Western Midstream Partners, LP quarterly report, Q3 FY2023

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Western Midstream Partners, LP — Q3 2023 Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2023. The combined filing covers Western Midstream Partners, LP (WES) and its consolidated subsidiary Western Midstream Operating, LP (WES Operating). Unless noted, amounts below are for WES and in U.S. dollars.

Business context and financial performance

WES operates midstream natural-gas, crude-oil, NGL and produced-water gathering, processing, transportation and disposal assets. Occidental Petroleum is its general partner’s owner and a significant customer.

  • Q3 revenue: $776.0 million, down 7.4% from $837.6 million in Q3 2022. Fee-based service revenue rose 4.3% to $695.5 million; product-based service revenue and product sales declined, largely reflecting lower commodity prices, volumes and contract mix.
  • Q3 earnings: Operating income was $360.8 million versus $357.0 million; net income attributable to WES was $277.3 million versus $265.7 million. Diluted earnings per common unit were $0.70 versus $0.66.
  • Nine-month results: Revenue was $2.248 billion, down 9.1%; operating income was $987.6 million, down 14.8%; and net income attributable to WES was $733.9 million, down 16.7% versus 2022. Diluted earnings per unit were $1.86 versus $2.15.
  • Operating measures: Q3 throughput attributable to WES increased year over year 2% for natural gas and 20% for produced water, while crude-oil and NGL throughput decreased 7%. Nine-month throughput changed by +2%, +20% and -7%, respectively.
  • Margins and EBITDA: Q3 adjusted gross margin was $741.9 million and adjusted EBITDA was $510.9 million; both were higher than Q2 2023, by 5% and 5%, respectively. Nine-month adjusted gross margin was $2.144 billion, down 3%, and adjusted EBITDA was $1.498 billion, down 7%. These are non-GAAP measures.
  • Cash flow: Nine-month operating cash flow was $1.188 billion versus $1.212 billion in 2022. Capital expenditures were $536.4 million versus $341.5 million. Defined free cash flow was $682.2 million, down 24% from $902.9 million.
  • Liquidity and debt: At September 30, cash was $489.5 million, current assets exceeded current liabilities by $499.9 million, and debt carrying value was $7.262 billion, including $2.3 million of short-term debt. The $2.0 billion revolving facility had no borrowings and $2.0 billion of available capacity. Debt less cash was approximately $6.77 billion before the subsequent Meritage acquisition and related funding.
  • Distribution and repurchases: The Q3 distribution was $0.575 per unit, a 2.2% increase from Q2, payable November 13, 2023. WES repurchased 5.39 million units for $134.6 million during the first nine months; $627.8 million remained authorized under its $1.25 billion repurchase program.

Material changes and notable items

  • Nine-month product sales fell 68% to $100.3 million, while product costs fell 62% to $123.8 million. The decline in commodity-linked sales and costs reflects, among other factors, lower average prices and contract mix.
  • Operation and maintenance expense increased 15% to $562.1 million for the nine months, reflecting higher maintenance, labor and other operating costs. A $52.1 million impairment was recorded on Rockies assets following a contract termination notice.
  • WES Operating issued $750 million of 6.150% notes due 2033 and $600 million of 6.350% notes due 2029; it also repurchased or retired senior notes and repaid its 2023 floating-rate notes. Its revolving facility was extended to April 2028. Fitch upgraded its debt rating to investment grade; the filing reports investment-grade ratings from S&P, Moody’s and Fitch.
  • On October 13, 2023, after quarter-end, WES acquired Meritage Midstream Services II for $885 million, subject to customary adjustments. Funding included cash, proceeds from the September note issuance and revolver borrowings. Purchase-price accounting was incomplete at filing, and the acquisition’s post-close debt and operating contribution are not reflected in September 30 balances.

Outlook, risks and contingencies

  • Management forecast 2023 capital expenditures of $700 million to $800 million on an accrual basis, a $125 million increase to the midpoint of prior guidance. Planned spending includes processing-plant projects and expansion to support new commercial activity. The filing provides no specific earnings or cash-flow guidance.
  • Management stated that available cash, operating cash flow and revolver capacity were expected to meet short- and long-term requirements. Distributions remain subject to Board determination, reserves and available cash; the enhanced distribution is discretionary and subject to leverage conditions.
  • Key risks include producer activity and commodity-price volatility, inflation and supply constraints, higher interest rates, counterparty credit risk, and dependence on Occidental. Occidental accounted for more than 10% of revenue and was associated with 34% of natural-gas throughput and 87% of crude-oil and NGL throughput in Q3. A dispute over cost-of-service rates on a DJ Basin oil-gathering contract could reduce rates and cause a non-cash earnings charge.
  • The filing describes litigation relating to revenue allocation at Mont Belvieu and a Whitethorn joint-venture contract dispute, including an Enterprise counterclaim seeking approximately $12 million. Outcomes and financial effects are uncertain. Management reported no other known proceeding expected to have a material adverse effect.
  • WES reported effective disclosure controls. A new ERP system was implemented in April 2023; controls were modified or automated, and management said it would continue evaluating them.

Investor facts to verify

  • How the Meritage acquisition performs, integrates and affects debt, leverage and cash flow after closing.
  • Whether increased capital spending converts into expected throughput and earnings, and whether operating-cost inflation persists.
  • Progress and outcome of the DJ Basin rate discussions and the Mont Belvieu and Whitethorn disputes.
  • Occidental’s production, credit condition and continued role as a major customer, alongside the sustainability of distributions and unit repurchases.
  • Reconcile the filing’s non-GAAP adjusted gross margin, adjusted EBITDA and free cash flow with GAAP results; the filing cautions that these measures are not substitutes for GAAP metrics.