Q4 2023 Western Midstream Partners LP Post Earnings Presentation

Participants

Daniel Edwards Jenkins; Director of IR - Western Midstream Holdings LLC; Western Midstream Partners, LP

Kristen S. Shults; Senior VP & CFO - Western Midstream Holdings LLC; Western Midstream Partners, LP

Presentation

Daniel Edwards Jenkins

Welcome to Western Midstream's Fourth Quarter 2023 Post Earnings Call Fireside Chat with our Chief Financial Officer, Kristen Shults.

Question and Answer Session

Daniel Edwards Jenkins

To start us off, can you provide an overview of WES' fourth quarter results and what some of the key drivers were for our strong fourth quarter performance?

Kristen S. Shults

Sure, Daniel. So for fourth quarter, we finished the quarter with $571 million of adjusted EBITDA, really strong quarter for WES. We had about $20 million worth of cumulative revenue recognition adjustments in that number. So without that, it would have been closer to $550 million.
When we take a step back and we look at just the total year, we experienced record-breaking throughput across the board. We had in the Delaware Basin alone, 11% growth for natural gas, 8% growth for crude oil and 21% for produced water, respectively.
And then, digging into the portfolio level growth, our natural gas throughput increased by 5% year-over-year. Our crude oil and NGL throughput increased by 7% year-over-year and our produced water throughput 21% year-over-year. So an incredibly successful year for WES as we've seen a lot of growth coming out of the basins.
We've seen the DJ Basin returning back to a growth mode, and as we're entering into 2024, we have all of our basins growing and adding to the portfolio. Another strong piece for the fourth quarter was the addition of Meritage, and we had 2.5 months of Meritage that contributed to the adjusted EBITDA, and we're going to see quite a bit of throughput growth 2024 relative to 2023 because of the Meritage volumes within the PRB.

Daniel Edwards Jenkins

Can you talk about the asset divestitures that WES announced last week? Why did WES decide to monetize these assets? And are there other noncore assets that we're interested in selling as well?

Kristen S. Shults

Daniel, we have employed a strategy over the last few years to divest of noncore assets and return that capital back into the base business and back to our stakeholders. The JVs in particular, we consider noncore, and quite a few things have just come together. So divested off 5 assets for $790 million, those included Marcellus, Saddlehorn, Whitethorn, Panola, Enterprise EF78.
Really excited to be able to recognize those kind of proceeds in aggregate. It's approximately 9.6x of 2023 adjusted EBITDA and be able to return that cash flow back into the business itself. We purchased Meritage at the end of last year for roughly the same amount as what we just divested -- the proceeds from the divestitures.
And what we've been able to do is delever in the process of getting rid of noncore assets and then shoring up our core assets, and at the same time, increasing our presence within the PRB so that we are the largest G&P within that area. So really excited that those came across, and we were able to announce those as part of our earnings call.

Daniel Edwards Jenkins

WES announced that it will be recommending an increase to its base distribution to $3.50 per unit on an annual basis. How did management determine that this is the right amount?

Kristen S. Shults

So there's quite a few metrics and factors that we look at when we're considering the base distribution. As we've discussed for quite a while now, it's imperative that we make the base distribution sustainable into the future.
Over the last years, we've done a lot to change WES and stand it up as a solid stand-alone midstream company. That includes when you look back at the beginning of 2020, our leverage was at 4.6x at that point. We have reduced that. And inclusive of the asset divestures we just talked about in our 2024 guidance, we should be around 3x by the end of 2024. So almost 2 turns, a little bit less than 2 turns decrease in our leverage over the past few years. We've also repurchased 15% of our unaffected unit count relative to 2020.
And so looking at the distribution burden that we've been able to reduce because of these repurchases, and then, at the new distribution level, that equates to about $230 million on an annual go-forward basis of reduced distribution burden, just because of the amount of units that we've repurchased over the last few years.
So when we took a step back and considered, first of all, the acceleration of deleveraging that we're able to accomplish with the asset sales where leverage was going to be by the end of this year, the strong asset portfolio we have, the continued growth, everything about it, we decided to increase the base distribution by the $1.20 on an annual basis, the $0.30 a quarter that we recently announced.
Looking even into the future. We looked at future projections. We looked at how we don't need as much CapEx in the next year when the plants are finished being built, and how we really see even a path to continue distribution growth in the future as the business continues to perform well and grow. So all those factors came into play and allowed us to increase that base distribution to what we fully believe is a sustainable level into the future as well.
The enhanced distribution is still a critical part of our framework, but it's supposed to provide for incremental returns of capital when the business outperforms in a certain year. It shouldn't be the size and the strength of the base distribution. And so by increasing the base distribution level the way that we did, we really accelerated that return of capital that unitholders theoretically would have gotten as an enhanced distribution in 2025 for the 2024 year and really try to maximize unitholder value by doing it that way, too.

Daniel Edwards Jenkins

Okay. Let's talk about our guidance. Can you provide some color on the annual throughput and financial guidance that we expect for 2024?

Kristen S. Shults

So for 2024, we're looking at throughput growth across the portfolio. We're expecting the Delaware Basin to be growing throughout the year, a little bit more heavily weighted in the front half of the year. DJ Basin will also be growing throughout the year, a little bit more in the back half of the year for the DJ. And the PRB should also be growing just kind of evenly over the course of the year.
For our expectations for 2024 growth, we've got gas from low to mid-teens. That includes Meritage, which is in that low to mid-teens. And then we also have oil that's going up by upper single digits. We've taken out the asset divestitures. And so those are not in the 2023 numbers. The throughput from those assets are not in the 2023 numbers, and the throughput for those are not in the 2024 numbers.
Just to take a step back on the oil side and provide some context there, the oil number that we show in 2023, about half of that is from our JVs. And so with the divestitures that we've recently mentioned, Whitethorn, in particular, is about 1/3 of the JV throughput that you see, and all the other divestitures added up is another 1/3 of that. So there's going to be a decline in the oil volumes as we get into Q1 and then once again in Q2, and you no longer have those assets within the portfolio. But those were the nonoperated assets previously, and that is part of the guidance that we've given when we say upper single-digit growth.
On the water, we're expecting low to mid-teens growth for 2024 relative to 2023, so a little bit less than what you saw in 2023 relative to 2022, but still incredibly healthy growth on the water side and actually more in line and more in pace with what you would see from the gas and oil side coming out of the Delaware Basin, too.
As it relates to our guidance ranges, we came out with adjusted EBITDA between $2.2 billion and $2.4 billion, which implies a midpoint of $2.3 billion. It's about 11% EBITDA growth year-over-year. Capital expenditures ranging from $700 million to $850 million, so implies a midpoint of $775 million. Still a little bit of a heavier year capital-wise for us. We need to wrap up Mentone III. We've got the vast majority of the capital spend for North Loving within this 2024 budget.
And as in prior years, the vast majority of our budget is being spent in the Delaware Basin in particular. So free cash flow guidance, $1.05 billion to $1.25 billion, so an implied midpoint of $1.15 billion, very healthy free cash flow growth year-over-year, actually looking at 19% growth year-over-year. And all of those guidance ranges are inclusive of the asset divestitures as well.
The base distribution guidance is at least $3.20. That includes our first quarter distribution of $0.575 and then 3 other quarters of $0.875. So really strong year from a guidance standpoint for us. We are really excited about what we're seeing just across the portfolio. The growth that we're seeing from every basin, contributions to EBITDA from every basin, could not be more excited about the health of the business. And once again, through the M&A that we've been doing, growing our operated asset base and really optimizing the portfolio and the assets we have.

Daniel Edwards Jenkins

Kristen, thank you for joining us today.

Kristen S. Shults

Thanks, Daniel.

Daniel Edwards Jenkins

For our listeners, if you have additional questions, please feel free to reach out to us. Our contact information is located in the Investor Relations section of our corporate website at westernmidstream.com.