It is well known that U.S. oil and gas producers, whipsawed over the last decade by extreme price volatility and negative investor sentiment, have adopted a new fiscal discipline that eschews deficit-inducing growth and instead prioritizes free cash flow generation to reduce debt and reward shareholders. Midstream companies, tasked with funding a massive infrastructure buildout to support surging production from the Shale Revolution, have also been buffeted by volatile commodity prices, eroding investor support and, finally, a global pandemic. However, midstreamers face a different set of challenges than E&Ps in repairing the balance sheet and restoring investor confidence. Most importantly, midstream investment decisions are determined by E&P development and production activity, and infrastructure buildout is commonly supported by volume commitments from producers. But infrastructure can’t be relocated like rigs, and those contracts eventually expire, leaving midstream companies scrambling to fill pipes and feed processing plants in plays where producers are pulling back or exiting. Also, 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. As a result, midstream capital allocation has become a delicate balance act of prioritizing free cash flow to reduce leverage and raise shareholder returns while making judicious investment in high-return opportunities and working to minimize declines in lower-return areas. A case in point is Western Midstream Partners.
East Daley’s exhaustive analysis of Western Midstream Partners provides detailed forecasts, including the following conclusions:
- Adjusted EBITDA is expected to rise from $1.947 billion in 2021 to $2.117 billion in 2022, then decline back to near the 2021 level at $1.982 billion in 2025.
- Gas Gathering & Processing segment Adjusted EBITDA will decline slightly from $1.287 billion in 2021 to $1.261 billion in 2025 as 65% growth in the Delaware Basin will nearly offset 27% and 52% declines in the DJ Basin and Non-Core Gas G&P assets, respectively.
- Income from Equity Investments will rise a modest 9% to $721 million in 2025.
- New debt will decline 20% from 2022-2025 and the leverage ratio will fall to 3.17x.
- The distribution coverage ratio will remain above 1.6x through 2025, which incorporates a projected 25% increase in the annual dividend
Spotlight: Western Midstream Partners is included in RBN’s Drill Down report series, a suite of reports covering many of the key issues expected to impact the markets for crude oil, natural gas and natural gas liquids. Spotlight reports are part of RBN Backstage Pass™ premium resources that also include Blog Archive Access, Spotcheck Indicators, Market Fundamentals Webcasts, Get-Togethers and more. Spotlight is a joint venture of RBN Energy and East Daley. By subscribing to RBN’s Backstage Pass™ Premium Services, you plug into our network and get direct access to our premium resources.