Key analysis: Western Gas Partners’ 1st quarter 2014 earnings

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Must-know: Analyzing Western Gas Partners' 1Q14 earnings (Part 2 of 6)

(Continued from Part 1)

1Q14 earnings

Western Gas Partners (WES) released its financial information for 1Q14 on May 6, 2014. The company recorded total revenues of $279.5 million for 1Q14, almost unchanged from the $277.7 million recorded in 4Q13. Total revenues from affiliates were $206.3 million, and $73.1 million of the revenues came from the third parties. Affiliates include Anadarko Petroleum (APC) and its subsidiaries and also include WES’s equity interests in Fort Union, White Cliffs, Rendezvous, and the Mont Belvieu joint venture. The company recorded a marginally improved bottom line. It recorded a net income of $91.1 million in 1Q14 versus a net income of $89.2 million in 4Q13, or an increase of 2.1%. Net income per common unit was $0.54 in 1Q14, against the net income of $0.56 per common unit recorded in the last quarter of 2013, primarily because of the higher average common units outstanding in the latest quarter. Earnings for 1Q14 and 4Q13 beat consensus estimates. Consensus estimates for 1Q14 and 4Q13 were $0.50 and 0.46 per common unit, respectively.

Distributable cash flows increased by ~13% to $119.3 million in 1Q14 over $105.7 million in the previous quarter. Adjusted EBITDA increased 9.3%—from $129.0 million in 4Q13 to $141.0 million in 1Q14. The company’s gross margin improved marginally during the first quarter of 2014 to 67.1% versus the 66.1% recorded in the last quarter of 2013. WES’s general and administrative costs and depreciation and amortization costs in 1Q14 increased by 11.7% and 3.2% over 4Q13, respectively. Interest expense remained decreased by 2.4% in 1Q14.

Total natural gas asset throughput for WES for 1Q14 averaged 3.4 billion cubic feet per day, or 2% lower than 4Q13 and 17% above 1Q13. Gathering, treating, and transportation volume throughput in 1Q14 went down by 19% over 4Q13, while processing throughput increased by 22%. In 4Q13, reported throughput included 112 million cubic feet per day of volumes at the Wattenberg system (a natural gas gathering and treating facility run by Anadarko) and processed in the Platte Valley system (acquired by WES in February 2011). In 1Q14, the Wattenberg and Platte Valley systems combined into a new entity called the “DJ Basin Complex.” So the results of these two systems are presented together and the Wattenberg system volumes, previously reported as “Gathering, treating and transportation,” are now reported as “Processing.” Adjusted for comparability, WES’s 1Q14 reported throughput would have been 2% higher than the previous quarter.

During the latest quarter, total crude and NGL throughput increased significantly. The volume more than tripled to 79 thousand barrels per day from 25 thousand barrels per day in 4Q13. This occurred due mainly to Mont Belvieu fractionators 7 and 8 coming online during the reported quarter and recent acquisitions of Texas Express and Front Range.

The adjusted gross margin, which includes cash distributions received from equity investments, remained steady at $0.60 per thousand cubic feet of natural gas gathered. Since 1Q13, gross margin per thousand cubic feet has increased by ~11% due to various projects coming online.

Benjamin M. Fink, the chief financial officer of WES, said in the conference call of 1Q14, “We’ve historically reported a single gross margin per Mcf number for our entire portfolio. This metric historically blended our gas assets together with our crude and NGL assets but mostly reflected gas asset performance due to minimal cash flows from our crude and NGL assets. Today, with Mont Belvieu fractionators 7 and 8 now on line, our recent acquisitions of Texas Express and Front Range and the future opportunities that we see in the crude side of the business, we believe that our cash flows from crude and NGL assets will become more meaningful going forward. Therefore, beginning this quarter, we’re reporting an adjusted gross margin per Mcf metric strictly for our natural gas assets and a separate adjusted gross margin per barrel metric for our crude and NGL assets.”

Distribution per unit declared on April 17, 2014, was $0.63 per unit, or $2.50 per unit annualized. This amounts to a distribution yield of ~3.5% for a stock price of $71.38 as of May 20, 2014. Distribution coverage for the first quarter of 2014 was 1.2x, compared to 1.0x for 4Q13. This distribution represents a 4% increase over 4Q13 and a 16% increase over 1Q13.

Western Gas Partners (WES) is a master limited partnership operating in the midstream energy space. WES’s general partner is owned by Anadarko Petroleum Corporation (APC). WES is a component of the Alerian MLP ETF (AMLP). APC is part of the Energy Select Sector SPDR (XLE) and SPDR S&P Oil & Gas Exploration & Production (XOP) ETFs.

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