Western Midstream Partners, LP — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. The combined filing covers Western Midstream Partners, LP (WES) and its consolidated subsidiary Western Midstream Operating, LP. Financial figures below are in U.S. dollars; unless stated otherwise, amounts are millions. 2018 comparatives were recast to include the Anadarko Midstream Assets (AMA), so they are not simply the originally reported historical results.
Business context and material changes
- WES operates midstream gathering, processing, transportation, and water systems across the Rocky Mountains, Pennsylvania, Texas, and New Mexico, serving Anadarko and third-party customers.
- On February 28, 2019, WES completed its merger with WES Operating and acquired AMA from Anadarko. The transaction expanded the asset base and substantially increased WES’s common units outstanding.
- WES acquired a 30% interest in Red Bluff Express in January. Mentone Train II, with capacity of 200 MMcf/d, began operating at the West Texas complex at the end of Q1.
- Anadarko entered into an agreement to be acquired by Occidental in May. The proposed transaction remained subject to shareholder approval and other closing conditions at the filing date.
Financial and operating results
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue and other | $685.1 | $518.1 | $1,356.9 | $1,019.1 |
| Operating income | $310.1 | $114.2 | $629.0 | $339.1 |
| Net income | $175.1 | $67.2 | $387.0 | $248.2 |
| Net income attributable to WES | $169.6 | $100.2 | $288.3 | $231.7 |
| Adjusted EBITDA (non-GAAP) | $432.9 | $311.1 | $861.3 | $623.3 |
| Distributable cash flow (non-GAAP) | $335.5 | $249.1 | $675.7 | $513.2 |
- Q2 revenue increased 32%, operating income increased 171%, and net income attributable to WES increased 69% year over year. Operating margin was approximately 45% versus 22%; reported net income margin was approximately 26% versus 13%.
- Growth reflected higher fee-based service revenue, throughput, equity-investment distributions, and the expanded asset base. Q2 fee-based service revenue rose 37% to $593.5 million. Adjusted gross margin increased 38% to $596.5 million.
- Throughput attributable to WES increased 10% for natural gas and 84% for crude oil, NGLs, and produced water in Q2. Six-month increases were 11% and 102%, respectively; the latter largely reflects added water systems and other acquired or expanded assets.
- Operating cash flow for the first half was $686.5 million, up from $629.3 million. Investing used $2,865.2 million, including the AMA acquisition and capital spending; financing provided $2,182.3 million. Cash ended the period at $95.8 million.
- Six-month cash capital expenditures were $704.4 million, including $638.8 million of expansion spending and $65.6 million of maintenance spending. Cash paid for interest was $137.7 million.
- At June 30, debt carrying value was approximately $7.5 billion, up from $5.2 billion at year-end 2018. The balance included $2.0 billion under the term loan facility and $920 million drawn on the $2.0 billion revolving credit facility. About $1.1 billion remained available under the revolver; WES reported compliance with facility and note covenants.
- Current assets of $336.2 million were below current liabilities of $499.3 million, a $163.1 million working-capital deficit. Total assets were $12.0 billion.
- Q2 distributable cash flow coverage was 1.20x; first-half coverage was 1.21x. WES declared a Q2 distribution of $0.618 per unit, 1% above Q1 and 6% above Q2 2018, payable August 13, 2019.
Outlook, risks, contingencies, and unusual items
- No specific full-year earnings, cash-flow, or capital-spending guidance is provided in the filing text. Management said it expected available liquidity sources to meet working-capital and maintenance and expansion capital needs, while noting that acquisitions and expansion spending may require external financing.
- In July 2019, after quarter-end, WES amended its term loan facility: maturity was extended to December 2020, commitments increased from $2.0 billion to $3.0 billion, and up to $1.0 billion of debt-offering proceeds was exempted from mandatory repayment. The additional $1.0 billion could be drawn by September 30, 2019.
- Non-cash interest-rate swap losses were $59.0 million in Q2 and $94.6 million for the first half, largely due to lower benchmark rates; the swap liability was $102.6 million at June 30. WES does not apply hedge accounting. These losses weighed on GAAP earnings but were excluded from Adjusted EBITDA.
- Q2 2018 included $127.2 million of impairment expense related principally to permanently shut gathering systems; first-half 2019 impairment expense was $1.2 million. The 2019 comparison therefore benefits from the absence of the prior-year charge.
- WES remains substantially dependent on Anadarko for customers and control. Anadarko accounted for the only customer exceeding 10% of revenue. The pending Occidental acquisition could change control, create conflicts of interest, and affect customer activity, capital allocation, and operating plans.
- The filing cites potential adverse effects from Colorado’s new oil-and-gas rules, commodity and interest-rate risks, counterparty credit exposure, and customer concentration. Sanchez Energy, a significant Eagle Ford customer, had deferred an interest payment; the filing describes possible adverse effects if it entered bankruptcy.
- WES was negotiating with the EPA and Colorado authorities regarding alleged Clean Air Act leak-detection violations at its Fort Lupton facility, and with the EPA and Wyoming authorities regarding alleged violations at its Granger facility. Management said penalties exceeding $100,000 for each matter were reasonably likely; final outcomes were uncertain.
- Management reported no ordinary-course legal proceeding expected to have a material adverse effect and stated disclosure controls were effective. The filing identifies no other off-balance-sheet arrangements beyond short-term operating leases and standby letters of credit.
Most important facts for investors to verify
- How comparable performance looks after separating organic throughput and rate changes from the AMA acquisition, merger, and other additions to the asset base.
- Debt reduction plans and refinancing terms for the $2.0 billion term loan, including the effects of the July amendment and any further borrowing.
- Whether operating cash generation can sustain capital investment and distributions, and how coverage changes after interest, maintenance spending, and noncontrolling distributions.
- Whether Occidental completed its acquisition of Anadarko and what subsequent changes occurred to WES’s governance, customer commitments, and capital plans.
- Developments in Sanchez Energy’s credit situation, Colorado regulatory implementation, and the two leak-detection matters.
- Underlying results excluding swap valuation losses and the prior-year impairment; review the filing’s reconciliations because Adjusted EBITDA and distributable cash flow are non-GAAP measures and have stated limitations.