Western Midstream Partners, LP — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. The combined filing presents Western Midstream Partners, LP (WES) and its consolidated operating subsidiary, Western Midstream Operating, LP (WES Operating). Unless otherwise noted, financial amounts below are in millions of dollars.
Business context
WES gathers, processes, treats and transports natural gas, crude oil and NGLs, and gathers and disposes of produced water. Its assets span Texas, New Mexico, the Rocky Mountains and north-central Pennsylvania. Occidental Petroleum owns WES’s general partner and is a significant customer and related party.
Financial and operating performance
| Metric | Q3 2022 | Comparable period |
|---|---|---|
| Total revenue and other | $837.6 | $763.8 in Q3 2021; up 9.7% |
| Operating income | $357.0 | $383.3 in Q3 2021; down 6.8% |
| Net income attributable to WES | $265.7 | $255.7 in Q3 2021; up 3.9% |
| Basic / diluted earnings per common unit | $0.67 / $0.66 | $0.61 / $0.61 in Q3 2021 |
| Adjusted gross margin | $750.1 | Down 1% from Q2 2022 |
| Adjusted EBITDA | $524.8 | Down 4% from Q2 2022 |
| Free cash flow | $330.4 | Down 11% from Q2 2022 |
For the first nine months, revenue was $2,472.3, up 14.6% year over year; net income attributable to WES was $880.8, up 30.9%; and diluted earnings per unit were $2.15 versus $1.59. Adjusted gross margin was $2,210.5, up 11%, and Adjusted EBITDA was $1,612.2, up 10%. These are non-GAAP measures defined by the partnership and should be considered alongside GAAP results.
- Cash flow and investment: Nine-month operating cash flow was $1,212.2, compared with $1,105.0 a year earlier. Capital expenditures were $341.5 versus $219.8; free cash flow was $902.9 versus $911.6. Cash at quarter-end was $159.1.
- Debt and liquidity: Carrying value of debt was approximately $7.03 billion, up from $6.91 billion at year-end 2021. WES had a $150.4 working-capital surplus and approximately $1.4 billion of available revolving-credit capacity. It reported compliance with debt covenants.
- Distributions and repurchases: The Q3 distribution was $0.50 per unit, unchanged from Q2, or $197.1 in aggregate. During the first nine months, WES repurchased 18.0 million units for $447.1, including 10.0 million units bought from Occidental.
- Throughput: Nine-month WES-attributable natural-gas throughput increased 2% year over year to 4,201 MMcf/d; crude-oil and NGL throughput rose 6% to 686 MBbls/d; and produced-water throughput rose 23% to 831 MBbls/d.
Material changes and unusual items
- Revenue and earnings benefited from higher throughput, fees and commodity prices, particularly at the West Texas complex and DBM oil and water systems. Nine-month fee-based service revenue increased 6%, while product-based service revenue increased 130% and product sales increased 38% year over year.
- Operating costs increased: nine-month operation and maintenance expense rose 12%, reflecting higher chemicals, repairs, utilities, labor and other costs; depreciation and amortization rose 6%, including accelerated depreciation tied to revised asset-life estimates in the DJ Basin.
- Interest expense fell 13% for the first nine months, partly reflecting debt redemptions and lower borrowing costs following a January 2022 S&P upgrade to BBB-. In Q3, interest expense increased from Q2 as revolving-credit borrowings rose.
- In September, WES acquired the remaining 50% of Ranch Westex for $41.0 and became its sole owner. In November 2022, after quarter-end, WES sold its 15% Cactus II interest for $264.8, including a pro-rata distribution, with proceeds expected in Q4.
- The Board increased the unit-repurchase authorization from $1.0 billion to $1.25 billion in November 2022. This is a subsequent event, not a quarter-end commitment to repurchase a specified amount.
Outlook, risks and contingencies
Management said available cash, operating cash flow and revolving-credit capacity are expected to meet short- and long-term working-capital, capital-spending and debt-service needs. The filing provides no specific earnings or throughput guidance. Management expects commodity-price volatility, inflation, supply-chain and labor constraints, and higher interest rates to affect the business; higher costs may be recoverable only to the extent allowed by contracts and regulations.
- Occidental was the only customer representing more than 10% of consolidated revenue. It accounted for about 35% of natural-gas throughput and 88% of crude-oil and NGL throughput for Q3; the partnership highlights counterparty concentration and possible effects if Occidental’s production, financial condition or performance changes.
- WES is discussing interpretations of cost-of-service rates with Occidental under a DJ Basin oil-gathering contract. An adverse resolution could reduce rates and result in a non-cash earnings charge.
- A Colorado enforcement action alleges Clean Air Act leak-detection violations at the Fort Lupton facility; WES is exploring a resolution that may include injunctive relief and a civil penalty. Management does not expect a material financial impact.
- A separate lawsuit seeks a ruling on revenue allocation at the Mont Belvieu JV. WES cannot assure the outcome or its impact.
- Environmental remediation and reclamation liabilities were $8.3 at September 30, with most payments expected over the next year. The filing also identifies exposure to contractual NGL-recovery shortfalls, commodity-price volatility, inflation, interest rates, and customer or counterparty non-performance.
Most important facts for investors to verify
- Whether higher operating and capital costs, including inflation-related pressures, persist or are offset by fee increases and throughput growth.
- Occidental’s future volumes, creditworthiness and the outcome of the DJ Basin cost-of-service discussions, given customer concentration.
- Debt and liquidity trends, including revolving-credit utilization, floating-rate exposure and upcoming maturities.
- Cash generation after capital spending and the sustainability of the $0.50 quarterly distribution alongside buybacks and investment needs.
- The closing proceeds and accounting impact of the post-quarter Cactus II sale, and the outcomes of the Fort Lupton and Mont Belvieu proceedings.