Western Midstream Partners, LP (NYSE:WES) Q1 2023 Earnings Call Transcript May 4, 2023
Operator: Good afternoon. My name is Emma and I will be your conference operator today. At this time, I would like to welcome everyone to the Western Midstream Partners’ First Quarter 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. I would now like to turn the conference over to Daniel Jenkins, Director of Investor Relations. Please, go ahead.
Daniel Jenkins: Thank you. I’m glad you could join us today for Western Midstream’s first quarter 2023 conference call. I would like to remind you that today’s call, the accompanying slide deck and last night’s earnings release contain important disclosures regarding forward-looking statements and non-GAAP reconciliations. Please reference Western Midstream’s most recent Form 10-Q and other public filings for a description of risk factors that could cause actual results to differ materially from what we discuss today. Relevant reference materials are posted on our website. With me today are Michael Ure, our Chief Executive Officer; and Kristen Shults, our Chief Financial Officer. I’ll now turn the call over to Michael.
Michael Ure: Thank you, Daniel, and good afternoon, everyone. During the first quarter, we continued to experience strong producer activity levels in the Delaware Basin, resulting in higher throughput across all three product lines, including record-breaking natural gas and produced water throughput. Despite continued throughput growth in the Delaware Basin, our first quarter adjusted EBITDA declined sequentially, primarily due to decreased distributions from Cactus II which was sold in the fourth quarter of 2022, reduced margin from our South Texas assets due to a contractual step down in demand fees, which we previously communicated on last quarter’s call and reduced natural gas throughput and margin from our assets in Utah and Wyoming, mostly due to weather.
Although, adjusted EBITDA declined sequentially, we expect quarterly profitability to gradually improve as throughput increases for the remainder of the year. Kristen will go into more detail regarding our first quarter performance and our second quarter expectations shortly. Operationally, I’m very pleased to highlight that our commercial team continues to generate substantial value for WES. Subsequent to quarter end, we executed long-term amendments to Occidental’s natural gas gathering and processing agreement in the Delaware Basin, increasing their firm capacity on our system and extending the gathering agreement by three years to 2035. Over the past year, we’ve executed multiple amendments to Occidental’s natural gas processing and gathering agreements in the Delaware Basin, increasing their firm processing capacity by up to 800 million cubic feet per day.
Moving to the balance sheet. In March, we obtained investment-grade status. And subsequent to quarter end, we issued $750 million of senior notes to refinance existing revolver borrowings and to enhance our liquidity position. This was our first debt issuance since early 2020 and I’m very pleased, it was well received by the market. In addition, we executed an amendment with our bank group that extends the maturity of our credit facility to 2028 and solidifies $2 billion of commitments. These capital market transactions have fortified our liquidity position, improved our debt maturity profile and enable us to be opportunistic regarding future capital allocation decisions, which is a real strength when considering today’s volatile and uncertain market conditions.
Finally, the Board approved the payment of $140 million or approximately $0.36 per unit in an enhanced distribution that will be paid in conjunction with our first quarter base distribution of $0.50 per unit for a total of approximately $0.86 per unit. We view our capital allocation strategy and especially our ability to pay an enhanced distribution as a way to build long-term value for our unitholders and to further differentiate WES relative to our peers. With that, I will turn it over to Kristen to discuss our operational and financial performance.
Kristen Shults: Thank you, Michael, and good afternoon, everyone. Our first quarter natural gas throughput decreased by 3% on a sequential quarter basis. This was primarily due to lower throughput from our other assets, specifically in Utah and Wyoming, mostly due to record snowfall in the Rockies throughout the first quarter. We also experienced lower throughput from our natural gas equity investments during the quarter. Our crude oil and NGLs throughput decreased by 6% on a sequential quarter basis. This was primarily due to the divestiture of Cactus II in 2022 and expected declines in the DJ Basin. Excluding the Cactus II sale, our crude oil and NGL throughput would have decreased by 2% sequentially. Produced water throughput increased by 12% on a sequential quarter basis, primarily due to continued strong producer activity levels and new customer connections in the Delaware Basin.
Our per Mcf adjusted gross margin for our natural gas assets increased by $0.03 compared to the prior quarter. This was primarily driven by higher throughput in the Delaware Basin, which has a higher-than-average per Mcf margin as compared to our other natural gas assets. This increase was partially offset by an annual cost of service rate adjustment that increased revenue in the fourth quarter of 2022 from our assets in South Texas. Excluding the impact of the cost of service rate adjustment in the fourth quarter, our per Mcf adjusted gross margin would have increased by approximately $0.08. We expect our second quarter natural gas per Mcf adjusted gross margin to decrease slightly as we more fully utilize offloads to service increasing throughput in the Delaware Basin.
Our per barrel adjusted gross margin for our crude oil and NGL assets increased by $0.12 compared to the prior quarter, primarily due to an annual cost of service rate adjustment that decreased revenue in the fourth quarter of 2022 at the DJ Basin oil system. The $0.12 increase was partially offset by a decrease in distributions from Cactus II that was sold in the fourth quarter of 2022. Excluding the cost of service rate adjustment in the fourth quarter, our per barrel adjusted gross margin would have decreased by $0.20. We expect our per barrel adjusted gross margin in the second quarter to increase modestly due to demand fee revenues in the DJ Basin and throughput growth in the Delaware Basin. Our per barrel adjusted gross margin for our produced water assets decreased by $0.11 compared to the prior quarter, primarily due to the cost of service rate redetermination that became effective on January 1, 2023 and lower deficiency fee revenues.
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We expect our per barrel adjusted gross margin to increase slightly in the second quarter mostly due to improving contract mix associated with increased throughput. During the first quarter, we generated net income attributable to limited partners of $199 million and adjusted EBITDA of $499 million. Relative to the fourth quarter, our adjusted gross margin decreased by $20 million, primarily due to a decrease in distributions from Cactus II, which was sold in the fourth quarter of 2022, a decrease in distributions from our remaining equity investment portfolio and throughput reductions that affected our assets in Utah and Wyoming mostly due to weather. In addition, we experienced reduced margin from our assets in South Texas due to a contractual step down in demand fees in line with what we communicated last quarter.
These decreases were partially offset by increased margin contribution from our Delaware Basin assets. As expected, we experienced a sequential quarter increase in our O&M expense as higher personnel and maintenance expenses were partially offset by lower utility expense. Consistent with prior years, we expect our O&M expense to trend higher in the second and third quarters in line with seasonal factors driven by increased utility and maintenance expenses, which are typically during the summer months. During the first quarter property and other taxes decreased substantially, due to a reduction in ad valorem property tax accrual related to the finalization of 2022 assessments at the DJ Basin complex. Because of the impact of the accrual reduction in the first quarter, we expect our go-forward quarterly property and other tax expense to be more in line with our fourth quarter 2022 results.
Turning to cash flow. Our first quarter cash flow from operations totaled $302 million generating free cash flow of $142 million. Free cash flow after fourth quarter distribution payment in February totaled negative $55 million. From a balance sheet perspective, in early April, we closed on $750 million of 10-year fixed rate senior notes. We used the proceeds to refinance borrowings under our credit facility and for general partnership purposes. Our first debt issuance since retaining investment-grade status was heavily oversubscribed and puts us in a strong position to refinance future maturities as needed. Additionally, we executed an amendment to our $2 billion unsecured credit facility which extends the maturity date to April of 2028. These capital markets transactions provide financial flexibility, which will help us better execute our capital return and allocation strategy regardless of the prevailing market conditions.
At this time, we’re not making any changes to our previously announced financial guidance ranges from our fourth quarter 2022 earnings call. With that said, we continue to see strong forecast out of our Delaware Basin customers and future volume growth may require us to increase our associated processing capacity. We continue to assess the future processing needs at our West Texas complex and we will update the market in due time of any changes that could accelerate the need for additional capital spending and potentially affect our previously disclosed financial guidance ranges. We currently expect, however that we will maintain our annual base distribution guidance of at least $2 per unit in 2023. Focusing on basin-specific activity in the Delaware, we still expect average year-over-year throughput to increase across all three products.
We are reducing the number of wells expected to come online to approximately 320 wells mostly driven by updates and producers rig schedules and associated completion timing. We forecast that the associated throughput changes will be offset by improvements in producer’s drilling efficiencies and type curves. In the DJ Basin, we still expect annual throughput declines for both natural gas and crude oil and NGLs. The natural gas throughput decline will be a similar percentage to last year as steady on load activity and increased producer activity levels will be offset by base declines. For crude oil and NGLs, we expect the decline of volumes to cease later this year as additional wells come online. These projected changes in natural gas and crude oil and NGL throughput in the DJ Basin are expected to have a minimal impact on our adjusted EBITDA due to demand and deficiency fee revenues we collect associated with minimum volume commitments.
Focusing on our other asset portfolio specifically our assets in Utah and Wyoming, we experienced record snowfall throughout the first quarter that negatively impacted throughput. Even though the associated adjusted EBITDA impacts are minimal, we expect some lingering logistic difficulties that could result in select throughput curtailments in the second quarter. With that, I will now turn the call back over to Michael.
Michael Ure: Thank you, Kristen. Before we open it up for Q&A, I would like to take a few minutes to discuss valuation and reiterate why we believe WES and its unitholders continue to be extremely well positioned. Overall, WES screens very well relative to comparable sectors of the S&P 500. When considering the data, WES generates the highest free cash flow yield yet trades at the lowest valuation. When you take into account the stable, long-term contract structures, the fee-based nature of the business, continued growth associated with strong producer activity levels and the tremendous amount of free cash flow generation, WES has a differentiated investment profile relative to comparable sectors of the S&P 500. We continue to be a market leader in generating a superior total capital return yield when taking into account distribution increases, unit buybacks and debt reduction.
We have done this while being one of the leaders in generating strong returns on capital employed. As we look to the future WES is very well-insulated from market and commodity price volatility with almost all of our throughput service under fee-based contracts, supported by either minimum volume or cost of service commitments. WES is also on very strong financial footing given our strong liquidity position, investment-grade balance sheet and minimal dependency on the capital markets given our favorable maturity profile and robust free cash flow expectations. We will continue to focus on all three pillars of our balanced capital allocation strategy to advance our reputation as the leader in generating substantial value for stakeholders in terms of total capital return.
As I often do, I would like to close the call by thanking the entire WES workforce for living our values and for all of their hard work and dedication to our business objectives. Our first quarter performance provides a solid start to the year and our teams have already achieved an impressive list of accomplishments through the first three months of 2023. I look forward to updating you on additional progress throughout the year. With that, we’ll open the line for questions.
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