10-K: Western Midstream Partners, LP 10-K Filing: Detailed Analysis of Operations, Financials, and Governance

This 10-K filing provides a comprehensive overview of Western Midstream Partners, LP's business, financial performance, risk factors, and corporate governance as of December 31, 2023.

Summary

• Western Midstream Partners, LP (WES) is a master limited partnership focused on midstream energy services, including gathering, processing, and transportation of natural gas, crude oil, and produced water.
• As of February 14, 2024, WES had 380,483,668 common units outstanding, with 185,181,578 held by affiliates of its General Partner, including Occidental, and 195,302,090 held by the public.
• The company's operations are primarily concentrated in Texas, New Mexico, the Rocky Mountains, and North-central Pennsylvania.
• WES's assets include extensive gathering systems, processing plants, and pipelines for natural gas, NGLs, and crude oil, as well as produced water disposal systems.
• In 2023, WES acquired Meritage Midstream Services II, LLC for $885 million, expanding its footprint in the Powder River Basin.
• WES's financial performance is significantly influenced by its relationship with Occidental, which accounted for 59% of total revenues and other, 34% of natural gas throughput, 86% of crude oil and NGLs throughput, and 78% of produced water throughput in 2023.
• The company's cash distribution policy requires distributing 100% of available cash within 55 days after the end of each quarter.
• WES's cash flow is dependent on the ability of OLP (a subsidiary) to make distributions, which in turn depends on OLP's operational cash generation.
• For the year ended December 31, 2023, WES reported a net income of $1,022.2 million, with a gross margin of $2,341.2 million.
• The company's Adjusted EBITDA was $2,068.6 million and Free cash flow was $964.2 million for the year ended December 31, 2023.
• WES is subject to various regulations, including pipeline safety, environmental, and interstate commerce regulations.
• The company's financial results are subject to risks related to commodity prices, customer creditworthiness, and regulatory changes.

Sentiment

Score: 5

Explanation: The document presents a mixed picture. While WES has made strategic acquisitions and has a strong operational base, it faces significant risks related to its dependence on Occidental, commodity price volatility, and regulatory changes. The financial results show a decrease in net income and free cash flow, which is a concern. The sentiment is neutral to slightly negative.

Positives

• WES has a substantial presence in basins with strong producer economics, particularly in the Delaware, DJ, and Powder River Basins.
• The company has well-positioned and well-maintained assets, providing opportunities for expansion and attracting additional volumes.
• WES mitigates commodity-price and volumetric risk through fee-based contracts, minimum-volume commitments, and cost-of-service structures.
• The company has strong liquidity to pursue expansion and acquisition opportunities.
• WES's relationship with Occidental enables it to pursue more capital-efficient projects.
• WES has a culture of safety and focus on protecting the environment.
• WES has a strong focus on generating efficiencies between its commercial, engineering, and operations teams.

Negatives

• WES is heavily dependent on Occidental for a significant portion of its revenue and throughput.
• The company is exposed to the credit risk of third-party customers.
• Sustained low commodity prices could adversely affect WES's business and cash flows.
• WES's cash distribution policy limits its ability to grow as fast as businesses that reinvest their available cash.
• The company's profitability may be negatively impacted by inflation in the cost of labor, materials, and services.
• WES is subject to potential conflicts of interest due to Occidental's ownership of its general partner.
• The company's indebtedness may limit its ability to capitalize on acquisitions and other business opportunities.

Risks

• A material reduction in Occidentals production would result in a material decline in WES's revenues and cash available for distribution.
• Any development that materially and adversely affects Occidentals operations, financial condition, or market reputation could have a material and adverse impact on WES.
• Any future credit-rating downgrade could negatively impact WES's cost of and ability to access capital.
• Sustained low natural-gas, NGLs, or oil prices and volatility of such prices could adversely affect WES's business.
• WES's success depends on its ability to compete for new sources of oil and natural-gas throughput.
• Implementation of Colorado Senate Bill 19-181 may increase costs and limit oil and natural-gas exploration and production operations in the state.
• Changes in laws or regulations regarding hydraulic fracturing could result in increased costs, operating restrictions, or delays in the completion of oil and natural-gas wells.
• Adoption of new or more stringent legal standards relating to induced seismic activity associated with produced-water disposal could affect WES's operations.
• Adverse developments in WES's geographic areas of operation could disproportionately impact its business.
• WES's indebtedness may limit its ability to capitalize on acquisitions and other business opportunities or its flexibility to obtain financing.
• WES may not be able to obtain funding on acceptable terms or at all.
• WES's failure to maintain an adequate system of internal control over financial reporting could adversely affect its ability to accurately report its results.
• WES's business could be negatively affected by security threats, including cyber-threats, and other disruptions.
• WES typically does not obtain independent evaluations of hydrocarbon reserves connected to its systems.
• WES's results of operations could be adversely affected by asset impairments.
• If third-party pipelines or other facilities interconnected to WES's systems become unavailable, WES's revenues and cash available for distribution could be adversely affected.
• A change in the jurisdictional characterization of some of WES's assets could result in increased regulation.
• Adoption of new or more stringent climate-change or other air-emissions legislation or regulations could negatively impact WES.
• Federal and state legislative and regulatory initiatives relating to pipeline safety and integrity management could subject WES to increased capital costs, operational delays, and costs of operation.
• Some portions of WES's pipeline systems have been in service for several decades, and WES has a limited ownership history with respect to certain of its assets.
• WES is subject to stringent and comprehensive environmental laws and regulations that may expose it to significant costs and liabilities.
• WES's construction of new assets is subject to regulatory, environmental, political, legal, and economic risks.
• WES may fail to successfully combine its business with the assets and business of Meritage.
• WES is subject to increased scrutiny from institutional investors with respect to its governance structure and the social cost of its industry.
• WES has partial ownership interests in several joint-venture legal entities that it does not operate or control.
• WES does not own all of the land on which its pipelines and facilities are located, which could result in disruptions to its operations.
• WES's business involves many hazards and operational risks, some of which may not be fully covered by insurance.
• Our general partners liability regarding our obligations is limited.
• Our partnership agreement limits our general partners fiduciary duties to holders of our common units and restricts the remedies available to holders of our common units for actions taken by our general partner that might otherwise constitute breaches of fiduciary duty.
• The general partner interest in us may be transferred to a third party without unitholder consent.
• We may issue additional units without unitholder approval, which would dilute existing ownership interests.
• The market price of our common units could be affected adversely by sales of substantial amounts of our common units in the public or private markets, including sales by Occidental or other large holders.
• Unitholders may have liability to repay distributions that were wrongfully distributed to them.
• Unitholders liability may not be limited if a court finds that unitholder action constitutes control of our business.
• Our taxation as a flow-through entity depends on our status as a partnership for U.S. federal income tax purposes, and our not being subject to a material amount of entity-level taxation by individual states.
• The tax treatment of publicly traded partnerships or an investment in our common units could be subject to potential legislative, judicial, or administrative changes and differing interpretations, possibly on a retroactive basis.
• If the IRS were to contest the federal income tax positions we take, it may impact the market for our common units adversely, and the costs of any such contest would reduce the cash available for distribution to our unitholders.
• If the IRS makes audit adjustments to our income tax returns, it (and some states) may assess and collect any taxes (including any applicable penalties and interest) resulting from such audit adjustment directly from us.
• Our unitholders are required to pay taxes on their share of our income even if they do not receive any cash distributions from us.
• Tax gain or loss on the disposition of our common units could be more or less than expected.
• Tax-exempt entities face unique tax issues from owning our common units that may result in adverse tax consequences to them.
• Non-U.S. unitholders will be subject to U.S. taxes and withholding with respect to their income and gain from owning our units.
• We generally prorate our items of income, gain, loss, and deduction between transferors and transferees of our common units each month based on the ownership of our common units on the first day of each month, instead of on the basis of the date a particular common unit is transferred.
• We have adopted certain valuation methodologies in determining a unitholders allocations of income, gain, loss, and deduction.
• Our unitholders are subject to state and local taxes and return-filing requirements in jurisdictions where they do not live as a result of investing in our common units.

Future Outlook

WES intends to continue generating low-volatility cash flows through fee-based contracts and to optimize the return of cash to stakeholders.

Management Comments

• Our primary business objective is to create long-term value for our unitholders through continued delivery of profitable operations and return of capital to stakeholders over time.
• Our foundational principles of operational excellence, superior customer service, and sustainable operations influence our decision making and long-term strategy.

Industry Context

The midstream services business is highly competitive, with WES competing against other midstream companies, producers, and intrastate and interstate pipelines. Competition is based on reputation, commercial terms, operational reliability, service levels, location, available capacity, capital expenditures, and fuel efficiencies.

Comparison to Industry Standards

• WES's Adjusted gross margin for natural gas assets averaged $1.28 per Mcf, which is within the range of other midstream companies.
• WES's Adjusted gross margin for crude oil and NGLs assets averaged $2.48 per Bbl, which is competitive with other midstream companies.
• WES's Adjusted gross margin for produced water assets averaged $0.83 per Bbl, which is slightly below the average of other midstream companies.
• WES's reliance on fee-based contracts is a common practice in the midstream industry to mitigate commodity price risk.
• WES's focus on operational efficiency and cost control is consistent with industry best practices.
• WES's capital expenditure plans are aligned with industry trends, focusing on growth and maintenance projects.

Corporate Governance

Legal Proceedings

• In connection with the sales of our interests in both the Mont Belvieu JV and Whitethorn LLC on February 16, 2024, the Mont Belvieu Lawsuit and the Whitethorn Lawsuit were settled.

Related Party Transactions

• WES has significant gathering, processing, and produced-water disposal arrangements with affiliates of Occidental on most of its systems.
• WES has entered into operating leases for corporate and shared field offices with Occidental as the lessor.
• WES has entered into a Services Agreement with Occidental for certain centralized corporate functions.
• WES has entered into construction reimbursement agreements with Occidental.
• WES has entered into a Commercial Understanding Agreement with Occidental.

Stakeholder Impact

• Shareholders: The document provides detailed information about WES's financial performance, operations, and risks, which is crucial for making informed investment decisions.
• Employees: The document outlines the compensation structure for executive officers and provides insights into the company's performance and future outlook.
• Customers: The document highlights WES's commitment to providing reliable and efficient midstream services, which is important for its customers.
• Suppliers: The document provides information about WES's operations and capital expenditures, which is relevant for its suppliers.
• Creditors: The document provides information about WES's financial condition, debt obligations, and liquidity, which is important for its creditors.

Next Steps

• WES expects to complete the Mentone Train III processing plant at the end of the first quarter of 2024.
• WES expects to complete the North Loving processing plant in the first quarter of 2025.
• WES expects to install additional compression at the Chipeta complex by July 2024.
• WES will continue to evaluate the relevant price environments and adjust its capital spending plans to reflect its customers anticipated activity levels.
• WES will continue to monitor and mitigate security threats and to increase security for its facilities, infrastructure, and information.

Key Dates

Keywords

Midstream Energy, Natural Gas, Crude Oil, NGLs, Produced Water, Gathering, Processing, Transportation, Pipeline, Delaware Basin, DJ Basin, Powder River Basin, Occidental Petroleum, Master Limited Partnership, Financial Performance, Risk Factors, Corporate Governance