Defying Gravity - Western Midstream Presses Permian Advantage to Offset Legacy Basin Declines

We’ve written a lot lately about how U.S. E&Ps, whipsawed over the last decade by extreme price volatility and negative investor sentiment, have adopted a new fiscal discipline that de-emphasizes production growth and prioritizes generation of free cash flow to reduce debt and reward shareholders. But what about midstreamers? They too have been buffeted in recent years by volatile commodity prices, eroding investor support, shifting upstream investment patterns, and finally, a global pandemic. Midstream companies face a different set of challenges than oil and gas producers in repairing their balance sheet and restoring investor confidence, however, mostly because midstream investment decisions are determined both by downstream market changes and by E&Ps’ development and production activity — including producers’ ever-increasing focus on the Permian at the expense of other basins. In today’s RBN blog, we discuss highlights from RBN and East Daley’s Spotlight Report on Western Midstream Partners and how the master limited partnership has been working to reduce its debt and make the most of its strong base in the Permian’s Delaware Basin.

Over the last two decades, midstream companies took on the massive task of funding an infrastructure build-out to support surging production from the Shale Revolution. The construction of pipelines, processing plants, storage facilities and other hard assets is commonly supported by volume commitments from producers. However, infrastructure can’t be relocated like rigs, and those contracts with producers eventually expire, leaving midstreamers scrambling to fill pipes and feed processing plants in plays where producers are pulling back or exiting. In addition, it has become more difficult to find and fund expansion or acquisition opportunities where the recovery in drilling activity has been robust, such as the Permian Basin.  As a result, midstream capital allocation has become a delicate balancing act of prioritizing free cash flow to reduce leverage and raise shareholder returns with judicious investment in high-return opportunities while also minimizing declines in lower-return areas.

A prime example of a company struggling with such challenges is Western Midstream Partners, LP (NYSE: WES). WES is a large ($11.2 billion market cap) master limited partnership (MLP) that is engaged in gathering, compressing, treating, processing and transporting natural gas; gathering, stabilizing and transporting condensate, natural gas liquids and crude oil; and gathering and disposing of produced water.  The company owns or has interests in 23 gathering systems with 10,722 miles of pipeline, 72 treating and processing plants, 15 crude oil and NGL pipelines, and six natural gas pipelines. Occidental Petroleum owns 49.7% of the outstanding common units and controls the general partnership.

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