Western Midstream Partners Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 2, 2023

There are 10 speakers on the call.

Operator

Thank you for standing by. My name is Kayla Baker, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Western Midstream Partners Third Quarter 2023 Earnings 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

I would now like to turn the call over to Director of Investor Relations, Daniel Jenkins. You may begin.

Speaker 1

Thank you. I'm glad you could join us today for Western Midstream's Q3 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 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.

Speaker 1

With me today are Michael Ure, our Chief Executive Officer and Kristen Schultz, our Chief Financial Officer. I'll now turn the call over to Michael.

Speaker 2

Thank you, Daniel, and good afternoon, everyone. During the Q3, increased throughput from all operated assets and across all products led to improved adjusted gross margin and adjusted EBITDA on a sequential quarter basis. Specifically, in the Delaware Basin, our throughput increased across all three products, mostly due to new production coming online and continued high facility operability. In the DJ Basin, both natural gas and crude oil and NGL's throughput increased quarter over quarter, a trend we expect to continue into the Q4 and throughput also increased from our other assets, specifically in South Texas as additional volumes from new customers came online. Focusing on the Delaware Basin, We achieved record natural gas, crude oil and NGLs and produced water throughput during the Q3.

Speaker 2

For the first time in West's history, We averaged more than a Bcf per day of natural gas gathered from third parties for the months of August September, demonstrating our focus on growing the entirety of our business. This throughput record is a testament to our team's ability to successfully compete for new business by reducing costs and providing superior customer service. Since 2021, West has grown its 3rd party volumes in the Delaware Basin by approximately 65%, with one of our largest producing customers in the Delaware Basin, bringing total dedicated acreage from that producer to roughly 40,000 acres and extending the duration of our agreement by 10 years to 2,035. This extended dedication keeps significant natural gas volumes on West infrastructure over the long term and supports expected volume growth over the coming years. Before I turn the call over to Kristen, I wanted to discuss the Meritage Midstream acquisition we announced in early September, which is the 2nd largest unaffiliated corporate level M and A transaction in Wes' history and our first significant acquisition since becoming an independent partnership in 2020.

Speaker 2

We have consistently said that our M and A strategy is focused on accretive deals that optimize the value of our existing asset base and allow us to leverage our operational expertise to generate incremental value for our unitholders. We believe that the Meritage acquisition fits within that strategy for a number of reasons. First, the Meritage deal transforms and significantly expands WES' existing Powder River Basin asset base, adding natural gas gathering and processing facilities and increasing West's total processing capacity in the region to approximately 440,000,000 cubic feet per day. Through the Meritage acquisition, we were able to optimize our previously subscale position to become the largest gathering and processing provider in the basin, which places us in a strong strategic position to compete for additional blocks of undated catered acreage in the basin. 2nd, this transaction provides meaningful customer diversification by adding several new investment grade customers as well as several high quality, financially strong private customers to Wes' customer base.

Speaker 2

3rd, we acquired numerous long term contracts secured by large acreage dedications or substantial minimum volume commitments that are expected to contribute to Wes' earnings and free cash flow over the coming years. Finally, we consummated the deal at an extremely attractive valuation of approximately 5 times to 6 times 2024 adjusted EBITDA, not including the synergies we have identified for 2024 and beyond that are expected to reduce the forward acquisition multiple. Overall, the Meritage acquisition enhances West's future profitability and our free cash flow generation profile, which should in turn Increase our ability to return more capital to stakeholders over time. This starts with our 3rd quarter base distribution, which we just increased by $0.015 per unit or $0.05 per unit on an annualized basis. The Meritage acquisition was funded with cash, including amounts received from our recent issuance of $600,000,000 of 5 year senior notes and from borrowings on our revolving credit facility.

Speaker 2

As a result, our trailing net leverage ratio will increase in the near term, but we expect to return to premaritage leverage levels by year end 2024 as we grow adjusted EBITDA and capture cost synergies. Additionally, Our focus over the past several years on strengthening our balance sheet by reducing costs, capturing operational efficiencies and growing adjusted EBITDA Paired with meaningful debt reduction put our partnership in a position of strength to execute an all cash transaction such as Meritage. Finally, it is important to note that while we meaningfully strengthened our legacy asset base in the Powder River Basin, our other core basins continue to experience increased producer activity levels. In 2024, the Delaware Basin will continue to be the main driver of throughput growth, and we continue to invest meaningfully amounts of capital towards meeting growing customer demand with the expansion of Mentone and the construction of our Greenfield plant at North Loving. In the DJ Basin, which generates roughly 50% of our free cash flow, We reached the trough of the throughput decline and we expect to see producers gradually grow volumes over the coming quarters.

Speaker 2

The Powder River Basin has favorable producer and Acreage with competitive economics and when paired with our existing core basins will support West's long term growth strategy for years to come. With that, I will turn the call over to Kristin to discuss our operational and financial performance.

Speaker 3

Thank you, Michael, and good afternoon, everyone. Our 3rd quarter natural gas throughput increased by 5% on a sequential quarter basis, primarily due to increased throughput in the Delaware Basin from new production coming online from our other assets, specifically in South Texas and from our equity investments. Additionally, we achieved increased throughput in the DJ Basin due to increased completion activity from both affiliated and third party producers. Our Crude oil NGL's throughput increased by 7% on a sequential quarter basis, primarily due to increased throughput from our equity investments in Delaware Basin Oil System. Of note, we saw our 1st sequential quarter increase in crude oil and NGL's throughput from the DJ Basin since the Q4 of 2021.

Speaker 3

Produced water throughput increased by 14% on a sequential quarter basis due to increased completion activity and high facility operability in the Delaware Basin. Our per Mcf adjusted gross margin for our natural gas assets was flat compared to the prior quarter. Higher throughput from our South Texas assets, which have a lower than average per Mcf margin as compared to our other natural gas assets and lower distributions from our natural gas equity investments had a dilutive impact on our per Mcf adjusted gross margin, which was offset by increased throughput from both the Delaware Basin and DJ Basin. Excluding any potential impact from cost of service, we expect our 4th quarter natural gas per Mcf adjusted gross margin to increase slightly, primarily due to the addition of volumes from the Meritage acquisition. Our per barrel adjusted gross margin for our crude oil and NGL assets decreased by $0.31 compared to the prior quarter, primarily due to a decrease in distributions coupled with an increase in throughput from our equity investments, which have a lower than average per barrel margin as compared to our other crude oil and NGL assets.

Speaker 3

Excluding any potential impact from cost service, we expect our per barrel adjusted gross margin in the 4th quarter to increase slightly, primarily due to a lower throughput expectation from our equity investments. Our per barrel adjusted gross margin for our produced water assets increased by $0.01 compared to the prior quarter, mostly due to contract mix. We expect our per barrel adjusted gross margin in the 4th quarter to be in line with our Q3 results. During the Q3, we generated net income attributable to limited partners of $271,000,000 Adjusted EBITDA in the 3rd quarter totaled $511,000,000 a quarter over quarter increase of 5%. Relative to the Q2, our adjusted gross margin increased by $35,000,000 This was mostly due to increased throughput across all expense impacts our adjusted EBITDA as the remainder is reimbursed through either cash reimbursements of electricity costs or contribution of fuel gas for reimbursement of electricity equivalent costs.

Speaker 3

We expect our operation and maintenance expense in the 4th quarter In line with our Q3 results as lower utility costs are partially offset by the inclusion of 2.5 months of contribution from Meritage. Our property and other tax expense decreased on a sequential quarter basis from a reduction in the ad valorem property tax accrual related to the finalization of rates in West Texas and lower property values in Colorado. Turning to cash flow, our 3rd quarter cash flow Operations totaled $395,000,000 generating free cash flow of $200,000,000 Free cash flow after our 2nd quarter distribution payment in August was a use of cash of $21,000,000 From a capital markets perspective, at the end of the third quarter, we accessed The debt capital markets for the 2nd time this year issuing $600,000,000 of 5 year senior notes with a 6.35 percent coupon, the proceeds of which were used to fund a portion of the Meritage acquisition. We were pleased with how well the issuance was received by the market with an Order book more than 4 times oversubscribed and a deal that ultimately priced at 170 basis points above the 5 year treasury rate. Since we expanded our unit buyback program to $1,250,000,000 in November of 2022, we have repurchased approximately 50% of the total aggregate allocated towards our unit buyback program or just over $622,000,000 This includes 5,100,000 common units purchased from Occidental in the Focusing on the base distribution, in October, we declared distribution of 0 point 5 $7.50 per unit, an increase of just over 2 capital allocation framework and we will continue to maintain a balanced approach of retiring debt, buying back units opportunistically and increasing our base distribution over time.

Speaker 3

We will continue to be good stewards of our unitholders' investment by efficiently allocating growth capital that will create the greatest value for our unitholders with the ultimate goal of prudently growing adjusted EBITDA and free cash flow. Moving to annual throughput growth rates with 2.5 months of contribution from the Meritage assets, we now expect average year over year natural gas throughput growth to be in the mid single digit range for 2023. We continue to anticipate low single digit growth for crude oil and NGL throughput and upper teens throughput growth for produced water. Keep in mind that our crude oil and NGL's growth Expectations for 2023 exclude the impact of Cactus II from our 2022 throughput actuals. Focusing on basin specific activity, we still The Delaware Basin to be the main driver of throughput growth and we continue to expect average year over year throughput growth across all three products in the basin as we exit this year.

Speaker 3

Although we believe the throughput declines in the DJ Basin have subsided, we still expect average year over year throughput to decrease for both natural gas and crude oil and yields relative to 2022. Steady on loan activity and increased producer activity levels that resulted in additional wells Online contributed to the end of this decline and should provide continued modest growth for both products during the Q4. These projected changes in natural gas and crude oils and NGLs throughput in the DJ Basin are expected to have a minimal impact on our adjusted in the near term due to the current structure of demand and deficiency fee revenues. Pivoting to our financial guidance, we now expect to be at high end of our previously revised adjusted EBITDA guidance range of $1,950,000,000 to $2,050,000,000 This This is based on our Q3 financial performance and the expected adjusted EBITDA contribution from Meritage in the 4th quarter. With that said, we We are maintaining the following 2023 guidance ranges from the prior quarter.

Speaker 3

Total capital expenditures of $700,000,000 to $800,000,000 This includes additional growth capital for Meritage as well as capital for both Mentone Train 3 and our North Loving plant. While we expect some Mentone and North Loving plant capital to push out of 2020 Free cash flow of $900,000,000 to $1,000,000,000 which includes the incorporation of the Meritage capital expenditure plan for the remainder of 2023. Based on our most recent increase to the base distribution in conjunction with the closing of the Meritage acquisition, we've grown the base distribution to approximately $2.21 per unit for 2023, slightly exceeding our base distribution guidance range of at least $2.1875 unit. We will continue to evaluate the base distribution on a quarterly basis and will consider recommending an increase in the base distribution to our Board as The underlying fundamentals of our business support additional adjustments. We also remain committed to our enhanced distribution framework with a net leverage threshold of 3.2 if we can't find a better use for that capital during the year.

Speaker 3

And as Michael said earlier, we see a path to pre meritage leverage levels by year end 2024. Finally, focusing on 2024, even though we have not yet provided official guidance, we expect our average year over year throughput for operated assets to increase relative to 2023. In the Delaware Basin, producer activity levels remain strong and we expect more wells to come to market year over year. In the DJ Basin, we reached the trough of the decline in the Q3. Going forward, we expect modest increases in total volumes over the coming quarters And more noticeable growth in the back half of twenty twenty four, especially for natural gas volumes, but crude oil and NGL volumes will be at a slower, more moderate pace.

Speaker 3

Increased throughput in the DJ Basin in 2024 will have a minimal impact on our adjusted EBITDA due to demand and deficiency fee revenue we collect associated with minimum volume commitments. We also expect healthy natural gas throughput growth in the Powder River Basin associated with the addition of Meritage assets. Turning to capital expenditures, we are seeing some of our capital needs push into 2024 due to updated plant construction timelines, certain capital expansion projects Moving into next year and select producers pushing well connects into early 2024. As such, we expect some of the capital for Mentone and almost all of the costs for North Loving plant to come in 2024 as we look to bring those facilities online in early 2024 and early 2025 respectively. Additionally, now that the transaction is closed, we continue to evaluate the capital needs for the new Meritage assets.

Speaker 3

We expect 2024 to be a slightly heavier capital year for these assets in order to complete certain expansion projects needed for increasing throughput in both 2024 2025. With that, I will now turn the call back over to Michael.

Speaker 2

Thank Before we open it up for Q and A, I would like to highlight a few key points and reiterate why WES is in a strong position as we exit this year and transition into 2024. Wes is very well positioned for throughput and adjusted EBITDA growth in 2024 relative to 2023. We expect to benefit from capital efficient organic projects such as Mentone Train 3 by the end of the Q1 of 2024, and we are on track to complete the North Loving plant by the end of Q1 2025. Keep in mind, these capital expansion projects are supported by significant minimum volume commitments, and we continue to expect that the plants will be full once they come online. These plant expansions will put us in a strong position to capture more value for our partnership through increased natural gas processing capacity.

Speaker 2

The Meritage acquisition was consummated at an extremely attractive valuation, which should result in approximately $155,000,000 to $175,000,000 of incremental adjusted EBITDA based on the 5 to 6 times pre synergy multiple we highlighted when we announced the transaction. Additionally, we continue to be focused on returning capital to stakeholders, which is demonstrated in our leading total capital return yield amongst midstream companies. Our view is that M and A opportunities like Meritage enhanced capital return opportunities over time with expanded adjusted EBITDA and increased free cash flow generation. We remain committed to a balanced approach to capital return As seen with the additional increase in the base distribution upon closing of the Meritage transaction and our opportunistic unit buyback from Occidental in September. Finally, WES continues to screen favorably relative to midstream companies and members of the Russell 3,000 Index.

Speaker 2

When comparing the midstream sector relative to the Russell 3,000 Index, WES is now the leading midstream investment opportunity with an investment grade credit rating and a trailing 12 month distribution yield of nearly 9%. I would like to close the call by thanking the entire West workforce for all of their hard work and dedication to our organization. I would also Like to extend additional thanks to all of our employees that have been part of the Meritage acquisition. Your efforts enabled us to close the transaction quickly and begin moving forward with integration. Whether it's working on strategic acquisitions or enhancing our daily operations, our employees' contributions continue to yield substantial results that are creating additional value for our stakeholders.

Speaker 2

I look forward to finishing the year on a strong footing and updating you on additional progress as we transition to 2024 on our Q4 call in February. With that, we'll open up the line for questions.

Operator

Your first question comes from the line of Spiro Dounis with Citi. Your line is open.

Speaker 4

Thanks, operator. Afternoon, team. Maybe starting with Meritage, if we could. Michael, as you said in your prepared remarks, M and A Really hasn't been part of the strategy historically, so this is kind of new. So just curious, is this a shift in strategy or just seeing A more conducive M and A environment.

Speaker 4

And if you can maybe just provide a little more context on how Meritide is playing together?

Speaker 5

Yes, thanks Spiro. Definitely not a shift in strategy. Our strategy has always been that we would be Opportunistically looking for M and A opportunities. This is an acquisition opportunity as we looked at our existing footprint out there. From our perspective, it was either we needed to potentially exit the area or get larger.

Speaker 5

As we looked At this particular opportunity and at the area as a whole, we got really excited about what this might be able to become for us and for the company overall. And so it's a company and an opportunity that we've actually been following for quite some time. And then the timing just made a lot of sense post our transformation for us to be able to feel confident that we can tuck in these assets and be able to achieve Greater synergies and potential opportunities for growth on the heels of the work that we've been doing in order to get more Across the board in our operations. So definitely not a shift in strategy, just executing opportunistically as we had indicated and that opportunity really found home as we executed that transaction in the Q3.

Speaker 4

Got it, got it. Helpful. And switching gears a bit to CapEx. Kristen, it sounds like in your remarks there, a few factors coming together that maybe keep CapEx a little bit elevated next year. It Sounds like Delaware, obviously, there's 2 processing plants, your biggest spend, which makes sense.

Speaker 4

But looking at the DJ and Meritage, once again, kind of a 2 part question here. TJ growing again, should we expect more capital to be allocated there as a result or do you kind of have a long run rate of sort of available capacity? And then with Meritage, you also mentioned Higher capital needs next year, just maybe a sense of what is the nature of that spending? Is that well connect CapEx or something more substantial?

Speaker 3

Yes. So on the DJ, you're right, Spiro, we've got extra capacity in the DJ right now. So I'd say any capital that we're spending there will be Relatively minimal, kind of what you've seen in 2023, just as we're connecting new pads, so forth and so on. For Meritage, yes, there's a little bit more growth capital next year for Meritage. And so well connects, compression, things of that nature, that I would expect to hit the 2024 budget.

Speaker 4

Got it. Helpful color. Thanks for the time, guys.

Speaker 5

Thanks, Spiro.

Operator

And your next question comes from the line of Brian Reynolds with UBS. Your line is open.

Speaker 6

Hi, Good afternoon, everyone. Maybe to follow-up on Spiro's CapEx question. Kristen, I think you mentioned that you expect the processing plants Effectively open full. So how should we be thinking about the next processing plant just given that it seems like West is gaining more and more acreage dedications out in the Delaware? Thanks.

Speaker 5

Yes, Brian, thanks. It's a great question. Yes, the way that we've managed that is we've offloaded Volumes in order to bridge the timing between when it is that we receive the commitments from our customers as to when those commitments kicked in to take So the interruptible volumes, we've offloaded in order to bridge that timing to when that plan comes online. And so that's our expectation of when those plans come online that they're ultimately full. As we sit here today, first we Expanded the North Loving area in a new Greenfield area with the opportunity for us to Expand more of that footprint, should the need arise.

Speaker 5

But as we sit here today, we don't currently see the need in order to offer up additional expansions on North Loving.

Speaker 6

Great. Thanks. Appreciate that. And then looking ahead to 'twenty four, There'll be some growth. Clearly, the Delaware is growing and the processing clients are running full.

Speaker 6

But is there any way to sensitize how many volumes are currently being offloaded and potentially the impact That will have on margin as that comes back onto your system. And then as it relates to DJ, some tailwinds there with the Q1 of growth. When should we expect to be above those MVCs at this point? Is it second half of twenty twenty four or early twenty twenty five at this juncture? Thanks.

Speaker 3

Yes. So on the Growth side of things, as Michael was saying, we're offloading volumes today. And so as we're bringing Mentone 3 online, that the capacity of that You would expect that to get on our system and decrease those offloads. So, quite a bit that's being offload today. Obviously, When we're saying that we expect Mentone III to be full on day 1.

Speaker 3

And then Sorry, Peter, can you repeat your last question that you answered that you asked?

Speaker 6

Just as it relates to margin, I mean, could we see some margin benefits just given that you're no longer offloading the volumes in

Speaker 3

We definitely will. We expect to see a little bit of margin benefit incremental every month from that. So higher OpEx on our side As we're obviously running that plant and we've got the people to run that plant, maintenance as well on that. But yes, we would expect to see some adjusted gross margin benefit as the offload fees are reduced.

Speaker 5

And then Brian, to answer your question on the DJ, we would we currently would still There would be minimum volume commitments received primarily on the oil side throughout 2024 as it sits here today.

Speaker 6

Great. All makes sense. I'll leave it there. Enjoy the rest of your afternoon.

Speaker 5

Thanks, Brian.

Operator

And your next question comes from the line of Jeremy Tonet with JPMorgan. Your line is open.

Speaker 5

Hi, good afternoon.

Speaker 4

Hey, Jeremy.

Speaker 7

Just wanted to take a step back and think about the your portfolio as it stands right now, your base business. And if you think about just The organic growth that's possible. How do you think about that right now in general as far as the low single digit, mid single digit, otherwise? Just wondering how you think about organic growth? Obviously, you're not giving 24 guide, but just trying to get a sense for how you think about the business at this point?

Speaker 5

Yes. So I would I'd call your attention to Slide 9 in the deck where we talk about our estimated growth rates for 2023. And as we look into 2024 expectation that that will actually grow on top of 2023. And so we're seeing positive tailwinds frankly pretty much throughout our operated portfolio which are contributing overall to an expected growth in 2024 over 2023.

Speaker 7

Got it. And from an EBITDA perspective, any color that you could share there?

Speaker 5

No color just yet. We haven't actually put out our 2024 guidance, but definitely look forward on the next quarter call to walk through our expectations for 2024. We're still in the process of Receiving full information from a lot of our producers in terms of what their drilling plans and expectations are for the back half of this year and into the first part of That will be the primary drivers for what our expectations might be on volumetric growth for 2024. So As we gather that information and then are able to share that with the market on our call in the Q1 of Next year, then we'll definitely be able to walk through what our expectations might be on EBITDA growth.

Speaker 7

Got it. That's helpful there. And Just wanted to shift to the DJ for a minute if I could and see that Williams kind of got a bit bigger in the base and I think they're now the number 3 processor. Just wondering If this changes the competitive dynamics in any way or any other thoughts that you could share with us on the DJ at this point?

Speaker 5

Yes, it's a great question. Definitely don't foresee that having a meaningful impact on us in terms of the competitive dynamics. You know, Williams is a great company and so the fact that they're investing as much as they are in the DJ obviously, is very positive sign from our perspective, corroborates our view of the basin as a whole and the highly prolific nature of that basin, but Certainly wouldn't expect that it would have a meaningful impact on us.

Speaker 7

Got it. And if I could just sneak one last one in for the Meritards acquisition. Just wondering On a per unit basis, is this accretive or dilutive to per Mcf or per barrel fee? And just how do you see the trajectory from this business over time?

Speaker 3

So it would be accretive on a per Mcf basis. So I actually expect in Q4 to see our gross margin per Mcf increase just a little bit as we add those Meritage volumes into our throughput numbers.

Operator

Our next question comes from the line of Neil Mitra with Bank of America. Your line is open.

Speaker 1

Hi, thanks for taking my question. I just wanted to understand maybe the rationale going forward Underpinning distribution increases, now that Meritage is in the mix and debt is a little bit higher, wanted to understand The priorities with capital allocation and when you look at distribution increases, do you have a formula where you look at payout ratios or percentage of CFO. Just wanted to understand the Background behind that and how you're looking at that going forward?

Speaker 5

Yes, it's a great question, Neil. So our primary driver is that we want to be able to set the base distribution At a level that we believe is sustainable over time. And so the reason for actually now the multiple increases in the base distribution that we've had this year We're primarily for the first one, the fact that we had received close to Bcf of incremental commitments overall since we had established that primary base distribution level and the fact that we're spending as much growth capital We are, which would indicate stronger sustainability from a free cash flow perspective as we go over time. With the most recent increase in the distribution, it was the fact that we're bringing on incremental free cash flow through the Meritage acquisition. So therefore, our expectation of a sustainable level increased in light of that new free cash flow is coming online with that transaction.

Speaker 5

And so When we look at it on a quarterly basis, we are looking at what do we believe is actually a sustainable base distribution level going forward. We haven't actually made any changes at all in terms of our prioritization of return of capital For the remaining free cash flow that we have on an annual basis, we're always looking at opportunistic ways that we can deploy that capital. So for example, if in particular period, we think it's of greater benefit to pay down debt, then we'll pay down debt. If there's On the unit repurchase side, then we'll do that. And obviously this year, we've actually seen pretty much both of those things through debt repurchases, unit repurchases, As well as the addition of Meritage into the company.

Speaker 5

And so that's going to continue to be our levers that we pull And as we have potentially continued progress in terms of our expectations, sustainability of that base distribution going forward, then We'll look at it on a quarterly basis with the Board and determine whether or not we think it warrants an increase overall. If we have superior year on year performance relative to expectations and that puts us in a place to be able to pay an enhanced distribution as we meet those criterion that we've highlighted in our slides. And then that's where the base distribution comes in to pay out that incremental value relative to our expectations for that period. So I hope, Neil, that answers your question.

Speaker 2

Yes, that's very helpful.

Speaker 1

I appreciate it. And just as a follow-up, I know you can't answer where the numbers shake out, but Maybe you could just kind of outline the factors that go into cost of service For the calculation next year, I know the wells were turned in line later than expected, some lower commodity prices. But As I understand it, it's backward looking and forward looking and there are some other components. So are there any general themes that we should look at going into next year?

Speaker 5

Yes, it's a great question, Neil. So, the way that that calculation works is that it takes The previous period, so in this instance, it would be 2023 relative to our expectations of free cash flow under those contracts for 2023 and combines that with the expectations of the free cash flow out through the end of the period of those contracts and then determines in accordance with what the predetermined rate would be, what the fees would ultimately need in order Expectations were held flat the same as they were before into future periods, you would expect that those rates would have to go up in order to generate the same expected rate of return that was expected as of the previous year when that rate was determined. So does that hopefully give you a little bit of context to how As we sit here today, we don't know quite yet what those long term forecasts would be in order to generate that rate and then what the cost would be In order to bring those volumes onto the system to generate that return, that will occur throughout the end of this year into the 1st part of next, wherein we'll be able to give a little bit more information on our expectations for 2024 EBITDA and capital.

Speaker 1

Okay, got it. That's very helpful. Thank you.

Speaker 4

Thank you, Neil.

Operator

And the next question comes from the line of Gabe Moreen with Mizuho. Your line is open.

Speaker 8

Hey, good afternoon, everyone. Maybe I can just start with a quick On the CapEx spend next year, what Kristen talked about it being a heavier year, is that just heavier compared to 2023? Just wanted to clarify that.

Speaker 3

Yes, that's right, Gabe. So heavier compared to what Meritage was spending in 2023, I think when we looked at Doing the due diligence on that historically, you're looking around $50,000,000 kind of a run rate CapEx spend for an asset like that. And so heavier relative to that, just slightly.

Speaker 8

Got it. Okay. And then maybe if I can ask, It's been a couple of quarters here when you talked about South Texas volumes being up. I know you don't talk about that very much considering the other basins that you've got. Can you just talk a little bit about what's going on there?

Speaker 8

Wes' competitive position, are you spending any capital out there? That would be helpful.

Speaker 5

Yes. So actually that's frankly a reflection of the incredible job the team is doing down there in establishing new relationships and with those new relationships garnering increased confidence Those counter parties actually bring more volumes on to our system. So actually not a meaningful amount of capital. It's really more of a reflection of the team's excellent job in gaining confidence from new customers coming into the area. So We believe we're definitely competitively positioned there, but as much as anything speaks to the strong customer service element of the way that we think about the business And the high touch nature with our customers that is resulting in increased volumes coming on to our system.

Speaker 8

Thanks, Michael. And maybe if I can just stay in that 3rd party customer vein. Earlier you mentioned the milestone that you kind of crossed in 3rd Party volumes overall. But as it pertains to getting more third party volumes, particularly in the Delaware Basin, Can you just talk about WES' positioning in terms of being a little bit less integrated than peers in terms of your downstream assets? Are you viewing that as a hindrance because you don't have that integration that you might need it?

Speaker 8

Or is it really the shoe on the other foot because everyone's looking to add downstream capacity So your 3rd party producer customers can kind of pick and choose between different options?

Speaker 5

Yes, it's a great question. Actually the way that we look at Obviously, we can provide an integrated solution for our customers by combining all of the marketing needs and then creating flow assurance through the marketing process that we do at no cost to us. It's all passed back. Well, we actually view it as a positive that we can then differentiate ourselves through the high touch nature of our customer service operations and through our ability to be so concentrated on making sure that those volumes that are coming from their customers are cared for properly And that we are focusing exclusively on making sure that they're optimizing their throughput coming through the system overall As opposed to necessarily providing some arbitrage through the system down to the water. And so for us it's inherent in making sure that we provide a superior customer service product, making sure that our operability which incidentally has increased Every quarter this year, that our operability is high and sustained, such that our customer base Knows that we're going to be strong stewards of the relationship that we have overall with them.

Speaker 5

So frankly, we view it as You know a great opportunity for us to differentiate ourselves and what you're seeing by virtue of that third party growth as well as Those increased commitments from our customers is that it's ringing true in terms of our new customer acquisition and retention.

Speaker 8

Got it. Thanks, Michael.

Operator

And your next question comes from the line of Ned Baramov with Wells Fargo. Your line is open.

Speaker 9

Hi, good afternoon. Thanks for taking the question. You've had the Meritage asset For several weeks now, could you maybe talk about the integration progress and any early findings on the magnitude of potential synergies?

Speaker 5

Yes. So thanks for the question. Actually what we found is a great excitement overall between The 2 companies, we've as far as an integration perspective, it's literally like hand in glove at the field level. The teams are working very well together overall. The team is very excited about being a part of a franchise like Western Midstream and we're obviously very excited to have them into our organization.

Speaker 5

So it's still a little early to be able to determine what Our expectations might be from a synergies perspective because we're trying to make sure that we're diligent in finding all opportunities that we can potentially drive Greater EBITDA growth out there, but I would say overall that the integration is going very positively And the teams are really excited to work well together.

Speaker 9

Thanks for that, Mike. And then on the new customer contract, are So the extended agreement comparable to what you had in place with this customer before the amendment?

Speaker 5

So it's it is an extension from this existing customer that we would say are done at very competitive So it's an addition of incremental acreage into the system and an extension of an existing agreement at competitive rates. So, it's a customer that we have had a long standing relationship with, an incredible rapport. We have the highest amount of respect for them And obviously, it appears as if they do the same for us. So we're really excited about being able to continue that relationship long into the future.

Speaker 9

Thanks. That's all I had.

Operator

And I will now turn the call back over to Michael Ure.

Speaker 5

Thank you everyone for joining for the Q3 call. I would like to wish everyone an early Happy Holidays And look forward to speaking again in the Q1 of next year.

Operator

And this concludes today's conference call. You may now disconnect.

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Key Takeaways

  • Western Midstream achieved record Q3 throughput across all products, including over 1 Bcf/d of third-party gas in the Delaware Basin and a 65% increase in third-party volumes since 2021, driving sequential adjusted gross margin and EBITDA growth.
  • The Meritage Midstream acquisition expands Powder River G&P capacity to ~440 MMcf/d, adds investment-grade and private customers under long-term contracts, was acquired at an attractive 5–6× 2024 EBITDA multiple, and is expected to contribute $155–175 million of incremental EBITDA.
  • In Q3, net income to limited partners was $271 million, adjusted EBITDA rose 5% sequentially to $511 million, operating cash flow reached $395 million, and free cash flow was $200 million; the partnership also raised its base distribution by $0.015 per unit and repurchased over $622 million of common units.
  • 2023 guidance has been reaffirmed at the high end of adjusted EBITDA of $1.95–2.05 billion, capital expenditures of $700–800 million, and free cash flow of $900 million to $1 billion, with expected mid-single-digit gas, low-single-digit oil/NGL, and upper-teens produced water throughput growth.
  • Looking into 2024, Western Midstream anticipates higher year-over-year throughput led by organic projects like Mentone Train 3 (Q1 2024) and the North Loving plant (Q1 2025) plus Meritage volumes, while targeting a balanced capital allocation to return leverage to pre-acquisition levels by year-end 2024.
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Earnings Conference Call
Western Midstream Partners Q3 2023
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