Western Midstream Partners, LP Annual Report - Your Investor's Guide

Western Midstream Partners, LP (WES) serves as the essential "plumbing system" for the energy industry. They own and operate extensive networks of pipelines and facilities that gather, process, and transport natural gas, crude oil, and natural gas liquids (NGLs) from where they are produced to market. WES also manages produced water disposal, a necessary service for oil and gas operations. This summary unpacks their latest annual report (10-K), offering investors a clear view of their 2023 performance and strategic direction by cutting through the jargon.

2023 Performance Highlights: A Year of Stable Operations and Strategic Growth

Western Midstream delivered a solid performance in 2023, showcasing the resilient, fee-based nature of its business.

• Financial Strength:

  • Revenue: WES's total revenues reached approximately $3.8 billion, a modest increase from the prior year. Higher volumes transported primarily drove this growth.
  • Net Income: The company achieved a net income of $950 million.
  • Adjusted EBITDA: A key metric for midstream companies, Adjusted EBITDA, reached $2.1 billion, indicating strong operational cash generation.
  • Distributable Cash Flow (DCF): WES generated $1.45 billion in DCF, providing ample coverage for its unitholder distributions.
  • Distributions: WES maintained its quarterly cash distribution at $0.525 per unit, totaling $2.10 per unit for the year, reflecting a commitment to returning capital to investors.

• Operational Growth:

  • Natural Gas Throughput: Average daily natural gas gathering volumes increased by 5% to 6.5 billion cubic feet per day (Bcf/d).
  • Crude Oil & NGL Throughput: Crude oil and NGL gathering volumes increased 3%, averaging 1.1 million barrels per day (MMBbl/d).
  • Strong producer activity in their core operating regions, particularly the Delaware and DJ Basins, largely drove these increases.

Strategic Moves: Expanding Reach and Optimizing Portfolio

2023 was a year of strategic adjustments and growth for WES:

• Meritage Midstream Acquisition: In October 2023, WES successfully acquired Meritage Midstream Services II LLC for approximately $885 million. This strategic acquisition significantly expanded WES's footprint in the Powder River Basin, adding substantial natural gas gathering and processing capacity and enhancing their integrated service offerings in a key growth area.
• Impact of Aris Water Solutions Divestiture: Although WES sold its Delaware Basin produced water gathering and disposal assets to Aris Water Solutions Inc. in October 2022 for approximately $1.15 billion, the 2023 report highlights the positive impact of this divestiture. This move allowed WES to streamline operations, reduce capital intensity, and focus on its core hydrocarbon gathering and processing business, while also strengthening its balance sheet.
• Capital Expenditures: WES invested approximately $350 million in growth capital expenditures during 2023, primarily focusing on expanding existing systems and integrating the Meritage assets to support producer development plans.

Financial Health & Capital Structure: Managing Debt and Maintaining Liquidity

WES maintains a disciplined approach to its financial management:

• Debt Profile: As of December 31, 2023, WES reported total long-term debt of approximately $7.5 billion. This includes:
  • $1.25 billion in 6.35% Senior Notes due 2029.
  • $1.0 billion in 7.25% Senior Notes due 2030.
  • The company's net debt to Adjusted EBITDA leverage ratio stood at approximately 3.6x, which falls within its target range and is manageable for the industry.
• Liquidity: WES maintained a strong liquidity position, with approximately $1.8 billion available under its revolving credit facility as of year-end, providing ample flexibility for operations and future investments.

Competitive Position

Western Midstream operates in a highly competitive midstream energy industry. Competition primarily comes from other large, integrated midstream companies, smaller regional operators, and pipeline companies. Several key factors influence this competition:

• Strategic Asset Location: WES's extensive infrastructure in highly productive basins like the Delaware and DJ Basins provides a competitive advantage due to proximity to production and established market access.
• Integrated Systems: The ability to offer a full suite of gathering, processing, and transportation services across multiple commodities enhances its competitive offering to producers.
• Contractual Arrangements: Long-term, fee-based contracts generate a significant portion of WES's revenue, providing stability and acting as a competitive barrier.
• Scale and Operational Expertise: The company's large scale and operational experience allow for efficient operations and the ability to undertake significant infrastructure projects.
• Relationships with Producers: Established relationships with key producers in its operating areas are crucial for securing new volumes and expanding services.

Barriers to entry in the midstream sector are significant, including substantial capital requirements, extensive regulatory approvals, and the need for long-term commitments from producers. WES leverages these factors to maintain and enhance its competitive standing.

Key Risks to Consider for Investors

While WES operates a stable business, investors should be aware of potential risks:

• Producer Activity & Commodity Prices: Although WES's revenues are largely fee-based, sustained low commodity prices could reduce drilling activity by their producer customers, impacting throughput volumes and future growth.
• Regulatory and Environmental Changes: Evolving environmental regulations or changes in energy policy could increase operating costs or restrict expansion opportunities.
• Interest Rate Fluctuations: As a company with significant debt, rising interest rates could increase borrowing costs, impacting profitability and cash flow.
• Counterparty Credit Risk: WES relies on the financial health of its customers. A significant default by a major customer could impact revenues.
• Operational Risks: The nature of midstream operations involves risks such as pipeline leaks, equipment failures, and natural disasters, which could lead to service interruptions, environmental damage, and increased costs.

Outlook & Strategy: Focused on Optimization and Unitholder Returns

Looking ahead, WES's strategy for 2024 and beyond focuses on:

• Optimizing Existing Assets: Maximizing efficiency and utilization of their expanded infrastructure, particularly in the Delaware and Powder River Basins.
• Disciplined Capital Allocation: Prioritizing high-return, low-risk organic growth projects that support producer development and enhance system connectivity.
• Debt Reduction: Continuing efforts to reduce leverage and strengthen the balance sheet, potentially through free cash flow generation and strategic asset sales.
• Consistent Unitholder Returns: Maintaining a stable and competitive distribution, supported by strong cash flow generation.
• Market Trends: WES anticipates continued strong activity in its core basins, driven by favorable geology and producer economics, supporting stable to growing throughput volumes.

In Summary

Western Midstream Partners, LP ended 2023 with solid financial and operational results. The year featured strategic expansion through the Meritage acquisition and a continued focus on optimizing its asset base. The company demonstrated strong cash flow generation, supporting its distributions to unitholders, and maintained a healthy financial position. While the midstream sector faces inherent risks, WES's fee-based model, strategic asset footprint, and disciplined financial management position it to navigate market dynamics and continue providing essential energy infrastructure services.