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

Welcome to Western Midstream's Second Quarter 2024 Earnings Call Fireside Chat, with our Chief Financial Officer, Kristen Shults; and our newly appointed Chief Operating Officer, Danny Holderman. Kristen we'll start with you. Can you provide us with a general overview of WES' second quarter results? And what were some of the key drivers for WES' strong operational performance?

Sure, Daniel. The second quarter was another really strong quarter for WES. We had sequential quarter throughput growth in the Delaware Basin and in the DJ Basin for natural gas. They both grew by about 6% quarter-over-quarter. We also had record total operated crude oil and NGL throughput, that increased about 6% quarter-over-quarter as well. The Powder River also continued to grow for both natural gas and crude oil and NGLs. So when you look at all those strong operational results that we had this quarter, we're still expecting our throughput to steadily grow throughout the remainder of the year, and for us to be at the high end of our 2024 adjusted EBITDA and free cash flow guidance ranges. The second quarter adjusted EBITDA was a little bit lower than we had in first quarter, but that's predominantly due to the asset divestitures that occurred during the first quarter, and then at the very beginning of the second quarter, that drove our adjusted gross margin down by about $9 million. Our operating expense was also a little bit higher in the second quarter. We expect that to continue into the third quarter, just part of the summer months, as we're getting into those months, the utilities go up a little bit. We do more of our maintenance and repair jobs. So we see more maintenance and repair expense, things like that.

Danny, with your new role as COO, can you talk about some of the transformation oriented processes, our teams have been implementing? And how that has and will continue to benefit WES over the coming quarters?

Certainly. Since our transformation go live in April 2023, teams have implemented several processes that had a significant positive impact on WES. One of the key initiatives has been enhancing the resolution of our data relative to spending. These improvements have enabled us to develop more effective sourcing strategies, resulting in over $15 million in cost savings across both OpEx and CapEx year-to-date. Additionally, we've made substantial strides in our Compression Preventative Maintenance program, which has contributed to the significant improvement in our West Texas operability this year. We expect even greater synergies with this preventative maintenance work in 2025, as we incorporate our supply chain strategies across the full year and across all Basins to leverage additional cost savings by more effectively leveraging our scale. Furthermore, our ongoing operations' data management initiative is set to elevate our data quality and analysis capabilities. By the end of the year, this will provide our engineers and operators with advanced tools, to further optimize our cost and operational performance across our assets. These initiatives collectively position us to achieve sustained operational excellence and cost efficiency, driving long-term benefits for WES.

Danny. It's also been a while since we talked about commercial successes in the Rocky's or the Northern region. Can you provide some additional color on the new commercial contracts that WES has signed in the DJ and Uinta Basins? Also, what's driving the increase in activity in these regions?

Sure, Daniel. In the DJ Basin, WES signed an amendment to DCP's original natural gas offload agreement to WES, that extends the processing of 175 million cubic feet a day from 2027 to 2029, which is 100% take-or-pay. Additionally, this multiyear amendment provides P-66 with an incremental 200 million a day of firm processing capacity, primarily supported by minimum volume commitments, starting in 2026. If fully utilize these agreements could fill up the remaining capacity across our DJ Basin complex starting in 2026 through at least 2029. At our Chipeta facility in Utah, we executed a multiyear natural gas processing agreement with Kinder Morgan in support of their Altamont Green River Pipeline project, providing up to 150 million a day of firm natural gas processing capacity, which is expected to be in service by mid-2025. Additionally, we executed agreements with several customers supporting Williams Companies Mountain West Pipeline expansion to provide up to 110 million cubic feet per day of natural gas processing capacity at Chipeta, all of which are on a take-or-pay basis. We have already begun to receive a portion of these volumes and expect incremental volumes in the second half of 2024 and into 2025. These new agreements will require some expansion capital for our facilities in basin, mostly for compression and additional liquid stabilization capacity at Chipeta with incremental capital needs mostly occurring in 2025.

Thanks, Danny. Kristen, how are these new agreements going to potentially affect our capital expenditure plans for the rest of '24 and going into '25?

So in general, when we're looking at 2024, we started at the beginning of the year looking at what's in the commercial pipeline, kind of just giving some thought to what can make it over into final executable stage throughout the year. So that type of pipeline within it, some of those discussions, they help us form how wide the range should be. It's a little bit more of an art than a science on that one, but for us right now, this year, we still expect to be within the guidance range that we set for capital, even with those new commercial deals, because we give thought to what type of commercial deals might materialize as the year progresses. As we're looking to 2025, there are commercial deals that we talked about this quarter that will impact the 2025 capital budget. It's a little bit too early to get into the details, obviously, of what the 2025 capital budget should be. But we do expect to spend some capital in the DJ Basin in Wyoming and Utah where we haven't historically been spending, as much capital. At the same time, we don't have a big chunky capital project like the plants that we've had for the last 2 years. We haven't sanctioned another plant there. And so I do still expect a large part of the capital that you saw in 2024 to not reoccur in 2025. But we will update everyone later as we continue to work through producer' forecast and really define what the capital budget should be for 2025.

In light of that, WES did achieve its 3x leverage target at the end of the second quarter. Can you talk about WES's capital allocation priorities going forward?

So, if you look at the new slide we've put into the earnings deck, Slide 24, we have worked really hard over the past few years to grow the business, to prudently allocate capital, to improve the strength of the balance sheet and to be a leading return generator for our stakeholders. In fact, since January of 2020, we've reduced our debt balance. We've paid out approximately $3.5 billion through base and enhanced distributions to our unitholders. And we've bought back over 1.1 billion of our common units, which is about 50% of our unaffected unit count. So now that we've achieved our target 3x leverage, a little bit sooner than what we had expected, we're going to focus on the following priorities in no particular order. Investing capital in the business to expand organically. And you're seeing us do that quite a bit. We just talked about this quarter, all the commercial success we had, and we'll put a little money in there to build out and bring those volumes onto the system for those high-returning projects. We always look at M&A and what makes sense from an asset perspective to inorganically bring those assets into the portfolio. And so we're going to continue to look at that, and see if there's any capital that we can allocate towards accretive M&A. We also look at the base distribution and it's the right time to increase the base distribution based on us being at the leverage that we're at, and what kind of cash flow is the business generating. And then obviously, if there's anything left from a cash flow perspective after we've bought back debt, and we've bought back units and we've paid our base distribution. If there's anything left, than that's what our enhanced distribution is for as well. So I think we've been very consistent in the delivery of that message around our capital allocation priorities, and we're really happy that we've reached our leverage target.

Kristen, Danny, thank you both for joining us today, for our listeners, 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.