Western Midstream Partners, LP ($WES)

Good morning, and welcome to Western Midstream's First Quarter 2026 Fireside chat with our Chief Executive Officer and President, Oscar Brown; and our Senior Vice President and Chief Financial Officer, Kristen Shults.

Oscar, WES's reported adjusted EBITDA of $683 million in the first quarter, a 15% increase year-over-year. What drove that outperformance? And what does it tell us about the trajectory of the business for the rest of the year?

Thank you, Daniel. It was truly a great quarter for us, and the results reflect the cumulative impact of several strategic decisions we've made over the past 18 months. Three primary drivers came together in the first quarter: the full quarter contribution from the Aris acquisition, per day throughput growth across all 3 product lines and the continued success of our cost reduction efforts. Further, our adjusted gross margin benefited from the meaningful increase in crude oil prices in March. On the Aris front, the integration is complete and the assets are performing well. The Aris contracts share the fee-based foundation of WES's broader portfolio, but also provide meaningful upside when crude oil prices are elevated because we retain skim oil volumes. In March, as crude oil prices rose, we captured incremental value through those skim oil recoveries and that dynamic is something we expect to benefit from going forward in this environment. The Delaware Basin continues to be our primary driver of growth in 2026. During the quarter, our natural gas throughput increased by 3% despite throughput being negatively impacted by WAHA-driven curtailments during the quarter. We also achieved record crude oil and NGL throughput of 272,000 barrels per day, up 4% sequentially and 6% year-over-year. Produced water throughput hit a record 2.8 million barrels a day, up 4% sequentially. These aren't coincidental results. They reflect deliberate customer development, significant infrastructure investment and years of building one of the most integrated 3-stream platforms in the basin. Equally important is our commitment to cost discipline. Excluding the Aris acquisition, we reduced operation and maintenance expense by 7% year-over-year while still delivering higher throughput. That operating leverage improvement is real, durable and directly translating into earnings power.

Let's turn to the acquisition announcement. WES is paying $1.6 billion for Brazos Delaware II, a privately held gathering and processing platform in the Delaware Basin. Can you walk us through the strategic logic, why Brazos? Why now? And what makes this asset unique relative to other M&A opportunities you have evaluated?

Thanks, Daniel. Happy to. Brazos is exactly the kind of asset WES has been looking for, high-quality, contiguous bolt-on that amplifies the value of our existing asset base. Strategically, the fit is exceptional. The Brazos system is immediately adjacent to our existing West Texas complex operating across the heart of the Texas Delaware Basin. Brazos comes with approximately 470,000 dedicated acres, which increases our total Delaware Basin dedicated acreage by nearly 50% to more than 1.4 million acres. We're also adding 460 million cubic feet per day of natural gas processing capacity with the Comanche complex, which immediately expands our Delaware Basin processing capacity by approximately 20% to 2.75 billion cubic feet per day. WES will have just over 3 billion cubic feet of natural gas processing capacity in the basin once North Loving II comes online in the second quarter of 2027. The asset is also an excellent fit for our MLP structure. Nearly all of the approximately 3,500 identified drilling locations at $65 per barrel are within 2 miles of existing low-pressure gathering infrastructure, which translates into very limited incremental capital requirements for new well connections. That's a fundamental driver of the free cash flow conversion we're looking for. On the customer side, the Brazos contracts diversify our revenue mix meaningfully. The existing contracts are long-term fixed fee arrangements with a weighted average remaining life of over 9 years, anchored by investment-grade and high-quality private Permian producers. This structure is philosophically aligned with WES's own contract framework, which provides durable cycle-resistant cash flows. In terms of timing, the midstream M&A environment remains constructive, and our balance sheet is one of the strongest positions it's ever been. We have the financial flexibility to move decisively and structuring the deal is 50% cash and 50% WES common units allows us to maintain pro forma net leverage of approximately 3x throughout 2026. That's consistent with our conservative leverage philosophy and preserves capacity for our organic growth program.

Can you walk us through the financial mechanics of the deal, the valuation, accretion assumptions and how you're thinking about the return profile relative to WES's cost of capital?

The $1.6 billion purchase price represents approximately 8x 2027 estimated EBITDA on a stand-alone basis. We expect that multiple to compress to approximately 7.5x as we commercialize the roughly 125 million cubic feet a day of currently available processing capacity at the Comanche complex and capture identified synergies from integrating the systems. That available capacity is really an important point. The Comanche plant is running at approximately 73% utilization today, processing 336 million cubic feet a day as compared to the 460 million cubic feet a day of nameplate capacity. As the dedicated acreage is developed and volumes ramp, particularly given the density of proximate drilling locations, there is a clear line of sight to higher throughput without proportional incremental capital. That's where the EBITDA multiple improvement story is the most compelling. From an accretion standpoint, the transaction is immediately accretive to estimated 2026 DCF per unit. Assuming a close by the end of the second quarter, we expect Brazos to contribute approximately $100 million of incremental adjusted EBITDA in 2026. Meaningful in the context of our existing full year guidance range. In terms of returns relative to our cost of capital, the combination of an 8x entry multiple declining to 7.5x with identified upside levers, coupled with the low ongoing capital intensity of the business supports returns meaningfully above our weighted average cost of capital.

Oscar, with Brazos closing in the second quarter and 2 major organic projects, Pathfinder and North Loving II set to come online in early 2027, how do you think about balancing capital deployment and financial discipline? And how should investors think about guidance and the distribution trajectory from here?

This is really the crux of the WES investment case, and I want to be direct about it. We have a strong balance sheet, and we intend to keep it that way. We ended the first quarter with more than $2.5 billion in total liquidity, trailing 12-month net leverage of approximately 3.1x. After the Brazos close, we expect to maintain pro forma net leverage of approximately 3x throughout 2026, consistent with our long-standing target and peer-leading among midstream MLPs. On guidance, we are not formally updating our full year ranges today because we haven't yet received revised drilling plans from our producers for the year. But what I can tell you is that based on current commercial discussions, the favorable commodity price environment and our improving cost structure, we expect to be towards the high end of our adjusted EBITDA guidance range of $2.5 billion to $2.7 billion and our distributable cash flow guidance range of $1.85 billion to $2.05 billion, and that's before any Brazos contribution. We plan to provide updated guidance in conjunction with our second quarter results after the Brazos close. On capital deployment, roughly half of our $850 million to $1 billion of 2026 capital budget is directed towards Pathfinder and North Loving II. Two high confidence projects in the core of the Delaware Basin. Both projects are on schedule for first quarter and second quarter 2027 in-service dates, respectively, and both are underpinned by volume commitments that give us conviction in their returns. Regarding the distribution, our first quarter distribution of $0.93 per unit, up 2.2% sequentially, keeps us on track for full year calendar distribution guidance of at least $3.70 or $3.72 on a run rate basis. Our distribution strategy is straightforward: grow distributions at a rate slightly below adjusted EBITDA growth in order to steadily increase coverage over time. The Brazos acquisition supports this strategy, adding strong free cash flow to our asset base as we look to grow the distribution over time.

To close, how would you summarize the WES investment thesis at this moment? And what are the 2 or 3 things you most want investors to take away from this conversation?

This is my favorite question. First and foremost, WES is operating from a position of strength. We just delivered the strongest quarter in the partnership's history from an adjusted EBITDA perspective. The Aris integration is complete, Pathfinder and North Loving II are on schedule, and we expect to close Brazos by the end of the second quarter. These aren't aspirational milestones. What it demonstrates is that we're executing on our priorities and commitments. And the team that delivered Mentone III, North Loving I, the Meritage integration and the Aris integration in the last several years is mostly the same team executing today. Investors should have high confidence in WES' ability to deliver. Second, the Delaware Basin is the foundation of our growth strategy, and we're building one of the strongest asset bases in the Delaware Basin. More than 60% of our 2026 adjusted EBITDA is expected to come from the Delaware Basin, and that proportion will only increase as Brazos closes. Pathfinder comes online and North Loving II adds processing capacity. With approximately 3,500 drilling locations at $65 per barrel on Brazos acreage alone and continued development across our legacy footprint, we have line of sight to decades of throughput growth in the most prolific basin in North America. And third, WES offers one of the most compelling return profiles in the midstream sector. Our potential 12% to 14% annual equity return is underpinned by an almost 9% current cash yield and a 4% to 5% long-term adjusted EBITDA annual growth rate that drives further upside. We're building a midstream company designed to grow unitholder value over the long term. We believe the combination of yield, growth, financial discipline and strategic positioning makes WES one of the most compelling investment opportunities in the midstream sector today. We look forward to continuing to demonstrate that in the quarters ahead.

Oscar, Kristen, thank you 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.