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

Welcome to Western Midstream's Third Quarter 2023 Post Earnings Call Fireside Chat with our Chief Financial Officer, Kristen Shults; and our Vice President of Corporate Development, Jon Greenberg.

Kristen, can you talk about what WES saw from a throughput perspective during the third quarter? What growth rates do you anticipate for 2023?

Daniel, we had a really strong third quarter. Our total portfolio natural gas throughput was up 5%. Our crude oil NGL throughput was up 7%, and our water throughput was up 14%. All of that was driven by the Delaware Basin, just having a fantastic quarter-over-quarter growth story. As we're looking at the annual throughput growth rates, now that we've actually closed Meritage, we're bringing those gas volumes into our system. We anticipate the year-over-year natural gas throughput growth to be mid-single digits. Our expectations for the crude oil and NGLs and produced water remain unchanged from the second quarter call, which would be single digits for the crude oil and NGLs and upper teens for the produced water.

What do you expect for gross margin per unit in the fourth quarter?

So quarter-over-quarter, excluding any adjustments that we would have from cost of service and the revenue recognition impacts we would see during fourth quarter. We expect our natural gas per Mcf adjusted gross margin to increase slightly as we add those Meritage volumes into our system. On the crude oil and NGLs, we expect that to slightly increase as well. This quarter, you saw a decrease in the per barrel adjusted gross margin on the crude oil side. If you remember, about half of our oil throughput is from the equity investments that we own. And so as we're looking towards Q4. We expect some of that throughput to decrease in those equity investments just a little bit and hopefully bring that gross margin per barrel up a little bit on the oil side. On the produced water side, you've seen that remain relatively flat throughout this year. Second quarter at $0.83 and then third quarter now at $0.84, I would expect fourth quarter to be right in line with third quarter as well.

Thanks, Kristen. Jon, we recently closed on the acquisition of Meritage Midstream, which we announced during the third quarter. Can you talk a bit about the strategic rationale for that transaction?

Sure, Daniel. At WES, we're consistently looking for ways to optimize the value of our asset base across our portfolio. Like Michael mentioned on the earnings call, our legacy assets were undersized in the Powder River Basin, and the Meritage transaction transformed our footprint into the largest gathering and processing provider in the basin while also being able to purchase the business for an attractive valuation of 5 to 6x 2024 adjusted EBITDA. If you look at the map on Slide 5 of our earnings presentation, you can see the geographic overlap between the Meritage assets and our legacy PRB assets. WES now has 440 million cubic feet per day of processing capacity that is approximately 2/3 utilized at this time, and that open capacity will allow us to handle growth from our existing customers and pursue new customer opportunities in a capital-efficient way. The Meritage acquisition also expanded our customer base to include new third-party blue-chip counterparties in the region. Along with these producers, comes a strong portfolio of long-term contracts secured by large acreage dedications and minimum volume commitments that will contribute to WES' future profitability and free cash flow generation. Lastly, we are optimistic about the prospects for the basin. In the near term, rig activity on the footprint remains robust, driving anticipated production growth going into next year. Over the long term, we believe that we will see sustained activity and growth in the basin driven by several factors. First, as producers drill out inventory in other basins, we believe that we will see a shift to increased producer activity in the Powder over time. And second, as LNG export facilities come online, we believe that will create an increasing pull on domestic gas production to supply those LNG facilities. In addition, long-term drilling activity would be well supported by significant depth of upstream inventory and stacked pay locations in the Powder. So taking all those factors together, it makes us really excited about the future of what we just bought.

Why did WES choose to expand the PRB instead of the Delaware Basin?

Yes. With M&A being opportunistic in nature, buying Meritage came at the right time at the right valuation and was very transformative to our Powder River Basin footprint. So we capitalized on that opportunity when we saw that it could be actionable. With that said, buying Meritage does not preclude or prevent us from making acquisitions in the Delaware. We still look at all relevant M&A opportunities, and we'll pursue them to the extent that we believe they'll add value to unitholders. Another thing to keep in mind is that WES still continues to heavily invest in the Delaware as evidenced by the amount of capital that we are currently spending to expand our processing capacity at Mentone and North Loving in West Texas. Our investment to date has just taken the form of organic growth to service our customers in the Delaware. And so far, we found organic growth to be more attractive and more actionable than inorganic opportunities in the basin.

Kristen, can you provide some high-level thoughts on WES' outlook for 2024?

So as I was just mentioning, throughput growth was really strong during the third quarter, driven by the Delaware Basin. The Delaware Basin continues to have strong activity levels from our producers, and we're expecting to bring more wells online year-over-year, the once again strong throughput growth in 2024, just like we saw in 2023. As we talked about this quarter in the DJ Basin, we've actually hit the trough, the bottom of the decline that we've been seeing there since 2021. So at this point, expecting some modest increases on the oil side and that to steadily modestly increase throughout 2024. On the gas side, a little bit more of a pickup in the back half of 2024, but once again, expect to see average year-over-year throughput growth in the DJ Basin in 2024 as well. As we add those Meritage volumes into the system, the Powder River Basin is going to be strong for next year as well. So overall, expecting nice throughput in 2024 relative to 2023. On the capital side, we're seeing some of our 2023 capital needs push into 2024. This is pretty typical at the end of the year just as a few projects push. We've got both plants that are being constructed right now. And so time lines and really just some of the construction related to that have pushed a little bit. They're still on track to come in during Q1 of 2024 for Mentone III and then Q1 of 2025 for North Loving, but a little bit of the capital is pushing out of '23 and into 2024. So on the capital side, I expect a little bit of that push. We're also going to bring Meritage in for next year. Normal run rate that we've seen for Meritage is around $50 million-ish of capital a year, and next year is slightly heavier just being a growth year for that asset. From a DJ perspective, I don't really expect much of the capital change year-over-year there where you have spare capacity still in the DJ. And so you're just looking at additional well connect and hooking up to new pads as they come online.

Kristen and Jon, thank you for joining us today. If you have any additional questions, please feel free to reach out to us. Our contact information is located in the Investor Relations section of our corporate website at westernmidstream.com.