8-K: Western Midstream Shifts to Fixed-Fee, Redeems Units

Western Midstream Partners, LP has amended its Delaware Basin gas gathering contracts with Occidental and secured new agreements with ConocoPhillips, transitioning to a fixed-fee structure and redeeming 15.3 million common units from Occidental.

Summary

• Western Midstream Partners, LP (WES) subsidiary, Delaware Basin Midstream LLC (DBM), amended its Gas Gathering Agreement with Anadarko E&P Onshore LLC (AEP), a subsidiary of Occidental Petroleum Corporation (Occidental), effective January 1, 2026.
• The amendment replaces a cost-of-service-based gathering fee structure with a fixed-fee structure and adds a new minimum volume commitment (MVC) through the end of 2027.
• WES also entered into new natural-gas gathering and processing agreements with a subsidiary of ConocoPhillips, adding new dedicated volumes to WES's system.
• In consideration for these contract amendments and new agreements, Occidental will transfer approximately 15.3 million WES common units, valued at $610.0 million, to WES for redemption and cancellation on February 3, 2026.
• This transaction is intended to be a value-neutral exchange, with cumulative distribution savings from the unit redemption expected to largely offset the cumulative reduction in operating cash flows from the new fixed-fee structure over time.
• Occidental's total ownership in WES will decrease from approximately 42% to 40% (including common and GP units), and its common unit ownership will be 37.2% after the redemption.
• The conversion to a fixed-fee structure is not expected to reduce Adjusted EBITDA through 2027, with minimal impact until 2032.
• WES anticipates maintaining net leverage at or near 3.0x Adjusted EBITDA in 2026, despite a robust $1.1 billion growth-oriented capital program and the acquisition of Aris Water Solutions.

Sentiment

Score: 8

Explanation: The filing outlines a strategic and financially disciplined move by WES to enhance its long-term stability and independence. The transition to fixed-fee contracts, diversification of customer base, and unit redemption are positive steps for transparency, revenue predictability, and per-unit metrics. The explicit expectation of maintaining financial metrics like Adjusted EBITDA and leverage, despite significant capital outlays, reinforces a strong financial position. While there are economic concessions, the "value-neutral" nature and offsetting distribution savings mitigate immediate negative impacts.

Positives

• Transition from a cost-of-service to a simplified, fixed-fee structure enhances transparency and aligns interests with its largest producer, Occidental.
• New minimum volume commitments (MVCs) with Occidental provide volumetric protection through 2027, and the processing contract continues MVCs through 2035.
• New natural-gas gathering and processing agreement with ConocoPhillips diversifies WES's customer base and reduces total related-party revenue by more than 10%.
• Redemption and cancellation of 15.3 million common units from Occidental (valued at $610.0 million) enhances Adjusted EBITDA per unit and maintains public float.
• The transaction is structured as a value-neutral exchange, with distribution savings from the unit redemption expected to largely offset reduced operating cash flows.
• The conversion to a fixed-fee structure is not expected to reduce Adjusted EBITDA through 2027 and will have a minimal impact until 2032.
• WES expects to maintain net leverage at or near 3.0x Adjusted EBITDA in 2026, demonstrating disciplined capital allocation and financial flexibility despite significant capital programs and acquisitions.
• The amended contracts enhance drilling economics and encourage development of top-tier acreage in Occidental's portfolio.
• The primary term of the Gas Gathering Agreement is extended through December 31, 2035, with potential for further extensions.

Negatives

• The transaction involves economic concessions reflected in the agreements, leading to a corresponding decrease in WES's operating cash flow over time, though expected to be offset by distribution savings.
• Specific fixed-fee rates and minimum volume commitments are redacted in the public filing (Exhibit 10.1), limiting full quantitative analysis.
• AEP indemnifies DBM for incorrect allocation statements, shifting some risk to AEP.

Risks

• A number of factors could cause actual results to differ materially from projections, including WES's ability to meet financial guidance or distribution expectations, operate assets safely and efficiently, and meet projected in-service dates for capital-growth projects.
• Construction costs or capital expenditures could exceed estimated or budgeted costs.
• The supply of, demand for, and price of oil, natural gas, NGLs, and related products or services could impact results.
• DBM may discontinue service to uneconomical Points of Receipt after December 31, 2027, or discontinue operation of all or part of the system if deemed uneconomical.
• AEP indemnifies DBM for losses caused by incorrect allocation statements or failure to timely provide them, indicating a potential for such issues.
• The forward-looking non-GAAP measures (Adjusted EBITDA, Free Cash Flow) are not reconciled to GAAP equivalents, as items necessary to estimate such amounts are not reasonably estimable, which could significantly impact financial measures.

Future Outlook

WES expects the conversion to a fixed-fee structure will not reduce Adjusted EBITDA through 2027 and will have a minimal impact until 2032. Beginning in 2026, ongoing distribution savings from the common unit redemption, combined with cost reduction initiatives launched in 2025, are anticipated to fully offset the reduction in Free Cash Flow after distributions resulting from these transactions. Despite a robust $1.1 billion growth-oriented capital program in 2026 and the integration of Aris Water Solutions, WES aims to maintain net leverage at or near 3.0x Adjusted EBITDA. Management believes these changes provide greater clarity and confidence in WES's long-term earnings potential and position the company for new growth opportunities and sustainable, industry-leading returns.

Management Comments

• "These changes represent a significant step in WES's continuing evolution after becoming a standalone midstream enterprise."
• "The cost-of-service model was instrumental in safeguarding cash flows during our substantial investment in building WES's Delaware Basin gathering system. As the basin has matured, transitioning to a simplified, fixed-fee structure is both logical and timely."
• "This evolution strengthens alignment with our largest producer, further diversifies our customer base, enhances transparency, and reinforces our ability to deliver enduring value for our stakeholders."
• "The revised natural-gas gathering terms in exchange for common units is a highly strategic transaction for WES, realigning our equity capital structure to accommodate changes that we believe provide long-term strategic benefits to WES."
• "Redeeming the units received from Occidental enhances Adjusted EBITDA per unit, creating value for all unitholders, while still maintaining the public float."
• "Even as we undertake a robust capital program in 2026 and integrate Aris, we expect to maintain net leverage at or near 3.0x, demonstrating our commitment to disciplined capital allocation and financial flexibility."
• "As the gathering contract amendment addresses our most material cost-of-service rate structure, we believe it provides investors with greater clarity and confidence in WES's long-term earnings potential."
• "Our diversified asset base and strong balance sheet positions us to continue capturing new growth opportunities and delivering sustainable, industry-leading returns for our stakeholders."

Industry Context

This announcement reflects a broader industry trend in the midstream sector, particularly in mature basins like the Delaware Basin, where operators are moving away from complex cost-of-service agreements towards more transparent and predictable fixed-fee structures. This shift aligns interests between producers and midstream providers, offering producers more predictable costs and midstream companies more stable revenue streams. The diversification of WES's customer base by adding ConocoPhillips volumes, while reducing reliance on its largest producer (Occidental), is a strategic move to enhance resilience and reduce related-party risk, a common objective for midstream companies seeking to operate more independently. The focus on maintaining disciplined leverage despite significant capital programs also aligns with investor expectations for financial prudence in the energy sector.

Comparison to Industry Standards

• The transition from cost-of-service to fixed-fee structures is a common evolution in mature basins, as seen with other midstream operators like Energy Transfer (ET) or Kinder Morgan (KMI) who have diversified their contract portfolios over time. This move by WES aligns it with industry best practices for revenue predictability.
• The addition of ConocoPhillips as a new customer and the reduction of related-party revenue by over 10% is a positive step towards greater independence, similar to how other midstream companies like Targa Resources (TRGP) or MPLX LP (MPLX) have expanded their third-party business to mitigate concentration risk.
• Maintaining net leverage at or near 3.0x Adjusted EBITDA, especially with a $1.1 billion capital program and the Aris Water Solutions acquisition, demonstrates a commitment to financial discipline that is generally viewed favorably by credit rating agencies and investors, often comparing well to peers who might target 3.5x to 4.0x.
• The redemption of common units from Occidental, while reducing Occidental's ownership, is a strategic move to optimize the capital structure and enhance per-unit metrics, a tactic employed by various MLPs to create unitholder value and signal a more independent operational stance.

Corporate Governance

Related Party Transactions

• Amendment to Gas Gathering Agreement between DBM (WES subsidiary) and Anadarko E&P Onshore LLC (AEP, Occidental subsidiary).
• Unit Redemption Agreement between WGR (Occidental subsidiary), AE&P (Occidental subsidiary), WES, and DBM.
• Occidental indirectly holds all equity interests of WES's general partner and will hold 37.2% of WES's outstanding Common Units after the transaction.
• The transaction involves Occidental transferring 15.3 million WES common units to WES for redemption.

Stakeholder Impact

• Shareholders (Unitholders): Expected to benefit from enhanced Adjusted EBITDA per unit due to unit redemption, increased transparency from fixed-fee contracts, and reduced related-party risk. Long-term earnings potential is expected to be clearer.
• Occidental Petroleum Corporation: Reduces its ownership stake in WES, receives economic concessions on gathering fees, which enhances drilling economics and encourages development of its acreage.
• ConocoPhillips: Gains a new natural-gas gathering and processing agreement with WES for a portion of its Delaware Basin production.
• Employees: No direct impact mentioned, but a more stable and diversified company could offer greater long-term security.
• Customers (Producers): Benefit from enhanced drilling economics and more predictable fixed-fee structures.
• Creditors: Maintaining net leverage at or near 3.0x Adjusted EBITDA, despite significant capital programs, signals financial prudence and stability, which is positive for creditors.

Next Steps

• Closing of the unit redemption on February 3, 2026.
• DBM to provide AEP with annual production forecasts and monthly nomination forecasts.
• DBM to provide AEP with monthly actual volume data.
• AEP to provide DBM with monthly allocation statements.
• WES to continue its anticipated $1.1 billion growth-oriented capital program in 2026.
• WES to continue integrating Aris Water Solutions.
• WES to continue cost reduction initiatives launched in 2025.
• WES to file all Tax returns and other reports consistent with the Intended Tax Treatment (deemed distribution).

Key Dates

Recommendation

The filing details a highly strategic and financially sound set of transactions for Western Midstream. The shift from a cost-of-service to a fixed-fee structure, coupled with new minimum volume commitments, significantly enhances revenue predictability and transparency, which are key attractions for midstream investors. Diversifying the customer base by adding ConocoPhillips and reducing related-party revenue by over 10% mitigates concentration risk with Occidental. The unit redemption, valued at $610 million, is accretive to Adjusted EBITDA per unit and demonstrates disciplined capital allocation, while the commitment to maintaining a strong balance sheet with net leverage at or near 3.0x Adjusted EBITDA, even with substantial growth capital, underscores financial prudence. These actions collectively position WES for long-term stability, improved per-unit metrics, and greater independence, making it an attractive investment.

Keywords

Midstream, Natural Gas Gathering, Natural Gas Processing, Delaware Basin, Western Midstream Partners, WES, Occidental Petroleum, Anadarko E&P Onshore, ConocoPhillips, Fixed-Fee Contract, Minimum Volume Commitment, Unit Redemption, Common Units, Energy Infrastructure, Oil & Gas, Partnership, MLP