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Operator
and welcome to the Western Midstream Partners Third Quarter 2021 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touch-tone telephone. To withdraw your question, please press star then two. Please note, This event is being recorded. I would now like to turn the conference over to Kristen Schultz, Vice President, Finance and Communications. Please go ahead.
Kristen Schultz
Thank you. I'm glad you could join us today for Western Midstream's third quarter 2021 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 most recent Form 10-K and Form 10-Q and other public filings for a description of risk factors that could cause actual results to differ materially from what we discussed today. Relevant reference materials are posted on our website. With me today are Michael Ure, our Chief Executive Officer, and Craig Collins, our Chief Operating Officer. I'll now turn the call over to Michael.
Form 10 - Q
Thank you, Kristen, and good afternoon, everyone. As you saw from yesterday's earnings release, we are pleased to report another quarter of strong operational and financial performance at Western Midstream. We generated net income available to limited partners of $250 million that resulted in adjusted EBITDA of $532 million, representing increases of 11% and 8% respectively compared to the prior quarter. Our third quarter performance was the result of increased throughput in the Delaware Basin, continued commercial success, lower operating expenses, and the positive impact associated with the reversal of previously constrained revenue. We continued to generate significant free cash flow in the third quarter by focusing on operational efficiencies, reducing our overall cost structure, and remaining disciplined with our capital spending program. We generated $320 million of free cash flow and $185 million of free cash flow after distributions. We increased our third quarter distribution to $0.323 per unit, representing a 1.3% increase over the prior period and in line with our target of 5% annualized growth. The third quarter also represented our third consecutive quarter of distribution increases since the onset of the pandemic. Before Craig discusses our operational performance, in particular our outperformance in the Delaware, I would like to mention a few factors that affected our third quarter financial performance. Starting at year-end 2020, under revenue recognition accounting standards, we constrained revenue related to certain third-party cost-of-service contracts associated with a gathering asset. Based on our current expectation, we no longer believe the previous constraint is warranted. As a result, we recorded a cumulative catch-up revenue adjustment of approximately $19 million during this quarter. While this adjustment impacted our adjusted gross margin and adjusted EBITDA for the quarter, it did not impact our free cash flow. Turning to expenses, as expected, O&M expense declined 8% on a sequential quarter basis, as the one-time charges in the second quarter did not extend into the third quarter. We now expect the near-term O&M run rate to be more in line with our third quarter results, while still recognizing that there is a variable component to O&M associated with throughput. Ad valorem taxes decreased by 24% on a sequential quarter basis due to a favorable adjustment to our year-to-date accrual recorded in the third quarter as asset valuations were finalized. G&A expense increased over 13% on a sequential quarter basis, primarily related to increased personnel expense and contracting consulting costs. As we mentioned last quarter, we expect G&A to remain at this level as we work to fully transform our company into the best-in-class standalone enterprise that we envision. With our strong third quarter performance, coupled with the impact of the cumulative revenue catch-up adjustment, we now expect to exceed the high end of our previously announced 2021 adjusted EBITDA guidance range of $1.825 to $1.925 billion. We also expect to be below the high end of our 2021 capital expenditure range of $275 to $375 million, as some of the capital is now expected to shift into 2022, thus reducing capital requirements for the year. Additionally, we have continued to optimize our assets. For example, in the Delaware Basin, where our engineering team implemented design modifications to increase our nameplate rotif capacity by 20% per train, resulting in a total increase in oil treating capacity by 36,000 barrels per day. These modifications were made with minimal investment and highlight a clear example of our team finding capital efficient solutions to expand our operational capabilities. Moving to the balance sheet, we exited the third quarter with $100 million of cash and $1.8 billion of availability on our revolving credit facility, resulting in total liquidity of approximately $1.9 billion. Total outstanding debt was $7.2 billion, resulting in a 12-month trailing net leverage ratio of approximately 3.7 times at quarter end. well below our year-end 2021 target of 4.0 times and closing in on our year-end 2022 target of 3.5 times. In late August, we successfully executed a tender offer, retiring $500 million in aggregate principal of our outstanding senior notes for a total purchase price of $522 million. With this tender, we have reduced our annualized interest expense by $21 million and extended the weighted average time to maturity of our debt from 12.5 to 13.1 years. Since our bond issuance in January 2020, we have retired $1.15 billion of our senior notes, and we intend to continue retiring near-term maturities using free cash flow. During the third quarter, we received an upgrade for West Operating's long-term debt from BB to BB Plus from S&P. This upgrade reaffirms the success we have had in improving the health of our balance sheet. We are of the view that we have already achieved investment grade metrics, and we believe others share that sentiment based on investor feedback received during the tender process. I'm also pleased to report that as of September 30th, we have repurchased approximately $137 million of common units under the authorized $250 million unit repurchase program. of which approximately $88 million of common units was repurchased during the third quarter. Through the unit buyback program and the Anadarko Note Exchange, we have retired approximately 36 million units, and we will continue to opportunistically repurchase units with the remaining authorization. As you have seen over the last several quarters, we have made tremendous progress in strengthening our balance sheet. Since the January 2020 bond issuance, we have retired $1.15 billion of our senior notes, or 14% of the senior note balance, and 36 million units, or 8% of the unit count. We have also paid out approximately $1.1 billion in distributions to both our limited and general partners, which has resulted in approximately $2.6 billion of total capital returned to our stakeholders. Said differently, on a per unit basis, We returned $3.69 through debt retirement and unit repurchases and $2.62 per unit in distributions for a total of $6.31 returned to unit holders since the onset of the pandemic. I would also like to note that this analysis does not consider any market driven appreciation in our quarter end unit price of $20.96 that resulted from the actions we have taken since the beginning of 2020. Additionally, through these actions, we've increased our annualized free cash flow after distributions by $83 million and expect to further increase these savings through continued debt reduction. With this track record and as market conditions allow, we look forward to creating additional value for our stakeholders through buying back more units, paying down debt, and increasing our distribution over time. I'll now turn the call over to Craig to discuss our operations in the third quarter.
Kristen
Craig? Thank you, Michael. As expected, we continue to see growing volumes in the Delaware Basin and declining volumes in the DJ Basin, trends we expect to continue through the fourth quarter. Additionally, we expect 2021 exit rates relative to 2020 to be in line with prior commentary from last quarter's earnings call. In the Delaware Basin, activity levels remain strong, and we are seeing continued capital investment on acreage that we service. Our top-tier position in the basin, strong producer relationships, and competitive cost structure have enabled us to generate incremental and capital-efficient adjusted EBITDA. Our commercial team has done a tremendous job to transform these competitive advantages into additional business, as we expect approximately $20 million of incremental EBITDA in 2021 as a result of this additional third-party business. Turning towards the DJ Basin, we have recently seen some positive momentum on permitting under the new process arising from Senate Bill 181. with the approval of the first permits in Weld County shortly after quarter end. Our producers remain cautiously optimistic with the new regulatory framework as they continue to work through their own permitting and budgeting processes. We continue to see activity levels in line with expectations as discussed in our second quarter earnings call. We continue to witness private producers increasing activity levels with favorable commodity prices. especially in the Delaware Basin, and public producers maintaining capital discipline within their 2021 budgets. We are having close conversations with our producers as they evaluate their 2022 capital allocation and drilling plans, and we intend to provide further Basin insight through our formal 2022 guidance in conjunction with our fourth quarter and year-end 2021 results. Overall, gas throughput declined by 4%, or 184 million cubic feet per day on a sequential quarter basis. The Delaware Basin growth was offset by decreased volumes at the bison treating facility, which we sold in the second quarter, and by natural production declines in the DJ Basin and areas around our Marcellus non-operated position and the Springfield gas gathering system located in South Texas. Excluding the effects of the bison divestiture, our gas throughput would have only declined by approximately 2%. Our crude oil and natural gas liquids throughput decreased by 7% on a sequential quarter basis, or 46,000 barrels per day, primarily due to declining volumes in the DJ and reduced volumes through our equity method investments. Higher production in the Delaware Basin increased water throughput by 7%, or 47,000 barrels per day on a sequential quarter basis. Our per barrel and per MCF adjusted gross margin increased across all products, we saw an increase of 10 cents per MCF on our natural gas assets, 12 cents per barrel on our crude oil and natural gas liquids assets, and 2 cents per barrel on our produced water assets. The margins for our natural gas assets, as well as crude oil and natural gas liquid assets, were positively impacted by recording revenue previously constrained from certain cost-of-service contracts, resulting in an increase of our per MCF adjusted gross margin of approximately 3 cents and our per barrel adjusted gross margin of approximately 13 cents, respectively. Additionally, for our natural gas assets, we saw increased throughput in the Delaware Basin, which has a higher margin contract mix. With that, I'd like to turn the call back over to Michael to talk about our recently issued sustainability report. Michael?
Form 10 - Q
As many of you have already seen, we published our second sustainability report in late October. Before we get into some of the report's highlights, I want to take a minute to thank all our employees and contractors for their work on ESG. Implementing our ESG framework and strategy has been a monumental effort, and there is no doubt that we would not be where we are today without the focus and dedication of our entire workforce. Our report features a number of ways we are advancing energy through the three pillars of our approach to ESG. Supporting sustainable environments, focusing on people, and operating responsibly. We know that to provide superior midstream services, we must be transparent about our environmental performance. That is why in 2020, we joined OneFuture, a coalition of industry peers working to reduce methane emissions across the oil and gas value chain. Within a year of joining, I'm very pleased to report that we have surpassed OneFuture's 2025 methane intensity targets for similarly situated companies that gather and boost and process hydrocarbons. Additionally, we were instrumental in working with the Energy Infrastructure Council and the GPA Midstream Association in developing the first-ever ESG reporting template for our sector, and our organization was one of the first five companies to adopt the new reporting template. We continue to focus on reducing our Scope 1 and 2 emissions, and a large part of that effort is utilizing electric-driven compression, which has enabled us to reduce NOx emissions by 7% since 2018. Through 2020, we have installed approximately 350,000 horsepower of electric compression, and we have expanded our utility usage from renewable sources to 25%. Shifting to our strategic pillar of operating responsibly, we made great strides in improving safety, enhancing governance, and increasing our focus on environmental issues. We have reduced our employee total recordable incident rate, or TRIR, by 73% since 2018. Additionally, in 2020, our employees logged a total of 22,000 training hours. Each employee is required to complete LiveSafe training, which focuses on risk identification and mitigation and general life-saving rules. Today, 100% of our field-based contractors are assessed on both the scope of work to be performed and their historical safety performance. We've also added several ESG leadership positions within our organization. At the board level, we established an ESG committee to guide the company's direction on ESG issues. We have also incorporated ESG metrics into our internal bonus compensation program and added leadership positions to oversee ESG reporting, sustainability in our operations, and our diversity, equity, and inclusion efforts. I'm proud of our early record on diversity, as the majority of our current senior leadership team is either female or of racial or ethnic minority. This sets the foundation for great diversity of thought and an expectation of inclusion throughout the entire organization. Finally, giving back to our communities is a big part of working at WES. Improving lives is part of our vision. So we have launched several employee-led programs designed to incentivize volunteerism and social investment within our communities through partnerships with local nonprofit organizations. Additionally, as of today's call, we have exceeded our annual volunteering target of 50% employee participation for 2021, donating over 8,500 hours to the communities in which we live and work. I invite you to take some time to read about these efforts and more in our sustainability report found on the sustainability tab of our corporate website. Before we close out today's call, I would like to reiterate a few key points. First, We have a solid operational platform anchored by strong assets in the most active producing basins in the country, and in particular, the Delaware Basin. The current commodity price environment supports increased producer activity, and we have already seen pockets of improvement throughout our asset portfolio. As we exit 2021 and move into 2022, we remain committed to addressing our customers' needs in a safe and efficient manner. We have a strong liquidity position, and we continue to improve the health of our balance sheet. Since the start of 2020, we have retired $1.15 billion of our senior notes, significantly decreasing our interest burden and reducing our leverage solidly below 4.0 times. Finally, we continue to generate significant free cash flow, allowing us to pay down debt, buy back units, and increase our distribution. We have now executed on more than half of our $250 million unit repurchase program and increased the distribution for the third consecutive quarter since the onset of the pandemic. We continue to work with our board on the best avenues for future capital allocation as we focus on generating value for all our stakeholders. I would like to wrap up by thanking our workforce for their hard work and dedication to WES. We look forward to updating you on our fourth quarter and full year 2021 results and providing 2022 guidance on our next earnings column. With that, we'll open the line for questions.
Operator
Thank you. We'll now begin the question and answer session. To ask a question, you may press star then 1 on your touch-tone phone. To withdraw your question, please press star then 2. If you're using a speakerphone, we do ask you to pick up your handset before pressing the keys. Today's first question comes from Brian Reynolds at UBS. Please go ahead.
Brian Reynolds
Hi. Good afternoon, everyone. To start off, I was wondering if you could provide some updated commentary around West's leverage target. Just given that West has retired over a billion in senior notes and with leverage heading towards, you know, three times, I was wondering if we could see any return of incremental return of capital opportunities as we look into 2022. and whether a potential distribution step up in early 2022 would be viewed as an efficient form of return on capital. Thanks.
Form 10 - Q
Yeah, thanks, Brian. That's a good question. Our targets as it relates to leverage really haven't changed. We're very pleased with the progress that we've been able to achieve up to this point. around exiting this year at below four times. Obviously, we sit below that level today, exiting 2022 at below three and a half times, and we're approaching that based on the performance that we've been able to achieve up to this point. As we start getting a little closer towards pointing to being able to achieve those targets with greater certainty as we take a look at our guidance for 2022 and expectations around that. It's certainly a conversation we expect to have with the board around what are the most efficient ways at that point for us to be able to return additional capital to our stakeholders. We've been very disciplined in returning capital to our stakeholders and the proportion at which we do that is something that we hope to engage with our board on as we take a look at our guidance for 2022. the first part of next year. The degree of which each of those levers are going to be pulled is definitely a topic of conversation, and obviously within that will be a discussion around the distribution itself and whether or not there is a step change warranted in that regard.
Brian Reynolds
Great. Appreciate the color. And maybe just to continue for a follow-up on capital allocation and unit buybacks, You know, Oxy's ownership in West continues to take up close to that 50% threshold. Just given, you know, the amount left on the share buyback authorization, just curious if there's been any conversations with Oxy at this point, you know, if that threshold is crossed and then if there was a potential for any buybacks from Oxy directly to, you know, maintain deconsolidation at the Oxy level. Thanks.
Form 10 - Q
Yeah, well, there's always continued dialogue that we have with Oxy in that regard, and, you know, our focus is buying back, you know, any units that we can, and obviously theirs being the largest, you know, holder, you know, we have continued dialogue with them. As it relates to that threshold, you know, obviously it's their decision, you know, to the best manner in which they would like to keep their ownership and how they want to keep their ownership, but We certainly stand ready and are constantly engaged in discussing whether or not WES can be a participant in any divestiture that they might have. They continue to reiterate their support, their desire to maintain a significant ownership in WES, and that coordination and cooperation has been very positive and continues to be positive. If there is an opportunity for us to buy back some of those units as they seek to to maintain the desired ownership, then we stand ready to have those conversations when they might occur. But for us, we're just focused on reducing the amount of units outstanding, regardless of where they may come from.
Brian Reynolds
Great. That's all from me. Have a great day, everyone. Thanks, Brian.
Operator
And our next question today comes from Spiro Dunes with Credit Suisse. Please go ahead.
Spiro Dunes
Thanks, operator. Hey, Michael. Hey, Greg. I wanted to follow up. Not bad, not bad. I wanted to follow up on some of the cap allocation questions and just narrow in a little bit on the buyback, but also growth. So I know buyback, obviously opportunistic, and you sort of weave in and out of the market. But you sort of described it as a lever there. And I imagine there's maybe a formula in the background that you're all using to decide when and maybe how much you sort of buy back. Any color can give us, as we think about sort of what makes you make that move into the market, And then as we think about another bucket for capital allocation, of course, there is growth. And I know that's been largely absent the last few years, but as we look forward, you know, just curious if you've been less aggressive up till now while you've got leverage lower. And then now that we're at this point, just curious if we should be thinking about accelerated growth again, any spending there, and even if M&A comes into the picture.
Form 10 - Q
Yeah, sure. Let me take the first question. You know, as we think about, you know, capital allocation and buying back units, you know, as we've indicated that we wanted to do that on an opportunistic basis. And the way that we really think about it is, you know, where we might see some weakness in the market, then, you know, that's an opportunity for us to, you know, to buy units in those particular instances. And, you know, obviously we found that in the third quarter, and that's why we utilized the program in that way. As it relates to growth, you know, really we're focused on being able to, you know, service our customers in the best way possible. And so in as much as, yeah, as well as growing that customer base through acquiring new customers, you know, overall. And so, you know, in as much as our customer base, you know, desires that they want to grow their volume significantly, then, you know, obviously we're going to spend that growth capital in order to follow that. you know, as it relates to M&A, for us, we're always, you know, taking a look at M&A opportunities, whether it's on optimizing our portfolio through, you know, potential divestiture of assets as well as bolting on additional assets that might fit within our system. But it really has to be an enhancing, you know, acquisition for us and, you know, making sure that we're able to optimize, you know, our system through that acquisition target. And so we've We maintain that posture really throughout over the past couple of years in how we contemplate M&A, either on the potential portfolio optimization side as well as new targets.
Spiro Dunes
Got it. Thanks for that. Switching gears a bit, but still thinking about the outlook. I know we're not getting guidance on this call. Sounds like we'll get it next quarter, so fully understand that for 2022, but I guess, just based on what you said before, I think you've talked about 2022 growing off of 2021, which now appears kind of an easy lift. But I guess as we think about the back half of 2021 and the run rate here, even if we just look at this third quarter and back out that $19 million non-cash revenue item, it would seem like 2022 should even be stronger than the back half of 2021, just given all your outlook in terms of activity improving sequentially from here. Just curious if there's any reason or anything we're missing about next year or any lumpiness that we should be thinking about that maybe makes that not a great comparison.
Form 10 - Q
Yeah, there's nothing I can really point to you with regards to 22 just yet with regards to, you know, any specificity with regards to what we're seeing in our business now or what we expect, you know, going forward. But, Definitely look forward to engaging, you know, on that conversation once we put out formal guidance and give some more specific detail. But nothing I could give to you right now, Spiro, that would guide you one way or the other. But really look forward to doing that first part of next year.
Spiro Dunes
Understood. Have to give it a try. Thanks for the time, guys. Thanks, Spiro.
Operator
Ladies and gentlemen, as a brief reminder, if you'd like to ask a question, please press star then 1. Our next question comes from Derek Walker at Bank of America. Please go ahead.
Derek Walker
Hey, good afternoon, everyone.
Operator
Hey, Derek.
Derek Walker
Hey, I appreciate the time, guys. Maybe just a quick clarification. I know you guys reiterated sort of the expectations on exit rates for 21, but I believe you guys talked about the agreement with Crestone next year sort of offsetting the natural declines in the D.J., Has that outlook changed at all, and how has that relationship gone so far?
Kristen
Yeah, Derek, we're actually in the final throes of making those connections to bring those volumes onto our system, and so there's been a lot of good progress relative to that project since our last call, and really the outlook for those creststone volumes that we expect in 2022 hasn't changed relative to what we had previously communicated. And so we're optimistic that those additional volumes in the DJ in 2022 will go a long ways in helping maintain our volumes from that asset next year. But as we've stated, we continue to work with all of our producers to understand what their development plans are for 2022. I think we'll have a much more definitive and more clarity around what that looks like as we issue our 22 guidance.
Derek Walker
Understood. I appreciate that. Maybe just a higher level question. I think some peers have talked about potentially seeing an incremental NAC gas pipe out of the Permian, maybe sooner than prior expectations. Is participating in a potential natural gas pipe out of the Permian at some point, is that something of interest to you guys? I know you guys have several equity interests in pipelines. I didn't know if that was something that was on your radar.
Kristen
Yeah, we're always watching that market, and as you point out, we are an equity partner in many of those existing downstream pipes, both in the Delaware and out of the DJ. And so, you know, those are opportunities that... that, you know, we monitor and we're, and we're looking at, looking at, uh, and really fundamentally just is based on, on what the value proposition looks like for us. Um, and, and what we, we see is the downstream takeaway commitments that, that may be necessary in order to support our business. But, um, you know, we, we, uh, we feel like we're in a pretty good position right now, uh, with our, our gas takeaway, um, uh, set up out, out in the Delaware basin and, uh, But we continue to look at those opportunities and, you know, that's just part of, you know, the customer service that we're providing to our producers is making sure that we're engaged in those opportunities or working with producers who may have an interest in participating in them.
Derek Walker
Got it. And maybe just one last one for me. When I look at your water volumes relative to your crude and NGL, that ratio continues to creep higher throughout the year. How are you guys looking at that ratio going forward?
Form 10 - Q
One thing to point out there, Derek, is that our water business is only in the Delaware Basin, whereas our crude and natural gas volumes are across our full portfolio of assets. You know, where you're seeing, you know, a lot of the differentiation in the growth rates overall, you know, a large part has more to do with, you know, one is concentrated in one particular area and the others, you know, are across our portfolio. And so we really haven't seen a huge step change as it relates to the water-to-oil ratio across our assets. You know, it's really just more a reflection of the fact that the majority of our growth is really coming out of the Delaware Basin, and that's where our water assets are located.
Kristen
And I would just add to that that we have the ability and have been quite successful commercially to go after incremental business on the water side. And so the addition of volumes across each of our three systems out in the Delaware isn't necessarily a formulaic ratio going forward because we're looking to build on incremental business across all three of those systems. with our water assets, having been in an area particularly ripe for commercial opportunities, and the team's been doing a great job at bringing incremental barrels onto it.
Derek Walker
Got it. I appreciate it. Thanks, Mike. Thanks, Rick. That's it for me. Thank you.
Operator
Ladies and gentlemen, this concludes the question and answer session. I'd like to turn the conference back over to the management team for any final remarks.
Form 10 - Q
Thank you, everyone, for joining the call. We look forward to discussing our 2022 guidance as well as our full year 2021 results, the first part of next year. Happy holidays, everyone.
Operator
Thank you. 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.
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