Western Midstream Partners, LP — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Financial amounts below are for Western Midstream Partners, LP on a consolidated basis unless noted; WES Operating, LP is its consolidated subsidiary and borrower.
Business context
WES gathers, processes, treats, and transports natural gas, crude oil, and NGLs, and gathers and disposes of produced water. Its assets span the Rocky Mountains, Pennsylvania, Texas, and New Mexico. Occidental Petroleum owns the general partner and held 53.4% of WES common units at June 30, 2020.
Financial and operating performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenues and other | $671.8 million | $685.1 million | $1,446.1 million | $1,356.9 million |
| Operating income | $373.8 million | $310.1 million | $158.9 million | $629.0 million |
| Net income (loss) attributable to WES | $273.0 million | $169.6 million | $16.5 million | $288.3 million |
| Net income (loss) per common unit | $0.60 | $0.37 | $0.04 | $0.69 |
| Adjusted EBITDA | $514.4 million | $432.9 million | $1,028.0 million | $861.3 million |
| Adjusted gross margin | $687.0 million | $596.5 million | $1,388.3 million | $1,184.2 million |
| Free cash flow | $208.6 million | $(6.4) million | $423.2 million | $(78.2) million |
Adjusted EBITDA, adjusted gross margin, and free cash flow are non-GAAP measures; the filing cautions they are not substitutes for GAAP results.
- Cash flow: Six-month operating cash flow was $739.0 million, versus $686.5 million. Cash capital expenditures were $313.1 million, down from $704.4 million; cash and equivalents ended June at $59.7 million.
- Margins and throughput: Q2 adjusted gross margin per Mcf for natural-gas assets was $1.13, up 7%; crude-oil and NGL margin per barrel was $2.56, up 2%; produced-water margin per barrel was $0.97, down 4%. Q2 throughput attributable to WES increased 3% for natural gas, 19% for crude oil and NGLs, and 50% for produced water.
- Debt and liquidity: Debt carrying value was approximately $8.0 billion, including $438.6 million of short-term debt. Current assets of $559.2 million were below current liabilities of $891.0 million, a $331.9 million working-capital deficit, largely because 5.375% notes due 2021 were classified as current. The $2.0 billion revolving facility had $1.9 billion available, with $75 million drawn and $5 million of letters of credit outstanding. WES Operating reported covenant compliance at quarter-end.
- Distribution: The Q2 distribution was $0.311 per unit, or $140.9 million, unchanged from Q1 and 50% below the prior-quarter distribution of $0.622 per unit.
Material changes and unusual items
- Six-month net income fell sharply, including $441.0 million of goodwill impairment and $165.9 million of long-lived asset impairments, primarily reflecting lower forecast throughput and commodity prices. Goodwill for the gathering and processing reporting unit was reduced to zero.
- Q2 operating income and net income improved year over year, while revenue declined modestly. Effective April 1, a marketing-contract change made AESC a customer rather than WES’s sales agent. This reduced reported revenue and cost of product but, according to the filing, did not affect operating income, net income, cash flows, or the cited non-GAAP measures.
- January debt issuance of $3.5 billion in new senior notes was used chiefly to repay and terminate the $3.0 billion term loan and repay revolving borrowings. Rating downgrades below investment grade increased annualized borrowing costs by $35 million; outstanding RCF pricing also rose.
- Related-party exposure is significant: Occidental was the only customer exceeding 10% of revenue. Related-party revenue and other was $473.4 million in Q2; related-party accounts receivable was $325.3 million at June 30. WES received $141.8 million of the June 30 related-party receivable balance by July 3.
Outlook, risks, and contingencies
- Management cited COVID-19, weak commodity prices, producer activity and potential production curtailments as sources of uncertainty affecting throughput, collections, earnings, and liquidity. The filing notes that prolonged low prices or changed drilling plans could cause further impairments.
- At the filing date, management’s revised full-year 2020 capital-expenditure estimate was $400 million to $450 million, following an earlier $450 million to $550 million range. Management also expected approximately $75 million of operating and G&A cost reductions. Further distribution reductions or other cash-preservation steps could be needed.
- Risks include Occidental and other counterparty creditworthiness, potential limits on RCF access under leverage covenants, refinancing and debt-service needs, and reduced long-term growth from deferred or cancelled projects. Downstream transportation commitments may also be affected by lower volumes.
- WES disclosed a July 2020 federal and Colorado enforcement action alleging Clean Air Act leak-detection violations at its Fort Lupton facility; management could not estimate the outcome. A Wyoming matter resulted in an agreed $100,000 fine. WES is also contesting Sanchez bankruptcy efforts to reject Springfield-related agreements; the outcome and impact are uncertain.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether Occidental’s production, financial condition, and payment timing support WES’s throughput and related-party receivables.
- Debt maturity, interest-cost, rating, and RCF covenant headroom, including the effect of further downgrades or weaker EBITDA.
- Whether the reduced distribution, revised capital plan, and targeted cost savings remain sustainable as commodity markets and customer activity evolve.
- The assumptions behind the $596.8 million of impairments and the possibility of additional asset write-downs.
- Developments in the Fort Lupton enforcement action and Sanchez’s effort to reject Springfield agreements.