Good day, and welcome to the Western Midstream Partners 4th Quarter 2019 Earnings Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note today's event is being recorded. I'd now like to turn the conference over to Abby Dempsey, Investor Relations.
Please go ahead.
Thank you. I'm glad you could join us today for Western Midstream's Q4 2019 conference call. I'd like to remind you that today's call, the accompanying slide deck and last night's earnings release contain important disclosures regarding forward looking statements and non GAAP reconciliations. Please reference Western Midstream's Form 10 ks and other public filings for a description of risk factors that could cause actual results to differ materially from what we discuss today. Those materials are all posted on our website at www.westernmidstream.com.
Additionally, I am pleased to inform you that the Western Partners and Western Midstream Partners K1s will be available on our website in mid March. Hard copies will be mailed out several days later. With me today are Michael Ure, our Chief Executive Officer Mike Pearl, our Chief Financial Officer and Craig Collins, our Chief Operating Officer. I would now like to turn the call over to Michael Ure.
Thank you, Abby, and good afternoon, everyone. 2019 was a historic year for WES. The partnership completed the simplification transaction and related asset acquisitions from Anadarko Petroleum, who was acquired by Occidental in August. We closed the year with the execution of several agreements with Occidental that established WES as a standalone midstream company. We generated over $1,700,000,000 of adjusted EBITDA, distributed over $1,100,000,000 of cash to unitholders and efficiently executed our capital program coming in approximately $100,000,000 below the 2019 guidance midpoint.
Comparing full year 2018 to full year 2019, we saw a 9% increase in natural gas throughput and a 57% increase in liquids throughput. We high graded and expanded our asset portfolio in February 2019 with the acquisition of Delaware and DJ Basin assets that complemented our existing asset portfolio. We also placed the 2nd Mentone train and 1st Latham train into service and acquired a 30% interest in Red Bluff Express, which transports residue gas from the Delaware Basin to the Waha Hub. I'm extremely proud of the performance that we delivered in 2019, considering the significant transformation that has taken place during the year. Our February 2019 acquisition and simplification transactions provided additional scale to our The value of these transactions was further enhanced by our entry into new service, operating and governance agreements with Occidental, which positioned WES as a standalone midstream operation and provided our unaffiliated unitholders with improved governance rights.
These unitholder friendly actions were accomplished with steadfast support from Occidental as our largest unitholder and customer and recognizing the pressure facing midstream MLPs. Our primary objective of creating long term value for our unitholders hasn't changed since our IPO. And as we enter 2020, our unitholders remain a top priority along with sustaining our investment grade credit profile. Our forecasted 30% to 35% decline in capital expenditures is accompanied by a 13% increase to adjusted EBITDA, which demonstrates our commitment to capital efficient organic growth. All of our stakeholders are well positioned to benefit from WES' ability to operate as a standalone investment grade midstream enterprise.
With that, I'll turn the call over to Mike,
who will discuss our 2019 financial results. Thanks, Michael. Yesterday afternoon, we reported an outperforming quarter with adjusted EBITDA of $447,000,000 distributable cash flow of $345,000,000 and a coverage ratio of 1.23x. The 9% sequential quarter increase in adjusted EBITDA resulted from increased throughput across all products in the Delaware and DJ Basin. For full year 2019, we generated adjusted EBITDA of $1,720,000,000 distributable cash flow of $1,330,000,000 and an annual coverage of 1.18x.
Our adjusted EBITDA increased 17% from full year 2018, and our full year 2019 coverage ratio was above guidance. Total 2019 capital expenditures were $1,250,000,000 which was approximately $100,000,000 below our 2019 guidance midpoint of $1,350,000,000 Optimized planning and continued focus on capital discipline during the second half of twenty nineteen allowed us to deliver total year capital expenditures well below our initial expectation. In January, we priced a $3,500,000,000 4 tranche senior notes offering. The issuance was 6.2x oversubscribed on an upsized and tightly priced offering with more than $21,000,000,000 of demand. This unequivocally successful offering, which included an investor requested 30 year debt tranche, demonstrates the market's long term and fundamental support for WES, reduces WES' average cost of long term debt and extends the average maturity of the same.
I now will turn the call over to Craig to discuss 4th quarter operations.
Thanks, Mike. Operationally, gas throughput increased by approximately 120,000,000 cubic feet per day quarter on quarter. This increase was primarily driven by higher throughput from our DJ Basin complex as a result of 3rd quarter downstream constraint that did not impact 4th quarter operations. Excluding the effects of this downstream constraint from 3rd quarter results, our DJ Basin complex throughput increased by approximately 60,000,000 cubic feet per day quarter on quarter. Full year 2019 total natural gas throughput averaged 4,200,000,000 cubic feet per day, representing a 9% increase from full year 2018.
We added approximately 450,000,000 cubic feet per day of compression capacity for the year and increased our processing capacity by 400,000,000 cubic feet per day. Turning to liquids. Our quarter on quarter throughput increased by approximately 187,000 barrels per day. This growth was driven by a 5% throughput increase from our DBM water assets where we brought 2 additional saltwater disposal facilities online and saw an aggregate 8 percent throughput increase from our Delaware and DJ Basin crude oil gathering and treating asset. Full year 2019 total liquids throughput averaged 1,200,000 barrels per day, representing a 57% increase from full year 2018.
For 2019, we added over 230,000 barrels a day of produced water capacity from the addition of 8 saltwater disposal facilities and continued strong liquids throughput from many of our equity investments. As expected, our liquids gross margin declined to $1.69 per barrel for the quarter and $1.77 per barrel for 2019. As a reminder, as our water business continues to grow, we expect our overall liquids margin to track lower. However, compared to crude, the water business generates higher returns, notwithstanding the associated lower per barrel margins. Our quarter over quarter gas gross margin increased to $1.08 per Mcf and increased $0.06 per Mcf on a year over year basis.
In the DJ Basin, our first Latham gas train was placed into service during the Q4 of 2019. The second Latham train came online earlier this month. Additionally, Loving Rodef Train 3 was completed in the Q4 of 2019 and started up in January. Loving Road of Train 4 is expected to be completed in the Q4 of 2020. In the first half of twenty twenty, we expect the Front Range and Texas Xpress pipeline expansions to be placed into service.
We also will experience a full year of contributions from Cactus II. I will now turn the call back over to Michael for 2020 guidance discussion and concluding remarks.
Thanks, Craig. Our previously communicated 2020 outlook of adjusted EBITDA between $1,875,000,000 $1,975,000,000 and capital expenditures between $875,000,000 $950,000,000 remains unchanged. We expect meaningful throughput growth from the DJ and Delaware basins in 2020. Natural gas throughput is expected to grow approximately 7% to 4,500,000,000 cubic feet per day, underpinned by OXY's Delaware Basin development plan and the mid-twenty 20 commencement of DCP's delivery into our Latham plant in the DJ Basin. Oil throughput is expected to grow approximately 18% to more than 765,000 barrels a day, primarily driven by new Oxy development wells in the Delaware Basin and full year crude oil shipments on the Cactus II pipeline, where we own a 15% equity interest.
Water throughput is Water throughput is expected to increase by more than 20% to approximately 678,000 barrels a day, largely attributable to new Oxy and third party connections. Aggregate increased throughput volumes across all products is expected to drive adjusted EBITDA growth of approximately 13% across the West portfolio. We strongly believe that a West dedicated workforce enhances employee focus, which in turn positions and empowers employees to deliver improved customer service, establishes heightened accountability and supports the realization of operational efficiencies that previously were more difficult to achieve with a dual purpose workforce that split time tending to shared midstream and upstream responsibilities. We expect increased expenses associated with operating as a standalone business and our 2020 guidance fully reflects the impact of these additional costs. We also expect that anticipated cost savings from realized operational and capital efficiencies will meaningfully exceed the incremental expense attributable to operating as a standalone midstream enterprise.
Total capital expenditures plus equity investment contributions are expected to decrease by approximately 30% from 20 19 aggregate capital spending of $1,250,000,000 We expect to invest approximately 64% of our total capital spend in the Delaware Basin, 26% in the DJ Basin and the remaining 10% on equity investments and other assets within West's portfolio. Total maintenance capital is expected to be between 100 and $25,000,000 $135,000,000 in line with previous years as approximately 7% of adjusted EBITDA. The 2020 Delaware Basin Capital Program is focused on continued build out of the oil, gas and water infrastructure, predominantly focused on gathering facility capacity expansions, including anticipated expansion work at 8 operating CTFs and new facilities on the gas system. The startup of a third train and the completion of a 4th train at the North Laving Rodiff providing an additional 60,000 barrels a day of additional throughput capacity and the addition of approximately 180,000 barrels a day of additional saltwater disposal capacity in the Delaware Basin. The capital program in the DJ Basin focuses on infill expansion of compression capacity, gathering pipelines and the completion of a second 200,000,000 cubic feet per day processing train at the Latham plant.
For the past 28 quarters, West has increased its distribution. We intend to continue quarterly distribution growth, however, at a significantly more modest rate of approximately 1% year over year. This remains consistent with our goals of lowering leverage and increasing distribution coverage to at least 1.25 times. Before I conclude my prepared remarks, I would like to thank all of the West dedicated employees and contractors for their contributions, dedication and continued focus on safety. We look forward to 2020 and delivering the results that our stakeholders expect.
With that, I would like to open the line for questions.
Thank you. We will now begin the question and answer session. Today's first question comes from Colton Bean at Tudor, Pickering, Holt. Please go ahead.
Good afternoon. So just listening to the Oxy call earlier, there are some references potentially letting production rollover if we were to remain at current crude prices. So one, I guess, could you just confirm if the earnings guidance is predicated on the existing upstream guide? And then 2, kind of how you're thinking about potential to mitigate any activity cuts?
Thanks, Colton. Yes, the current guidance that has been put out is reflective of the budget and the guidance that is reflected in Oxy's current expectations. I would note that while they do talk about a decline in production, I would just reference Vicki's commentary as it relates to the capital cuts and where those would likely come first in non productive capital and then secondarily in productive capital. We as a whole, feel very good about the position that WES has and the assets that underlie the position. We think it's underlying the best basins in North America.
And so, definitely expect that even in light of the current commodity prices as temporary as it has been in nature that there will be continued production going through it. When you look at our capital budget, the majority of that is with regards to servicing immediate production that would go through our system. And so in the event that there is a reduction overall in the expectation of that production obviously that capital would decline.
Understood. And just any order of magnitude sense as to what you could do on the capital front to balance any downside here on the earnings side?
Again, it's hard to answer that question in a vacuum not knowing exactly what the resultant reduction in production or capital would be.
Got it. And just a final one. Just on the dividend increase, I mean, understanding that it's 1% year over year, but just wanted to a little bit better the mindset in terms of continuing with growth at these levels.
So, West has continued has had a increase in its distribution for 28 straight quarters. We feel very good about that track record and the result that our unitholders have been able to count on over that period. We feel very good about the business as we sit here today. And so what we are balancing there is a continued effort towards the success of that distribution growth coupled with renewed focus around reducing overall leverage and increasing coverage.
Got it. Appreciate the time.
And our next question today comes from Jeremy Tonet of JPMorgan. Please go ahead.
Hi, good afternoon. Just want to lead off here with regards to your efforts as transitioning to a standalone midstream company. And just wondering if you could provide a bit more color on where you are in that process. And I guess, what changes you've seen in the organization as a result of these efforts?
Jeremy, it's a great question. So at the end of 2019, we entered into agreements with Oxy that would provide for the leadership team of WES to move over as employees of WES. Prior to that period there were no actual employees of WES. So that is the top line leadership team that is now currently employed and receiving their paychecks from WES. During 2020 and ideally the early part of 2020, the remainder of the WES dedicated standalone employees will come over to be employed by WES.
As it sits today, those employees, their affairs, their, the hiring and firing decisions are all made by the WES employees. However, at the point in time when they do come over as employees, they will get their paychecks directly from Wes. The impact on that, frankly, I think you've seen it a little bit in the 4th quarter results as we're able to reduce overall capital and improve operations as it relates to the revisions from an outlook perspective from Q3 to today are an expectation that as a standalone enterprise, we're able to motivate, provide accountability and focus the operations to achieve greater synergies and greater efficiencies overall through the system. So we believe it's an excellent step in the efficiencies overall of WES. As it relates to 3rd party customers, it's also an increased awareness and focus to them to indicate that obviously their business is very important to us.
Clearly, Oxy is still our number one customer and important to the overall health of WES, but the 3rd party business profile is able to be enhanced as that employee base is exclusively focused on WES and its success.
And Jeremy, if I could, this is Mike Parag. One other thing I'd add to that. We've heard loud and clear throughout the years about the mismatch between incentive compensation, not only just for management, but for what we call now West identified employees. And we've made the change where all West dedicated employees and management are now receiving equity compensation in West that actually tracks midstream targets and we're no longer tied to the targets of the E and P. And so we feel like that fundamental shift in focus will drive efficiencies through our business and have employees focused where they need to be in terms of making Wes' operations more efficient.
Aligning compensation with accountability and ultimate results of WES. Absolutely.
That's good to see. Thanks. And maybe just kind of turning to, I guess, how the agencies have viewed these changes with kind of the agreements with Oxy overall. It looks like Moody's, I think, might have placed you on positive watch recently. Any updates you can provide us there?
You nailed it. They did put us on positive watch. We just recently visited all three agencies. I'd characterize the discussions as extremely productive as we look at the new standalone WES and talk about our plans into the future. I think all of the agencies are looking for us to lower our leverage, which we are keen to do.
In my mind, that's job 1, is to get our leverage metrics back to what has been traditionally the sweet spot for West of 3.5 times to 4 times. As we exited 2019, we're roughly 4.5 times through organic growth of EBITDA and also debt reduction by the end of the year, we expect to be much closer to 4% and then below 4% thereafter.
Great. I'll stop there. Thanks for taking my question.
Thank you.
And our next question today comes from Derek Walker of Bank of America. Please go ahead.
Good afternoon, guys. I appreciate the time and congrats on the quarter. Maybe I could just follow-up with that last question on the leverage front. As far as getting down to 4 by the end of this year and below 4 in 'twenty one, Is it mostly just from an actually doing through an EBITDA growth? Or are you looking to do potentially asset sales to help accelerate that process?
And if so, sort of how you're looking at the non core asset side of things?
Yes. Thanks for the question. It's going to be both. And I know your attention is immediately going to turn to what is a non core asset. And that will depend on a few things.
I guess the threshold is, are you in DJ or Delaware? And if the answer is yes, then it's likely core. Aside from that, determining what's non core will also depend on the price discovery associated with whatever we might be looking at divesting of. But the goal is to look at the portfolio and rationalize to the extent it makes sense taken into account what we can get in terms of proceeds and then dedicating those proceeds to restoring the balance sheet.
Got it. And then maybe just a follow-up on Jeremy's question on the standalone piece. Any updated thoughts on C Corp conversion at this point? Are you guys still kind of working through some of the latest agreements here and shifting employees over?
Yes. We actually looked at that back in February when we did the simplification transaction and sort of shelved that to see what West looked like and how it performed coming out of simplification and the acquisition from Anadarko. It's still something that we're definitely analyzing. One thing about going to C Corp is once you do it, you can't go back. And so we need a firm understanding of what we look like from a taxation perspective, because once you become a C Corp, you become taxable there with 21% of your distributable cash flow.
So it's something we're going to be very thoughtful and mindful of, but we are definitely analyzing it.
Got it. Thank you very much.
And our next question today comes from Spiro Dounis of Credit Suisse. Please go ahead.
Hey, afternoon guys. Just want to go back to the 3rd party business as well. Just trying to figure out how we should think about the maybe the CapEx impact of those efforts. I guess some of your peers right now retrenching a bit, maybe moving towards maintenance CapEx mode. And so with your efforts to sort of increase that 3rd party revenue line, you feel like you can do both, capture that 3rd party business and then keep CapEx on the lighter side?
Yes. Spiro, this is Craig, and I'd like to try and answer that for you. I mean, when we look at the extensive infrastructure footprints that we have in the Delaware and the DJ Basins specifically, and with the aerial and with the aerial extent of our systems, we are very close to several producers in and around our existing infrastructure. And so we're actually seeing very good progress and discussions that we're having with those producers in terms of getting incremental business brought online. And we think we can do that with pretty minimal capital going forward.
And so I think that really provides us a competitive advantage as we continue to engage with these producers. And in this environment, I think the competition also has capital recent successes that we've had in this regard.
Understood. And then Mike, just trying to reconcile some of your comments around the success to the successful refinancing and obviously the positive momentum from the ratings agencies. But at the same time, as it just came up, you have a 20% yield on the equity. And so just trying to put those 2 together and I guess to the extent that you believe that there is a large dislocation here in the equity, do buybacks have any space in your capital allocation framework even if you were to sort of buyback from Opdiv on a go forward basis?
Yes, that's a very good question. I don't the units are yielding as if there's some problem with being able to pay the distribution, which we firmly do not believe to be the case. At the same time, I don't view this decision point any different than exercising capital discipline with respect to on the upstream side of prices go up, you dramatically change what you plan to do. I don't think that screams capital discipline. And the same thought process is going on here.
I would tell you that in order for West to be nimble in terms of being opportunistic, whether it's on an acquisition side or anything else we might be looking at, the balance sheet needs to be right sized to be able to be nimble, right?
Totally agree.
Again, I reiterate that the balance sheet metrics are 1st and foremost. We're committed to being investment grade. That's why we had such a successful bond offering coming out of the marketing related to that offering, and it's something that we're absolutely dedicated to being an investment grade company.
Yes, makes sense. That's it for me. Thanks, guys.
And our next question comes from Shneur Gershuni of UBS. Please go ahead.
Hi, good afternoon everyone. Maybe I can start off with sort of a combination of some of the questions that have been asked already. When I think about Western Gas and I think about the broad midstream sector in general, I mean, you've been growing very quickly over the years and so forth. And you're kind of at this interesting point where you're bringing all these employees on from Oxy on to WES and so forth. How much effort has been made has been done to make sure that you're bringing on the right number of employees?
Can you use this as an opportunity to reduce costs in a pretty significant manner? Do you need 1100 or do you really need 900? Can you walk us through how you're thinking about that process to ensure that you're rightsizing the cost structure for the environment that we're actually in?
Sure. It's Michael. It's a great question. We actually went through a very extensive process coming up to the point at the end of the year in order to right size the overall business, choose the right employees overall for the company on a go forward basis in light of the trends out of the OxyAnadarko acquisition. There was a significant amount of work that was done to select the right employees that fit best on the Oxy side, that fit best on the West side and in that process find the optimal structure overall for West.
So leading up to the deconsolidation at the end of or at the entering into those agreements with Oxy at the end of the year, There was months months of work in order to get the business in the right place going forward for where we sit.
Okay. And then tying together, I think your comment, I think maybe it was to Spiro's question about balance sheet comes first. And I think you got asked questions about the distribution growth rate earlier, and that you're proud of the history of the distribution increases. But when I sort of look at where you're trading today and even not just this last week, but the week before, the week before that, it's clear that or it seems that the market is not valuing the distribution at this point right now. Is that track record more of a nice to have versus why not accelerate down your leverage further or buyback units?
Is that something that you've discussed with the Board? Or does the desire for cash flow from some of your constituents sort of overwhelm what could be a great buyback opportunity?
Yes, I understand. And again, the distribution policy is something obviously that we sound and socialize with the Board. I think the recent dislocation we've seen in the broader market and in our own security, it will have us thinking about exactly what you're alluding to. I think you actually talked about a unit buyback. But at the same time, we need to get the balance sheet right.
Is it a nice to have in terms of a 1% year
over year distribution? I think that's exactly how I would characterize it.
But again, I don't distribution? I think that's exactly how I would characterize it. But again, I don't I also don't believe that, that distribution increase of 1% is meaningful in terms of what we have from a balance sheet leverage perspective as well as from any perspective or theoretical unit buyback. So it is a nice to have. I would actually agree with that.
But then again, if we come out and we say, okay, well, 0% distribution increase, then the immediate question comes, are you looking at a distribution cut, right? And I don't think we're prepared to say anything close to that. And so we're comfortable with the 1% year over year.
Okay. Final question. Just when I think about your production forecast versus Oxy's forecast, should I also be thinking about the JV and that could create some differences to how I think about what OXY is saying about what it's expecting versus what you're expecting because you get all the volume from the JV with Shell versus and that can create some sort of the differences in trying to understand what Oxy is saying versus your guidance? Is that
Yes, Shneur. Sorry, sorry. I thought you were done there. My apologies. The shell that Anadarko had with Shell has actually expired.
It's no longer in place. And so when you do think about volumetric growth as it relates to WES' system, you do need to take into consideration that OXY's guidance are on a corporate level as opposed to the specific asset level where WES is. And then yes, you do need to think about it in terms of working interest percentages versus gross volumes that would be flowing through our systems. Does that answer your question?
No, that definitely does. Really appreciate it. All right, thank you very much guys and enjoy the weekend.
And ladies and gentlemen, this concludes the question and answer session. I'd like to turn the conference back over to Michael Ure for any closing remarks.
Thank you all for your participation on the call. I want to really thank the WES employees on delivering an excellent quarter in the 4th quarter and we as a whole are incredibly excited about the future of WES as a standalone enterprise. Thank you everyone for participation. Everyone please be safe.
Thank you, sir. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.