental’s financial condition, production, and contract performance support WES’s volumes, collections, and distributions.
- Developments and potential financial effects of the DJ Basin rate dispute, Sanchez and Gavilan bankruptcy proceedings, Mont Belvieu litigation, and EPA enforcement action.
- Whether throughput and cash generation recover after weather disruption and producer declines, and whether future impairments or capital needs arise.
- Debt maturities, interest costs, covenant headroom, and the sustainability of the $0.315 quarterly distribution and unit-repurchase activity.
- Comparability of reported revenue with prior periods, given the AESC marketing-accounting change; and limitations of Adjusted EBITDA, Adjusted gross margin, and Free cash flow, which are non-GAAP measures.