Western Midstream Partners, LP — Q3 2021 Form 10-Q
Business context and period. Unaudited results for the three and nine months ended September 30, 2021; the filing was submitted November 9, 2021. Western Midstream gathers, processes and transports natural gas, crude oil and NGLs, and gathers and disposes of produced water. This combined filing covers Western Midstream Partners, LP (WES) and its consolidated operating subsidiary, Western Midstream Operating, LP. Unless stated otherwise, amounts below are for WES and in U.S. dollars.
Financial performance and liquidity
Amounts are in millions except per-unit data. The filing’s results discussion emphasizes Q3 versus Q2 sequentially and nine-month year-over-year comparisons.
| Metric | Q3 2021 | Comparison / period context |
|---|---|---|
| Total revenues and other | $763.8 | Up from $719.1 in Q2 2021; nine-month total was $2,157.9 versus $2,125.1 in 2020. |
| Operating income | $383.3 | $347.1 in Q2 2021; nine-month income was $1,010.6 versus $506.0 in 2020. |
| Net income | $263.6 | $238.3 in Q2 2021 and $254.1 in Q3 2020. Nine-month net income was $693.2 versus $246.1 in 2020. |
| Net income attributable to WES | $255.7 | $231.3 in Q2 2021; nine-month amount was $672.8 versus $263.1 in 2020. |
| Net income per common unit | $0.61 | Basic and diluted; $0.55 in Q3 2020. Nine-month basic was $1.60 versus $0.58. |
| Adjusted gross margin (non-GAAP) | $705.4 | Up 4% from Q2; nine-month amount was $1,997.3, down 4% year over year. |
| Adjusted EBITDA (non-GAAP) | $531.6 | Up 8% from Q2; nine-month amount was $1,465.8, down 5% year over year. |
| Free cash flow (non-GAAP) | $320.0 | Down 16% from Q2; nine-month amount was $913.6 versus $762.4 in 2020. |
For the nine months, operating cash flow was $1,105.0 versus $1,131.9 in 2020. Capital expenditures were $217.8 versus $372.3; cash used in investing was $187.3, and cash used in financing was $1,262.8. Cash declined $345.1 during the period to $99.9.
At September 30, WES had total debt carrying value of approximately $7.1 billion, including $726.4 million classified as short-term. Current assets were $756.7 million and current liabilities $1,307.3 million, a reported working-capital deficit of $550.6 million. The deficit principally reflects $502.1 million of 4.000% notes due 2022 and $220.0 million of revolver borrowings classified as short-term. The $2.0 billion revolving facility had $1.8 billion of available capacity; WES was in compliance with its covenants. Total liabilities were $8.3 billion.
The board declared a Q3 distribution of $0.323 per unit, or $134.9 million, payable November 12, 2021. WES repurchased 5.59 million units for $104.4 million in the first nine months; $113.1 million remained authorized under its buyback program at September 30.
Material changes and operating trends
- Nine-month fee-based service revenue fell 7% to $1,841.7 million, while product-based service revenue and product sales increased. The product-sales gains largely reflected higher commodity prices; reported revenue and cost of product were also affected by a 2020 marketing-contract accounting change that management says had no effect on operating income, cash flow or its non-GAAP operating measures.
- Nine-month natural-gas throughput attributable to WES declined 6% to 4,132 MMcf/d; crude-oil and NGL throughput declined 11% to 645 MBbls/d; produced-water throughput declined 5% to 673 MBbls/d. Q3 produced-water throughput increased 7% sequentially, while gas and crude-oil/NGL throughput fell 4% and 7%, respectively.
- Nine-month Adjusted EBITDA decreased $80.6 million, primarily due to higher cost of product, higher G&A and lower distributions from equity investments. Lower throughput, reduced lease revenue and lower equity-investment distributions also weighed on Adjusted gross margin.
- Nine-month operating cash flow was slightly lower year over year, but free cash flow increased, primarily because capital spending was lower. Capital expenditures fell $154.5 million year over year.
- Prior-year comparisons include $441.0 million of goodwill impairment and $200.6 million of long-lived asset and other impairments, versus $29.2 million of long-lived asset and other impairments in the 2021 nine-month period. 2021 impairments included project cancellations and an $11.8 million Ranch Westex investment impairment.
Outlook, commentary and risks
- The filing provides no numerical full-year earnings, cash-flow or throughput guidance. Management said operating cash flows, cash, and available revolver capacity were expected to meet short- and long-term working-capital, capital-spending and debt-service needs; future distributions remain subject to results, capital requirements and board decisions.
- Q3 fee-based revenue included an $18.9 million cumulative catch-up after management concluded it no longer needed to constrain revenue under certain cost-of-service agreements. Further revenue reversals could occur depending on legal proceedings and negotiations.
- Management estimated Winter Storm Uri and a Colorado blizzard reduced nine-month net income and Adjusted EBITDA by approximately $30 million. The estimate could change. COVID-19, commodity-market volatility and producer activity remain uncertainties.
- Occidental is WES’s largest customer, owns its general partner, and is the counterparty to significant contracts. It represented 36% of nine-month natural-gas throughput and 89% of crude-oil/NGL throughput attributable to WES; the filing identifies Occidental as the only customer contributing more than 10% of consolidated revenue. Counterparty performance and Occidental’s production, finances and capital plans therefore matter to WES.
- Material unresolved matters include a dispute with Occidental over DJ Basin oil-gathering cost-of-service rates; Sanchez and Gavilan bankruptcy proceedings affecting Springfield system contractual rights and related commercial discussions; a Mont Belvieu JV revenue-allocation lawsuit; and a DOJ/EPA and Colorado enforcement action alleging Clean Air Act leak-detection violations at Fort Lupton. The filing says the Fort Lupton outcome cannot currently be reasonably estimated.
- The filing also identifies potential future asset impairments from lower commodity prices, weaker producer activity or bankruptcies. Other disclosed risks include inflation in labor, materials and services, environmental obligations, interest-rate exposure, and potential changes to publicly traded partnership tax treatment.
- WES Operating retired $500 million of senior notes through a Q3 tender offer and recorded a $24.7 million early-extinguishment loss. S&P upgraded its long-term debt rating from BB to BB+ in August; management estimated the upgrade would reduce annualized borrowing costs by $7.9 million.
Important facts for investors to verify
- Whether Occidental’s production, credit condition and contract disputes affect volumes, fee rates, collections or distributions.
- How the $502.1 million of 4.000% notes due 2022 will be refinanced or repaid, and whether revolver availability and covenant headroom remain adequate.
- Whether the $18.9 million revenue catch-up is sustained, and the potential financial effect of the DJ Basin rate dispute and Springfield proceedings.
- Whether throughput and Adjusted EBITDA stabilize, particularly in the DJ Basin, West Texas, and crude-oil/NGL equity investments.
- How planned capital spending, distributions and unit repurchases affect cash balances and leverage; non-GAAP measures should be assessed alongside GAAP cash flows and earnings.