Western Midstream Operating, LP Annual Report - A Deep Dive for Investors

Welcome to your essential guide to Western Midstream Operating, LP's latest annual report. We'll cut through the jargon to give you a clear picture of what this company does, how it performed, and what it means for your investment decisions.

1. Business Overview: The Energy Backbone

Western Midstream Operating, LP (WES Operating) plays a crucial role in North American energy infrastructure. It operates as a subsidiary of Western Midstream Partners, LP (WES), which Occidental Petroleum Corporation (OXY) majority-owns. This relationship means WES Operating's business largely depends on OXY's production activities, providing a stable foundation.

WES Operating specializes in gathering, processing, and transporting natural gas, crude oil, and natural gas liquids (NGLs). They also provide essential produced water disposal services, a growing need in the oil and gas industry. Their vast network is like the circulatory system for energy, moving vital resources from production sites to markets.

Their extensive infrastructure includes:

• Over 17,000 miles of natural gas gathering pipelines.
• Natural gas processing plants with a combined NGL production capacity of 1.9 million barrels per day (mBbls/day).
• 2,400 miles of natural gas liquids pipelines.
• 1,600 miles of crude oil pipelines.
• 1,200 miles of natural gas transmission pipelines.
• Comprehensive systems for produced water gathering, treatment, and disposal.

2. Financial Performance: A Year of Steady Growth

WES Operating delivered consistent financial performance last year, driven by stable demand and strategic expansions.

• Revenue Growth: Total revenue for 2025 reached $4.26 billion, a solid 3.65% increase from $4.11 billion in 2024. This follows a 3.27% increase from $3.98 billion in 2023, demonstrating a steady upward trend.
• Profitability:
  • Net Income: The company reported Net Income of $920 million in 2025, up from $850 million in 2024, reflecting efficient operations and cost management.
  • Adjusted EBITDA: Adjusted EBITDA, a key metric for midstream companies, grew to $2.35 billion in 2025, compared to $2.20 billion in 2024. This indicates strong operational cash generation.
  • Distributable Cash Flow (DCF): WES Operating generated $1.75 billion in DCF in 2025, up from $1.60 billion in 2024. This robust cash flow supports distributions to its parent, Western Midstream Partners, LP, which in turn distributes to its unitholders.
• Revenue Mix:
  • Fee-Based Services: As the most stable income source, fee-based services generated $1.84 billion in 2025 (up from $1.79 billion in 2024). This revenue stream largely insulates the company from commodity price volatility.
  • Product-Based Services: Contributed $1.02 billion in 2025 (up from $980 million in 2024).
  • Product Sales: Accounted for $1.25 billion in 2025 (up from $1.20 billion in 2024).
  • Other Products and Services: Generated $150 million in 2025 (up from $140 million in 2024).
• Affiliate Revenue: Affiliated companies, primarily Occidental Petroleum, account for approximately 42% of total revenue, underscoring the strategic importance of this relationship for revenue stability.

3. Management's Discussion and Analysis (MD&A) Highlights

Management discusses the key factors influencing the company's financial condition and operational results.

Key Operational and Strategic Developments:

• Consistent Revenue and Profit Growth: The company achieved steady increases in revenue and profitability, driven by stable demand for its midstream services and effective cost management. This reflects its resilient fee-based business model.
• Strategic Acquisitions: WES Operating strategically expanded its asset base and service offerings through key acquisitions. In October 2025, it acquired certain produced water assets from Aris Water Solutions, Inc. for $1.1 billion in cash, significantly enhancing its footprint in the critical and growing water management sector. This diversification should open new revenue streams and align with evolving industry needs. Earlier, in October 2023, WES Operating acquired Meritage Midstream Services II, LLC for $885 million in cash, bolstering natural gas gathering and processing capabilities in the DJ Basin, a core operating area.
• Stable Customer Base: The company maintained approximately 100 customers in both 2024 and 2025, indicating strong, ongoing relationships and a diversified customer portfolio beyond its primary affiliate.

Challenges and Management Focus Areas:

• Debt Management: Management's significant focus is the upcoming $1.0 billion debt maturity in 2025. The company actively evaluates options for refinancing or repayment to maintain financial flexibility and optimize its capital structure.
• Commodity Price Volatility: While a substantial portion of revenue is fee-based, sustained low commodity prices can indirectly impact throughput volumes and growth opportunities by reducing producer activity. Management continuously monitors commodity markets and their potential effects on customer drilling and completion plans.
• Regulatory Scrutiny: The midstream industry faces increasing environmental regulations and permitting complexities. These factors can impact project timelines, increase compliance costs, and necessitate ongoing investment in operational improvements to meet evolving standards. Management commits to proactive engagement with regulatory bodies and adherence to all applicable laws.

4. Financial Health & Liquidity

WES Operating maintains a substantial debt load, which remained stable at $7.0 billion in both 2025 and 2024.

• Cash Position: As of December 31, 2025, the company held $650 million in cash and cash equivalents.
• Liquidity: Beyond its cash, WES Operating has access to a $2.0 billion revolving credit facility, with approximately $1.5 billion available as of year-end 2025. This provides ample liquidity for operational needs and strategic initiatives.
• Debt Ratios: The company's Net Debt to Adjusted EBITDA ratio stood at approximately 2.7x at year-end 2025. This ratio is well within the comfort range for a midstream company, indicating a manageable debt level relative to its earnings power.
• Upcoming Debt Maturities:
  • $1.0 billion in Senior Notes are due in 2025.
  • Another $1.0 billion in Senior Notes are due in 2029.
  • $1.0 billion in Senior Notes are due in 2030. Managing the 2025 maturity will be a key focus, likely through a combination of cash, credit facility draws, or refinancing.

5. Risk Factors

Investors should carefully consider the following key risks:

• Debt Refinancing Risk: The $1.0 billion in senior notes due in 2025 poses a refinancing risk. Depending on market conditions, new debt could carry higher interest rates, increasing interest expenses and impacting profitability and cash flow.
• Reliance on Affiliates: While affiliated entities, primarily Occidental Petroleum, provide stability and significant revenue (42%), WES Operating's performance remains closely tied to OXY's operational health and capital allocation decisions. Any reduction in OXY's activity or changes in its strategic focus could impact WES Operating's volumes and revenue.
• Commodity Price Exposure: Although revenue is largely fee-based, sustained low commodity prices can lead to reduced drilling and production activity by producers, which could negatively impact WES Operating's throughput volumes and growth prospects.
• Regulatory and Environmental Risks: Evolving environmental regulations, pipeline safety standards, and permitting complexities could increase operating costs, delay projects, or restrict operations. The growing water management segment also introduces new environmental compliance complexities and potential liabilities.
• Operational Risks: Operating extensive energy infrastructure carries inherent risks, including accidents, equipment failures, natural disasters, and cybersecurity threats. These could lead to service interruptions, environmental damage, and significant financial liabilities.
• Interest Rate Risk: Rising interest rates could increase the cost of variable-rate debt and future refinancings, impacting net income and cash flow.

6. Competitive Position

WES Operating stands as a major player in the midstream sector, particularly in its core operating regions like the Delaware Basin, DJ Basin, and Gulf of Mexico. Its competitive advantages include:

• Scale and Integration: Its vast, integrated network of pipelines and processing facilities provides economies of scale and efficient service delivery across its operating footprint.
• Strategic Geographic Focus: Operations are concentrated in prolific basins with strong production activity, ensuring a steady supply of volumes and opportunities for organic growth.
• Fee-Based Contracts: A high percentage of fee-based, long-term contracts provides revenue stability and predictability. This differentiates WES Operating from more commodity-exposed peers and mitigates direct commodity price risk.
• Diversified Service Offering: Its expansion into produced water management broadens its service portfolio, catering to evolving industry needs and reducing reliance solely on traditional hydrocarbon transportation.
• Affiliate Support: Its strategic relationship with Occidental Petroleum provides a stable base of volumes and strategic alignment, offering a competitive edge in securing long-term contracts.

Key competitors include other large midstream operators such as Enterprise Products Partners, Energy Transfer, and Kinder Morgan, each with their own regional strengths and asset portfolios. The dynamic competitive landscape sees companies vie for business based on service reliability, cost-effectiveness, and access to key production and demand centers.

7. Future Outlook

WES Operating's strategy clearly focuses on disciplined growth, asset optimization, and diversification.

• Expansion & Diversification: The acquisitions of Meritage Midstream in 2023 and Aris Water Solutions' assets in 2025 highlight a strategic pivot. WES Operating aims to expand its asset base and service offerings, particularly in the high-growth water management sector, to capture more market share and adapt to the evolving energy landscape.
• Capital Allocation: Management commits to maintaining a strong balance sheet, prioritizing debt reduction, and funding attractive organic growth projects that enhance long-term value.
• Operational Efficiency: Ongoing efforts to optimize existing assets, reduce operating costs, and leverage technological advancements are central to enhancing profitability and cash flow.
• Guidance for 2026: Management anticipates continued volume growth in its core basins, projecting Adjusted EBITDA in the range of $2.45 billion to $2.60 billion and capital expenditures (including maintenance) of approximately $600 million to $700 million. WES Operating expects to comfortably cover its 2025 debt maturity through available liquidity and potential refinancing.

8. Industry Trends & Regulatory Environment

WES Operating operates within a dynamic energy landscape, influenced by several key trends:

• Energy Transition & ESG: An increasing focus on environmental, social, and governance (ESG) factors drives demand for cleaner energy solutions and more sustainable operational practices. WES Operating's expansion into water management directly addresses environmental concerns related to energy production, positioning it favorably in this evolving landscape.
• Regulatory Scrutiny: The industry faces ongoing and potentially stricter regulations regarding emissions, pipeline safety, and environmental protection. Compliance costs and permitting challenges remain significant, requiring continuous monitoring and adaptation.
• Technological Advancements: Innovations in drilling and production technologies continue to unlock new resource plays, driving demand for midstream infrastructure and requiring WES Operating to adapt its services and capabilities.
• Geopolitical Factors: Global energy demand, supply dynamics, and geopolitical events can influence commodity prices and, indirectly, producer activity in WES Operating's operating regions, impacting throughput volumes and investment decisions.

WES Operating's strategic moves, particularly in water management, position it to adapt to these trends, capitalize on new opportunities, and navigate potential challenges.