Western Midstream Partners Stock: Overlooked 8.6%-Yielder Hiked Payout 12.5%
Current Natural Gas Market Bodes Well for WES Stock
Record-high production and demand for natural gas and natural gas liquids (NGLs) have put overlooked energy stocks like Western Midstream Partners, LP (NYSE:WES) back on the radar of Wall Street.
Crude oil hogs the spotlight when it comes to energy and midstream plays, but the fact is, natural gas accounts for almost a quarter of U.S. energy consumption. The U.S. is the biggest natural gas provider, and the U.S. has been producing a lot of natural gas lately.
In May, the production of dry natural gas increased year-over-year for the 26th consecutive month, to 3,196 billion cubic feet (Bcf), or 103.1 Bcf per day (Bcf/d). This represents a 5.5% increase over the May 2022 level and is the highest level for any month since 1973, which was when the U.S. Energy Information Administration (EIA) began tracking dry natural gas production. (Source: “Natural Gas Monthly,” U.S. Energy Information Administration, July 31, 2023.)
Dry natural gas is used for heating, cooking, cooling, and generating electricity.
The natural gas gross withdrawals (volume extracted from underground reservoirs) also increased in May, up by 5.3% year-over-year to a record 3,863 Bcf, or 124.6 billion Bcf/d. This represents the highest daily rate of gross withdrawals of any month since 1980, which was when the EIA began tracking natural gas gross withdrawals.
The total natural gas exports in May were 634 Bcf, up by 2.8% from 19.9 Bcf/d in May 2022. This represents the highest monthly natural gas exports since the EIA began tracking them in 1973.
To get all this natural gas to domestic and international customers, you need pipelines, and that’s exactly what Western Midstream Partners, LP is known for.
About Western Midstream Partners, LP
Western Midstream Partners is involved in the gathering, compressing, treating, processing, transporting, buying, and selling of natural gas. The company also gathers, stabilizes, and transports condensate, NGLs, and crude oil; gathers and disposes of produced water; and buys and sells condensate and NGLs. (Source: “First-Quarter 2023 Review,” Western Midstream Partners, LP, May 4, 2023.)
The partnership is majority-owned (50.6%) by energy giant Occidental Petroleum Corp (NYSE:OXY) and the rest (49.4%) is owned by public unitholders.
The company’s core assets provide midstream services to customers in two of the most active and productive basins in the U.S.: the Delaware Basin, which is in West Texas and New Mexico, and the DJ Basin, which is in northeastern Colorado. The company has additional assets and investments in north-central Pennsylvania, south Texas, Utah, and Wyoming.
Western Midstream Partners, LP’s infrastructure includes:
- 71 processing and treating facilities
- 23 gathering systems
- 14 crude oil/NGL pipelines
- Seven natural gas pipelines
Its pipelines span more than 15,000 miles.
While energy prices can be volatile, 93% of Western Midstream Partners, LP’s gas contracts are fee-based, and 100% of its liquids contracts are fee-based. This provides the partnership with direct commodity exposure protection.
In May, the company announced it was expanding its West Texas complex by adding a new 250 million-cubic-feet-per-day (MMcf/d) cryogenic processing plant in the North Loving area of the complex. (Source: “Western Midstream Announces Sanctioning of New Cryogenic Plant and Updated 2023 Guidance,” Western Midstream Partners, LP, May 22, 2023.)
The partnership expects that the new plant will be in service by the fourth quarter of 2024 and that the production at the complex will grow from its current 1.5 Bcf/d to 2.1 Bcf/d.
Commenting on the expansion, Michael Ure, Western Midstream Partners, LP’s president and CEO, said, “The recent amendment to Occidental’s natural-gas processing agreement to provide up to 300 MMcf/d of additional firm-processing capacity provides greater certainty regarding WES’s future profitability and underpins our decision to sanction an additional plant.” (Source: Ibid.)
First-Quarter Financials & Full-Year Outlook
For the first quarter ended March 31, Western Midstream Partners reported net income of $199.0 million, or $0.52 per share. It also reported first-quarter 2023 adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of $498.7 million. (Source: “Western Midstream Announces First-quarter 2023 Results,” Western Midstream Partners, LP, May 3, 2023.)
The partnership’s first-quarter 2023 cash flows from operating activities came in at $302.1 million, while its free cash flow totaled $141.6 million.
During the quarter, the company processed record-high Delaware Basin natural gas throughput of 1.6 Bcf/d (up by three percent sequentially) and gathered record Delaware Basin produced water throughput of 977,000 barrels per day (up by 13% sequentially).
After the quarter-end, Western Midstream Partners, LP executed a long-term amendment to Occidental Petroleum Corp’s natural gas processing agreement in the Delaware Basin to provide up to 300 MMcf/d of additional firm-processing capacity, supported by significant minimum-volume commitments. The partnership also extended the original term of the agreement by three years through 2035.
Management noted that, while Western Midstream Partners, LP reported record growth in the Delaware Basin, its overall natural gas and crude oil throughput fell sequentially due to expected declines in the DJ Basin, reduced throughput from its equity investments, and poor weather that affected the company’s legacy Rocky Mountain assets in Utah and Wyoming.
For 2023, Western Midstream Partners, LP said it expects to report:
- Total capital expenditures in the range of $700.0 to $800.0 million, representing a $125.0-million increase to the midpoint of its previous guidance
- Free cash flow in the range of $1.0 to $1.1 billion, representing a $125.0-million decrease to the midpoint of its previous guidance
- Adjusted EBITDA in the range of $2.1 to $2.2 billion, maintaining its previous guidance
- A base distribution of at least $2.00 per unit, which excludes the impact of any potential enhanced distribution
Moreover, the company expects that its quarterly profits will gradually rise as its throughput increases in the remainder of this year.
WES Units’ Base Distribution Increased by 12.5%
In May, Western Midstream Partners, LP paid a quarterly cash distribution of $0.856 per unit. This included a base distribution of $0.50 per unit and an enhanced distribution of $0.356 per unit.
A base distribution is the minimum that shareholders will take home each quarter. A company announcing a base distribution implies that it will also pay out enhanced distributions from time to time. Western Midstream Partners stock’s first-quarter enhanced payout was tied to the partnership’s 2022 financial performance.
In July, the board announced a quarterly cash distribution of $0.5625 per unit, to be paid on August 14. This base distribution represents a 12.5% increase over WES stock’s prior base distribution.
With the extra distribution in May and the increased base distribution in August, Western Midstream Partners stock’s dividend yield currently stands at about 8.6%, which is almost triple the current inflation rate of about three percent.
In terms of share price, Western Midstream Partners units have been on the rise. As of this writing, WES stock is up by:
- Five percent over the last month
- 10% over the last three months
- Five percent year-to-date
- 13% year-over-year
Chart courtesy of StockCharts.com
Thanks to the high demand for natural gas, NGL, and condensate—and Western Midstream Partners, LP’s fee-based gas and liquids contracts—the outlook for WES units is robust.
Wall Street analysts have provided a 12-month median estimate of $32.00 per unit and a high estimate of $36.00. This points to potential gains in the range of about 15.5% to 30%.
The Lowdown on Western Midstream Partners Units
Western Midstream Partners, LP is a great energy company that’s been taking advantage of industrywide tailwinds.
The demand for natural gas and NGL is exceptionally high, the company has direct commodity exposure protection through fee-based gas and liquids contracts, it’s expanding its operations to meet high demand, and it continues to raise its high-yield distribution.