Western Midstream Partners, LP — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. The combined filing covers Western Midstream Partners, LP (WES) and its consolidated subsidiary, Western Midstream Operating, LP. Unless noted, dollar figures are in millions. 2018 comparatives were recast to include the Anadarko Midstream Assets (AMA).
Business context and material developments
WES gathers, processes, treats and transports natural gas, crude oil and NGLs, and gathers and disposes of produced water. Its operations span the Rocky Mountains, Pennsylvania, Texas and New Mexico. The February 2019 merger consolidated WES Operating under WES and included the AMA acquisition; Occidental acquired Anadarko on August 8, 2019, and became WES’s controlling parent.
Financial and operating results
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue and other | $666.0 | $587.9 | $2,023.0 | $1,607.0 |
| Operating income | $268.7 | $257.6 | $897.7 | $596.6 |
| Net income attributable to WES | $121.2 | $151.4 | $409.5 | $383.1 |
| Adjusted EBITDA | $410.2 | $385.8 | $1,271.5 | $1,009.1 |
| Distributable cash flow | $304.4 | $308.3 | $980.0 | $821.5 |
- Q3 revenue rose 13% and operating income rose 4%; nine-month revenue and operating income rose 26% and 50%, respectively. Adjusted EBITDA increased 6% for Q3 and 26% year to date.
- Q3 net income attributable to WES fell about 20%; reported diluted earnings per unit declined to $0.27 from $0.49. Nine-month earnings per unit were $0.94 versus $1.26. Comparisons are affected by the merger-related increase in units outstanding.
- Adjusted gross margin was $599.6 million in Q3, up 15%, and $1,783.8 million for nine months, up 30%. Adjusted gross margin per Mcf for natural gas was $1.04 in Q3; per Bbl for crude oil, NGLs and produced water was $1.81.
- Cash provided by operating activities was $1,026.7 million for nine months, compared with $965.2 million. Cash used in investing was $3,134.6 million, including $947.3 million of capital expenditures and $2,007.5 million for affiliate acquisitions, principally AMA. Cash from financing was $2,133.2 million.
- Throughput attributable to WES increased 6% for natural gas and 28% for crude oil, NGLs and produced water in Q3. Nine-month increases were 9% and 67%, respectively, reflecting new capacity, acquired assets and higher volumes.
Debt, liquidity and distributions
- At September 30, long-term debt carrying value was $7,730.5 million; total debt including finance leases was approximately $7,738.6 million. Debt increased from year-end following the merger and AMA acquisition.
- The $2.0 billion revolving credit facility had $160 million drawn and $1.8 billion of available capacity, after letters of credit. WES was in compliance with facility and debt covenants. Working capital was negative $203.6 million.
- The $3.0 billion term loan facility matures in December 2020 and bore 3.42% interest at quarter-end. WES also had $750 million of revolving-credit borrowings outstanding and senior notes with maturities from 2021 to 2048.
- Q3 distribution was declared at $0.62 per unit ($280.9 million aggregate), payable November 13, 2019. DCF coverage was 1.08x for Q3 and 1.17x for nine months, using declared distributions of $280.9 million and $837.2 million, respectively.
Outlook, commentary and risks
- Management stated that available cash, operating cash flow, the revolving facility and access to debt or equity markets were expected to meet short- and long-term needs. WES expects to rely on external financing for expansion spending and acquisitions. The filing provides no quantitative earnings or distribution guidance.
- Q3 net income was reduced by a $68.3 million noncash loss on interest-rate swaps; the nine-month loss was $162.9 million. Swap liabilities were $170.9 million at quarter-end. WES does not apply hedge accounting.
- Occidental was the only customer representing more than 10% of revenue. The filing highlights exposure to Occidental’s credit, production and capital plans, as well as potential conflicts of interest following its acquisition of Anadarko. A $260 million note receivable from Anadarko is another counterparty exposure.
- WES Operating’s ratings were BBB- at S&P and Fitch and Ba1 at Moody’s; S&P changed its outlook to negative in October. A downgrade could raise financing costs or trigger collateral requirements; up to approximately $78.3 million of swap collateral could have been required under specified rating conditions at quarter-end.
- Other identified risks include Colorado’s new oil-and-gas legislation and permitting changes, and Sanchez Energy’s August 2019 Chapter 11 filing. Sanchez directly represented 9% of natural gas gathering, treating and transportation volumes and 6% of natural gas processing volumes, with potential adverse effects on Eagle Ford earnings and asset values.
- WES was negotiating with the EPA and Colorado authorities over alleged Clean Air Act leak-detection violations at its Fort Lupton facility, and with the EPA and Wyoming authorities over alleged violations at its Granger facility. Management considered fines or penalties above $100,000 reasonably likely in each matter, but did not identify ordinary-course proceedings expected to materially harm the partnership.
Important facts for investors to verify
- Debt repayment plans and refinancing of the $3.0 billion term loan due December 2020, including the effect of credit ratings and collateral provisions.
- Whether operating cash flow and DCF continue to cover distributions, given Q3 coverage of 1.08x and the working-capital deficit.
- Occidental’s creditworthiness, production plans and contribution to WES throughput and revenue; also monitor the Anadarko note receivable.
- Volume and earnings effects of Sanchez Energy’s bankruptcy and implementation of Colorado Senate Bill 19-181.
- Actual resolution and financial cost of the environmental enforcement discussions and the mark-to-market exposure on interest-rate swaps.