Western Midstream Partners, LP — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. The filing is combined with Western Midstream Operating, LP, which holds the operating assets and debt. WES gathers, processes, treats and transports natural gas, crude oil and NGLs, and gathers and disposes of produced water. Amounts below are in millions unless stated otherwise.
Financial and operating results
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Total revenues and other | $719.1 | $671.8 | $1,394.1 | $1,446.1 |
| Operating income | $334.9 | $373.8 | $627.3 | $158.9 |
| Net income | $238.3 | $281.3 | $429.5 | $(8.1) |
| Net income attributable to WES | $231.3 | $273.0 | $417.1 | $16.5 |
| Adjusted EBITDA (non-GAAP) | $491.1 | Not stated in this comparison | $934.2 | $1,028.0 |
| Adjusted gross margin (non-GAAP) | $677.2 | Not stated in this comparison | $1,291.9 | $1,388.3 |
Q2 revenue increased 6.6% year over year, while WES-attributable net income declined. For the first half, revenue fell 3.6% and Adjusted EBITDA fell 9.1% year over year. The prior-year first-half net loss reflected $441.0 million of goodwill impairment and $165.9 million of long-lived asset and other impairments; 2021 recorded $27.6 million of impairments. Management’s sequential comparison showed Q2 Adjusted EBITDA up 11% from Q1 and adjusted gross margin up 10%.
Q2 gross margin was $503.2 million; first-half gross margin was $958.7 million. First-half operating cash flow was $713.7 million, versus $739.0 million a year earlier. Capital expenditures were $137.9 million, down from $313.1 million. Defined free cash flow, a non-GAAP measure, was $593.6 million, up from $423.2 million. Cash and equivalents were $305.6 million at June 30, versus $444.9 million at year-end 2020.
At June 30, total debt carrying value was approximately $7.4 billion. Current liabilities exceeded current assets by $240.4 million, largely because $580.7 million of 4.000% notes due 2022 was classified as short-term; management intended to retire those notes within 12 months. The $2.0 billion revolving credit facility had no borrowings and $2.0 billion of available capacity; WES Operating reported covenant compliance. The Partnership declared a Q2 distribution of $0.319 per unit, or $134.7 million, payable August 13, 2021.
Business developments and material changes
- Throughput recovered sequentially from Q1, which was affected by winter storm Uri, but first-half volumes were lower year over year: WES-attributable natural-gas throughput declined 6%, crude-oil and NGL throughput 13%, and produced-water throughput 12%.
- Management estimated Uri and a Colorado blizzard reduced first-half net income and Adjusted EBITDA by about $30 million through lower volumes, commodity-price effects and higher utility costs.
- Fee-based service revenue fell 11% year over year for the first half. Results also reflect lower volumes and fees in several systems. A marketing-contract accounting change effective April 2020 reduced reported revenue and product costs but, according to the filing, had no effect on operating income, net income or cash flow.
- First-half capital spending declined substantially as major expansion projects completed or slowed. The Bison treating facility sale closed in Q2; the sale produced a reported $5.4 million net gain.
- WES repurchased 1.1 million common units for $16.2 million in the first half; $201.2 million remained authorized under its $250 million buyback program. Occidental held 48.0% of WES common units and owns its general partner.
Outlook, commentary and risks
Management stated that available cash, operating cash flow and revolving-credit capacity were expected to meet short- and long-term working-capital, capital-spending and debt-service needs. The filing does not provide a specific earnings or throughput forecast. Management said capital spending would be adjusted to customer activity while maintaining liquidity and financial flexibility.
- Occidental is WES’s largest customer and its general partner’s owner; it was the only customer contributing more than 10% of consolidated revenue. Related-party revenues and other totaled $415.4 million in Q2 and $793.7 million for the first half. This creates customer, credit, governance and concentration exposure.
- WES and Occidental dispute the cost-of-service rate under a DJ Basin oil-gathering contract. An adverse resolution could reduce rates and cause a non-cash earnings charge; revenue on certain cost-of-service agreements was constrained pending negotiations and proceedings.
- Sanchez bankruptcy proceedings: the court ruled that Springfield gathering agreements were rejected but that acreage dedication covenants survived. WES is continuing to defend its rights; outcomes could affect South Texas assets and potential impairment.
- Other notable matters include an EPA/Colorado enforcement action over alleged Clean Air Act leak-detection violations at the Fort Lupton facility, and litigation concerning revenue allocation at the Mont Belvieu JV. Outcomes and potential financial effects were not clear or estimable in the filing.
- WES recorded an $11.6 million impairment of its Ranch Westex investment due to lower forecast producer throughput. The filing warns that lower commodity prices, reduced drilling, producer bankruptcies and continued volume weakness could prompt further impairments.
- Recorded environmental remediation and reclamation liabilities were $11.3 million. The Partnership also disclosed commodity, inflation, COVID-19, weather, counterparty and interest-rate risks. A 10% commodity-price change was not expected to materially affect operating income, financial condition or cash flows over the next 12 months, excluding imbalance effects.
- On August 5, 2021, the board approved executive severance and change-in-control severance plans, disclosed as subsequent-period information.
Investor verification points
- Confirm the near-term funding or refinancing plan for the $580.7 million of 2022 notes classified as current, and any effect on liquidity or distributions.
- Track Occidental’s production, credit condition and payment performance, plus the DJ Basin rate dispute and related constrained revenue.
- Review volume trends, especially whether sequential recovery continues and first-half year-over-year declines reverse.
- Assess cash conversion and the sustainability of distributions against operating cash flow, capital needs and debt service; Free cash flow and Adjusted EBITDA are non-GAAP measures and have stated limitations.
- Monitor the Sanchez and Mont Belvieu proceedings, environmental matters, and potential asset impairments.