Must-know: Analyzing Western Gas Partners' 1Q14 earnings (Part 4 of 6)
Western Energy Partners’ (WES) affiliation with Anadarko Petroleum Corporation (APC) has been beneficial to the company in order to grow and execute its business plans. The general partner of WES is indirectly controlled by Anadarko through WGP. Anadarko is one of the largest upstream oil and gas exploration and production companies in the world. As of December 31, 2013, WGP owned a 41.2% limited partner interest and 2.0% general partner interest in WES.
In 2013, 57% of the gathering, transportation, and treating throughput of WES was owned or controlled by Anadarko. Of the total processing throughput for 2013, 56% was owned or controlled by Anadarko. These exclude WES’s equity investments in various assets.
In the company’s natural gas gathering systems of Wattenberg, Dew, Pinnacle, Haley, Helper, Clawson, and Hugoton, Anadarko has dedicated all the wells that have been drilled within one mile of wells connected to these gathering systems. WES is also able to use APC’s management efficiency and expertise in managing its resources.
Since its IPO in 2008, WES received eight different dropdowns from Anadarko worth approximately $2.68 billion. Recently, in March 2014, WES acquired a 20% interest in Texas Express Gathering LLC (TEG) and Texas Express Pipeline LLC (TEP) each, and a 33.33% interest in Front Range Pipeline LLC (FRP), from Anadarko.
A large part of WES’s facilities that supply to Anadarko have long-term agreements that ensure cash flow stability for WES. Anadarko has retained commodity-price risk related to dropdown assets, as 99% of gross margin from Anadarko has fixed price and is fee-based while only 1% of the gross margin in unhedged. In the MIGC transportation system at the Powder River Basin of Wyoming, WES has a firm transportation agreement with Anadarko for 40 million British thermal units per day that extends through October 2018. The facility also has 11 million British thermal units per day under backhaul service agreements that are renegotiated on an annual basis through May 2014. In the Granger straddle plant with refrigeration capacity of 200 million cubic feet per day capacity, the processing contract expires in December 2014. In the OTTCO transportation system, extending between Sweetwater, Lincoln, and Uinta Counties in Wyoming, WES has short-term contracts with Anadarko for contracts generally extending less than one year.
WES is currently constructing the Lancaster plant in the DJ Basin. The project is expected to be completed in 2014. When completed, the plant will have a capacity of 300 million cubic feet per day for processing production from the Niobrara and Codell formations in the Wattenberg Field. Anadarko has agreed to a ten-year fee-based contract for 270 million cubic feet per day of guaranteed throughput guarantee. Plus, a second facility has been approved that will provide capacity of 300 million cubic feet per day and that’s expected to come online in 2Q15.
WES has the opportunity to grow via increasing interest in its joint ventures with APC or via asset dropdown by APC to WES. The chart above illustrates the company’s sharing of ownership with APC in different assets and facilities. The company also looks to grow its crude oil business through potential dropdowns from Anadarko. Donald R. Sinclair, the president of Western Gas Holdings LLC, said in the conference call of 1Q14, “So if you think about Eagle Ford, DJ and West Texas, those are probably the 3 most prominent that there’s existing midstream assets that are crude-based. At some point in time, those assets will be ready for drop to WES, so we just look at that as a continuation of our existing gathering business in the field, being operated by the same people. Same thing as it is today, it will just be incremental inventory for us to acquire from Anadarko.”
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.
Browse this series on Market Realist: