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

Welcome to the Western Midstream post-second quarter fireside chat. With me today is Kristen Shults, our Chief Financial Officer.

Thanks, Daniel. Happy to be here today.

And Kamal Govender, Director of ESG.

Happy to be here today.

Kristen, I'll go ahead and start our conversation out with you. This quarter, we received quite a few questions on margins. Why did our margins increase in the second quarter? And what are our expectations for margins on a per unit basis for the remainder of the year?

So on the gas side, we had higher throughput in the Delaware Basin, which has a per Mcf margin higher than the average compared to our natural -- other natural gas assets. Additionally, we had favorable plant performance. So that plant performance in combination with strong commodity prices that benefited our margin for the second quarter as well. I'm expecting that margin to see a little bit of compression as we go into the remainder of the year. We're offloading more volumes, as we've talked about in the Delaware, and our contract mix is changing just a little bit as well. On the oil side, we were up quarter-over-quarter once again, has to do with increased throughput in the Delaware Basin, which also has a little bit of a higher per barrel margin than the average of the rest of the crude oil and NGL assets. We also received higher distributions from the equity investments. We've talked a little bit about this, that we expect our equity investments to be have a more muted contribution to the gross margin for this year. So I don't expect that to continue into the third and fourth quarter as we sit here today. And as it relates to that, it would decline that gross margin per unit on the oil side a little bit for the remainder of the year. On the water side, contract mix and as the throughput has been increasing in the Delaware, that's going to be decreasing the deficiency revenue that we've got. The gross margin per unit that you saw for the second quarter is probably a pretty good run rate as we're looking towards the remainder of the year.

Our operational and maintenance expense was higher in the second quarter. Can you talk about some of the reasons why O&M was higher? And how do you see that playing out for the second half of the year?

Sure. O&M in the first quarter was actually lower than what we normally see. Some of that is seasonality. Are utilities normally run lower just from a usage perspective during the winter months. We also have lower repairs and maintenance costs in the first quarter. So as we're looking at the second quarter, increased repairs and maintenance costs and increased utilities is really the biggest jump there. The prices that we're paying for utilities has increased as well as the actual usage. We expect that to continue in third quarter as well. Additionally, we're spending some extra money in third quarter, around $10 million on some field level projects that is supporting our transformation efforts. Specifically to help us on the maintenance and repair side, just be more proactive and more efficient in how we're performing that work. So it's about $10 million there for that specific project, utility still coming in high in the third quarter. And finally, as we're looking into fourth quarter, expect that to be closer to the second quarter levels.

Okay. Shifting our focus to returning capital to investors, we executed material unit repurchases in the second quarter that definitely continued into July. Is that something that investors should expect to continue over the coming quarters?

So you saw from us over the last quarter and really in the June and July months, with us being opportunistic about that buyback program. We have a $1 billion program. It extends out 3 years. We've completed around 42% of that program to date. I expect that we'll still continue to utilize that program in the same fashion that you've seen us utilizing it, which is being opportunistic. And when we see market volatility and some weakness there, that's 1 of the signs and 1 of the things that we look at when we go and deploy that program. The other thing that we need to keep in mind is just the shape of the balance sheet as well. But overall, I don't think you should expect anything different from us than what we've been doing, which is capitalizing on what we're seeing in the market and the balance sheet and how we've gotten into a better spot.

Obviously, many investors focused on the magnitude and the size of the unit buybacks. Is there still room to potentially pay an enhanced distribution after paying out $425 million in buybacks?

There is. So we've included an additional slide in the slide deck to help illustrate this point, Slide 20 in our second quarter slide deck. Some of it will depend on how we do from a financial performance perspective in the second half of 2022. But to the extent we're funding unit repurchases from borrowings or if we're refinancing some of the debt that we retired at the beginning of the year, those transactions would be excluded from the computation of a potential enhanced distribution payment. Said differently, we only tend for permanent reductions in the outstanding debt and equity in the aggregate to be considered in the excess free cash flow calculation. So if our leverage is below the 3.4x at the end of the year and that calculation is coming up with a positive number there, then we would expect to have that conversation with the Board and be -- have the ability to pay that enhanced distribution.