Western Midstream Partners, LP — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Unaudited combined filing covers Western Midstream Partners, LP (WES) and its consolidated subsidiary, Western Midstream Operating, LP (WES Operating). Dollar amounts below are in millions unless stated otherwise.
Business context and financial performance
WES gathers, processes, treats, and transports natural gas, crude oil, NGLs, and produced water across the Rocky Mountains, Pennsylvania, Texas, and New Mexico. The filing attributes market disruption to COVID-19, weaker hydrocarbon demand, and low commodity prices; WES also reports higher throughput in several basins and lower operating costs.
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue and other | $679.0 | $666.0 | $2,125.1 | $2,023.0 |
| Operating income | $347.1 | $268.7 | $506.0 | $897.7 |
| Net income attributable to WES | $246.6 | $121.2 | $263.1 | $409.5 |
| Net income per common unit | $0.55 | $0.27 | $0.58 | $0.94 |
| Adjusted EBITDA (non-GAAP) | $518.4 | $410.2 | $1,546.4 | $1,271.5 |
| Free cash flow (non-GAAP) | $339.2 | $70.7 | $762.4 | $(7.5) |
For the nine months, cash from operating activities was $1,131.9 million, compared with $1,026.7 million. Capital expenditures were $372.3 million, down from $947.3 million, largely reflecting completion of major projects and reduced construction spending. Adjusted EBITDA and free cash flow are non-GAAP measures; the filing cautions they are not substitutes for GAAP results.
Debt, liquidity, and distributions
- At September 30, cash was $138.0 million and carrying debt was approximately $7.88 billion, including $438.8 million classified as short-term. Working capital was a $193.5 million deficit, primarily because 5.375% notes due 2021 were classified as current.
- The $2.0 billion revolving credit facility had no borrowings and $2.0 billion of available capacity, net of $5.0 million in letters of credit. WES Operating reported compliance with debt covenants.
- WES issued $3.5 billion principal amount of senior notes in January 2020, used substantially to refinance the term loan and revolving-credit borrowings; it also repurchased and retired $193.5 million of notes during the first nine months.
- Credit ratings fell below investment grade at Fitch, S&P, and Moody’s. The filing estimates the rating-triggered increase in annualized borrowing costs at $34.6 million.
- The Q3 distribution was $0.311 per unit, unchanged from Q1 and Q2 and 50% below the prior-quarter 2019 distribution. The declared Q3 distribution totaled $132.3 million and was payable November 13, 2020.
Material changes and unusual items
- Q3 operating income rose 29% and net income attributable to WES more than doubled year over year. Nine-month operating income fell 44%, while attributable net income fell 36%, principally reflecting significant 2020 impairments and higher interest expense.
- Nine-month results included a $441.0 million goodwill impairment and $200.6 million of long-lived asset and other impairments. The impairments followed lower expected producer throughput, lower commodity prices, project cancellations, and a decline in the value of the Ranch Westex investment.
- A September agreement exchanged WES’s 98% interest in the $260 million Anadarko note receivable for 27,855,398 WES common units transferred by Occidental affiliates and immediately canceled by WES. The transaction reduced outstanding units and ended WES’s interest income from that note.
- Effective April 1, a marketing-contract change made Occidental’s marketing affiliate a customer rather than an agent. It 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.
Outlook, commentary, and risks
- In November 2020, management said 2020 capital expenditures were expected to be meaningfully below the previously stated $400–$450 million range and expected approximately $175 million in operating and G&A cost savings. These are forward-looking statements, not reported results for the period.
- Management said the duration and effects of COVID-19, commodity-price weakness, producer activity changes, and customer financial distress remain uncertain. WES warned of possible further impairments, lower throughput, reduced liquidity, and additional distribution cuts.
- Occidental is a significant counterparty: it accounted for 41% of natural-gas throughput and 87% of crude-oil/NGL and produced-water throughput in Q3, excluding equity-investment throughput. Occidental held 50.4% of WES common units at September 30.
- WES reported a Colorado enforcement action alleging Clean Air Act leak-detection violations; management could not estimate its outcome. Bankruptcy-related disputes involving Sanchez and Gavilan may affect Springfield-system contracts. WES also filed a declaratory-judgment suit concerning revenue allocation at the Mont Belvieu JV.
- After quarter-end, WES announced a common-unit buyback authorization of up to $250 million through December 31, 2021, and reported the October sale of its Fort Union interest for proceeds included in $27 million of combined proceeds; the Fort Union sale gain of $21 million was to be recorded in Q4.
Important facts for investors to verify
- Whether cash generation and the reported cost savings can sustain the current distribution while funding debt service and necessary capital spending.
- Debt maturities and refinancing plans, the effect of below-investment-grade ratings on interest costs, and continued compliance with the revolving-credit covenants.
- Occidental’s financial condition, payment performance, production plans, and ongoing importance as a customer and controlling unitholder.
- Whether low commodity prices, producer bankruptcies, or throughput declines lead to further asset impairments or contract renegotiations.
- The outcomes and potential financial effects of the Colorado enforcement action, Springfield bankruptcy disputes, and Mont Belvieu revenue-allocation litigation.