Western Midstream Partners, LP (NYSE:WES) Q1 2025 Earnings Call Transcript

Western Midstream Partners, LP (NYSE:WES) Q1 2025 Earnings Call Transcript May 8, 2025

Operator: Good Morning. My name is Ludy, and I will be your conference operator today. At this time, I would like to welcome everyone to the Western Midstream Partners First Quarter 2025 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. [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 am glad you could join us today for Western Midstream’s first quarter 2025 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-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.

Oscar Brown: Thank you, Daniel and good morning everyone. Yesterday we reported another successful quarter for WES marked by strong financial performance and continued high levels of customer service and system wide operability. I’m also pleased to announce that we completed the commissioning of the North Loving plant in the Delaware Basin in mid-February and it became operational later that month. This is our first major Greenfield construction project as a standalone partnership and I would like to thank the teams involved for bringing the plant to completion. This achievement increases our West Texas natural gas processing capacity by approximately 13% or 250 million cubic feet per day, benefiting west financially through our fixed fee processing agreements and reducing our need for offloads.

Thanks again to our employees and contractors for bringing the North Loving plant online safely, ahead of schedule and under budget. Before turning the call over to Danny and Kristen, I want to address the recent market volatility and reiterate WES strong position. Since early 2020, we have taken significant steps to strengthen our balance sheet, optimize our asset portfolio, reduce operational costs and generate substantial free cash flow. These actions have meaningfully reduced our leverage, enabled disciplined investment in organic growth projects supported by minimum volume commitments, and allowed us to return significant capital to unitholders. Today we have the strongest balance sheet in the partnership’s history, an investment grade credit rating, net leverage below three times, and approximately $2.4 billion of liquidity, giving us financial optionality and flexibility to navigate and potentially take advantage of volatile markets and commodity price cycles.

Our stable long-term contract structures, proactive customer engagement and strategic supply chain sourcing all contribute to our financial resilience. Our contracts, which include cost of service protections and or minimum volume commitments, provide more predictable cash flows even when commodity prices are volatile by maintaining close communication with our customers regarding their drilling and completion plans and we can quickly reduce capital spending if desired. Additionally, our potential direct tariff exposure for 2025 is minimal because we’ve already ordered all the pipe needed to construct the Pathfinder produced water pipeline from a domestic steel mill using mostly U.S. produced materials. Also regarding Pathfinder, I am pleased to share that we have had positive conversations with several customers and midstream providers regarding contracting pipe space prior to the estimated January 2027 in service date.

With that, I’ll turn the call over to our Chief Operating Officer, Danny Holderman to discuss our operational performance in the first quarter. Danny?

Danny Holderman: Thank you Oscar and good morning everyone. Our first quarter natural gas throughput decreased by 2% on a sequential quarter basis, primarily due to lower volumes from the DJ basin, which achieved a record in the prior quarter, and from the Powder River Basin. These declines were partially offset by volume growth from our other assets, specifically in South Texas and in Utah. Volumes from the Delaware Basin were slightly higher sequentially but a bit below expectations as a result of delays in wells coming online relative to our initial estimates coming into the year. Our crude oil and NGL throughput decreased by 6% on a sequential quarter basis due to reduced throughput from our equity investments and lower volumes from both the DJ and Delaware basins.

Our operated crude oil and NGL’s throughput decreased by 3% on a sequential quarter basis. Additionally, our produced water throughput decreased by 2% on a sequential quarter basis due to the timing of wells coming online in the Delaware Basin and slightly higher recycling activity in the quarter. Our first quarter per thousand cubic foot adjusted gross margin for our natural gas assets increased by $0.05 compared to the prior quarter. This increase was primarily driven by increased excess natural gas liquids volumes under our fixed recovery contracts at our West Texas complex in combination with higher overall natural gas liquids pricing. Going forward, we expect our second quarter per 1,000 cubic foot adjusted gross margin to be more in line with the fourth quarter, primarily due to lower forecasted excess natural gas liquids volumes and reduced NGL pricing experience so far in the second quarter.

Our first quarter per barrel adjusted gross margin for our crude oil and NGL assets increased by $0.17 compared to the prior quarter due to the timing of distribution payments associated with our equity investments. On an operated basis, our per barrel adjusted gross margin remained relatively flat. We expect our second quarter per barrel adjusted gross margin to be more in line with the fourth quarter due to more normalized distributions from our equity investments. Our first quarter per barrel adjusted gross margin for our produced water assets decreased by $0.02 and was in line with our expectations due to the new produced water amendment we executed with Oxy and the cost of service rate redetermination, both of which became effective on January 1st.

Going forward, we expect our second quarter per barrel adjusted gross margin to be in line with the first quarter. Turning our attention to the remainder of the year. At this time we still expect our portfolio wide average year-over-year throughput to increase by mid-single digits percentage growth for both natural gas and produced water and low single digits percentage growth for crude oil and NGLs. For year-over-year comparative purposes these expectations exclude the volumes associated with the non-core asset sales that closed in early 2020. In the Delaware Basin, we still expect average year-over-year throughput to increase modestly for all three product lines and for the basin to continue being the main engine of throughput growth in 2025.

As Oscar previously mentioned, we are staying in close contact with our customers due to the volatile market and recent commodity price weakness. Our Delaware Basin customers remain focused on capital discipline and operational efficiency as they continue to monitor the pricing environment before making any long-term operational changes. We plan to stay engaged with all of our customers and are prepared to adjust our plans as needed. In the DJ Basin, we still expect average year-over-year throughput to remain flat for natural gas and to be flat to slightly down for crude oil and NGL. In the Powder River Basin, even though our most active customers continue to evaluate the current environment, we still expect average year-over-year throughput for both natural gas and crude oil and NGLs to increase slightly.

We also still expect meaningful natural gas throughput growth from our other assets, specifically in the Uinta Basin, to commence early in the second half of 2025 driven by increased volumes from Williams Mountain west pipeline expansion and the tie in of Kinder Morgan’s Altamont pipeline to our Chipeta plant early in the third quarter. Finally, if any of our customers begin to alter their development plans, we can pivot and delay certain expansion capital projects. Any material changes to our capital expenditure plan would impact growth and development plans late in the second half of this year, which would most likely impact our initial throughput expectations for 2026 as opposed to materially impacting throughput in 2025. With that, I’ll turn the call over to Kristen to discuss our financial performance during the quarter.

Kristen Shults: Thank you, Danny and good morning everyone. During the first quarter, we generated net income attributable to limited partners of $302 million, an adjusted EBITDA of $594 million. Relative to the fourth quarter, our adjusted gross margin decreased by $8 million, which was primarily driven by decreased throughput and the recording of $9.2 million of favorable revenue recognition cumulative adjustments that we benefited from in the fourth quarter and that did not reoccur in the first quarter associated with redetermined cost of service rates on certain contracts associated with our assets in South Texas and our DJ Basin oil system. These decreases were partially offset by increased gross margin contribution from our Delaware Basin natural gas assets due to higher excess natural gas liquids volumes in combination with higher NGL pricing.

Our operation and maintenance expense decreased slightly quarter-over-quarter, but we expect it to trend modestly higher in both the second and third quarters, primarily due to increased asset maintenance and repair expense and higher expected utility costs, all of which should be partially offset by ongoing cost containment efforts. We continue to expect seasonality associated with our utility expense in the summer months, mostly due to higher estimated electricity pricing. As a reminder, we were able to seek reimbursement for approximately 75% of our utility costs portfolio wide from our producing customers. Turning to cash flow, our first quarter cash flow from operating activities totaled $531 million, generating free cash flow of $399 million.

Free cash flow after our fourth quarter 2024 distribution payment in February was $58 million. Focusing on capital markets activities, we retired $664 million of senior notes upon their maturity in early January with cash on hand, and we maintained our trailing twelve month net leverage ratio of just below three times at quarter end. Looking forward, we plan to retire the remaining tranche of senior notes that mature in 2025 in early June with cash on hand and from free cash flow generation. In April, we declared a quarterly distribution of $0.91 per unit, which represents a 4% increase over the prior quarter’s distribution that will be paid on May 15 to unitholders of record on May 2. At this time, we’re not making any changes to our 2025 financial guidance ranges.

With that said, the lower commodity price environment could have an impact on our profitability in line with the sensitivities that we have provided in our investor deck. Even if that turns out to be the case, we would still expect our full year 2025 results to be within the guidance ranges that we have provided. With that, I will now turn the call over to Oscar for closing remarks.

Oscar Brown: Thanks, Kristen. Before we open it up to Q&A, I would like to highlight why WES is well positioned to manage the recent market volatility. First, we continue to be prudent allocators of capital, which should support our future growth and profitability. All major expansion projects such as Mentone III, North Loving and Pathfinder are backed by material minimum volume commitments which provide adjusted EBITDA and free cash flow stability even during commodity price swings that help us achieve our targeted returns. Second, our disciplined capital allocation decisions have delivered leading returns for our investors. Since becoming a standalone partnership, WES has generated leading return on capital employed and has maintained one of the highest positive rates of change in ROCE among midstream peers.

Our strong distribution yield has also resulted in a leading total capital return yield compared to both midstream peers and all sectors of the S&P 500 for at least 11 consecutive quarters. And finally, WES strong balance sheet gives us the flexibility to execute multi-year expansion projects like Pathfinder driving future profitability and supporting our returns. We plan to maintain a strong balance sheet with net leverage at or below three times, allowing us to pursue growth while increasing distributions such as the 4% increase to the distribution that will be paid later this month. Before turning the call over to Q&A, I’m delighted to highlight that Bob Phillips, the founder and CEO of Crestwood Equity Partners until its merger with Energy Transfer, has recently joined our Board as an independent Director.

Bob brings significant midstream knowledge and expertise to our already talented board and his years of successful leadership within the midstream space will be invaluable as we execute on our capital efficient growth strategy with the goal of creating long-term value for all of our stakeholders. Thank you to the entire WES workforce for your hard work and dedication. We have had a strong start to 2025 and I am proud of how everyone has maintained focus on servicing our customers and progressing our cost containment efforts, especially in light of the recent market uncertainty. We remain committed to achieving our 2025 goals and I look forward to sharing our progress on our second quarter earnings call in August. With that we’ll open the call for questions.

Operator: Thank you. [Operator Instructions] And your first question comes from the line of Spiro Dounis with Citi. Please go ahead.

Spiro Dounis: Thanks, operator. Good morning, team. Oscar. I want to go back to some of your closing comments. There talked about strong balance sheet flexibility and sort of mentioned capital allocation. So I am just curious to the extent we do sort of move into a slower growth environment here. Curious how that allocation stack maybe restacks how you reprioritize some of those, some of those buckets.

Q&A Session

Oscar Brown: Thanks for that. No, I don’t think we change our strategy in any way or our priorities. Obviously if the environment slows and there’s less organic growth opportunities, I think we’re in great shape to take advantage of potential acquisitions and things like that. Obviously, we will continue to be opportunistic when we look at the opportunities for a stock buyback or reducing debt further. But really so far what we’re seeing is pretty robust activity in terms of assets available in the M&A market. So that’s something that we’re keeping an eye on and if the market continues to be volatile, we’d hope that sellers expectations around price would change accordingly. But so far we’re keeping our BD team pretty busy.

Spiro Dounis: Got it. That’s helpful. Second question, just maybe going to guidance for the rest of the year. I think as it stands looks like guidance would imply a stronger second half of the year. And so just want to get you to maybe fine tune that a little bit. I’m not sure if there’s any specific projects ramping up from here. Obviously North Loving is online now just to really point to and maybe which basins are really driving that in the go forward.

Oscar Brown: I think it’s, I mean as we mentioned, nothing’s really changed materially in the outlook. And so you’re correct, we expected the volumes to pick up a bit. We came up a very strong fourth quarter and so that sort of impacted sort of the tough comparables sequentially. But for the remainder of the year there’s no signs yet that our outlook should change on volume expectations. Growth continue to be driven by West Texas, as Danny said, also in the Uinta, some growth is still in the powder, although we’re making investments there in anticipation of 2026. That’s obviously an area where if activity changes for some reason then we can adjust capital accordingly pretty easily. So yeS, again it’s, with $5 swings every week it seems like and oil prices we like our customers are just sort of monitoring carefully and running scenarios. But so far everything appears to be on track with guidance.

Spiro Dounis: Great. I’ll leave it there. Thanks, Oscar.

Oscar Brown: Thank you.

Operator: Your next question comes from the line of Keith Stanley with Wolfe Research. Please go ahead.

Keith Stanley: Hi, good morning. Wanted to start on Pathfinder. If there’s any update on contracts in place for the project and how discussions are going with customers. And then relatedly, are you mainly targeting take or pay contracts with third parties on that pipeline or would it be fixed fee commitments where you do have some volume risk?

Oscar Brown: Yes, thanks for that. On Pathfinder we’ve been pretty excited. Sort of the conversations have developed better than we hoped. So we’re getting a lot of interest from producing customers, but also other midstream players in the water space. And that latter piece is sort of extra gratifying because it just sort of shows the folks that are in the business day to day across different producers are seeing what we see in the very crucial need for this pipeline. These are complicated contracts. So if you’re alluding to that, this is a different decision than just deciding to put an SWD down somewhere and longer term commitments. And we are seeking MVC type commitments and we’re looking at a range of commercial sort of structures.

But again, the whole premise of this pipeline was very much in line and why we’re excited about it is it’s right down the fairway of whether it be a gas line or an oil line. It’s typical. We’ve got our anchor shipper in place and a lot of capacity to fill to drive returns sort of north of typical midstream returns. So that’s our strategy. I don’t think we’ll necessarily see rapid fire series of contracts again, given these are sort of longer term, more complicated commitments. We’ve also got some time. So frankly, the longer we go, I think the more challenging the water environment becomes in the Delaware Basin. So time works to our advantage here. And so we’re being pretty thoughtful about sort of the incremental shippers and contracts that we’re going to take for this pipe.

Trying to balance that with not getting too aggressive and damaging our progress. But we are pretty pleased. I mean it’s pretty exciting and it’s nice to be validated in a thesis like this. That’s sort of a multiyear solution.

Keith Stanley: Thank you. That was all for me.

Oscar Brown: Thank you.

Operator: And your next question comes from the line of Jeremy Tonet at JPMorgan. Please go ahead.

Jeremy Tonet: Hi Good morning. Just wanted to I guess think about the producer outlook at this point. Your producer customer conversation. Just wondering how I guess recent they were at this point. We have seen a lot of changes already during earnings and it seems like it’s been very fluid where things have been changing very recently. So just wondering, we’ve seen some announcements of CapEx cuts and rig drops, across multiple different producers here and just wondering, how recent are your conversations with your producer customers? Does it account for, I guess, the number of different updates we have been hearing during earnings season?

Oscar Brown: Great question. I haven’t seen much of our commercial team. They are basically living in customers offices so it’s pretty real time, but you’re right, it’s sort of, it seems like it’s day to day the way people are sort of reacting. But in general I think, look, everybody is sort of running their scenarios in our customer base. Mostly what we’ve seen is folks looking at different projects. Again, we haven’t seen enough activity or change in activity or outlook to change anything around our guidance, including on the CapEx front at this point. And I think even the customers, our customers specifically that have announced any changes in capital frankly haven’t adjusted changes in sort of their well count other than frankly up, but certainly not production outlook yet.

So again we’re just sort of responding accordingly. So for now again, at least with our customer portfolio we feel pretty good and everybody’s doing exactly like you’re saying, producers who aren’t our customers. What we’re saying is what you’re saying, which is some rig drops around sort of the fringes of different geographies and that sort of thing and a lot of it’s sort of performance driven and not necessarily commodity price driven at this point. So we are ready, right? We are in there every day and you know, the good news is we have got, let us put it this way, a lot more flexibility in our capital than we would expect to experience on volatility in our cash flows given our customers and our contract structure. So we’re pretty confident in the outlook and just monitor the situation.

So don’t know if that’s helpful, but that’s what we’re seeing.

Jeremy Tonet: Got it. Understood. Not to belabor the point and realize it’s probably too early to ask, but just wondering in a scenario if commodity prices go to the mid-50s or whatever point that leads to flat Permian growth and gas growth is just modest. Just wondering, any thoughts you might be able to share on how well west might look in that scenario.

Oscar Brown: Again, I mean, that’s sort of what we’re looking at. So I don’t think there’s again, not much change from what you’re seeing in our guidance under that scenario. If customers start dropping rigs or we see lower activity across the basin, I think it more impacts sort of our growth outlook than sort of a big negative impact on our free cash flow. And in fact, if we, if people want to drop projects on the growth side and we pull back capital, frankly that just gives us some firepower to be opportunistic on the capital side, capital allocation side that we already talked about. So for us, we don’t hope for a slowdown, but I think we come at it with a position of strength and frankly, probably will see some opportunities to take advantage of in that scenario too.

So, things hold well or, or approved to back to where we thought they would be, a few months ago. I think we’ve got a great organic growth story and if that shifts, then I think we’ve got, a potential consolidation story to work on as well. And of course we’ll keep an eye on the unit price. If that goes out of whack, we’ll jump there too.

Jeremy Tonet: Got it. That’s helpful. I’ll leave it there. Thanks.

Oscar Brown: Awesome. Thank you.

Operator: [Operator Instructions] Your next question comes from the line of Sumantra Banerjee with UBS. Please go ahead.

Sumantra Banerjee: Hi, thank you for taking the question. Wanted to go back on return of capital for a second and capital allocation priorities. It’s great to see that leverage is now below the three times. And so I know you mentioned that you’re targeting mid to low single digit distribution increases, but also wanted to ask how buybacks might fit into those priorities.

Oscar Brown: You bet. So I guess the way we look at it is, if the return on our equity is in excess of sort of our organic or inorganic growth opportunities and it’s obviously highly de risked because we’re pretty sure we understand our own business, then it’s something we got to look at we’ll be opportunistic on. But right now so far we’re seeing both on the projects that we have in place that haven’t the customers haven’t yet adjusted or give us any signal on the change. Those returns are still in excess of what we can earn just by buying back our own stock on a risk adjusted basis. And it’s the same for the moment as to what we’re seeing externally as well. So for now it seems like our cascade of sort of capital location is the same.

Right. We love to pursue organic growth at our midstream type returns and then it’s inorganic growth, sort of M&A and that sort of thing. And then of course the buybacks are in the mix. The whole thing, as we’ve said over and over again, we only allocate capital to sustain or grow the distribution. That’s sort of our financial license to operate as an MLP. And so that’s our North Star in terms of how we allocate capital. We’ll just keep an eye on it and if we exhaust the first two, then of course buybacks are an option out there as well. Especially if there’s just uncertainty. Right. We don’t necessarily want to lean into jumping past our targeted distribution growth if there’s just volatility in the market, then buybacks might make sense. We are also cognizant of, our float is lower than we’d like it to be and so, buybacks also impact some of the technical trading around our stocks.

So we’re just always cautious there. But again, it’s a great option if I don’t really want to see it because it means our stock’s going down. But, but if we can buy back shares at midstream plus returns on a from our purposes risk free basis, we’ll kind of do it.

Sumantra Banerjee: Got it. That’s really helpful, thank you. I’ll turn it over.

Oscar Brown: Thank you.

Operator: And your next question comes from the line of Zack Van Everen with TPH. Please go ahead.

Zack Van Everen: Hi all, thanks for taking my question. Maybe just going back to M&A. I know you mentioned if organic projects slow, there’s still a lot out there on the inorganic side. Maybe touch on. I know you’ve talked about this before, but would these be in basin bolt ons on the GMP side or would you guys also look outside the Permian and your current basins for different type of assets?

Oscar Brown: Yes, I think so. Again, nothing’s really changed in our thought or strategy around acquisitions. We really believe that to be successful in those we have to bring something additive to the mix. So that does tend to steer you more likely to in basin opportunities or add ons to our various products and service teams, service activities. So again, I think it’s it’s going to be pretty much down the fairway unless there’s a customer or something that wants to bring us to a new basin and can really de risk it for us and maybe that’s the value add we can bring. So it’s going to be very likely in our core businesses and our core geographies unless something kind of unusual happens with the way that we can add value and de risk a different opportunity.

Zack Van Everen: Got it. That makes sense. And then one more quick one on slide 24. You guys talk about 2.8 BCF a day of natural gas, MVC or cost of service protection, as well as on the crude and NGL side. Have you guys ever broken out or could you give some more color on, where these contracts are? Is it mostly Permian and DJ, maybe a percent on which is MVC versus cost of service?

Oscar Brown: Yes, I don’t think we’ve broken out that much detail. But, but obviously the vast majority of MVCs and cost of service are in West Texas and in the DJ. Obviously the Permian market’s more of a dedication market or, sorry, the Powder river is more of a dedication market, whereas we’ve got some great legacy contracts in the DJ and the Permian.

Zack Van Everen: Makes sense. Appreciate the time. Thanks.

Oscar Brown: Thank you.

Operator: And your next question comes from the line of Ned Baramov with Wells Fargo. Please go ahead.

Ned Baramov: Hi, good morning. Thanks for taking the question. In a flat Permian production environment and assuming you pull back your PRB growth projects, which I think contribute to 2026 volumes but are currently included in your 2025 CapEx guidance, what do you think your spending budget would look like this year? Should we think about CapEx as the low end of your current CapEx guidance range or maybe just closer to sustaining CapEx levels?

Oscar Brown: Yes, Kirsten can help me out here, but I think in your scenario with Permian splat and powder weekends, I think is what you’re asking. We would probably and that happens soon, let’s say, because we’re almost mid-year as it is. I guess the answer is probably the low end of Capex guidance, maybe even below that.

Kristen Shults: I would agree. I mean, I think kind of going back to when you look at our capital spend, there’s quite a bit in the PRB. So if you see some type of pullback and then to Oscar’s point, relatively soon, we’re very, our capital spends very dependent on our producers and what they’re doing. So we can pretty much delay or cancel or pause most projects if we see changes like that, do that relatively quickly.

Ned Baramov: Understood. Very helpful. Thank you. That’s all I had.

Operator: All right, thank you. And there are no further questions at this time. I would like to turn it back to Mr. Oscar Brown for closing remarks.

Oscar Brown: Great. Thanks to everyone for participating on our first quarter 2025 earnings call. We continue to be exceptionally well positioned to navigate a range of business environments. So I’ll just reiterate. We have an incredibly strong contract portfolio, excellent assets in the most economic basins in North America, an engaged and resilient workforce, a strong balance sheet with one of the lowest net leverage ratios amongst midstream peers, a nearly 10% deferred distribution yield, our seasoned leadership team, strong board oversight and a solid prudent strategy underpinned by organic growth projects. Wanted to thank again our incredible employees for supporting the efforts to increase our competitiveness and their focus on our mission, our licenses to operate and our differentiating capabilities, all while operating safely, efficiently and responsibly.

I would also like to thank our customers for their continued support and their trust in WES to provide flow assurance and creative midstream solutions. We look forward to seeing everyone at upcoming energy conferences this month. And with that, we’ll close the call. Thanks again.

Operator: Thank you. And this concludes today’s conference call. Thank you all for joining. You may now disconnect.