Yahoo Finance Western Midstream Partners, LP (NYSE:WES) Q4 2023 Earnings Call Transcript
Western Midstream Partners, LP (NYSE:WES) Q4 2023 Earnings Call Transcript February 22, 2024
Western Midstream Partners, LP isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good afternoon. My name is Shiloh [ph] and I'll be your conference operator today. At this time, I would like to welcome everyone to the Western Midstream Partners Fourth Quarter and Full Year 2023 Earnings Conference 2023 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remark, there will be a question-and-answer session. [Operator Instructions] 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 fourth quarter 2023 conference call. I'd 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-K 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. Additionally, I'm pleased to inform you that the Western Midstream Partners K1 will be available via our website beginning March 8. Hard copies will be mailed out the following week. With me today are Michael Ure, our Chief Executive Officer and Kristen Shults, our Chief Financial Officer. I will now turn the call over to Michael.
Michael Ure: Thank you, Daniel, and good afternoon, everyone. Before we discuss our fourth quarter and full year 2023 operational and financial results, I'm excited to announce that we recently executed a series of agreements to divest of WES's remaining interest in several non-core, non-operated assets for $790 million. This includes WES's interest in the Whitethorn, Panola and Saddlehorn Pipelines, the Mont Belvieu joint venture and the Marcellus gathering system in Pennsylvania. The proceeds from these transactions, which in the aggregate represent an attractive accretive multiple of approximately 9.6x our 2023 adjusted EBITDA will provide liquidity to further strengthen our balance sheet and accelerate the return of capital to our unitholders in 2024.
For the past few years, we have successfully executed our strategy of divesting legacy non-core assets and reallocating capital into our core asset base with the goal of generating incremental business and accelerating capital return to our unitholders. Furthermore by coupling divestiture with strategic M&A such as Meritage Midstream acquisition we've been able to cost effect grow and further diversify our operated asset footprint. Additionally as a result of WES meaningful net leverage reduction reduced unit count and significant sustainable free cash flow generation, management plans to recommend a base distribution increase of 52% starting in the first quarter of 2024, which equates to $0.875 per unit on a quarterly basis and $3.50 per unit on an annualized basis.
Management's confidence in the sustainability of our free cash flow generation underpins our recommendation to increase the base distribution rather than pay a material enhanced distribution in future years. While the enhanced distribution is a critical component of our capital allocation framework, we believe aligning the base distribution with the expected baseline cash generation of the business generates maximum unitholder value and allows the enhanced distribution to provide for incremental returns to unitholders when the business outperforms. Since becoming a standalone enterprise in 2020, we have also focused on growing our third-party business, maximizing our partnership with Occidental and operating our existing assets efficiently and safely.
As of year-end 2023, we have grown our adjusted gross margin 22% relative to year-end 2019. Additionally, by focusing on capital efficient growth and capital discipline, we have been able to grow our free cash flow from $37 million at year end 2019 to an expected $1.15 billion at the midpoint based on our 2024 free cash flow guidance. Furthermore, throughout this period, we have continued to return more value to stakeholders through our diversified, transparent capital return framework. Since January 2020, we have repurchased 15% of our unaffected unit count outstanding, inclusive of the anticipated quarterly $0.30 per unit increase. This will have resulted in an expected $500 million cumulative reduction in total distribution burden through year-end 2024.
The reduction in unit count at the $3.50 per unit-annualized amount also equates to roughly $230 million of reduced distributions that can be reallocated to existing unitholders starting in 2025, thus equating to such a significant per unit distribution growth rate. Additionally, we also allocated meaningful cash flow to retiring and repurchasing debt, which materially reduced leverage from WES's 2019 high watermark of 4.6x to an expected 3.0x by year-end 2024. All of these actions have put our partnership at a position of strength, which has ultimately resulted in our ability to accelerate the return of capital to our unitholders and target an increased to our quarterly based destruction of 41% relative to our pre-pandemic quarterly distribution level.
Even with an increase of this magnitude, we believe we will still have room to target additional base distribution increases in future years as the business performs and free cash flow generation continues to grow. Turning to our 2023 results. 2023 was a successful and pivotal year for WES as we achieved another year of record throughput growth across all three products. Further diversified our asset and customer base through commercial successes and accretive M&A, and returned $1.1 billion to unitholders through our capital return framework. Our ability to continue capturing throughput growth from our core basins, while maintaining cost and capital discipline has positioned WES on solid financial and operational footing as we enter 2024. This is reflected in our strong 2024 guidance that we announced in yesterday's press release, which anticipates continued throughput growth in 2024 and into 2025 and includes the capital investment necessary to complete the construction of Mentone III and the majority of the North Loving plant.
Our guidance also includes the impact of our announced non-core asset divestitures from yesterday. Before we discuss our fourth quarter results in more detail, I would like to highlight several accomplishments in 2023 that helped position WES for growth and success in 2024 and beyond. Focusing on the Delaware Basin, this was an extremely successful year for WES as throughput increased across all three products, resulting in record throughput from the basin. We also experienced tremendous commercial success and further diversified our customer base by adding 12 new third-party customers across both our natural gas and produce water businesses. Since late 2021, we've executed multiple long-term agreements with Occidental and other third-party customers that provide up to 950 million cubic feet per day of firm processing commitments, and our commercial team has materially increased third-party volumes on our system.
These commercial successes were the primary drivers behind the sanctioning of both Mentone III and the North Loving plant, which will increase our total processing capacity in the basin by 34% and maintain WES's position as one of the top 5 natural gas processors in the Delaware Basin. These accomplishments have also helped WES grow its third-party natural gas throughput at more than double the rate of the basin since early 2021. In the DJ Basin, throughput declines subsided in the second half of 2023, and we experienced sequential quarter crude oil and NGLs throughput growth starting in the third quarter for the first time since late 2021. In the Powder River Basin, we closed the Meritage acquisition early in the fourth quarter, which is the second largest unaffiliated corporate level M&A transaction in WES's history and our first significant acquisition since becoming a standalone partnership in 2020.
Our M&A strategy remains focused on accretive deals that optimize the value of our existing asset base and enable us to leverage our operational expertise to generate incremental value for our unitholders. Since closing the Meritage transaction and working to integrate it into our business, we have been pleased with its performance relative to our baseline expectations and we have identified another $6 million of operational cost savings that we believe are achievable by the end of 2024. Furthermore, we have identified at least $6 million of incremental cost savings that can be realized from certain field level efficiencies. With that said we are off to a strong start and plan to make substantial progress capturing expected cost savings and implementing operational efficiencies throughout 2024.
As we discussed on prior earnings calls, we strive to maintain a strong balance sheet and investment grade credit rating with the goal of ultimately driving leverage down towards our long-term leverage threshold in order to accelerate additional capital return to our unitholders. In 2023, WES bought back $135 million of common units as well as increased our base distribution twice during the year to $2.30 per unit on an annualized based, representing a 15% year-over-year increase. Additionally in May of 2023, we paid our first enhanced distribution of $35.06 per unit or a $140 million based on our 2022 financial performance. In total, we paid $978 million to unitholders in 2023 in the form of distributions, an increase of 33% compared to distributions paid in 2022.
Inclusive of yesterday's announced asset divestitures and our expected 2024 guidance ranges, we expect to reduce net leverage to approximately 3x by year-end 2024. Coupled with free cash flow growth and the reduction in our overall unit count, these divestitures allow us to accelerate the return of capital to unitholders through the anticipated distribution increase of 52%. With that, I will turn the call over to Kristen to discuss our operational and financial performance.
Kristen Shults : Thank you, Michael, and good afternoon, everyone. Our fourth quarter natural gas throughput increased by 9% on a sequential quarter basis. This was almost entirely due to increased throughput in the Powder River Basin resulting from the Meritage acquisition that closed in early October. Our crude oil and NGLs throughput increased by 5% on a sequential quarter basis, also due to increased throughput in the Powder River Basin from the Meritage acquisition and increased throughput from the DJ Basin. We also experienced slightly higher throughput from the Delaware Basin quarter-over-quarter. Produced water throughput decreased by 2% on a sequential quarter basis due to temporary volume curtailments associated with activities to support adjacent producer development.
Our fourth quarter currency adjusted growth margin for natural gas assets increased by $0.03 compared to the prior quarter. This increase was primarily driven by increased throughput from operated assets, including Delaware, DJ and the Powder River Basin, increased distributions from our equity investments and the favorable revenue recognition cumulative adjustment recorded in the fourth quarter associated with the higher cost of service rate pertaining to our South Texas assets. We expect our first quarter per NCF adjusted gross margin to be flat with the fourth quarter primarily due to higher go forward rate associated with the cost of service rate redetermination that are offset by the loss of volume from the recently divested Marcellus gathering system in Pennsylvania.
Our fourth quarter per barrel adjusted gross margin for our crude oil and NGL assets increased by $0.16 compared to the prior quarter, primarily due to a favorable recognition cumulative adjustment recorded in the fourth quarter associated with the higher cost of service rate at our DJ Basin and South Texas oil system. We expect our first quarter per barrel adjusted gross margin to increase by approximately 5% relative to the fourth quarter, mostly due to the loss of volumes associated with the sale of the Whitethorn pipeline and the Mont Belvieu JV, both of which closed last week. Additionally, we expect our per barrel adjusted gross margin to increase another 15% in the second quarter once the Saddlehorn and Panola Pipeline asset sales close.
Our fourth quarter per barrel adjusted gross margin for our produced water assets increased by $0.02 compared to the prior quarter, mostly due to contract mix and increased efficiency fee revenue. We expect our first quarter per barrel adjusted gross margin to increase modestly relative to the fourth quarter, mostly due to the cost of service rate redetermination that became effective on January 1. During the fourth quarter, we generated net income attributable to limited partners of $282 million and adjusted EBITDA of $571 million. Relative to the third quarter, our adjusted gross margin increased by $77 million. This increase was mostly driven by the gross margin contribution from the Meritage acquisition and the recording of $20 million of favorable revenue recognition cumulative adjustments associated with redetermined cost of service rates on certain contracts associated with our assets in South Texas and our DJ Basin oil system.
Turning to expenses, inclusive of 2.5 months of Meritage activity, our operations and maintenance expense decreased slightly quarter-over-quarter, mostly due to lower utilities expense. As we look to the future, we expect our 2024 operation and maintenance expense to trend modestly higher than 2023 as a result of increased throughput and our expanded asset base. As a reminder, we expect seasonality associated with our utility expense in the summer months due to higher overall electricity pricing and greater energy usage in conjunction with increased throughput. Turning to cash flow, our fourth quarter cash flow from operating activities totaled $473 million, generating free cash flow of $282 million. Free cash flow after our November distribution payment was $59 million.
Our fourth quarter 2023 cash based distribution of $0.575 per unit was unchanged relative to the prior quarter's distribution and was paid on February 13 to unitholders as of February 1. Turning to our full year results, average throughput across all three products increased year-over-year excluding the sale of Cactus II, which impacted our crude oil and NGL's volumes in 2022. For full year 2023, natural gas throughput averaged 4.4 billion cubic feet per day, representing a 5% year-over-year increase. Full year 2023 crude oil and NGL throughput averaged 652,000 barrels per day, a 7% year-over-year increase. This is an average of approximately 65,000 barrels per day of throughput in 2022 associated with the sale of Cactus II and includes approximately 5,000 barrels per day of throughput associated with the Meritage assets in the fourth quarter of 2023.
Full year 2023 produced water throughput averaged just over 1 million barrels per day, an increase of 21% compared to full year 2022. For our full year financial performance, we recorded just under $1 billion of net income attributable to limited partners generating $2.07 billion of adjusted EBITDA, slightly exceeding the top end of our revised 2023 adjusted EBITDA guidance range of $2.05 billion. Adjusted EBITDA performance was primarily driven by increased throughput from all three products in the Delaware Basin and the addition of 2.5 months of throughput and the associated financial contribution from Meritage during the fourth quarter. This growth position WES to deliver another year of strong operating cash flow, which totaled approximately $1.7 billion for 2023.
Our capital expenditures totaled $739 million in 2023 and consisted of predominantly expansion consisted of predominantly expansion capital, largely associated with the construction of Mentone III to support the growing needs of our customers. Our capital spend was toward the low end of our revised 2023 guidance range, resulting largely from several expansion projects shifting into early 2024. Our free cash flow generation totaled $964 million in 2023, within our revised guidance range. Our performance highlights the profitable nature of our asset base and our disciplined approach towards managing both operational cost and capital spending. Finally, WES declared base distributions that totaled $2.21 for 2023, including our recent fourth quarter base distribution of $0.575 per unit.
This amount exceeded our full year 2023 base distribution guidance of $2.1875 per unit. Additionally, we paid an enhanced destruction of $0.356 per unit in May of 2023. Turning our attention to 2024, we expect our portfolio-wise average year-over-year throughput to increase by low to mid-teens percentage for natural gas, upper single-digit percentage for crude oil and NGLs, and a low to mid-teens percentage for produced water. Our 2024 throughput guidance takes into account the non-core asset sales we announced yesterday and excludes those volumes from our 2023 reported results for year-over-year comparative purposes. In the Delaware Basin, we expect average year-over-year throughput to increase for natural gas and crude oil and NGLs at growth rates similar to or better than 2023.
We expect to see a slight decline in produced water volumes relative to 2023. This is mostly due to continued strong producer activity levels and a steady number of wells coming online throughout 2024. While the forecasted number of wells expected to come to market in 2024 is flat relative to 2023, producer driven efficiencies such as multi well pad drilling and longer laterals per well, are expected to result in higher throughput across our asset base. In the DJ Basin, we expect average year-over-year throughput to increase for both natural gas and crude oil NGLs. We expect the positive trends in the second half of 2023 to continue into 2024, namely strong producer activity levels and steady on loan activity that resulted in throughput increase in the second half of the year.
As a related forecasted, we expect to see consistent throughput growth in 2024 from approximately double the new well count in 2024 relative to 2023, in addition to steady onload activity. Keep in mind that increases in crude oil and NGL throughput in 2024 will have a minimal impact on our adjusted EBITDA in the near-term due to the current structure of demand fee revenue. Finally, we expect meaningful and steady throughput growth from the Powder River Basin 2024 for both natural gas and crude oil and NGL, primarily due to the full-year contribution from Meritage and steady throughput growth from customers in the basin. Turning to our 2024 financial guidance, we expect our adjusted EBITDA to range between $2.2 billion to $2.4 billion for the year, implying a midpoint of $2.3 billion, which represents growth of more than 11% year-over-year at the midpoint even after giving effect to the non-core asset sales announced yesterday.
Focusing on 2024, the overall distribution of adjusted EBITDA will change slightly compared to 2023, primarily due to the Meritage acquisition and our non-core asset sales announcement. However, we estimate that the Delaware Basin will remain our largest contributor at 51%, while the DJ and the Powder River Basin are expected to contribute 32% and 7% of our overall 2024 adjusted EBITDA, respectively. Sale of non-core assets and the acquisition of Meritage has allowed us to generate incremental adjusted EBITDA and expand our operated asset base while reducing leverage. We expect our 2024 capital expenditure guidance to range between $700 million and $850 million implying a midpoint of $775 million, which also includes the impact of yesterday's non-core asset sale announcement.
We expect 81% of our capital budget to be spent in the Delaware Basin. The majority of our capital spend will be expansion capital pertaining to the construction of the North Loving plant, the completion of Mentone III, and additional system expansion in our core operating basins due to continued commercial success from both new and existing customers. We still plan to enter the commissioning and start-up phase for Mentone III in the second half of March and expect to begin benefiting financially from Mentone early in the second quarter of 2024. We also expect to have higher overall well connect capital due to an increased number of total wells coming to market and higher overall maintenance capital mostly due to the needs of our produced water business and our expanded asset base.
Focusing on the Meritage transaction, since taking ownership of the assets, our team has better refined the Powder River Basin capital assumption and in combination of some of those operational efficiencies we're implementing. We were able to reduce our initial expansion capital assumptions in this basin for 2024. Taking both of our adjusted EBITDA and capital expenditure guidance ranges into account, we expect to generate free cash flow between $1.05 billion and $1.25 billion in 2024, implying a midpoint of $1.15 billion, which includes the impact of yesterday's non-core asset sale announcement and represents growth of 19% year-over-year at the midpoint. Including our expected increase, we are guiding to a full year based distribution of at least $3.20 per unit.
As Michael mentioned, $0.875 per quarter is 41% higher than WES's 2019 pre-COVID quarterly distribution level. We will continue to evaluate the base distribution on a quarterly basis and we believe, we will have room to target additional base distribution increases in future years based on the health and growth trajectory of our business. Any potential enhanced distribution payment in 2025 will be based on our full year 2024 financial performance governed by our year-end 2024 leverage threshold of 3x and subject to the board's discretion. Now I'll turn the call back over to Michael.
Michael Ure: Before we open it up for Q&A, I would like to reiterate our excitement regarding the partnership's current financial and operational position and our 2024 outlook. Significant effort has been invested by our people to put our partnership into the position of strength that we are in today. In early 2020, we had more than 450 million units outstanding, net leverage of approximately 4.6x, and we faced a monumental task in building the workforce, culture and back office infrastructure necessary to establish ourselves as a standalone entity. When the pandemic hit in 2020, WES was downgraded below investment grade and we immediately took significant steps to materially reduce leverage and improve the health of the balance sheet.
Since that time, we assembled a dedicated employee base focused on generating incremental business from existing customers and attracting new customers onto our system. We also adopted an entrepreneurial mentality and reexamined every aspect of our operations to identify incremental cost savings opportunities and to pursue efficiencies to improve our profitability. We've also implemented new technologies and processes to increased operational efficiencies, enhance employee development and safety and to minimize our environmental footprint. We were the first midstream MLP to pivot and focus on free cash flow as a financial performance indicator as opposed to the conventional MLP standard metrics of distributable cash flow and distribution coverage.
The shift of free cash flow generation has led to strong including repurchasing 15% of our unaffected unit count and reducing our expected year-end net leverage by more than 1.5 turns since the end of 2019, when taking into account the non-core asset divestitures and 2024 financial guidance we announced yesterday. We also regained our investment grade credit rating and our ability to meaningfully improve the balance sheet put us in a position to debt finance the Meritage Midstream acquisition and transformed our Powder River Basin footprint in the second half of 2023. Additionally, we've returned to growth mode, sanctioning Mentone III in 2022 and the North Loving plant in 2023, both of which were underwritten by long-term contracts backed by minimum volume commitments and further demonstrates our commitment to capital discipline.
These actions, coupled with the recent non-core asset divestitures, have ultimately resulted in our ability to accelerate the return of capital to our unitholders and position us to recommend a 52% increase relative to the base distribution. At $0.875 per unit quarterly, our target 2024 base distribution represents a 41% increase relative to our pre-pandemic distribution level, which should make WES one of the highest if not the highest yielding investment great from midstream entities when compare to other midstream companies in the Russell 3000 Index. In fact, WES has already been one of the leaders over the past several quarters even before our most recent 52% base distribution increase. Without a doubt, all of our efforts over the past few years have greatly improved WES's balance sheet and free cash flow generation and then provide a significant flexibility to be able to return more capital to unitholders.
Let's leave this pear group and total capital return to yield and has a higher yield than the S&P Energy Sector and the S&P 500 Index. We've also returned a higher percentage of our enterprise value back to unitholders than other midstream companies, and we continue to be top tier in return on total capital employed. Finally, we are excited about the trajectory of our business in 2024. The financial outlook for WES remains strong as we transition into 2024, which we expect will be driven by another year of throughput growth that generates an 11% increase in adjusted EBITDA and a 19% increase in free cash flow at the midpoint. I would like to close the call by thanking the entire WES workforce for all of their hard work and dedication throughout our company's history.
Our people's hard work and dedication to WES's foundational principles and core values enabled us to make landmark achievements for the organization and create sustainable value for our stakeholders. I look forward to updating you on our progress toward our 2024 goals on our first quarter call in May. With that, we will open the line for questions.
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