Western Midstream Partners, LP Q3 FY2025 earnings call

• Third quarter was a strong financial and operational quarter with record adjusted EBITDA due to cost reduction initiatives. - Achieved highest total natural gas throughput in partnership history, driven by Delaware Basin, DJ Basin, and Chipeta plant growth. - Completed acquisition of Aris Water Solutions on Oct 15, solidifying position as leading 3-stream midstream flow assurance provider in Delaware Basin, expecting $40 million annual run rate synergies. - Operational details: Natural gas throughput up 2% sequentially, crude oil and NGLs down 4% sequentially, produced water flat. Adjusted gross margin details. - Fourth quarter and 2026 guidance on throughput, margins, and basin-specific expectations, including Delaware Basin as primary growth engine, Powder River Basin and DJ Basin risks, and 2026 capital expenditure plans.

In the third quarter, Western Midstream achieved record adjusted EBITDA for the second consecutive quarter due to lower operational costs and cost reduction initiatives. Natural gas throughput reached a history high, driven by record natural gas throughput in the Delaware Basin, strong sequential growth in the DJ Basin for natural gas, crude oil, and NGLs, and growth at the Chipeta plant in Utah. Crude oil and NGLs throughput decreased 4% sequentially due to Delaware Basin decline offset by DJ Basin increase. Produced water throughput was flat sequentially. Adjusted gross margin for natural gas per Mcf decreased $0.05 sequentially due to Delaware Basin pricing and NGL volumes, partially offset by DJ Basin higher margin. Crude oil and NGLs per barrel adjusted gross margin increased $0.08 sequentially. Produced water per barrel adjusted gross margin was unchanged. Fourth quarter expectations include slightly lower natural gas per Mcf margin, in-line crude oil and NGLs margin, and combined produced water margin range of $0.85 - $0.90 with Aris contribution. Portfolio-wide average year-over-year throughput expected to increase mid-single digits for natural gas and low single digits for crude oil and NGLs, produced water expected to increase ~40% year-over-year with Aris contribution in Q4.

• 2025 adjusted EBITDA expected towards high end of $2.35B - $2.55B range, including ~$45M - $50M from Aris contribution. - 2025 free cash flow expected above high end of $1.275B - $1.475B range. - 2025 capital spending expected towards high end of $625M - $775M range. - 2026 capital expenditures expected at least $1.1B, Delaware Basin as primary throughput growth engine, Powder River Basin and DJ Basin risks, and Oxy's Bronco CAP project impact.

• Commodity price weakness leading to lower customer activity levels, impacting natural gas throughput. - Powder River Basin may see select rig drops or temporary rig relocations into 2026 if commodity price weakness continues. - DJ Basin expected modest throughput decline in 2026 due to lower activity in 2025 relative to 2024.

Q: I wanted to start on the O&M expense, it's down quite a bit year-over-year. So WES, the prior few years has seen pretty big increases in O&M costs. Can you talk to where you are on implementation of the cost management initiative, if you think Q3 O&M is pretty sustainable ignoring Aris? And how much more you think you could achieve from here?

A: It's Oscar. Thanks for the question. We started this effort in March of this year to really focus in on sort of updating our processes, streamlining our efforts and looking for ways to zero base kind of everything we do and think through how we can be more cost competitive so we can support our organic growth and sort of win new business. So the teams have gone through everything at this point. And we still see there's more to do. So what you see in the third quarter here should be sustainable, and we do expect there's more to come. I'll turn it over to Danny just to give some examples of some of the work that's been done and what we've been able to achieve so far. But we do think this is a new level that we can operate at, and we do think we'll see improvements throughout 2026.

Q: Maybe if I can start on the Pathfinder project and some of the assets you made on the additional pore space. Can you just talk about what that does for the projects from an efficiency standpoint relative to the, I think, $400 million to $450 million cost you originally laid out? And then maybe if there's also an update on how third-party contracting may or may not be progressing?

A: Sure. Thanks, Gabe. So I'll start at the end. On the contracting side, we are progressing well. I think with the Aris acquisition, it did allow us -- took a little bit of pause because we couldn't work in coordination with the Aris' commercial team until we closed. That started now. They've had conversations about growing their system. Of course, we've been working with other producers on Pathfinder itself. So this pore space deal did a couple of things, obviously added some more capacity. I think that will just benefit the entire system. Now that we have both New Mexico and Texas, ultimately, those will connect up over time and we'll have more flexibility and frankly, probably a bit greater ability to grow New Mexico faster than Aris could have done on its own when you combine Pathfinder access and then sort of everything we're doing to expand some of our capacity. In terms of -- that's why we really brought up this transaction, even though it's sort of not material for the details to be disclosed. It did give us extra pore space and it also allowed us to reroute a small portion of the pipeline to save us some capital. So not ready yet to give the specific numbers, but we do believe with this transaction, we've improved the returns on Pathfinder for the SEC that we already have in place. And then for future growth on that pipeline. So with that, I think the only other comment I'd make is just on contracting further on Pathfinder. Now that we've got again this combined company, more services and solutions, bigger footprint that I think it will sort of accelerate the dynamic that we'll have with other producers. And finally, we still got about a year, by the way, to get this online. And finally, I'd just say the environment itself has shifted in our favor even though over just the last 6 months. So in addition to some of the market activity that we commented on in the script, we've seen higher regulatory activity. We've certainly engaged more with regulators. There's probably more regulation coming. But it reminds me of sort of the gas business 20 or 30 years ago, whereas the regulations increased, it really pushed out smaller players, noninvestment-grade players that didn't have sort of the capability to deliver large projects and complete solutions that also comply with increasing regulatory pressure. So those things have moved in our direction. We've also witnessed now, not just seismicity but communication with producing wells and all kinds of other issues. So it's a real focus of the industry now. And we're also gratified that from a contracting perspective, the contracts you see at Aris in terms of very long-term dedications and then what we've been able to achieve so far, Pathfinder with minimum volume commitments, really it looks, again a lot like the gas business. So we're pretty happy with the trend, and I think we'll see continued strength in pricing as this becomes a bigger and bigger issue in the Delaware Basin.

Q: Just wanted to pick up with some of the points you brought up before as far as opportunistic inorganic deals that you might pursue. Is there any kind of holes in the portfolio you're looking to kind of solve for at this point? Or what are the parameters there is what WES might be interested?

A: Yes. So the financial parameters are unchanged. So I won't go through those. Those are very consistent over the years and certainly we've kind of validated this year. In terms of opportunities, I think always where we've got some angle footprint customer with something to build off of and generate some synergies will be our preference. As we talked about, just with the last question, New Mexico is an obvious one where there could be opportunities. We're probably biased a bit towards gas opportunities from this point, given we've really just put together the best position we possibly could in the Delaware Basin on the water side. In terms of stepping out in other basins, it's a little bit harder for us if we don't have something to bring, but not impossible with the right sort of significant or stand-alone type business that we think we could leverage into additional growth. But we're staying disciplined. It's been an interesting market from our perspective. There's been a lot of assets out there. We've seen a lot of failed processes. So we'll be helpful as we move through all that. But Jeremy, really not too much has changed in our strategy and where we would go from here.

Q: I want to start with New Mexico. Just in terms of expanding more there on the gas side, how are you thinking about the AGI component? A lot of your peers have bolstered their AGI capabilities. So just curious if that's a barrier to entry or do you think something you could overcome?

A: Yes. I think it's a real issue, right? There's a lot of sour gas in New Mexico. We certainly have the skill set to evaluate those and operate those as well as handle sour gas. So it's an understood challenge, I guess, operating in New Mexico. It's not -- New Mexico is not alone in that area. But in any case, there are a challenge. They take time to permit and they are assets that I think provide value. So I think if there's an opportunity for us inorganically there that is heavy on sour gas, of course, we would imagine that would probably come with some of those permits or wells. But if not, we certainly got the skills internally to work through that.

Q: Second question, maybe just going to synergies. Oscar, it sounds like you feel pretty confident in that $40 million. But maybe just looking beyond that, you continue to talk about being a 3-stream operator. And I guess I just wonder commercially, when do you think we start to see some of that benefit play out on the commercial side?

A: Yes, we're certainly having those conversations already. So it's really hard to control. It's kind of like M&A. You've got a counterparty there and a customer that has their own timetables and things that they are focused on. So we'll continue to work those. I don't have sort of a specific time frame. I do think it will take a little time. I mean for us on the organic side, we would have to find opportunities where we would -- it's a new area for us. It would be a new build-out sort of situation. So they would just have to mesh with whether it's expiring dedications or new development area or somewhere where our timing could match customers. So that could take a little time. But we certainly are going to leverage the Aris systems and relationships. We've got some overlap in those relationships to see what we can do on that side. So we haven't, in sort of the 3-stream area, we certainly haven't projected or promised sort of specifics on sort of amount or timetable that we think we're going to be successful there. There's also some likely synergies and opportunities to accelerate growth with the combined Aris and WES team. We've kept all their commercial team to add to ours and really work together to -- just to accelerate the growth on the water side. And again, having something that resembles like a giant gas header system with a beautiful pipeline right in the middle is pretty powerful. So it shouldn't take an incredibly long time for -- on the water side, the revenue synergies to show up, again, probably not ready to quantify them, but we imagine we see something going next year. And really the last piece, so the $40 million we are extremely confident, and the Aris team has been wonderful. We kind of hit the ground sprinting, not just running with the integration. So that's gone really, really well. But really, those -- that $40 million was really all overhead. We also think there's going to be some great opportunities on the operating side for synergies that we can realize probably starting around the first or second quarter. Right now, both teams are sort of operating side by side. And we're just sharing and reviewing how we do business and how we execute every day and pulling best practices for both sides. We are definitely going to take some of the things that Aris has been doing really well and apply that to the rest of our business. We've got some opportunities as well to share practices with them. But the time line on that side, and again, we haven't quantified that, it's not part of the $40 million. But we hope to have a reasonable update in February on some of the ideas and opportunities there. So pretty confident we're going to exceed the $40 million. So sort of stay tuned as we get our arms around the business.