Western Midstream Partners, LP annual report, FY2022

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Western Midstream Partners, LP — 2022 Form 10-K

Reporting period: Fiscal year ended December 31, 2022. Although the request identifies Q4 2022, this filing reports full-year results; it does not provide a standalone fourth-quarter income statement summary. The combined filing covers Western Midstream Partners, LP (WES) and its consolidated subsidiary, Western Midstream Operating, LP (WES Operating). WES is a midstream partnership operating gathering, processing, transportation, and produced-water assets.

Financial and operating results

  • Revenue and income: Revenue and other was $3.252 billion, up 13% from 2021. Operating income was $1.588 billion, up 19%; net income was $1.251 billion, up 33%; and net income attributable to WES was $1.217 billion. Basic earnings were $3.01 per common unit versus $2.18.
  • Margins and EBITDA: GAAP gross margin was $2.248 billion, up from $2.003 billion. Adjusted gross margin, a non-GAAP measure, was $2.925 billion, up 10%; Adjusted EBITDA was $2.128 billion, up 9%. Adjusted gross margin per unit rose to $1.32 per Mcf for natural gas, $2.46 per Bbl for crude oil and NGLs, and $0.94 per Bbl for produced water.
  • Throughput: WES-attributable natural-gas throughput increased 1% to 4,210 MMcf/d; crude-oil and NGLs throughput increased 3% to 676 MBbls/d; produced-water throughput increased 19% to 836 MBbls/d.
  • Cash flow and investment: Operating cash flow was $1.701 billion, down from $1.767 billion. Free cash flow, a non-GAAP measure, was $1.268 billion, down 15%, primarily reflecting higher capital expenditures. Cash capital expenditures were $487 million versus $314 million in 2021.
  • Balance sheet and liquidity: Cash was $287 million. Debt carrying value was approximately $6.8 billion; year-end net leverage was approximately 3.1x. WES Operating had $375 million drawn and $1.6 billion of available capacity under its $2.0 billion revolving credit facility. The $3.4 million working-capital deficit largely reflected floating-rate notes classified as current; those notes were repaid in January 2023. The partnership reported compliance with debt covenants.
  • Distributions and repurchases: The quarterly distribution rose to $0.50 per unit in 2022, or $2.00 annualized; the fourth-quarter distribution was paid in February 2023. WES repurchased 19.5 million units for $487.6 million, including 10 million from Occidental. The authorization was increased to $1.25 billion, with $762.4 million remaining at year-end.

Material changes versus 2021

  • Revenue growth reflected higher fee-based service revenue, product-based service revenue, and product sales. Higher West Texas volumes and plant performance, increased DBM oil and water throughput and deficiency fees, and higher commodity prices contributed.
  • Operating costs also increased: cost of product rose 31% to $421 million and operations and maintenance rose 13% to $655 million. Management cited higher purchased-product costs, maintenance, chemicals, integrity work, labor, regulatory costs, and utilities.
  • Net income benefited from the $109.9 million gain on the Cactus II divestiture and lower interest expense. WES sold its 15% Cactus II interest for $264.8 million and acquired the remaining 50% of Ranch Westex for $40.1 million.
  • Equity income declined 10% to $183 million. Long-lived asset and other impairments totaled $20.6 million, primarily a $19.9 million impairment of the White Cliffs investment.

Outlook, risks, and contingencies

  • Outlook: Management estimated 2023 capital expenditures of $575 million to $675 million, including equity investments. Mentone Train III, a 300 MMcf/d processing train, was under construction with completion expected in the fourth quarter of 2023. The filing does not provide explicit 2023 revenue or earnings guidance.
  • Capital returns: A new enhanced-distribution policy targets a payment alongside the first-quarter distribution based on prior-year free cash flow after specified uses. Any payment is discretionary, subject to reserves and a year-end leverage condition; it is not assured.
  • Customer concentration: Occidental accounted for 55% of 2022 revenue and production attributable to Occidental represented 89% of crude-oil and NGL throughput and 80% of produced-water throughput. A reduction in Occidental activity or a deterioration in its ability to perform could materially affect WES.
  • Related-party and contractual matters: WES is discussing with Occidental the calculation of cost-of-service rates for a DJ Basin oil-gathering contract; an adverse resolution could reduce rates and cause a non-cash earnings charge. The filing also describes disputes with Enterprise concerning Mont Belvieu revenue allocation and Whitethorn trading profits; outcomes are uncertain. Enterprise counterclaimed for approximately $12 million in alleged overpayments.
  • Regulatory and environmental exposure: A federal and Colorado enforcement action alleges Clean Air Act leak-detection violations at the Fort Lupton facility. Management expects a resolution likely to include injunctive relief and a penalty, but believes it will not materially affect results, cash flows, or financial condition. The filing also highlights evolving methane, emissions, pipeline-safety, produced-water disposal, and induced-seismicity requirements.
  • Other risks: Inflation, higher interest rates, producer activity and commodity-price volatility, aging assets, third-party pipeline availability, cyber incidents, and MLP governance and tax risks could affect throughput, costs, financing, distributions, or unit value. A 10% commodity-price move was not expected to materially affect operating income or cash flows over the next 12 months, excluding imbalance effects.

Most important facts for investors to verify

  • Reconcile the $1.268 billion reported free cash flow and the conditions governing any enhanced distribution with the partnership’s distribution and leverage policies.
  • Track Occidental’s production plans, financial condition, and share of revenue and throughput, particularly in crude oil, NGLs, and produced water.
  • Monitor 2023 capital spending, Mentone Train III completion and utilization, and whether project returns support the planned investment.
  • Review debt maturities, borrowing costs, revolving-credit availability, and leverage after distributions, buybacks, and debt repayments.
  • Follow developments in the Occidental rate discussions, Enterprise disputes, and Fort Lupton enforcement matter, including any changes to recorded liabilities or expected financial exposure.

Audit note: KPMG issued unqualified opinions on the financial statements and WES’s internal control over financial reporting; the auditors identified evaluation of potential long-lived-asset impairment indicators as a critical audit matter.