2023-11-07 14:26:00 ET
Summary
- Western Midstream Partners, LP is a large midstream company with an $11 billion market capitalization and an 8% dividend yield.
- The company's recent performance showed strong growth in natural gas, crude oil, and produced-water throughput.
- Western Midstream recently completed the acquisition of Meritage Midstream, which will enhance its asset portfolio and increase shareholder returns.
Western Midstream Partners, LP ( WES ) is a large midstream company, with a $11 billion market capitalization. The company has an 8% dividend yield and is heavily tied to its sponsor Occidental Petroleum (OXY) as a source of both cash flow and demand for assets. As we'll see throughout this article, Western Midstream has a unique ability to generate strong shareholder returns.
Western Midstream Ownership
Western Midstream has a unique ownership structure, with the company is 50% owned by Occidental Petroleum.
Western Midstream Investor Presentation
The other 50% of the company's ownership is public unitholders. Occidental Petroleum also has a separate direct 2% stake in the operating structure, meaning the company has a net 52% stake in the operating assets and the profit they derive along with the debt. That is a risk that public shareholders face, which we'll discuss in more detail later.
Western Midstream Performance
Western Midstream's performance in the most recent quarter was strong.
Western Midstream Investor Presentation
The company's natural gas throughput was 4.65 billion cubic feet / day, with 5% QoQ growth. The company's crude oil throughput was 681 thousand barrels / day, 7% QoQ growth. The company's produced-water throughput was more than a million barrels / day, representing massive 14% QoQ growth. The company's volumes saw strength across the board.
The company recently completed its acquisition of Meritage Midstream, which we'll discuss in more detail later. The deal came with $600 million in new senior notes due in 2029. The yield on the notes is 6.375%, representing a substantial amount of strength that we like to see. The company increased its base distribution, and now has an 8% dividend yield base.
At the same time, the company repurchased $128 million shares (5.1 million common units) from Occidental Petroleum. We like to see increased repurchases here, as it saves the company on dividends, and also helps its long-term shareholder returns.
Western Midstream Meritage Midstream
The company recently closed on a large $800 million acquisition of Meritage Midstream.
Western Midstream Investor Presentation
The asset has strong synergies with the company's existing asset base in the Powder Riven Basin. It also enables the company to have newer cryogenic processing capacity. The company can achieve stronger margins with its tightly integrated asset portfolio, and expects to be more competitive in the industry it operates in.
The company has already increased its base dividend and expects to be able to increase shareholder returns over time.
Western Midstream Outlook
The company's outlook is to continue strong shareholder returns.
Western Midstream Investor Presentation
The company's guidance for the year is for $2 billion in adjusted EBITDA at the midpoint and $950 million in free cash flow ("FCF"). The company expects roughly $900 million in dividend expenditures from its FCF. The company has incredibly modest commodity price sensitivities, and expects its growth rates to remain incredibly strong.
Its debt obligations remain low and as seen with its recent bond issuance, the company's business is strong. The company can continue to achieve low interest rates and strong performance in its business.
Western Midstream Shareholder Returns
The company is committed to strong shareholder returns on the basis of this financial position.
Western Midstream Investor Presentation
The company's TTM FCF was $1.05 billion. The company plans to start paying its enhanced distribution next year, but it had $812 million in base distributions to shareholders, a more than 8% yield. The company also earned $236 million in extra cash flow from its debt repayment / additions schedule that it had.
The company spent $297 million on unit repurchases and finished with almost $300 million in excess FCF. The company is continuing to target a 3.2x net debt multiple, and it is currently ~$400 million away from that at 3.4x. The company needs to hit that to continue its enhanced distribution, but it has the cash flow to make it happen.
As far as midstream companies go, the company has low net debt, which will enable it to protect its financials in a rising interest rate environment.
Thesis Risk
The largest risk to our thesis is the company's ownership by Occidental Petroleum. That was a risk when Occidental Petroleum almost went bankrupt during the COVID-19 related price collapse. It will continue to be a risk as long as the company's ownership is so concentrated.
Any issue with Occidental Petroleum could punish Western Midstream, which is much relevant asset to those shareholders.
Conclusion
Western Midstream has an impressive portfolio of assets. The company is well integrated, and recently took advantage of its financial strength to acquire Meritage Midstream. The company's use of debt for the acquisition is exciting to see, and the company was able to issue relatively low cost debt for the acquisition showing its financial strength.
The company does have a higher premium, as a result of its financial strength. Its FCF yield is roughly 10%, which is low for the industry. However, it's also undergoing both buybacks and share repurchases, highlighting its financial strength. We expect Western Midstream Partners, LP to continue deploying its cash flow for shareholder returns, making it a valuable long-term investment.
For further details see:
Western Midstream Remains Focused On Shareholder Returns