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Why capex, asset mix, and margins drive Western Gas Partners

Avik Chowdhury

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

(Continued from Part 5)

DJ Basin to become the new focus area for WES

In 1Q14, the Wattenberg and Platte Valley systems combined into a new entity called the “DJ Basin Complex.” The DJ Basin aims to combine the Wattenberg Gathering System with Platte Valley and Lancaster Plants into a single integrated complex. The integration looks to provide flexibility in managing and optimizing natural gas assets for Western Gas Partners (WES). Andarko is set to increase production in the Wattenberg field through drilling new well locations, re-fractionating, and re-completions. It has identified 4,000 new such opportunities in 2013. In 2014, WES estimates it will invest around $380.0 million in the DJ Basin.

An overview of the DJ Basin

The Denver-Julesburg Basin, or DJ Basin, is located northeast of Denver, Colorado. The Wattenberg system is a natural gas gathering and treating facility run by Anadarko. It has a 2,020-mile wet gas gathering system and includes seven compressor stations. The Platte Valley system was acquired by WES in February 2011 and consists of a processing plant with cryogenic capacity of 100 million cubic feet per day, two fractionation trains, a 1,105-mile natural gas gathering system, and related equipment. For 2013, Anadarko Petroleum (APC) accounted for 7% of the Platte Valley system throughput and 28% of Wattenberg system throughput, while various third parties accounted for the rest of the volumes in these systems. The primary delivery points of the Wattenberg system are Anadarko’s Wattenberg processing plant, WES’ s Fort Lupton processing plant, and WES’s Platte Valley processing plant.

Presence in onshore oil and gas–rich basins

Western Gas Partners operates midstream assets located in major onshore producing basins in Wyoming, Colorado, Utah, Kansas, Oklahoma, Pennsylvania, and Texas. Its gathering systems in the Marcellus Shale serve dry gas production. The Marcellus Shale offers above returns to producers  due to the large scale and quality of the underlying resource. The Marcellus has also a geographically advantageous position, as it offers access to premium markets in the northeast United States. WES’s assets at Wattenberg, Platte Valley in Northeast Colorado, and Brasada in Texas serve production in liquids-rich growth areas producing natural gas, oil, condensate, and significant amounts of NGLs. NGL prices have historically correlated with crude oil prices as opposed to natural gas prices.

Due to the relatively high current price of crude oil compared to natural gas, production in these areas offers higher margins compared to basins where the gas is predominantly dry. Wet natural gas typically has higher NGL components and is therefore more valuable than wet natural gas, which is costlier to process and produce NGLs. WES has started to focus on its crude oil and NGL business recently. In 1Q14, 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 was due mainly to Mont Belvieu fractionators 7 and 8 coming online during the reported quarter and recent acquisitions of Texas Express and Front Range.

Fee-based turnover provides stability

In 2013, 74% of WES’ gross margin was attributable to fee-based contracts. A fixed fee is based on the volume or thermal content of the natural gas that the company gathers, processes, treats, or transports. For 2013, 99% of the company’s gross margin was hedged and was under either long-term, fee-based contracts or percent-of-proceeds or keep-whole agreements.

Renewal risks in contract terms

WES has its gross margin hedged from oil and gas price volatility through various hedging contracts. Its commodity price swap agreements with Anadarko, WES’s primary customer, will start to expire starting from December 31, 2014. If WES fails to renew its agreements with Anadarko or if these agreements are renewed at lower prices than what’s currently in place, the company’s exposure to sudden movements in oil and gas prices will increase. This could seriously affect WES’ gross profit. The total gross margin generated under percent-of-proceeds and keep-whole arrangements came down to 26% in 2013 from 34% in 2012. Under keep-whole contracts, the processor retains the NGLs extracted and returns the processed natural gas or value of the natural gas to the producer. Under this contract, the processor benefits when the price of NGLs increases and the price of natural gas decreases.

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.

To learn more about investing in MLPs, see Market Realist’s Master Limited Partnerships page.

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