Western Midstream Is An Important Core Holding For Any Portfolio

Summary

• Western Midstream is an important core holding for any portfolio with its reliable portfolio of assets.
• The company is dramatically increasing its dividend to a yield of more than 8%, with the potential for additional increases.
• After this, there are still growth capital expenditures, along with share and debt repurchases.
• The company can continue generating reliable and growing double-digit shareholder rewards.
• I do much more than just articles at The Energy Forum: Members get access to model portfolios, regular updates, a chat room, and more. Learn More »

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Western Midstream (NYSE: NYSE:WES) is one of the largest midstream companies, owned partially by Occidental Petroleum (NYSE: OXY). The company has a $10 billion market capitalization, and a more than 5% 2021 dividend yield that's expected to increase significantly in upcoming years. As we'll see throughout this article, the company's portfolio makes it a valuable investment.

Western Midstream

Western Midstream 2021 Performance

Western Midstream had strong 2021 performance showing the strength of its asset portfolio.

Western Midstream

Western Midstream 2021 Performance - Western Midstream Investor Presentation

Western Midstream generated almost $1.8 billion in 2021 FY operating cash flow. The company spent almost $280 million on capital spending resulting in almost $1.5 billion in FCF and more than $500 million in cash distributions paid. That left the company with almost $1 billion in post-distribution FCF on top of significant investments.

The company significantly passed its leverage target with roughly 3.6x in leverage (~$7 billion in long-term debt). The company managed to use its excess cash flow to repurchase $250 million in units (~2-3% worth) and repay almost $1 billion in debt saving the company on interest. The company has been focused on continued interest reductions and improvements here.

Western Midstream Financial Improvements

Overall, Western Midstream has had a continued commitment to financial improvements.

Western Midstream

Western Midstream Financial Improvements - Western Midstream Investor Presentation

Western Midstream has significantly improved its financial position since COVID-19 in early-2020. The company has retired a massive $1.15 billion of debt, repurchased $500 million of units, and paid $1.2 billion in distributions. Overall, the company has managed to return a massive $7 per unit in shareholder returns through a difficult time period.

These financial improvements should continue with the company's cash flow.

Western Midstream 2022 Guidance

The company's 2022 guidance, and onwards, is for strong and continued shareholder returns.

Western Midstream

Western Midstream 2022 Guidance - Western Midstream Investor Presentation

To start, Western Midstream is stepping up its distributions significantly in 2022. The company is starting with a $2 base distribution (an 8% yield costing almost $850 million / year) with the potential for an enhanced distribution. The company expects $1 billion in repurchases through 2024, or 10% of its current outstanding.

The company is expecting to steadily decrease its annual net leverage threshold while increasing its overall shareholder rewards. The company is spending $425 million in capital expenditures, which will support some growth, and leave the company with $1.25 billion in FCF after those capital expenditures.

The company is spending roughly $850 million in dividends leaving the company with $400 million. We'd like to see the company frontload repurchases to save on dividends, however, regardless of how the company spends money, we expect it to benefit and generate valuable double-digit shareholder returns.

Western Midstream Shareholder Returns

Western Midstream has a unique ability to generate strong shareholder rewards.

The company is earning $1.25 billion in FCF after $425 million in capital expenditures. Roughly half of those capital expenditures are growth investments (more than $200 million) and the company can be expected to generate market-leading returns on these investments as it undertakes opportunistic small capital projects.

Outside of that the company has committed to a dividend of more than 8%. That will cost the company more than $800 million. Together with the growth capital, the company can generate double-digit shareholder rewards. After all this the company still has $400 million it can spend as it chooses. It can repurchase shares or reduce debt and save on interest.

This combination can enable the company to continue generating impressive double-digit shareholder rewards.

Western Midstream Risk

Western Midstream's primary risk is the new risk that's started to influence midstream companies. It became increasingly evident during COVID-19. That's the company's industries to the oil industry and its sponsors. Western Midstream saw its stock price suffer from its ties to Occidental Petroleum along with Occidental Petroleum's need for liquidity.

While Occidental Petroleum has staved off the worst of the risk, there's always a chance that the company faces the same pressures, again putting negative pressure on its share price.

Conclusion

Western Midstream has a unique portfolio of assets. The company has recently substantially increased its dividend pointing towards a yield of more than 8%. At the same time, the company is continuing to invest in growth capital, repurchasing shares, and paying off debt. Those debt payoffs save on interest and share repurchases save on dividends.

That investment is significant. The company's substantial post capital spending FCF is enough to generate continued double-digit shareholder returns. The company has a variety of levers it can use to continue improving shareholder returns, levers that it's continued to use effectively. Putting all of this together we think Western Midstream is a valuable investment.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of WES, OXY either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Comments

[John749]

You guys touched a Third rail with Amazon. I agree with you. Lots of issues
going south at the same time. Stagflation number one, overbuilds fulfillment
centers at high cost. Immediately adds depreciation. High number of employees required per million in sales with wage pressures intensifying.
As we well know Energy cost especially Diesel will continue to rise, all utilities
double. Big increase in cost of money I have no reason to research that.
I know EPD loans by heart almost. That last Billion at 3.3% for fixed 30 years pure Genius. The EV bug will bite more than once, future decommission cost are unknown but will be high. The second most Toxic risk very similar to the current #1, spent Nuclear fuel rod storage. I personally hope we stop lithium
batteries soon, too many uneducated people believe in magic recycling
It’s been 80 years and we haven’t solved Nuclear waste.
People literally laughed when I posted on SA about the coming Stagflation
and what I was doing to build my own contracted word Stagfolio.
I mentioned Tubi on your Amazon article, if you are not using it give it
a try. Big competitor for all streaming services. Free.
I already follow you.
Best Luck
John

[Theta84]

Love their three pronged approach of paying down debt, buying back shares, and paying a very nice distribution. Very shareholder friendly company.

[John749]

I had not added to my 2020 and early 2021 units for some time foolishly stopping buying at $17.00 but recently I added some at $24.00 the increase
in distribution makes it realistic to add or even start a position when combined
with increasing unit cost of other MLP’S.
Best Luck
John

[slowtrader]

Boy. everyone loves energy companies now. It took more courage to buy in March of 2020 when the oil market crashed.
I bought shares over a couple weeks with average cost about $6.50 and got mostly bad news stories as it slowly recovered. I sold about 25% at $14 and
whatever the premium was for the covered calls I had sold. That returned over
half the investment and now can collect distributions at about 30% on my cost
on the rest.

[John749]

The most profitable stock I ever bought and now a big raise on income.
So it’s a permanent hold for me. Should of bought more.
Thanks for the information.
John

[Limestone Cowboy]

This is a no-brainer. The legacy APC acreage is functionally dedicated, guaranteeing them ~20% rates of return on anything that they build. With the combined heft of the Delaware basin positions, WES has become a monster in terms of capital efficiency.

Also note that OXY won't be in a hurry to cut the distributions, since it still owns such a large chunk of the shares. With the acreage dedicated in their most important positions, there's functionally no chance that they sell down the position, as they need to retain control.

The next big impulse will be gas production. With prices climbing past $5/mcf and on the way to $7-8, the large sucking sound of the LNG terminals on the gulf will be answered by WES pipe. Even in the rockies, gas demand is spiking, and much of the less liquids rich acreage now looks poised for prime time. Midstream companies make far more on gas than they do on oil or water treatment, especially in the age of produced water fracs. With the shutdown of the European chemical complex, the future has never been brighter for ethane to butane.

Buy it while you can, this is a $40 stock after the $2 dividends get paid.

[ZeroGravitas]

The base dividend on SA is listed as. 33 per qtr or $1.32. Your article mentions a $2 base distribution. Am I missing something?

[bayarea99]

@ZeroGravitas read the last earnings report. They are increasing the distribution to 50 cents a quarter or $2 per year , a 53% increase.

[Uncle Ted]

@bayarea99 thanks for update on distribution.

[danrichman54]

@ZeroGravitas You are not alone with your comment. All of the brokerage sites (like Fidelity) and stock info sites (like Yahoo) that I am aware of are still reporting distribution yields in the low 5% range based on annualizing the last DECLARED dividend of 32.7 cents. 32.7 x 4 = 1.308 annualized / 24.75 price = 5.28% distribution yield.

The going forward quarterly distribution of 50 cents per quarter has been ANNOUNCED but the first one (due toward end of this month) has yet to be DECLARED. The reporting services won't change their forward annualized distribution to 2.00 until the first 50-center is declared. Then 2.00 / 24.75 price = 8.08% annualized.

IMO, this market is slow and lazy. It will wait until 50 cents per quarter is in the rear view mirror and hits it on the head like a 2 x 4 before it realizes the yield really is over 8% at any price under 25.00. Then and only then will it bid the price up until the yield is less than 7%. Thus I expect a price of 28.57 (2.00 / 7%) shortly after the first the first 50 cents is declared.

Load up the truck at any price under 25.

Added by edit: PS: I just talked myself into buying another 3,000 at 24.62.
If I'm wrong about the market bidding the price up until the yield is about 7% or just under, I'm content to collect more than 8% while I wait.

The first quarter's distribution announcement was on 4/20 last year. That's 2 weeks from today if it's the same date.