Western Midstream Partners Q1 2023 Earnings Call Transcript

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Provided by Quartr
May 4, 2023

There are 7 speakers on the call.

Operator

Good afternoon. My name is Emma, and I will be your conference operator today. At this time, I would like to welcome everyone to the Western Midstream Partners First Quarter 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

Operator

Followed by the number 1 on your telephone keypad. Thank you. I would now like to turn the conference over to Daniel Jenkins, Director of Investor Relations. Please go ahead.

Speaker 1

Thank you. I'm glad you could join us today for Western Midstream's Q1 2023 conference call. I would like to remind you that today's call, the accompanying slide deck and last night's earnings release contain important disclosures regarding forward looking statements in non GAAP reconciliations. Please reference Western Midstream's most recent Form 10 Q and other public filings for to a description of risk factors that could cause actual results to differ materially from what we discuss today. Relevant reference materials are posted on our website.

Speaker 1

With me today are Michael Uhr, our Chief Executive Officer and Kristen Schultz, our Chief Financial Officer. I'll now turn the call over to Michael.

Speaker 2

Thank you, Daniel, and good afternoon, everyone. During the Q1, we continued to experience strong producer activity levels in the Delaware to the operator, resulting in higher throughput across all three product lines, including record breaking natural gas and produced water throughput. Despite continued throughput growth in the Delaware Basin, our Q1 adjusted EBITDA declined sequentially primarily due to Decreased distributions from Cactus II, which was sold in the Q4 of 2022, reduced margin from our South Texas assets due to a contractual step down in demand fees, which we previously communicated on last quarter's call and reduced natural gas throughput and margin from our assets in Utah and Wyoming, mostly due to weather. Although our adjusted EBITDA declined sequentially, we expect quarterly profitability to gradually improve as throughput increases for the remainder of the year. Kristen will go into more detail regarding our Q1 performance and our Q2 expectations shortly.

Speaker 2

Operationally, I'm very pleased to highlight that our commercial team continues to generate substantial value for WES. Subsequent to quarter end, we executed long term amendments to Occidental's natural gas gathering and processing agreement in the Delaware Basin, increasing their firm capacity on our system and extending the gathering agreement by 3 years to 2,035. Over the past year, We've executed multiple amendments to Occidental's natural gas processing and gathering agreements in the Delaware Basin, increasing their firm processing capacity by up to 800,000,000 cubic to the balance sheet. In March, we obtained investment grade status and subsequent to quarter end, we issued $750,000,000 of to senior notes to refinance existing revolver borrowings and to enhance our liquidity position. This was our first debt issuance since early 2020, And I'm very pleased it was well received by the market.

Speaker 2

In addition, we executed an amendment with our bank group that extends the maturity of our credit facility to 2028 And solidifies $2,000,000,000 of commitments. These capital market transactions have fortified our liquidity position, improved our debt maturity profile and enable us to be opportunistic regarding future capital allocation decisions, which is a real strength when considering today's volatile and uncertain market conditions. Finally, the Board approved the payment of $140,000,000 or approximately $0.36 per unit in an enhanced distribution that will be paid in conjunction with our Q1 base distribution of $0.50 per unit for a total of approximately $0.86 per unit. We view our capital allocation strategy and especially our ability to pay an enhanced distribution as a way to build long term value for our unitholders and to further differentiate WES relative to our peers. With that, I will turn it over to Kristin to discuss our operational and financial performance.

Speaker 3

Thank you, Michael, and good afternoon, everyone. Our first quarter natural gas throughput decreased by 3% on a sequential quarter basis. This was primarily due to lower throughput from our other assets, specifically in Utah and Wyoming, mostly due to record snowfall in the Rockies throughout the Q1. We also experienced lower throughput from our natural gas equity investments during the quarter. Our crude oil and NGL throughput decreased by 6% on a sequential quarter basis.

Speaker 3

This was primarily due to the divestiture of Cactus II in 2022 and expected declines in the DJ Basin. Excluding the Cactus II sale, our Crude oil and NGL throughput would have decreased by 2% sequentially. Produced water throughput increased by 12% on a sequential quarter basis, primarily due to continued strong producer activity levels and new customer connections in the Delaware Basin. Our per Mcf adjusted gross margin for our natural gas assets increased by $0.03 compared to the prior quarter. This was primarily driven by higher throughput in the Delaware Basin, which has a higher than average per NCF margin as to our other natural gas assets.

Speaker 3

This increase was partially offset by an annual cost of service rate adjustment that increased revenue in the Q4 of 2022 from our assets in South Texas. Excluding the impact of the cost of service rate adjustment in the 4th quarter, our per Mcf adjusted gross margin would have increased by to. We expect our 2nd quarter natural gas per Mcf adjusted gross margin to decrease slightly as we more fully utilize offloads to serve as increasing throughput in the Delaware Basin. Our per barrel adjusted gross margin for our crude oil and NGL assets Increased by $0.12 compared to the prior quarter, primarily due to an annual cost of service rate adjustment, a decreased revenue in the Q4 to the DJ Basin Oil System. The $0.12 increase was partially offset by a decrease in distributions from Cactus II that was sold in the Q4 of 2022.

Speaker 3

Excluding the cost of service rate adjustment in the Q4, our per barrel adjusted gross margin would have decreased by $0.20 We expect our per barrel adjusted gross margin in the Q2 to increase modestly due to demand fee revenues in the DJ Basin and throughput growth in the Delaware Basin. Our per barrel adjusted gross margin for our produced water assets decreased by $0.11 compared to the prior quarter, primarily due to the cost of service rate redetermination that to the Q1 of 2019. We expect our per barrel adjusted gross margin to increase slightly in the 2nd quarter, mostly due to improving contract mix associated with increased throughput. During the Q1, we generated net income Gross margin decreased by $20,000,000 primarily due to a decrease in distributions from Cactus II, which was sold in the Q4 of 2022, to a decrease in distributions from our remaining equity investment portfolio and throughput reductions that affected our assets in Utah and Wyoming, mostly due to weather. In addition, we experienced reduced margin from our assets in South Texas due to a contractual step down in demand fees in line with what we communicated last quarter.

Speaker 3

These decreases were partially offset by increased margin contribution from our Delaware Basin assets. As expected, we experienced a sequential quarter increase in our O and M expense as higher personnel and maintenance expenses were partially offset by lower utility expense. Consistent with prior years, we expect our O and M expense to trend higher in the to the Q2, in line with seasonal factors driven by increased utility and maintenance expenses, which are typically during the summer months. During the Q1, property and other taxes decreased substantially due to a reduction in ad valorem property tax accrual related to the finalization of to 2022 assessments at the DJ Basin Complex. Because of the impact of the accrual reduction in the Q1, we expect our go forward to quarterly property and other tax expense to be more in line with our Q4 2022 results.

Speaker 3

Turning to cash flow. Our first Order cash flow from operations totaled $302,000,000 generating free cash flow of $142,000,000 Free cash flow after 4th quarter distribution payment in February totaled negative $55,000,000 From a balance sheet perspective, in early April, we closed on $750,000,000 of 10 year fixed rate senior notes. We use the proceeds to refinance borrowings under our credit facility and for general partnership purposes. Our first debt issuance since reattaining investment grade status was heavily oversubscribed and puts us in a to a strong position to refinance future maturities as needed. Additionally, we executed an amendment to our $2,000,000,000 to our secured credit facility, which extends the maturity date to April of 2028.

Speaker 3

These capital markets transactions provide financial flexibility, which will help us better execute our capital return and allocation strategy regardless of the prevailing market conditions. At this time, we're not making any changes to our previously announced financial guidance ranges from our Q4 2022 earnings call. With that said, we continue to see strong forecast out of our Delaware Basin customers and future volume growth may require us to increase our associated processing capacity. We continue to assess the future processing needs at our West Texas complex, and we will update the market in due time of any changes that could accelerate the need for additional capital spending and potentially affect our previously disclosed financial guidance ranges. We currently expect, however, that we will maintain our annual base distribution guidance of at least $2 per unit in 2023.

Speaker 3

Focusing on basin specific activity in the Delaware, we still expect average year over year throughput to increase across all three products. We are reducing the number of wells expected to come online to approximately 320 wells, mostly driven by updates in producers' rig schedules and associated completion timing. We forecast that the associated throughput changes will be offset by improvements in producers drilling efficiencies and type curves. In the DJ Basin, we still expect annual throughput declines for both natural gas and crude oil and NGLs. The natural gas throughput decline will be a similar percentage to last year as steady on load activity and increased producer activity levels will be offset by base declines.

Speaker 3

For crude oil and NGLs, we expect the decline of volumes to cease later this year as additional wells come online. These projected changes in natural gas and crude oil and NGL throughput in the DJ Basin are expected to have a minimal impact on our adjusted EBITDA due to demand and efficiency fee revenues we collect associated with minimum volume commitments. Focusing on our other asset portfolio, specifically our assets in Utah and Wyoming, we experienced record snowfall throughout the Q1 that negatively impacted throughput. Even though the associated adjusted EBITDA impacts are minimal, we expect some lingering logistic difficulties that could result in select throughput curtailments in the second quarter. With that, I will now turn the call back over to Michael.

Speaker 2

Thank you, Kristen. Before we open it up for Q and A, I would like to take a few minutes to discuss valuation and reiterate why we believe WES and its unitholders continue to be extremely well positioned. Overall, West screens very well relative to comparable sectors of the S and P 500. When considering the data, West generates the highest free cash flow yield, Yet trades at the lowest valuation. When you take into account the stable long term contract structures, the fee based nature of the business, Continued growth associated with strong producer activity levels and the tremendous amount of free cash flow generation, WES has a differentiated investment profile relative to comparable sectors of the S and P 500.

Speaker 2

We continue to be a market leader in generating a superior total capital return yield when taking into account distribution increases, unit buybacks and debt reduction. We have done this while being one of the leaders in generating strong returns on Capital Employed. As we look to the future, WES is very well insulated from market and commodity price volatility, With almost all of our throughput serviced under fee based contracts supported by either minimum volume or cost of service commitments. Wes is also on very strong financial footing given our strong liquidity position, investment grade balance sheet and minimal dependency on the capital markets given our favorable maturity profile and robust free cash flow expectations. We will continue to focus on all three pillars of our balance to capital allocation strategy to advance our reputation as the leader in generating substantial value for stakeholders in terms of total capital returned.

Speaker 2

As I often do, I would like to close the call by thanking the entire West workforce for living our values and for all of their hard work and dedication to our business objectives. Our Q1 performance provides a solid start to the year and our teams have already achieved an impressive list of accomplishments through the 1st 3 months of 2023. I look forward to updating you on additional progress throughout the year. With that, we'll open the line for questions.

Operator

We will pause for a moment to compile the Q and A roster. Your first question comes from the line of Spiro Dounis with Citi. Your line is open.

Speaker 4

Thanks, operator. Afternoon, guys. First one, I want to just go to some of the commercial activities. It looks like over the last year or so, you've all firmed up about, I think it was 950,000,000 QFP a day of Interruptible volumes into MVCs, curious how much more headroom is there for you guys to do that going forward? And what do you sense is the appetite among customers to keep doing that?

Speaker 4

Yes.

Speaker 2

Hey Spiro, this is Michael. I can't specifically comment as it relates to upside potential in terms of specific metrics. What I would say is that Typically, producers will not go up to the total maximum amount of volumes they expect to come online in terms of firm commitments. There's usually just a little bit of excess that they expect to deliver in excess of that firm commitment level. And so as you progress through the years and as there's incremental tightness in our system as well as the basin as a whole And as those incremental volumes become a little bit stronger and firmer Then that's usually when they sign up those incremental firm commitments.

Speaker 2

And so, we would hope and That what we've seen over the past year will continue in terms of the robustness and confidence level overall in terms of the volumes coming through and Helpful that that will result in incremental firm commitments overall.

Speaker 4

Got it. Okay, understood. Thanks for that, Michael. Second one, just going to this need for sort of more processing capacity going forward, it sounds like you're starting to having that Celebration internally now, but curious on two fronts. So one, I guess, what is the deciding factor here in terms of the timing of the decision to announce under the processing Is this really kind of customer driven?

Speaker 4

Are you looking at more offload opportunities potentially? And then the second part of that question is, I understand that might impact free cash flow and CapEx, but I guess in terms of an EBITDA impact, I guess that there's really nothing that would occur this year on that front. And so as you guys think about EBITDA compared to where you provided the guidance earlier in the year, Christy, you had a lot of puts and takes there in your commentary. Are you sort of Still tracking within that range? Sounds like yes, but I just want to put a finer point on it.

Speaker 2

Yes, Spiro. So any decision that we would have with regards to the plant would not have an impact on 2023 EBITDA. And so what it is that we're doing right now is we've done over the past couple of years, We take a really holistic view on capital allocation, what's the most efficient use of that capital, Our offloads, sufficient way for us to do it. And then if we can't get comfort with regards to fulfilling to those commitments that we have overall, then we look at the perfect location or the best location, wherein to add that incremental capacity and make sure that we have our T's crossed and I's dotted before it is that we go ahead and announce something like that. So We're in the midst of that process right now, going through the full stack, what our needs might be and then assessing all of our various So that we can come up with the best solution for our shareholders that's going to be the most cost efficient and drive the best results for the company.

Speaker 4

Got it. Helpful color as always. Thanks, Michael. Thanks, team. Thank you.

Operator

Your next Question comes from the line of Jeremy Tonet with JPMorgan. Your line is now open.

Speaker 5

Howdy, everyone. This is Eli on for Jeremy.

Speaker 6

Just wanted

Speaker 5

to touch on unit repurchases. You guys repurchased $7,000,000 in the Q1. It seemed like a slight step down from historical levels. Framing Wes' financial flexibility, how should we be thinking about the cadence of share repurchases throughout the remainder of the year? And like what could move the needle there a bit?

Speaker 2

Yes, Eli, it's a great question. So we've had the same logic and perspective around unit repurchases We always have it's on an opportunistic basis. Up to this point, we had already we've already largely fulfilled about half of our original Buyback authorization amount, we're about 40% of the total. So we've obviously executed on that commitment over time. And so in any one given quarter, it's just dependent on whether or not we see dislocations and opportunities to repurchase units.

Speaker 2

So I couldn't specifically forecast what that's going to look like on a quarter to quarter basis because it's really dependent on what the market conditions might drive us during that particular quarter.

Speaker 5

Understood. That's helpful. Thanks. And then maybe switching gears a little bit, wanted to get to some more color on CapEx. We recognize Mentone 3 is coming on in 4Q, but maybe beyond that, how should we be thinking about return parameters for Kind of incremental projects or general thoughts around future spend?

Speaker 2

Yes. Our return parameters have Been consistent and will continue to be consistent. We always look for a solid return profile before we sanction projects And capital. So as it relates to Mentone, thus far, we're still on track from a timing and capital perspective. We're really pleased with where we sit on that.

Speaker 2

And then any incremental capital, in particular with regards to additional And capacity would still be under the same logic that we've held around driving returns overall and the timing Or requirement of that, will be dependent on what it is that we can feel comfortable that that's a project that would meet those return thresholds that We've already established.

Speaker 5

Got it. That's helpful. Thanks guys.

Operator

Your next question comes from the line of Keith Stanley with Wolfe Research. Your line is open.

Speaker 4

Hi, thank you. Can you quantify How the volumes are tracking across the products versus what you guided to last quarter on the percentage change basis? I imagine there's some impacts just from to the weather in Q1.

Speaker 3

Yes. Overall, we're still tracking to the same numbers that you saw last You had a little bit of noise this quarter just with the storm and the storms we saw in Wyoming and Utah, but nothing that materially impacted where we're seeing it just from an average year over year perspective.

Speaker 4

Got it. And separate just Technical question. As you amend contracts with Oxy to add firm volume commitments, should we assume that the processing rate Under the amended contracts for the expanded capacity is similar to what the existing contract rate is or does this vary deal to deal as you move forward and add volumes.

Speaker 2

Yes. Typically with the amendments, it's really more around the service level that we're offering up with regards to those incremental volumes. So in other words, going from interruptible to firm.

Speaker 4

Okay. Got it. Thank you.

Operator

Your next question comes from the line of Gabe Moreen with Mizuho. Your line is open.

Speaker 6

Hey, good afternoon, everyone. I know this may be the wrong question to ask after attaining investment grade, but I'm curious about the 3.2 kind of target that you're driving towards the year end as it pertains to unit repurchases. Should we really consider that 3.2 kind of a line in the sand Because I think Michael your comments about being opportunistic on the unit repurchases and all the slides talking about the free cash flow yields and quite frankly all the volatility out there in the market. I'm just willing wondering how much you're willing to put your balance sheet to work should the opportunities arise for more unit repurchases?

Speaker 2

Yes. No, it's a great question, Gabe. The 3.2 is again a target as we look to what that threshold might yield in terms of a potential enhanced distribution. We've always Held overall though that we're intending to be opportunistic around both capital projects, some of which again we've talked about on this call as well as unit repurchases and really only at the end of the year if we've met that leverage threshold and there's still incremental free cash flow available to us. In other words, we haven't been able to use that capital in other means, whether it's on the unit repurchase or capital projects side, then we would pay the enhanced distribution.

Speaker 2

And so, we would we will still definitely look for opportunities, on the unit repurchase program Irrespective of that leverage threshold and if we're able to utilize the buyback program and it takes us above that, all that means is that We wouldn't then be paying out an enhanced distribution. So we still have the flexibility to do all of the capital projects and unit repurchases that who we think are going to be enhancing overall to our stakeholders throughout the year.

Speaker 6

Fair enough. Thanks, Michael.

Speaker 2

Thanks, Kim.

Operator

There are no further questions at this time. Mr. Yer, I turn the call back over to you.

Speaker 2

Thank you everyone for joining. Excited about to the first start of the year and about the future quarters for the year. We look forward to speaking to everyone next quarter. Thank you very much.

Operator

This concludes today's conference call. Thank you for attending. You may now disconnect.

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Earnings Conference Call
Western Midstream Partners Q1 2023
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