Western Midstream Partners, LP — 2020 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2020. The filing is an annual report, so the figures below are primarily full-year results; it does not present standalone fourth-quarter financial statements in the supplied text. Western Midstream (WES) gathers, processes, treats, and transports natural gas, oil, NGLs, and produced water across several U.S. regions. WES Operating is its consolidated operating subsidiary.
Key Financial Results
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Total revenues and other | $2.773 billion | $2.746 billion | Up 1% |
| Operating income | $878.9 million | $1.231 billion | Down 29% |
| Net income | $516.9 million | $807.7 million | Down 36% |
| Net income attributable to WES | $527.0 million | $697.2 million | Down 24% |
| Adjusted EBITDA | $2.030 billion | $1.719 billion | Up 18% |
| Net cash from operating activities | $1.637 billion | $1.324 billion | Up $313.3 million |
| Free cash flow (non-GAAP) | $1.227 billion | $37.1 million | Up substantially |
- Adjusted gross margin was $2.718 billion, up 12%. Average adjusted gross margin was $1.16 per Mcf for natural-gas assets, $2.54 per barrel for crude-oil and NGL assets, and $0.98 per barrel for produced-water assets.
- Full-year throughput attributable to WES rose 1% for natural gas to 4,274 MMcf/d, 7% for crude oil and NGLs to 698 MBbls/d, and 28% for produced water to 698 MBbls/d.
- Cash capital expenditures were $423.1 million, down from $1.189 billion in 2019. The filing attributes the substantial free-cash-flow improvement to lower capital spending and higher operating cash flow.
- At year-end, cash was $444.9 million and the working-capital deficit was $17.9 million. Carrying value of debt was approximately $7.9 billion; the $2.0 billion revolving credit facility was undrawn, with $2.0 billion available after letters of credit.
- WES reported a 3.91x debt-to-adjusted-EBITDA leverage metric for its 2020 incentive program and said it reached its below-4.0x leverage target a year early. The filing does not provide a separate GAAP debt-to-EBITDA measure in the cited summary figures.
Material Changes and Unusual Items
- Operating income included $644.9 million of impairments: $441.0 million of goodwill impairment, which reduced gathering-and-processing goodwill to zero, and $203.9 million of long-lived-asset and other impairments. The charges were associated principally with weaker market conditions, lower expected throughput, and specific asset and project changes.
- Reported revenue and cost of product were each reduced by approximately $160.6 million following an April 2020 change in Occidental affiliate AESC marketing arrangements. Management said the change had no effect on operating income, net income, cash flows, or its non-GAAP performance measures.
- General and administrative expense rose 36% to $155.8 million as WES built a standalone workforce and systems; operating and maintenance expense fell 9% to $580.9 million amid cost-saving efforts.
- Interest expense increased 25% to $380.1 million. In January 2020, WES Operating issued $3.5 billion of new notes and used proceeds in part to repay and terminate its $3.0 billion term loan and repay revolving-credit borrowings. It repurchased and retired $218.0 million of notes during the year.
- Cash from the $260 million Anadarko note receivable was replaced through a September 2020 transaction in which Occidental affiliates transferred 27.9 million WES common units to WES for cancellation. WES also repurchased 2.37 million units for $32.5 million under a $250 million buyback program.
- WES sold its Fort Union interest for part of combined proceeds of $27.0 million from that sale and the Bison facility option agreement; the Fort Union sale generated a $21.0 million gain. The Bison option could be exercised during the first quarter of 2021.
Distribution, Outlook, and Principal Risks
- The quarterly distribution was cut by 50% in 2020, from $0.622 per unit for fourth-quarter 2019 to $0.311 per unit for each 2020 quarter. The fourth-quarter 2020 distribution totaled $131.3 million and was paid in February 2021.
- On February 23, 2021, WES provided 2021 guidance of $275 million to $375 million in accrual-based capital expenditures and a full-year distribution of at least $1.24 per unit, subject to quarterly Board review. Management cautioned that further distribution reductions could be needed depending on conditions.
- All three major rating agencies downgraded WES Operating debt below investment grade during 2020. The filing estimates a $43 million annualized increase in borrowing costs on notes with downgrade provisions; the revolving-credit facility’s fee also increased. Additional downgrades could raise costs and constrain access to capital.
- Occidental accounted for 66% of total revenues and, excluding equity investments, 41% of natural-gas throughput, 88% of crude-oil and NGL throughput, and 87% of produced-water throughput. WES identifies Occidental’s production, creditworthiness, and strategic decisions as significant exposures. Substantially all natural gas and NGLs began being marketed directly to third parties from January 1, 2021.
- COVID-19 and the oil-market disruption weakened commodity prices and customer activity. Although most throughput is under fee-based arrangements, lower producer drilling or shut-ins can still reduce volumes and cash flow. WES also identifies environmental, climate, pipeline-safety, produced-water disposal and induced-seismicity regulation as risks.
- Legal and contingent matters include Sanchez/Mesquite and Gavilan bankruptcy disputes over Springfield and Brasada agreements, an EPA and Colorado enforcement action concerning alleged leak-detection violations at the Fort Lupton facility, and a dispute regarding revenue allocation at the Mont Belvieu JV. Management could not estimate the outcome of the Fort Lupton action and gave no assurance on the bankruptcy or JV matters.
- Management reported effective internal control over financial reporting as of year-end; KPMG issued unqualified opinions on the financial statements and WES’s internal controls. The report identifies impairment estimates and constrained variable consideration under two gathering contracts as critical audit matters.
Investor Verification Priorities
- Verify whether 2021 guidance and the minimum distribution are supported by subsequent operating cash flow, capital spending, and the Board’s quarterly decisions.
- Track Occidental’s production, payments, and share of WES revenues and throughput, as well as the transition to direct third-party marketing.
- Review debt maturities, covenant headroom, credit ratings, downgrade-related interest costs, and the redemption of the 5.375% notes due 2021.
- Assess whether 2020 impairments or further changes in producer forecasts indicate additional asset or equity-investment impairment risk.
- Follow outcomes of the Springfield/Brasada bankruptcy disputes, Fort Lupton enforcement action, and Mont Belvieu JV litigation, including any effects on contract revenue or asset values.