Western Midstream Partners, LP — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. This combined filing covers Western Midstream Partners, LP (WES) and its consolidated subsidiary, Western Midstream Operating, LP. Unless noted, financial amounts below are WES consolidated amounts; dollars are in millions.
Business context and results
WES gathers, processes and transports natural gas, crude oil and NGLs, and gathers and disposes of produced water across several U.S. basins. Occidental Petroleum owns WES’s general partner and held 53.4% of WES common units at quarter-end. Results versus Q1 2019 are not fully comparable: the 2019 period included the Anadarko Midstream Assets (AMA) acquisition only from its February 28, 2019 closing, while Q1 2020 includes a full quarter.
- Revenue: $774.3, up 15% from $671.9. Fee-based service revenue rose 21% to $701.4; product sales fell 21% to $56.6. Q1 2020 included $59.5 of lease revenue under an Occidental operating and maintenance agreement.
- Profit: Operating loss was $214.9 versus operating income of $318.9; net loss was $289.4 versus net income of $212.0. WES-attributable net loss was $256.5, or $0.57 per common unit, versus income of $118.7, or $0.30 per unit.
- Impairments and margins: The quarter included $441.0 of goodwill impairment and $155.8 of long-lived asset impairments. Adjusted gross margin, a non-GAAP measure, increased 19% to $701.3; Adjusted EBITDA increased 20% to $513.6. These measures exclude significant items and are not substitutes for GAAP results.
- Cash flow: Operating cash flow was $393.3 versus $343.1. Free cash flow, a non-GAAP measure, was $214.6 versus negative $71.8, reflecting lower capital spending. Cash capital expenditures were $172.8 versus $386.1.
- Liquidity: Cash was $152.3; working capital surplus was $40.8. The $2.0 billion revolving credit facility had $125.0 drawn and approximately $1.9 billion available, after letters of credit.
- Debt: Long-term debt carrying value was $8.09 billion, plus $11.2 of short-term finance lease liabilities. January debt issuance funded repayment and termination of the $3.0 billion term loan and repayment of RCF borrowings. WES Operating was in covenant compliance at quarter-end.
- Operating trends: Throughput attributable to WES increased 6% for natural gas, 28% for crude oil and NGLs, and 38% for produced water. Some gains reflected newly completed capacity and increased activity before the full impact of market disruption was known.
Material changes, outlook and risks
- The board declared a Q1 distribution of $0.311 per unit, a 50% reduction from Q4 2019. The $140.9 aggregate payment was scheduled for May 14, 2020.
- Management’s April 20, 2020 outlook projected 2020 capital expenditures of $450–$550, 45% below prior guidance, and approximately $75 of operating and G&A cost reductions. Management cautioned further distribution cuts or other actions may be needed; pandemic duration and severity remain uncertain.
- COVID-19, falling energy demand and the oil-market oversupply may reduce producer activity, throughput and cash flow, and could lead to customer curtailments, contract disputes, additional impairments or pressure on distributions. WTI prices fell below $20 per barrel in April 2020, after quarter-end.
- Fitch and S&P downgraded WES Operating debt from BBB- to BB+ in March 2020. The downgrade increases annualized note borrowing costs by $17.5 and raises RCF pricing beginning in Q2. Further downgrades could increase financing costs or constrain market access. Occidental is a major customer and counterparty; it represented 42% of natural-gas throughput and 89% of crude-oil/NGL and produced-water throughput attributable to third-party/owned-system measures cited in the filing.
- The $260.0 Occidental note receivable was carried at $257.9 net of a $2.1 expected-credit-loss allowance; its disclosed fair value fell to $153.6 from $337.7 at year-end. Sanchez Energy, a key Springfield system producer, elected to reject gathering agreements in bankruptcy; WES disputes the rejection and intends to defend its rights.
- WES reported negotiations concerning alleged Clean Air Act leak-detection compliance at facilities in Colorado and Wyoming; management expects each matter may resolve with a fine or penalty of at least $100,000. Management did not identify other proceedings expected to materially affect the business.
Important facts for investors to verify
- Whether forecast producer shut-ins, customer activity and Occidental’s financial condition materially affect contracted volumes, collections and WES’s concentrated counterparty exposure.
- Compliance with the RCF’s maximum leverage covenant and continued availability of its stated borrowing capacity as earnings and credit ratings change.
- Execution and adequacy of the reduced distribution, $450–$550 capital plan and approximately $75 cost-saving target; confirm subsequent distribution decisions.
- Assumptions underlying the $596.8 total asset impairments and the potential for further impairments under prolonged low prices or reduced drilling.
- Outcome of Sanchez’s contract rejection and environmental matters, and collectability and valuation of the Occidental note receivable.