425: Western Midstream Reports Record Q2, Acquires Aris Water

Western Midstream Partners, LP announced record second-quarter financial results and a strategic $2 billion acquisition of Aris Water Solutions, alongside a major natural gas processing plant expansion.

Summary

• Reported strong second quarter operational and financial results, achieving the highest quarterly adjusted EBITDA in the partnership's history.
• Experienced increased throughput across all core operating assets and product lines, with record-breaking natural gas, crude oil, NGLs, and produced water throughput in the Delaware Basin.
• Announced an agreement to acquire Aris Water Solutions for $2 billion, including assumed net debt and liabilities, valuing Aris at approximately 7.5 times 2026 consensus EBITDA (inclusive of $40 million in estimated cost synergies).
• The Aris acquisition is expected to be accretive to 2026 free cash flow per unit and will be financed with up to 28% cash and 72% WES units, maintaining a pro forma net leverage of approximately 3 times.
• Sanctioned a second train at the North Loving natural gas processing plant in the Delaware Basin, adding 300 million cubic feet per day (MMcf/d) capacity, increasing the plant's total capacity to 550 MMcf/d and the West Texas complex capacity to approximately 2.5 billion cubic feet per day (Bcf/d) by early Q2 2027.
• Implemented new initiatives in the first quarter, yielding permanent annual run rate cost savings of approximately $50 million.
• Generated net income attributable to limited partners of $334 million, adjusted EBITDA of $618 million, cash flow from operating activities of $564 million, and free cash flow of $388 million in Q2 2025.
• Maintained a net leverage ratio of 2.9 times at quarter-end and retired $337 million of senior notes upon maturity in early June with cash on hand.
• Declared a quarterly distribution of $0.91 per unit for Q2 2025, consistent with the prior quarter.

Sentiment

Score: 9

Explanation: The filing conveys a highly positive sentiment, driven by record financial performance, a significant and accretive strategic acquisition, substantial organic growth projects with strong returns, and successful cost reduction initiatives. The company's strong balance sheet and commitment to unitholder returns further reinforce this positive outlook, despite minor sequential declines in some gross margins which were in line with expectations.

Positives

• Achieved the highest quarterly adjusted EBITDA in the partnership's history, reaching $618 million.
• Reported strong operational performance with increased throughput across all core operating assets and product lines.
• Set new records for natural gas, crude oil, NGLs, and produced water throughput in the Delaware Basin.
• Announced the strategic and accretive acquisition of Aris Water Solutions, which diversifies the customer base and expands the footprint in New Mexico.
• The Aris acquisition is expected to be accretive to 2026 free cash flow per unit and includes $40 million in estimated cost synergies.
• Sanctioned the North Loving II natural gas processing plant expansion, a short-cycle capital project with expected unlevered returns of at least mid-teens, addressing growing demand.
• Identified and are realizing permanent annual run rate cost savings of approximately $50 million through operational efficiencies.
• Maintained a strong balance sheet with a top-tier net leverage ratio of 2.9 times, even with significant capital investments.
• Secured long-term contracts, material acreage dedications, and minimum-volume commitments with investment-grade counterparties, enhancing revenue stability.

Negatives

• Per Mcf adjusted gross margin for natural gas decreased by 2 cents on a sequential quarter basis, primarily due to lower excess natural gas liquids volumes and reduced NGL pricing.
• Per-barrel adjusted gross margin for crude oil and NGLs decreased by 15 cents compared to the prior quarter, mainly due to normalized timing of distribution payments and increased throughput from lower-margin equity investments.
• Anticipate higher operation and maintenance expense during the third quarter due to increased utility expense from hotter summer months and higher estimated electricity pricing, though 75% is reimbursed by customers.

Risks

• The expected timing and likelihood of completion of the Aris Water Solutions transaction, including the timing, receipt, and terms and conditions of any required governmental and regulatory approvals that could reduce anticipated benefits or cause the parties to abandon the transaction.
• The ability to successfully integrate the businesses of Western Midstream and Aris Water Solutions.
• The occurrence of any event, change, or other circumstances that could give rise to the termination of the Merger Agreement.
• The possibility that stockholders of Aris Water Solutions may not approve the Merger Agreement.
• The risk that the parties may not be able to satisfy the conditions to the transaction in a timely manner or at all.
• Risks related to disruption of management time from ongoing business operations due to the transaction.
• The risk that any announcements relating to the transaction could have adverse effects on the market price of WES's common units or Aris Class A Common Stock.
• The risk that the transaction and its announcement could have an adverse effect on the ability of WES and Aris to retain customers and retain and hire key personnel and maintain relationships with their suppliers and customers and on their operating results and businesses generally.
• The risk the pending transaction could distract management of both entities and they will incur substantial costs.
• The risk that problems may arise in successfully integrating the businesses of the companies, which may result in the combined company not operating as effectively and efficiently as expected.
• The risk that the combined company may be unable to achieve synergies or it may take longer than expected to achieve those synergies.

Future Outlook

The company expects portfolio-wide average year-over-year throughput to increase by mid-single digits for natural gas and produced water, and low-single digits for crude oil and NGLs in 2025. Delaware Basin volumes are expected to remain flat in Q3 2025 compared to Q2, with activity weighted towards Q4. Meaningful natural gas throughput growth is anticipated in the Uinta Basin in the second half of 2025. For 2026, capital expenditures are projected to be at least $1.1 billion, primarily for the Pathfinder pipeline and North Loving II expansion, which are expected to drive substantial EBITDA growth starting in 2027. The company anticipates continued average year-over-year throughput growth across all three product lines in 2026, even before the Aris contribution. Distribution growth is intended to trail earnings growth to increase distribution coverage and provide greater cash flow certainty, while maintaining a long-term mid-single digit distribution growth outlook.

Management Comments

• Oscar Brown, CEO: "The second quarter was both eventful and highly successful for WES... highlighted by sequential improvement in adjusted gross margin and the highest quarterly adjusted EBITDA in our partnerships history."
• Oscar Brown, CEO: "Our steadfast commitment to and effective execution of our prudent growth strategy truly distinguishes this quarters performance. This is exemplified by our recent announcement of an agreement to acquire Aris Water Solutions and the sanctioning of a second train at our North Loving natural gas processing plant."
• Oscar Brown, CEO: "By financing the transaction with up to 28 percent cash and 72 percent WES units, we expect our industry-leading net leverage position to remain at approximately 3 times on a pro forma basis."
• Oscar Brown, CEO: "Our North Loving Train I reached full capacity within just one month of its late February 2025 start up, and we are still relying on offloads at times to manage our customers throughput profile."
• Danny Holderman, COO: "Our second quarter natural gas throughput increased by 3 percent on a sequential quarter basis, primarily due to increased throughput across all our core operating basins."
• Kristen Shults, CFO: "Through targeted optimization of field-level operations, procurement practices, and maintenance and turnaround procedures, we have successfully reduced downtime, increased efficiencies, and identified permanent annual run rate cost savings of approximately 50 million dollars."
• Kristen Shults, CFO: "Even with elevated levels of capital spending next year and the capital needed to close the Aris acquisition, we would still expect net leverage to remain at approximately 3 times."
• Jon VandenBrand, SVP of Commercial: "We're very positive that as North Loving II comes on, we're going to have a significant amount of volume day one upon that plant coming on."

Industry Context

The filing highlights the increasing importance of produced water management in the Delaware Basin, driven by growing volumes and new Texas Railroad Commission regulations, positioning Western Midstream as a key player through its Aris acquisition. The expansion of natural gas processing capacity, particularly with the North Loving II train, reflects the continued strong producer activity and increasing gas-to-oil ratios (GORs) in the Delaware Basin, indicating sustained demand for midstream infrastructure. The focus on integrated flow assurance and diversified customer base aligns with broader industry trends towards comprehensive service offerings and risk mitigation in volatile energy markets.

Comparison to Industry Standards

• The acquisition of Aris Water Solutions establishes Western Midstream as a 'best-in-class intra-basin produced water system provider' with a 'differentiated Texas and New Mexico water system,' suggesting a leading position in this specific segment compared to other regional water solution providers.
• The implied acquisition multiple of approximately 7.5 times 2026 consensus EBITDA for Aris, inclusive of synergies, provides a benchmark for valuation of water midstream assets in the current market.
• The company's maintained net leverage ratio of approximately 3 times is described as 'industry-leading' and 'top-tier,' indicating a strong financial position relative to its midstream peers.
• The expected unlevered returns of at least mid-teens for short-cycle capital projects like Pathfinder and North Loving II suggest competitive project economics within the midstream sector.

Stakeholder Impact

• Shareholders/Unitholders: Expected to benefit from increased distribution coverage, sustained and growing distributions, and enhanced long-term value through accretive acquisitions and capital-efficient growth projects.
• Customers: Will benefit from expanded service offerings, enhanced flow assurance, and sustainable water solutions, particularly in the Delaware Basin, due to the Aris acquisition and North Loving II expansion.
• Employees: The WES workforce was thanked for their hard work and dedication, and the Aris team and its stakeholders are expected to be welcomed into the WES partnership, implying integration and potential new opportunities.
• Creditors: The commitment to maintaining a strong balance sheet and industry-leading net leverage ratio (approximately 3 times) provides stability and predictability for creditors.

Next Steps

• Complete the regulatory review process for the Aris acquisition.
• Hold the Aris shareholder meeting to approve the merger agreement.
• Close the Aris acquisition, expected during the fourth quarter of 2025.
• Continue to receive updated forecasts from producers to develop 2026 forecasts.
• Attend upcoming conferences later in the month to engage with investors and analysts.
• Continue to implement and realize benefits from operational optimization initiatives in 2025 and 2026.
• Incur the majority of expenditures related to the Pathfinder pipeline and North Loving II expansion in 2026.

Key Dates

Recommendation

The filing presents a compelling case for a strong buy recommendation. Western Midstream has demonstrated exceptional financial performance with record adjusted EBITDA and strong free cash flow generation. The strategic acquisition of Aris Water Solutions is highly accretive, diversifies the business, and expands its footprint in a critical growth area (Delaware Basin water management). Concurrently, the sanctioning of North Loving II signals robust organic growth opportunities with attractive returns. The company's disciplined capital allocation, strong balance sheet with industry-leading leverage, and commitment to sustaining and growing distributions, while improving coverage, underscore its financial strength and long-term value creation potential. These factors collectively position Western Midstream for continued outperformance in the midstream sector.

Keywords

Midstream, Energy, Natural Gas, Crude Oil, NGLs, Produced Water, Delaware Basin, Permian Basin, DJ Basin, Uinta Basin, Acquisition, Aris Water Solutions, Western Midstream, WES, Infrastructure, Processing Plant, Pipeline, EBITDA, Free Cash Flow, Distribution, Capital Expenditure, Corporate Governance, Risk Management