2023-06-06 06:06:36 ET
Summary
- Western Midstream's recent weakness has resulted in the company's share price declining, meaning it now represents a valuable opportunity.
- The company is investing heavily in capital growth, with an increased budget of $750 million for the year that'll result in higher 2H spending.
- The company's FCF guidance for the year is a double-digit yield, which combined with capital spending, makes the company a valuable overall investment.
Western Midstream ( WES ) is a $10 billion midstream company that has recovered quite well. The company's share price has dropped slightly recently, but it still trades near its post-COVID-19 highs. That's because of the company's strong integrated assets and shareholder returns, with an almost 8% dividend yield. Overall, this makes the company a valuable investment.
Western Midstream Recent Performance
Western Midstream has continued to perform well and generate strong cash flow from its portfolio.
The company has continued to keep natural-gas throughput at record highs. It's increased 3% QoQ and is now at 1.57 Bcf/day. At the same time the company has a strong produced-water pipeline system that is just under 1 million barrels/day with 13% QoQ growth. The company continues to expand with new processing capacity and debt refinancing.
The company's ability to operate across capital and operational markets, highlights its financial strength.
Western Midstream 1Q 2023 Performance
The strength of the nuances of the company's business are visible within its 1Q 23 performance.
The company's natural-gas throughput decreased slightly, however, it did manage to increase margins from $1.27 to $1.3 / Mcf. Similarly crude-oil and NGLs saw volumes decrease by roughly 2%, however, gross margins per barrel increased by almost 10%, leading to a net increase in both revenue and profits for the company.
On produced-water, it was the opposite, with throughput increasing by 13%, but margins decreasing by 12%. That's allowed the company's business to maintain mostly fixed. We expect the company's performance, despite volatility, to continue its net overall growth.
Financially, the company's cash capital investments increased by roughly 33%. The company's distributions remained incredibly strong at just under 8%, though the company's FCF didn't cover it for the quarter. Still, it was abnormally low cash flow from operations for the quarter, and we expect the company to remain stronger into the end of the year.
The company is expecting $750 million in capex, growth from the quarter, but it's still guiding for $1.05 billion in FCF for the quarter. That's a more than 10% FCF yield despite the company's substantial and continued capital spending.
Western Midstream's Shareholder Returns
The company has a strong ability to continue shareholder returns, with its low valuation.
At YE'22, the company finished with its debt at its threshold. The company's adjusted EBITDA continues to be roughly $2 billion annualized and the company's debt level of less than $7 billion is incredibly manageable. By the end of this year, that debt will reduce further. The company is past its debt optimization target.
The company is now targeting $2 / share in annual base distributions on a share price of just under $26 / share. It's an almost 8% yield the company can comfortably afford. At the company's dividend, it's a great time to repurchase shares. Regardless of how the company spends its cash though, we expect strong shareholder returns.
Thesis Risk
The largest risk to our thesis is the company's ability to maintain volumes in a volatile environment along with the company's ties to Occidental Petroleum. The company has strong guidance, and in the current environment we expect it to succeed, but that success is not guaranteed. In a lower capital expenditure environment, the company will struggle to continue returns.
Conclusion
Western Midstream is a $10 billion midstream company, one of the largest. The company has been punished before for its intertwined assets with Occidental Petroleum along with the impacts to the company from declining capital spending in the markets. However, the company continues to have a strong portfolio of assets with strong FCF.
The company currently has an almost 8% dividend yield it can comfortably afford. Its debt has hit targets as well. We'd like to see the company work to aggressively repurchase shares, given its dividend yield. Overall, regardless of what happens, at its current price level the company is a valuable long-term investment.
For further details see:
Western Midstream: Buy The Dip