Western Midstream Partners, LP (WES) Earnings Call Transcript & Summary

Okay. I believe we are live. So good afternoon, everybody. Spiro Dounis here again, Midstream Analyst here at Crédit Suisse. Thank you all for joining us. Happy to present here with Western Midstream Partners. And from the company, we've got Michael Ure, President, CEO and CFO. Wears a lot of hats these days. So first of all, Michael, thanks for joining us today.

My pleasure. Thanks for having me.

Of course, wish we could do it in Vail. But of course, circumstances limit that. So hopefully, next year, I've been referring to this event as "Fake Vail" or "Fail", so pick your poison, but it's just not the same, so one day. But in either case, format today is going to be fireside chat. So a lot of Q&A, a lot of back and forth. [Operator Instructions]

So with that brief introduction, going to start off pretty high level and kind of just we'll go from there. But I think, Mike, when you came into WES, pretty challenging time. There was a lot going on. It only got more challenging with the pandemic. I think when you came in, it was in the middle of Oxy. Obviously, everyone's still trying to figure out exactly what the company was going to look like coming out of that. Then you got hit with the pandemic and sort of worked your way through that. Seemingly came out on top at this point, but so far in your tenure, it seems like you've been reacting to a lot of tough situations. And so I'm curious now as we sort of get back to normal, what, in your view, should WES be going forward? What are the initiatives most important to you that you're going to drive home going forward?

Yes. Thanks, Spiro. It's a good question. And I think it allows a little bit of an opportunity to talk about the strategy that we undertook at the time that I did come into this role. That strategy was one that we saw WES as a real unlockable opportunity, an opportunity wherein if you align incentives and governance and employees to be focused exclusively on the Midstream aspect of the business that it would drive overall better results through the additional execution opportunities, the refocus on ways in which you can improve potential third-party business, et cetera. You outlined very clearly the challenges that were put in front of us in order to execute that overall strategy. But the emphasis and desire from our standpoint is the same today, in fact, arguably stronger today than it was 18 months ago. What it was that we found as we transferred the employees over early 2020 is that the focus of the employee base to achieve cost synergies to allow better efficiencies to flow through our business, that the pandemic, frankly, heightened and, in fact, enhanced the strategic value of us being more standalone. You had a group of employees who were exclusively focused on trying to save costs, focused on keeping volumes on our system during the height of the overall challenges that our industry saw. You saw a renewed and an increased focus on ESG related matters. All of that has come into play in emphasizing that as we look forward, we believe that on a standalone basis, we have the opportunity to improve our operations and really be best-in-class, given the asset base that we have today. And so as we went through those challenges, we persevered and demonstrated that this strategy, frankly, has a significant amount of value associated with it and I don't see that changing going forward. So we have reshaped, frankly, the company pretty materially, generated free cash flow after distributions in the first time in our history. In fact, we transitioned to free cash flow at the beginning of last year before it really became vogue because we felt like that would enhance the discipline within our business. Generated free cash flow after distributions, reduced our leverage to a level that is a year -- over a year ahead of our original schedule, and have put out a target to exit 2022 at 3.5x, which is 0.5 turn below what we're targeting to exit 2021. So all of these things have put ourselves in a really prime position to allow ourselves to, frankly, be most successful within our business and seize on opportunities that we see within our space.

Got it. Great. Great overview. Switching gears a bit, getting more specific now, but just thinking about distribution growth, you still are an MLP, and so the distribution, whether you like it or not, still important. You guys are talking about now being at least $1.24, but maybe with an eye on increasing it -- or sorry, reviewing it for an increase each quarter. And so I guess I'm just curious, what are the signals that you're looking for, for that to be a real consideration? I know you can't get too specific, but what are the big check marks in mind do you need to think about?

Yes. No. It's a great question. So the most important determinant for us is that we set out a strategy of leverage reduction, which included a strategy of repaying our near-term maturities. So our 2021s, '22s and '23s, that's $1.2 billion of debt reduction just by paying off those maturities as they come due. So that's the first use of the free cash flow that we have. As we exited third quarter and achieved our leverage target ahead of time and we were trading at a low double-digit yield at the time, our desire was to repurchase as many units as we could at those levels because we felt like it would enhance that overall free cash flow after distribution, going forward. As we sit today, first of all, we're expecting to have continued decline overall in volumes through the first half of 2021. Then we expect that to be arrested as we go into the back half of 2021 and start on the upswing to volumetric growth. And so we'd like to make sure that, that dynamic is going to persist and would portend positive free cash flow, and therefore, enhance the opportunity that we have to be -- to feel really strong about our ability to deliver a sustainable long-term distribution growth profile. And so that's a key consideration. Obviously, the valuation of the units is a key consideration as to whether or not those are -- which of those levers, if not both of them, are things that we should be pulling to be able to enhance the overall profile for our unitholders. So primarily, it's debt reduction through paying off our near-term maturities; making sure that the business is on the upswing; and whenever it is that we announce a distribution growth target, that it's one that we believe is sustainable going forward; and then using both a lever of continuing to buy back units and applying that distribution growth to provide a really solid return profile to our unitholders is how the Board intends to look at it on a quarterly basis.

Got it. Helpful. Helpful. And so you mentioned the sort of lull that we're going to go through here in the first part of '21, just given the lack of rig activity and activity, in general, in the back half of '20. So that setup, I think, is fairly well-known at this point. But I guess the question, I guess, on most of our minds, and I know it's tough to sit here today and try and figure it out, but as we think about getting back to that EBITDA run rate that you kind of had in the first part of 2020, right, so maybe just over $500 million per quarter or so. I don't know how quickly you think you can get back there, but I think we talked about 2022 as being a growth year on the last earnings call. You mentioned that here again. Do you think you can get back to that level as early as 2022? Is that just out of reach still? I'm not sure how quickly you think you can get back to that point?

Yes. So we're currently expecting that we'll exit 2021 at higher volumes than we exited 2020. And so that would -- as you're going into 2022 at higher volumes and certainly on the up curve, that would indicate -- if that -- if current investment continues, that would indicate that, that growth would continue into 2022 from a volumetric perspective. So again, a near-term decline the first couple of quarters will arrest that decline or expect to arrest that decline around the middle of the year and turn to growth and as you exit 2021. As we see, as we exited 2020 on a decline that, that flows through into the early part of 2021, if activity levels continue, then we would expect going into 2022 on a growth trajectory and we'll have to see what 2022 activity levels look. But certainly, as we project forward today, it would highlight a continuation of that growth into 2022.

Great. Great. No. It's tough to sit here today and try and look at it, but I appreciate taking a swing at it. I guess as we think about producer mentality and what they're saying, a few different things going on now. One, you've got large producers out there being very capital disciplined. I think it surprised a lot of people, how disciplined they've been. And that's, I think, good overall, right? But you are in a volume business. And so from your perspective, it's like, "Go ahead, guys, feel free to spend." At the same time, I didn't see the exact comments last week, but I know -- I think it was Pioneer that said, "OPEC has nothing to fear from U.S. shale anymore." Somebody earlier today, a big integrated said, "OPEC's back in the driver's seat, more or less." And so I'm curious, you speak to your producer customers a lot. Curious what you think it's going to take to start injecting capital back, back into this space. Are they kind of getting there slowly? Obviously, commodities is helping. Is '22 that year? Or is that even longer dated?

Yes. So a couple of comments I would make on that. And the first is that, obviously, we love volume growth. But one of the things that we focused on, again, starting early 2020, is to put ourselves in a position that even if that volume growth doesn't come, that we can provide a very attractive overall return profile for our business through, again, free cash flow generation, opportunities around buyback and potential distribution growth, again, even in the absence of extreme volume growth. We believe that our portfolio provides that type of opportunity. So I guess that's the first comment is that, I'm certainly welcome to receive that volume growth. But even if it doesn't come, we think that our portfolio is really attractive even in a more muted activity level scenario. I think, to be honest with you, my strong impression is that the only thing that's going to change the discipline from a public perspective is going to be investors demanding something different. We haven't really seen a material change in the overall discipline as we exited third quarter relative to where we sit today. And you got probably about a $20-per-barrel difference in commodity prices during that period. And so I think the only thing that, frankly, that's going to change activity levels for U.S. public [names] is that investors desire it. And push for it. Haven't heard that from upstream investors up to this point. But if you do see that, then I would expect that the public companies would respond in kind.

Yes. And that's a good point. That seemingly is what drove a lot of the change to begin with. So I think your point is well taken that, that's probably what it's going to take to reverse or undo it if it's the right decision, of course. So I think that's -- I think that's fair. Just thinking about the competitive dynamic. Fortunately, you are in the Permian and the DJ, both great basins to be in going forward. You've got a logistics in place already. A lot of capital spend producers presumably want to be in those basins and you've gotten the DJ kind of entry situation where you do have a bit of an oligopoly. And so curious, as you think about the go-forward there, how that basin strategically fits, and it's everything that you're doing and I imagine it's quite important. But the Permian less so, right? Still more competitive, but fortunately, you do have a strategic sponsor to maybe lean on a little bit. So curious as we go forward and things get more competitive and that pie is going to be really difficult to grab a slice out of how do you guys think you fare in that dynamic?

Yes. So a couple of things, yes. We do consider the DJ very, very crucial to us and would agree with you that we feel very good about our position out there. And frankly, the way in which other Midstream operators are competitors/partners, in some instances, and the DJ have set up or established a thought process that I think will play out in other basins, and that is instead of building additional capacity, are there other ways that you can structure offload arrangements so that they can gather the volumes and you don't have to worry about a potential overbuild situation. Our arrangement with DCP is a perfect example of that. In the Delaware Basin, we actually feel really strongly, first of all, about where our assets are; second of all, because we're pretty unique from the standpoint that we offer oil, gas and water gathering services to our partners and counterparties there. And so we're pretty unique from that standpoint. Thirdly, as we have looked at or been able to drive down the cost in our business, we think that we offer a very attractive overall opportunity to get new business from a cost standpoint, so competitive from a cost perspective. Last is that I really believe -- lastly, I really believe that our overall leverage profile and counterparty perspective, I think, has proven its value during this difficult time, and I think will play out quite well as we look into the future as some of our producer customers are going to want to have a real stable, strong provider wherein they contract for their Midstream services. And I guess the last point I'll make there is that as we look at competition, we put ourselves in a really strong position from a leverage standpoint to be able to acquire potential capacity, should there be opportunities to enhance our overall footprint that I think will do nothing more than put ourselves in an even stronger competitive position overall. So we feel really good, frankly, because of the changes that we made over the past year or so and strong asset base in the best part of the basin, we would argue to be really competitive in the Delaware going forward.

Got it. And sticking on that point, thinking about contract structure, I think WES has long been known to have a pretty good high-quality contract book. You highlighted this a little bit on the last earnings call, just with respect to MVCs and cost of service seems to be a bit of a better mouse trap there. And I guess, as you think about the go-forward, that market tends to ebb and flow, right? Acreage dedications come in, in a big way and MVCs go out the door. Just curious as you go forward, do you think you'll still be able to maintain that differentiator, which has been to date anyway, a better contract book?

Yes. I think -- so a couple of things to note there. We've got a very long-dated contract portfolio, as we highlighted in our presentation. I mean, we're talking about close to a decade overall with regards to our overall contract structure. So a significant amount of time to allow things to work its way through the system as it relates to new contracts that might be coming due. And I think there's a lot of changes that'll come in our industry as a whole. And so right now, thankfully, it's not something that we necessarily have to worry about. But I would say that as we look into the future, I genuinely believe that the strong will survive, and that definitely puts ourselves in that category and in a great position to be able to enhance the overall contract structure when it does become an opportunity or obligation for us.

Got it. Okay. Yes. I know. Certainly, a while before you have to really worry about that, which is good. So switching gears a bit. ESG was a big factor on the last call for you all. And I guess a few parts to this question. First, you talked about a lot of things that you were doing. Currently, some of you've already been doing for years. Some you're ramping up on. Curious if you could just maybe separate those 2 into buckets in terms of, "This is something WES has always been doing," versus the new initiatives. And then as we think about what the announcements look like, going forward, as you progress down this ESG path and along these different projects is, what should we be expecting to hear from you? Is it every quarter you update us a little bit? Are there any big announcements you would plan on making? Any step-out transactions? Or is this sort of a "gradual over time, a little bit each quarter" type of situation?

Yes. No. It's a great question. So a couple of things that WES has really been doing for a long time because we have operated in environments, Colorado, in particular, where ESG has been a critical import for really some time. And so as we looked at the build-out of our infrastructure, our oil gathering infrastructure, in particular, that eliminates the needs for batteries, which greatly reduces greenhouse gas emissions as part of that gathering process. Our electric driven compression, 350,000 horsepower that we have today is something that we started, frankly, back in the previous decade, 2008 or so that we started to emphasize that strategy. And then overall, just operating as good stewards of our assets have been part of the culture for a really long time. What it is that we've enhanced over the past 18 months or so is: number one, our reporting overall. It's the first time that we actually published a full ESG report on a standalone basis at the end of last year, something we're very proud of; we also were one of 5 companies that were a part of the development of the standardized reporting structure as per the GPA Midstream structure and have now published that to our web page, our sustainability portion of our web page; we also created a standing ESG committee at the Board level. So we have -- previous to this, we had 2 board level committees: an audit committee and a special committee or our conflicts committee, both of which are required. And this is the only non-required committee at the Board level, and it's an ESG-oriented one. In addition to that, we actually repurposed one of our top commercial people internally to lead the effort around potential ESG opportunities for the company. And so we've taken pretty significant steps to enhance on top of what it is that we've been doing as a company for some time. As it relates to reporting on this, I wouldn't expect that it would be something on a quarterly basis. I would expect that it would be a little bit more as changes occur with regard to that. But rest assured that despite the fact that we may not report on it on a quarterly basis, it's something that we have -- we will not lose focus around. And frankly, we can't lose focus around because it is a critical part of our Board infrastructure as we sit here today with the creation of that new ESG committee.

Got it. Okay. Yes. No. A lot going on and good to see you guys are sort of leading the way on that and adopting a lot of the industry measures. [It's great to see]. Switching gears a bit again in just thinking about  I think you mentioned it a little bit, but on M&A and maybe bringing assets into your sphere and at the same time, at one point, you were talking about potentially divesting some assets on the downstream side. We've seen the M&A market open up again. And I don't know, from our perspective, the multiples, the valuation levels have not been that impressive. So one, curious on the transaction you've seen so far. Has that been your impression? Are more assets crossing your desk? And how you think about M&A more broadly? Would be great to hear.

Yes. No. I would agree with that assessment. And we've always had a strategy, well, for the past 12 to 18 months, I guess, since we've undertaken this standalone structure of portfolio optimization. As we went through the -- pretty much the entirety of 2020, we didn't really see opportunities where someone was willing to pay a greater value than what we valued our existing assets. So for a lot of our non-core assets, the equity interest, in particular, for us, we're constantly taking a look at if somebody's going to give more value to those assets than what we inherently, internally see them at, we would transact. We did [sell] our interest in FUGG and Bison at the end of last year. That was something that -- we didn't actually have any cash flow projected for those assets for 2021 and beyond. And so for us to get some value for them, we felt like that, clearly, was enhancing overall to our unitholders. Going forward, we will continue to look at those divestitures in that same way. Also, we look at ways in which we can enhance our business. So if there's additional third-party opportunities that we can bring on to our system and frankly, it might be more accretive for us to buy that capacity as opposed to build it, then we'll take a look at that going forward. But as of yet, I can't say that the market has been in a healthy enough position to where it would make sense for us to either go out and acquire something or to divest of anything. Our thought process on getting ourselves in a more stabilized basis as it relates to our leverage is really with the expressed purpose as it provides us opportunities with -- wherein we can execute on those potential investment or M&A opportunities that might come up going down the road. I suspect, honestly, that, that's -- we're probably still a little bit away before that market's likely healthy enough for those opportunities to really start crystallizing in my mind.

Yes. No. I think that makes a lot of sense. You mentioned leverage in that pathway there. You've certainly surprised us in your ability to get leverage down to where it is now. And the goal in 2022 at 3.5x or less, also very encouraging. But I guess, while those are great goals, and like I said, the advancement there has been great so far. How do you think about what the right leverage level is longer term? And to some degree, this is going to depend a bit on growth, as you said before and what that looks like post 2021. But as a G&P company, with some downstream assets heading into a world that is not like the last 10 years, how do you think about, ultimately, what the proper level of leverage is?

Yes. For us, we look at that a little bit in relation to the contract strength that is within our portfolio as well as how it is that we were able to manage through a downturn, which we saw last year. And so from a threshold perspective, we look at our business at anything at or below 4x as being really a threshold level of leverage.  anything in addition to that is just enhancing, overall. And so as we set our target for 2022 is in part because we felt like we can operate pretty effectively at 4x. And if you can operate at that level, if you get down to 3.5%, that just provides additional flexibility to be able to deliver positive returns to your unitholders. And so we really look at 4x as a threshold. Better than that is great and provides us enhanced flexibility. And as time goes on, as we pay off our near-term maturities, our '21s, '22s and '23s as well as if you return to an EBITDA growth scenario, that's going to be naturally deleveraging. And so it just provides greater enhancement, overall, to what your credit profile will look like and the flexibility that you have to be able to enhance the return for unitholders.

Got it. Yes. So a bit dynamic there. But yes. Trajectory is definitely moving in the right place, so it makes sense. Let's see. We've got a little bit more time here. And so I think I can squeeze in 2 more. I'm going to go back to a question I asked in the last call. You shot me down, but I'm going to ask it differently, maybe, is on going C-corp, right? And so this is still being debated out there even with tax rates going up. And I think the argument we hear a lot, which makes a ton of sense is from a tax map perspective. MLPs are better, right, from an NPV perspective, and I don't think anyone's really pushing back against that. The other side of that, of course, is just from an investor-based perspective, right? It just seems like by the day, the MLP investor base is not necessarily growing. And so in order to attract more investors to get more airtime as it were, it seems like going C-corp, while maybe costly, is ultimately the right move longer term. And so I don't know how much time you guys are devoting to debating this internally, but just curious, as you sort of weigh the options, I guess, what is the most unappealing thing about going C-corp? I imagine it's going to be taxes. But is that a hurdle that you think at some point could be surmountable?

I can see how it could be surmountable, but that's a big hurdle, frankly, to overcome. It's not just tax. Taxes on conversion first, right? So our current unitholder base is very important to consider in that regard. And then it's also taxes going forward. And there's a significant amount of uncertainty out there as it relates to the overall corporate tax structure and what it might look like, going forward. Our free cash flow generation in a passthrough world is really stellar, and we provide significant opportunities to be able to return that cash to unitholders and to potentially put that at risk. Frankly, it doesn't seem particularly appealing to us. And what I would say is I definitely understand the construct around the potential dwindling of investable dollars for the MLP space. What I would argue is that really good businesses and businesses that are providing strong returns and distributions and potential distribution [go] to its unitholders. I think those are going to always attract investment. And so for us, that's where our focus is. How is it that we can enhance the overall return to investors, and I think that the investment dollars will come to potentially put that at risk through both the taxation at the time of conversion as well as the taxation going forward, which is in a pretty uncertain environment, I would argue. The math just doesn't work out to be positive, we believe, to our unitholders. And it is something that we look at on a very regular basis. Kristen, our VP of IR, whom you know, actually used to be a senior tax person within Anadarko. So she has a depth of knowledge in that regard. And it's something that her and I debate on a pretty regular basis. And frankly, it just hasn't proven out to be particularly attractive at this stage.

Got it. Yes. No. I appreciate taking swinging at it once again. Okay. I've got 1 more. You might have to AK the response on this one. And unfortunately, because you're not on video, this might be lost on some people. Mike, I got to know, how much do you bench, Man?

It's more than you weigh. That's for sure. How's that.

Fair enough.

I'll put it right back on you. It's something that I -- I enjoy it. It allows me to stay stable and energized for the day ahead.

Good. Good. We all need energy these days. Makes sense, man. Well, look, we're out of time. So I appreciate you all joining. It was fun. Always glad to catch up, and I hope the rest of your meetings go well. So thank you, WES.

Appreciate it.

Thank you, guys.

Thank you. Appreciate it.