Western Midstream Partners Stock: Why This 7%-Yielder Is Near Record High
March 5, 2024
WES Stock Is Compelling at the Moment
The Henry Hub daily natural gas price, which is the U.S. benchmark for natural gas prices, has been averaging about $1.50 per million British thermal units (MMBtu) lately. In inflation-adjusted dollars, that’s its lowest level since at least 1997.
The low prices are a result of high production, low consumption, and high inventories. In fact, natural gas inventories are roughly 12% above their year-ago average and approximately 22% above their five-year average.
This is bad news for upstream natural gas companies, but not so bad for midstream companies like Western Midstream Partners LP (NYSE:WES).
Why? Upstream companies have to use the infrastructure of midstream companies regardless of natural gas prices.
Western Midstream Partners is involved in the gathering, compression, treatment, processing, and transportation of natural gas. It also gathers, stabilizes, and transports condensate, natural gas liquids (NGLs), and crude oil; gathers and disposes of produced water; and buys and sells natural gas, NGLs, and condensate. (Source: “Fourth-Quarter 2023 Review,” Western Midstream Partners LP, February 21, 2024.)
The partnership’s core assets provide midstream services to customers in two of the most active and productive basins in the U.S.: the Delaware Basin (West Texas and New Mexico) and the Denver-Julesburg Basin (northeastern Colorado). It has additional assets and investments in North Central Pennsylvania, South Texas, Utah, and Wyoming.
Western Midstream Partners LP’s infrastructure includes:
- 75 processing and treatment facilities
- 24 gathering systems
- 15 crude oil/NGL pipelines
- Seven natural gas pipelines
The company’s pipelines have a total length of 16,000 miles. (Source: “Operations,” Western Midstream Partners LP, last accessed February 29, 2024.)
As of the end of 2023, 95% of the partnership’s gas contracts were fee-based and 100% of its liquids contracts were fee-based. This provides the company with protection from energy price volatility.
Energy giant Occidental Petroleum Corp (NYSE:OXY) owns about 49.8% of Western Midstream Partners, and public unitholders own about 50.1%. Occidental Petroleum also owns Western Midstream Partners’ general partner, Western Midstream Holdings, LLC, which gives it full control of Western Midstream Partners’ operations.
Occidental Petroleum Exploring Sale of Western Midstream Partners LP?
According to some sources, Occidental Petroleum is considering selling its stake in Western Midstream Partners. This would help Occidental Petroleum, which is owned in large part by Warren Buffett’s Berkshire Hathaway (NYSE:BRK.B), reduce the $18.5 billion debt it has accumulated as a result of acquisitions. (Source: “Exclusive: Occidental Explores $20 Bln-Plus Sale of Western Midstream, Sources Say,” Reuters, February 20, 2024.)
In December 2023, Occidental Petroleum Corp announced a deal to acquire CrownRock L.P., an oil and gas producer, for $12.0 billion. That announcement came just four years after Occidental acquired Anadarko Petroleum Corporation for $54.0 billion.
Western Midstream Partners LP was actually formed by Anadarko Petroleum in 2007, but Berkshire Hathaway set it up as a standalone company when it bought Anadarko in 2019.
A cash cow like Western Midstream Partners going up for sale would certainly attract many suitors, such as Enterprise Products Partners LP (NYSE:EPD), Kinder Morgan Inc (NYSE:KMI), or Williams Companies Inc (NYSE:WMB). Private equity firms and infrastructure funds might also show interest in purchasing the partnership.
For its part, Western Midstream Partners’ management has confirmed it’s aware of Occidental Petroleum’s interest in selling assets. It also said, however, that Western Midstream Partners hasn’t started a sales process, nor has it engaged bankers or other advisors regarding a possible sale. (Source: “Western Midstream Statement Regarding Recent Media Coverage,” Western Midstream Partners LP, February 20, 2024.)
There’s good reason to believe that Western Midstream Partners is on the radar of energy giants. The partnership has a massive infrastructure that’s predominantly located in the aforementioned Delaware and Denver-Julesburg basins.
On top of that, the company makes a ton of money.
For the fourth quarter of 2023, the partnership reported net income of $281.6 million and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of $570.7 million. (Source: “Western Midstream Announces Fourth-Quarter and Full-year 2023 Results,” Western Midstream Partners LP, February 21, 2024.)
For full-year 2023, the company reported net income of $998.5 million and adjusted EBITDA of $2.07 billion, which exceeded management’s revised full-year guidance for adjusted EBITDA in the range of $1.95 billion to $2.05 billion. Its full-year cash flow from operating activities was $1.66 billion, while its full-year free cash flow (FCF) was $964.2 million.
Western Midstream Partners Stock at Highest Levels Since 2017
Western Midstream Partners LP might say it hasn’t started a sales process, but it seems that investors think there’s something to the rumors of an upcoming sale.
From February 13 to February 28, WES stock rallied by an impressive 25% to a new 52-week high of $35.04. This put the stock a little below its July 2018 record high of $38.03.
As of this writing, Western Midstream Partners stock is up by approximately 30% over the last six months, 17% year-to-date, and 41% year-over-year.
Chart courtesy of StockCharts.com
Management Hiked Distribution 15% Year-Over-Year
While investors wait to see if a sale of Western Midstream Partners LP actually happens, they can take solace in knowing that the company has been reporting terrific financial results and that its stock pays reliable, high-yield dividends.
In February, the partnership paid a quarterly base distribution of $0.575 per unit, which was consistent with WES stock’s previous quarterly distribution and up by 15% from the $0.50 it paid in February 2023. (Source: “Distribution History,” Western Midstream Partners LP, last accessed February 29, 2024.)
That works out to a yield of 6.76% (as of this writing). That’s more than double the current U.S. inflation level of about 3.09%.
What is a base distribution? It’s the minimum that unitholders take home each quarter (or month or year, depending on the company).
For 2024, Western Midstream Partners LP is targeting an annualized base distribution of at least $3.20 per unit. (Source: “Fourth-Quarter 2023 Review,” Western Midstream Partners LP, February 21, 2024, op. cit.)
The partnership also pays out “enhanced” distributions from time to time. For instance, in May 2023, Western Midstream Partners paid a base distribution of $0.50 per unit and an enhanced distribution of $0.356 per unit.
The Lowdown on Western Midstream Partners LP
With or without the company’s pending sale, Western Midstream Partners stock is a great energy play. Natural gas prices may be down, but the partnership has protection from direct exposure to commodity prices through its fee-based contracts.
Moreover, Western Midstream Partners LP has been expanding its operations to meet demand, and it continues to raise its base distributions.
After a strong performance in 2023, the company provided impressive guidance for 2024. That forecast includes adjusted EBITDA growth of about 11% year-over-year, FCF growth of about 19% year-over-year, and an annualized base distribution of $3.20 per share.
