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

Good morning. My name is Tina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Western Midstream Partners Second Quarter 2026 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Daniel Jenkins, Director of Investor Relations. Please go ahead.

Thank you. Good morning, and welcome to Western Midstream's Second Quarter 2026 Conference Call. Today's call, the accompanying slide deck and last night's press release contain important disclosures regarding forward-looking statements and non-GAAP reconciliations. Please reference Western Midstream's most recent Form 10-K and 10-Q and other public filings for a description of risk factors that could cause actual results to differ materially from any forward-looking statements we discuss today. Relevant reference materials are posted on our website. With me today are Oscar Brown, our Chief Executive Officer; Danny Holderman, our Chief Operating Officer; and Kristen Shults, our Chief Financial Officer. I'll now turn the call over to Oscar.

Thank you, Daniel, and good morning, everyone. Yesterday, we reported record adjusted EBITDA of $737 million, an increase of 8% sequentially and 19% compared to the prior year period. Our strong second quarter results reflect record throughput from our natural gas and produced water businesses in the Delaware Basin, approximately 2.5 weeks of contribution from the Brazos acquisition and the benefit of our fixed recovery natural gas processing contracts in conjunction with higher overall commodity pricing. In mid-June, we closed the $1.6 billion acquisition of Brazos Delaware II, funded with approximately $800 million in cash and $800 million of WES common units based on the volume-weighted average unit price at the time the acquisition agreement was signed. The Brazos acquisition expands our gathering and processing footprint in the Delaware Basin and reflects our discipline of only deploying capital that sustains or grows the distribution over time. It is accretive to per unit metrics, protects the partnership's balance sheet and investment-grade credit ratings and diversifies our customer base and ownership. The integration is off to a strong start. Our teams are focused on optimizing the legacy Brazos system and connecting it to the legacy WES system, which we expect to be completed by year-end. This will enable us to direct more volumes to Brazos' processing plants that have spare capacity, enabling us to process more volumes internally and offload fewer volumes, thus creating more value for WES unitholders. We also expect to capture approximately $15 million to $20 million of cost synergies over the coming quarters in connection with the Brazos acquisition, primarily through general and administrative cost elimination and reduced operation and maintenance expense from supply chain efficiencies. Additionally, we have recently seen a number of wells previously planned for 2027 move into the second half of 2026 from several customers on the Brazos acreage. We will continue to remain in close contact with these new customers regarding their near-term plans, but we would expect these developments to result in increased throughput relative to our initial underwriting assumptions when we consummated the deal. For the remainder of the year, higher commodity prices continue to incentivize our customers to increase activity, particularly in the Delaware and Powder River Basins positioning us for incremental throughput growth in 2027. In the Delaware Basin, multiple customers have communicated that they intend to accelerate activity into the second half of the year, which should drive throughput growth as we exit 2026 and into 2027. We also recently entered into new gathering and processing agreements with 2 of the most active producers in the Powder River Basin. These long-term agreements increased dedications to WES by approximately 270,000 acres, which contain over 1,000 remaining drilling locations and are backed by substantial minimum volume commitments. These agreements plus the associated volume commitments demonstrate producers' increasing focus on the Powder River Basin as they begin to more fully develop their vast acreage positions in the basin. Based on the strength of our first half results, continued elevated commodity prices and the Brazos acquisition, we are raising the midpoints of our full year 2026 adjusted EBITDA, distributable cash flow and free cash flow guidance ranges by 10%, 10% and 20%, respectively. We now expect 2026 adjusted EBITDA to be between $2.75 billion and $2.95 billion, implying a midpoint of $2.85 billion, an increase of $250 million compared to our original guidance range. Additionally, we now expect 2026 distributable cash flow to be between $2.05 billion and $2.25 billion and 2026 free cash flow of between $1.1 billion and $1.3 billion, which represents increases of $200 million at the midpoint. Kristen will provide more detail on our updated guidance ranges shortly. Finally, as we announced in mid-June, JIP 2, our second produced water treatment demonstration facility near Red Bluff Reservoir in Reeves County, Texas, was placed into service during the second quarter. It is now delivering approximately 1,000 barrels per day of reclaimed freshwater, roughly 10x the volume of JIP 1. The facility is designed to refine operating costs, evaluate reliability and demonstrate consistent reclaimed freshwater recovery for fit-for-purpose applications, including industrial cooling, surface discharge and nonconsumptive agriculture irrigation while protecting existing water sources for surrounding communities. We view JIP 2 as a critical step towards sanctioning our first commercial scale facility. In the Permian, crude oil and natural gas flow assurance does not happen without a solution for produced water and each step forward on beneficial reuse deepens what we can offer producers across all 3 streams. Over the past few quarters, produced water handling has been our fastest-growing product line, and we believe that beneficial reuse provides another path for growth as water-to-oil ratios continue to increase and as produced water continues to outpace natural gas, crude oil and NGL throughput growth. With that, I'll turn the call over to our Chief Operating Officer, Danny Holderman, to discuss our operational performance in the second quarter. Danny?

Thank you, Oscar, and good morning, everyone. Second quarter natural gas throughput increased 3% sequentially, driven by 2.5 weeks of contribution from the Brazos acquisition and another quarter of record natural gas throughput from the DJ Basin. Additionally, our crude oil and NGLs throughput increased slightly and our produced water throughput increased by approximately 5% on a sequential quarter basis. Our second quarter per Mcf adjusted gross margin for natural gas assets increased by $0.03 compared to the prior quarter, primarily driven by higher overall commodity pricing on excess natural gas liquids volumes under our fixed recovery contracts and by 2.5 weeks of contribution from the Brazos acquisition. We expect third quarter per Mcf adjusted gross margin to be slightly lower than the second quarter as commodity prices have moderated, so we now expect our full year 2026 adjusted gross margin to average approximately $1.30 per Mcf. Our second quarter per barrel adjusted gross margin for crude oil and NGLs assets increased by $0.14 compared to the prior quarter, primarily driven by higher deficiency fees in the Delaware Basin. We expect our third quarter per barrel adjusted gross margin to be slightly lower than the second quarter, but we still expect our full year 2026 to range between $3.10 and $3.15 per barrel for 2026. Our second quarter per barrel adjusted gross margin for produced water assets increased by $0.06 compared to the prior quarter, primarily driven by higher throughput. We expect our third quarter per barrel adjusted gross margin to be slightly lower than the second quarter, but we still expect our full year 2026 to average approximately $0.91, especially if the crude oil strip for 2026 remains elevated. For the remainder of the year, we now expect portfolio-wide average year-over-year throughput to increase by mid-single digits for natural gas and to decline by low single digits for crude oil and NGLs, reflecting 6.5 months of Brazos contribution and higher customer activity in the back half of the year. Additionally, we now expect average produced water throughput to increase by approximately 85% year-over-year, driven by the Aris acquisition and strong performance from our legacy water business, which is slightly higher than our original expectation of approximately 80% growth coming into the year. In the Delaware Basin, we now expect average year-over-year throughput to increase by low to mid-teens percentage growth for natural gas and for crude oil and NGLs to increase by low single-digit percentage growth in 2026 with the Brazos acquisition being the primary driver of the improved forecast. During the second quarter, we again saw certain customers curtail Delaware Basin throughput due to negative Waha natural gas pricing, but we exited the quarter with no curtailments as certain long-haul pipes returned for maintenance and the GCX expansion in the Hugh Brinson Pipeline entered service. We expect Waha pricing to be less volatile through the remainder of the year particularly as the Blackcomb Pipeline comes online later this year. In the DJ Basin, throughput outperformed in the first half of the year, primarily driven by strong well performance and higher onloads from other midstream companies. This outperformance improves our full year outlook for both natural gas and crude oil and NGLs throughput, and we now expect a low single-digit decline for natural gas and a mid-single-digits decline for crude oil and NGLs on average year-over-year. In the Powder River Basin, we now expect throughput to decline by mid- to high single digits on average year-over-year. As Oscar previously mentioned, we recently signed long-term gathering and processing agreements with 2 large producers in the basin that add approximately 270,000 dedicated acres to WES's footprint, support years of development drilling and are backed by multiyear minimum volume commitments. These customers plan to increase activity in the back half of this year, driving volume growth as we exit 2026 and again in 2027. Finally, regional natural gas pricing has improved in the Rocky Mountains, and we continue to expect mid-single-digit percentage throughput growth from our other natural gas assets, driven by a full year's contribution from Williams Mountain West Pipeline expansion, the tie-in of Kinder Morgan's Altamont Pipeline and Dar -- Chipeta processing plant in Utah in 2025 and steady throughput at our Brasada plant in South Texas. With that, I'll turn the call over to Kristen to discuss our financial performance.

Thank you, Danny, and good morning, everyone. During the second quarter, we generated net income attributable to limited partners of $395 million, record adjusted EBITDA of $737 million and distributable cash flow of $537 million. Relative to the first quarter of 2026, adjusted gross margin increased by $84 million, driven primarily by strong throughput growth from our produced water business, approximately 2.5 weeks of throughput from the Brazos Delaware acquisition and higher commodity prices on excess natural gas liquids volumes. Operation and maintenance expense increased approximately 8% quarter-over-quarter, mostly driven by higher disposal and land fees associated with the increased produced water throughput and higher chemicals and treating expense. Inclusive of both the legacy Aris and Brazos assets, we now expect our full year 2026 operation and maintenance expense to increase by approximately 20% to 25% year-over-year, which is still a meaningful reduction on a combined company basis as we execute on synergy capture and operational cost reduction efforts. For the third quarter specifically, we expect operation and maintenance expense to increase in the high single-digit percentage range, driven by the full quarterly run rate from Brazos, the increased asset maintenance and repair work that's typical during the third quarter and higher expected utility costs. Pro forma for the Brazos acquisition, we now estimate reimbursements of approximately 60% of our portfolio-wide utility costs from our customers. Turning to cash flow. Our second quarter cash flow from operating activities totaled $535 million, an increase of $65 million over the first quarter of 2026. Our operating cash flow resulted in $264 million of free cash flow generation and free cash flow after our first quarter 2026 distribution that was paid on May 15 was a use of cash of $111 million. Turning to the balance sheet. We ended the quarter with more than $1.8 billion of total liquidity and a trailing 12-month net leverage ratio pro forma for a full year of Brazos contribution of approximately 3.15x. In June, we issued $700 million of 10-year senior notes to refinance the commercial paper and revolver borrowings used to fund the Brazos acquisition. The 123 basis point spread to U.S. treasuries was the tightest 10-year spread for any WES 10-year senior note issuance in the partnership's history. On July 20, we declared a quarterly distribution of $0.93 per unit, unchanged from the prior quarter, and it will be paid on August 14 to unitholders of record as of July 31. Turning to guidance. As Oscar mentioned, we are raising our 2026 adjusted EBITDA range to be between $2.75 billion and $2.95 billion, implying a new midpoint of $2.85 billion, an increase of $250 million at the midpoint relative to our initial guidance announced in late February. This reflects the contribution from the Brazos acquisition, the strong commodity price environment in the first half of 2026 and a higher commodity price forecast for the second half as well as increased customer activity levels in the second half of the year in both the Delaware and Powder River Basins, as both Oscar and Danny previously mentioned. While second half 2026 commodity prices remain above what we modeled coming into the year, they have recently moderated, causing us to use an average oil price of $71 per barrel for the second half of the year and resulting in a full year average price of approximately $77 per barrel. On capital, we are maintaining our 2026 capital expenditure range of $850 million to $1 billion, though we now expect to be toward the high end of the guidance range. This is primarily driven by new expansion opportunities in the Delaware and Powder River Basins that were not contemplated in our prior forecast. In particular, the new long-term gathering and processing agreements in the Powder River Basin will require incremental growth capital for expanded gathering facilities and additional compression, a portion of which will be spent in 2026. Over half of our 2026 capital program remains directed towards the construction of the Pathfinder pipeline and the North Loving II natural gas processing train. We continue to expect capital spending to remain elevated through the third quarter before moderating in the fourth as we approach Pathfinders and North Loving IIs expected in-service dates in the first and second quarters of 2027, respectively. We are increasing our distributable cash flow or DCF guidance to a range of $2.05 billion and $2.25 billion, implying a midpoint of $2.15 billion, an increase of $200 million at the midpoint. This again mostly reflects the Brazos acquisition and higher commodity price environment through 2026. We are also raising our free cash flow guidance to a range of $1.1 billion to $1.3 billion, implying a midpoint of $1.2 billion, also an increase of $200 million at the midpoint. We continue to view free cash flow as a key indicator of the partnership's financial strength, while DCF provides investors an additional measure of our capacity to fund the distribution and a substantial portion of our expansion capital program. Finally, turning to the distribution. Our target of at least $3.70 per unit paid in 2026 remains unchanged. Our annualized run rate of $3.72 reflects the increased distribution rate of $0.93 per unit that commenced with the first quarter 2026 distribution and that will be paid again on August 14 for the second quarter distribution. With that, I will now turn the call over to Oscar for closing remarks.

Thanks, Kristen. Before we open the call for questions, I want to leave you with a few closing thoughts. First, WES has multiple ways to win and grow across the portfolio and across all 3 product lines: natural gas, crude oil and NGLs and produced water. Higher customer activity in the Delaware Basin, combined with new commercial agreements and increasing rig count in the Powder River Basin positions WES for increasing natural gas throughput as we exit this year and again in 2027. The Brazos acquisition adds further momentum, and we continue to expect it to generate approximately $100 million of adjusted EBITDA in the second half of 2026. The Pathfinder produced water pipeline and the North Loving II natural gas processing train will provide growth and financial uplift when both of those projects come online early in the first and second quarters of 2027, respectively. Second, beneficial reuse remains an important longer-term extension of our produced water strategy. With JIP 2 now in service and producing roughly 10x the reclaimed freshwater of JIP 1, we continue to progress our goal of sanctioning our first commercial scale facility, adding another path for future growth. Third, our growth is supported by our strong balance sheet and ample liquidity. We ended the quarter with more than $1.8 billion of total liquidity and a trailing 12-month net leverage ratio pro forma for a full year's contribution from Brazos of approximately 3.15x. This financial strength gives us the flexibility to fund organic expansion while returning capital to unitholders and pursuing additional strategic M&A as we did with Brazos and Aris. Finally, WES continues to offer one of the most compelling equity return profiles in the midstream sector. Our 12% to 14% potential total annual equity return is underpinned by a 7% to 9% current cash yield and a 4% to 5% long-term adjusted EBITDA growth rate, driving further upside over time. We exceeded that long-term growth rate in both '24 and '25, and we expect continued outperformance in 2026, generating expected total returns well above 14%. Combined with our strong balance sheet, investment-grade credit ratings and ample liquidity, our compelling returns continue to differentiate WES within the midstream sector. In closing, WES enters the second half of 2026 from a position of strength. We delivered record adjusted EBITDA this quarter, raised full year guidance and made significant progress integrating the Brazos acquisition. Looking ahead, we have multiple paths to continued growth. Pathfinder and North Loving II are progressing on schedule, rising activity across most of our core basins and several recent commercial successes that will strengthen our growth profile for years to come. I am confident in our team's ability to execute and continue creating value for our unitholders. I also want to say thank you to our entire Western Midstream workforce for their continued hard work, engagement and dedication to our partnership. We lead with our core values of partnership, customer focus, resourcefulness and performance to deliver on our mission of improving lives through safe, sustainable and efficient energy delivery. With that, we'll open the call for questions.

[Operator Instructions] Your first question comes from the line of Gabe Moreen with Mizuho.

Just had a quick question, I guess, on -- with the acceleration of activity from some of your customers into the back half of this year, can you just talk about any revised expectations for filling up the spare processing capacity you've got for Brazos and then also at North Loving and expansion there and what it may mean also for future processing -- potential future processing expansions?

Sure. Thanks, Gabe. It's Oscar. Yes. I think we are increasingly bullish on some of the outlook for gas as probably no surprise. We do have excess capacity at Brazos. It will probably take us towards the end of the year to connect the systems. So we won't really be taking advantage of that significantly until that time, and we expect to move a lot of volumes, especially volumes we've been offloading onto the plant. That said, the customer base there is much more active than we expected than we underwrote in the transaction. So we're probably going to see that plant head towards being full pretty quickly. I never mind us shifting over offloaded volumes. And then I guess with respect to additional capacity, we continue to review our processing stack. I think we are definitely in the mode of trying to understand the outlook. We'll know more as we progress through the year. We're probably at capacity in terms of space at North Loving. So next plant would maybe be somewhere else, but we're certainly in that mode now considering where to move plant capacity next. So it's a pretty good outlook.

Great. Maybe if I can ask again on -- a follow-up on Pathfinder. You mentioned the project is progressing according to plan. Can you talk about contracting strategy there? There's been a lot of discussion on your call here in the remarks about water and how that's your fastest-growing area, how that may translate to Pathfinder beyond kind of your anchor customer with Oxy? -- sorry, your contract with...

Yes. No. Thanks. So Pathfinder is going extremely well. I would say it's going better than planned. We've done a lot of work to bring down the total capital costs from the original sort of budget, and so that's gone well. We've also done -- you'll remember, we announced some land work where we've gained some excess core space capacity and sort of did a little reroute in part of the system. So that helped with capital costs and returns as well. So with the base Oxy contract that takes a little less than 1/3 of the capacity of the pipe and with some of the work we've done around the commercial side, that team has been successful in winning sort of incremental gathering and disposal opportunities that will ultimately, over the long term, need to utilize Pathfinder, we price that accordingly. So we're seeing that sort of chip away at the excess capacity. So right now, we're looking at returns have moved up about our expected returns by about 500 basis points from high single digits, 10% on this asset to closer to 15%, which you'd expect with all the work we've done. And then as we continue to fill that pipe into the next year or so, once it comes online, we expect returns to get into the 20% range. So everything fundamentally about the water business quite honestly, from our perspective, is much better than we thought and has improved more quickly than we anticipated when we sanctioned this project. So I think Pathfinder becomes kind of like a header system or a loop in terms of our entire integrated water system in New Mexico and Texas. So we probably will see another big contract or 2. But I think as well, we're going to see the utilization of that pipe in more integrated expansion of our overall gathering disposal system. So it's evolving. No change in our bullishness on filling the pipe and that time line, perhaps a change in the mix of what the contracts look like as a result of the changing environment here. And the final point on that one, too, is we're responding to sort of changing customer outlooks on how we want to handle their water and what they want on the water service providers. So our largest customers are getting very specific on where they want the water dispose, where they want to move to, how they want to sort of manage it and track it, which I think [ Creek ] in particular, is sort of a signal that this is a growing challenge for our customers. It's critical to overall oil and gas flow assurance and they want to deal with counterparties that are investment grade and can move water all over the system. And we could find ourselves sometimes moving water north and east and sometimes moving it to the south. So a lot of flexibility in that pipe and sort of the integrated footprint we now have.

Your next question comes from the line of Jeremy Tonet with JPMorgan.

This is Francina on for Jeremy. And just wanted to touch a bit on kind of the guide update here with the $200 million range provided between that and a couple of levers that we've identified on our end being the 2Q Brazos giving us $100 million in the second half, commodity prices and then throughput outlook being improved. Is that a fair characterization of kind of the main -- that we're looking to in the second half to kind of drive us to the higher end of the range versus the lower end? Can you talk a little bit about that? And then maybe just thinking about shaping results through the end of the year. Can we kind of expect a linear step-up into 4Q? Or how will that O&M increase really play at the end of the year? That would be helpful.