Western Midstream Partners, LP — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. The filing is a combined report for Western Midstream Partners, LP (WES) and its consolidated subsidiary, Western Midstream Operating, LP (WES Operating). Amounts below are in millions of dollars unless stated otherwise.
Business context and results
WES operates midstream assets that gather, process, treat and transport natural gas, crude oil and NGLs, and gather and dispose of produced water. Occidental Petroleum is its general-partner owner and its largest customer; related-party revenue was $441.6 million in Q2 and $890.4 million in the first half of 2023.
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenues and other | $738.3 | $876.4 | $1,472.3 | $1,634.7 |
| Operating income | $336.7 | $397.4 | $626.9 | $802.2 |
| Net income | $259.5 | $315.2 | $467.9 | $632.8 |
| Net income attributable to WES | $252.9 | $306.3 | $456.6 | $615.0 |
| Net income per common unit | $0.64 | $0.74 | $1.16 | $1.49 |
| Gross margin | $550.0 | Not stated here | $1,087.9 | $1,139.7 |
| Adjusted gross margin | $707.4 | Not stated here | $1,402.6 | $1,460.4 |
| Adjusted EBITDA | $488.3 | Not stated here | $987.0 | $1,087.4 |
Q2 revenue declined 15.8% year over year, mainly reflecting lower product sales amid reduced commodity prices and volumes. Q2 net income fell 17.7%. For the first half, revenue declined 9.9%, net income 26.1%, adjusted gross margin 4.0%, and Adjusted EBITDA 9.2%. Lower product sales and equity income contributed to the first-half declines; operation and maintenance expense increased $60.5 million.
Cash flow, capital spending, debt and liquidity
- First-half operating cash flow: $793.2 million, up from $743.4 million in 2022. Capital expenditures: $334.6 million cash basis, compared with $191.4 million. Free cash flow: $481.7 million, down from $572.4 million.
- Q2 cash generation: Operating cash flow was $490.8 million and free cash flow was $340.1 million. Free cash flow is a non-GAAP measure defined by the partnership.
- Cash and working capital: Cash was $214.0 million at June 30, versus $286.7 million at year-end 2022. The partnership reported a $175.7 million working-capital surplus.
- Debt: Carrying value was approximately $6.8 billion, with no borrowings due within the next year. The $2.0 billion revolving credit facility had no borrowings and $2.0 billion available capacity at quarter-end; its maturity was extended to April 2028.
- WES Operating issued $750 million of 6.150% senior notes due 2033, redeemed $213.1 million of floating-rate notes due 2023, and repurchased and retired senior notes. Fitch upgraded its debt rating to investment grade in May; WES reported covenant compliance.
Distribution, outlook and material developments
- The Board declared a Q2 distribution of $0.5625 per unit, up 12.5% from the regular Q1 distribution, payable August 14, 2023. A separate $0.356-per-unit enhanced distribution tied to 2022 performance was paid in May.
- 2023 capital expenditure guidance is $700 million to $800 million on an accrual basis, with the midpoint increased $125 million from February guidance. Spending includes Mentone Train III, the North Loving processing plant and additional expansion projects.
- Q2 natural-gas throughput attributable to WES rose 4% sequentially to 4,254 MMcf/d; crude-oil and NGL throughput rose 2% to 626 MBbls/d; produced-water throughput was down 1% to 943 MBbls/d. Versus the first half of 2022, crude-oil and NGL throughput fell 8%, while produced-water throughput rose 18% and natural-gas throughput was essentially flat.
- A $52.1 million first-quarter impairment was recorded on Rockies assets after a contract termination notice reduced expected cash flows. The impairment used Level 3 fair-value assumptions.
- Management cites producer activity, commodity-price volatility, inflation and supply-chain pressures, higher interest rates, and customer and counterparty creditworthiness as factors that may affect results. Most first-half wellhead gas volume and all crude-oil and produced-water throughput were under fee-based contracts; management estimated a 10% commodity-price change would not materially affect results over the next 12 months, excluding imbalance effects.
Risks, contingencies and unusual items
- Occidental accounted for 34% of natural-gas throughput and 87% of crude-oil and NGL throughput in Q2, and was the only customer exceeding 10% of consolidated revenue. Adverse changes in Occidental’s production, credit condition or contractual arrangements could affect WES.
- WES and Occidental are discussing interpretations of DJ Basin oil-gathering cost-of-service rates. An adverse resolution could reduce rates and result in a non-cash earnings charge.
- WES resolved a Colorado air-compliance enforcement action through a consent decree effective June 15, 2023, including injunctive relief and a civil penalty; the filing says the resolution did not materially affect financial results, cash flows or condition.
- Litigation remains concerning revenue allocation at the Mont Belvieu JV and a Whitethorn pipeline-related contract dispute. The latter includes an Enterprise counterclaim seeking approximately $12 million; outcomes and impacts are uncertain.
- Environmental remediation and reclamation liabilities were $12.1 million at June 30, 2023. The filing also describes capital commitments, pipeline volume commitments and offload agreements.
- A new ERP system was implemented April 1, 2023. Management reported effective disclosure controls, while noting that controls related to the new system will continue to be evaluated.
Important facts for investors to verify
- How much of the first-half earnings decline reflects lower commodity-linked sales and equity income versus higher operating costs and the Rockies impairment.
- Whether the DJ Basin cost-of-service discussions with Occidental affect rates or trigger an impairment.
- Occidental’s production, credit quality and continuing role as a major customer and related party.
- Execution, cost and timing of the increased 2023 capital program, including North Loving and Mentone Train III, and its effect on leverage and free cash flow.
- Debt repayment and refinancing plans, interest costs, and the conditions attached to future distributions and enhanced distributions.
- Developments and potential financial effects of the Mont Belvieu and Whitethorn disputes, environmental obligations, and ERP control evaluation.