Western Midstream (NYSE:WES) is a mid size energy company majority owned by Occidental Petroleum. The company’s share price has been more volatile than other midstream companies, affected by concerns around Occidental Petroleum’s financial strength and whether the upstream company would be forced to sell its stake.
Since then Western Midstream has recovered significantly, however, we still see substantial value in the stock.
Western Midstream Overview
The company is primarily owned by Occidental Petroleum which also has a partial separate stake in the assets.
The company is 50.4% owned by Occidental Petroleum which also has a separate 2% stake in the operating assets. That stake at the current time is valued at more than $5 billion, or almost 10% of Occidental Petroleum’s current market capitalization. The rest is owned by public unitholders which have a smaller stake.
The company’s operating assets are well distributed throughout midstream operations.
Western Midstream 2Q 2022 Earnings
The company generated strong 2Q 2022 earnings, supported by its impressive financials.
Western Midstream 2Q 2022 Earnings – Western Midstream Investor Presentation
The company’s QoQ volumes increased by roughly 14% showing rapidly increased demand. We expect as long as high prices continue demand will continue to go up. The company had $467 million in operating cash flow and spent $95 million in capital investments. From this the company generated roughly $370 million in FCF which means annualized FCF at roughly $1.5 billion.
That’s a roughly 15% FCF yield. The company paid $200 million in distributions for the quarter, an almost 8% dividend yield, and still had almost $166 million in post-distribution FCF. The company has roughly $7.5 billion in long-term debt, which costs it several hundred $ million interest. We’d like to see it continue to opportunistically pay down the debt.
Western Midstream Guidance
The company’s guidance shows the ability to continue outperforming.
Western Midstream Guidance – Western Midstream Investor Presentation
The company’s guidance is for $2.175 billion in adjusted EBITDA with $7.5 billion in long-term debt. The company has $575 million in total capital guidance, something it can comfortably afford, that’s expected to generate reasonable growth rates. Part of that is supported by the overall recovery of the markets.
The company expects >$2 / share in per-unit cash distributions or a dividend yield of almost 8%. At the same time, the company expects a massive $1.3 billion in FCF for the year that can continue increasing. Continued strength in the market can allow the FCF to increase even further going into 2023. That can lead to continued shareholder rewards.
Western Midstream Shareholder Returns
Western Midstream is one of our favorite companies in terms of how it spends its profits.
The company repurchased more than $400 million in shares in the first 2 quarters of 2022. The company’s dividends are roughly $800 million annually, after capital spending, leaving roughly $500 million in additional cash. That’s enough for the company to generate double-digit shareholder returns while lessening the costs of future dividend increases.
Regardless of how the company spends the cash, we expect it to be able to comfortably provide double-digit shareholder rewards.
The largest risk to our thesis is volumes which depend on long-term prices. At current prices, we expect volumes to continue growing, which can result in substantial shareholder earnings. However, in a volatile market, that can quickly change. Volumes fell off a cliff in 2020. That continued risk is worth paying close attention to.
Western Midstream has an impressive portfolio of assets. The company is well integrated into Occidental Petroleum which is one of the highest volume producers in the industry, with a strong shale focus. Occidental Petroleum is a majority owner, which could put pressure if the company’s financial position has changed.
We expect Western Midstream to continue generating double-digit shareholder returns. The company is continuing to spend hundreds of millions a year on share repurchases, saving on the dividend expenses for those shares. Additionally, the company is continuing to pay an 8% dividend. That combination means strong and reliable double-digit returns.