Thank you for standing by. My name is Keyo Baker [ph] and I will be your conference operator today. At this time, I would like to welcome everyone to the Western Midstream Partners Third Quarter 2023 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the call over to Director of Investor Relations, Daniel Jenkins. You may begin.

Thank you. I'm glad you could join us today for Western Midstream's Third Quarter 2023 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-Q and other public filings for a description of risk factors that could cause actual results to differ materially from what we discuss today. Relevant reference materials are posted on our website. With me today are Michael Ure, our Chief Executive Officer and Kristen Shults, our Chief Financial Officer. I will now turn the call over to Michael.

Thank you, Daniel and good afternoon everyone. During the third quarter increased throughput from all operated assets and across all products led to improved adjusted gross margin and adjusted EBITDA on a sequential quarter basis. Specifically, in the Delaware Basin our throughput increased across all three products mostly due to new production coming online and continued high facility operability. In the DJ Basin, both natural gas and crude oil and NGLs throughput increased quarter-over-quarter, a trend we expect to continue into the fourth quarter and throughput also increased from our other assets, specifically in South Texas as additional volumes from new customers came online. Focusing on the Delaware Basin, we achieved record natural gas, crude oil and NGLs and produced water throughput during the third quarter. For the first time in WES's history we averaged more than a Bcf/d of natural gas gathered from third parties for the months of August and September, demonstrating our focus on growing the entirety of our business. This throughput record is a testament to our team's ability to successfully compete for new business by reducing costs and providing superior customer service. Since 2021, WES has grown its third party volumes in the Delaware Basin by approximately 65% which is more than twice the rate of natural gas volume growth from the entire Delaware Basin. I would also like to highlight a new contract extension that WES recently executed with one of our largest producing customers in the Delaware Basin bringing total dedicated acreage from that producer to roughly 40,000 acres and extending the duration of our agreement by 10 years to 2035. This extended dedication keeps significant natural gas volumes on WES infrastructure of the long-term and supports expected volume growth over the coming years. Before I turn the call over to Kristen, I…

Thank you, Michael and good afternoon everyone. Our third quarter natural gas throughput increased by 5% on a sequential quarter basis, primarily due to increased throughput in the Delaware Basin from new production coming online from our other assets, specifically in South Texas, and from our equity investments. Additionally, we achieved increased throughput in the DJ Basin due to increased completion activity from both affiliated and third party producers. Our crude oil and NGLs throughput increased by 7% on a sequential quarter basis, primarily due to increased throughput from our equity investments and Delaware Basin oil system. Of note, we saw our first sequential quarter increase in crude oil and NGLs throughput from the DJ Basin since the fourth quarter of 2021. Produced water throughput increased by 14% on a sequential quarter basis due to increased completion activity and high facility operability in the Delaware Basin. Our per-MCF adjusted gross margin for our natural gas assets was flat compared to the prior quarter. Higher throughput from our South Texas assets, which have a lower than average per-MCF margin as compared to our other natural gas assets and lower distributions from our natural gas equity investments had a dilutive impact on our per-MCF adjusted gross margin, which was offset by increased throughput from both the Delaware Basin and DJ Basin. Excluding any potential impact from cost of service, we expect our fourth quarter natural gas per-MCF adjusted gross margin to increase slightly, primarily due to the addition of volumes from the Meritage acquisition. Our per barrel adjusted gross margin for our crude oil and NGL assets decreased by $0.31 compared to the prior quarter, primarily due to a decrease in distributions coupled with an increase in throughput from our equity investments, which have a lower than average per barrel margin as…

Thank you, Kristen. Before we open it up for Q&A I would like to highlight a few key points and reiterate why WES is in a strong position as we exit this year and transition into 2024. WES is very well positioned for throughput and adjusted EBITDA growth in 2024 relative to 2023. We expect to benefit from capital efficient organic projects such as Mentone Train III by the end of the first quarter of 2024 and we are on track to complete the North Loving plant by the end of first quarter 2025. Keep in mind these capital expansion projects are supported by significant minimum volume commitments and we continue to expect that the plants will be full once they come online. These plant expansions will put us in a strong position to capture more value for our partnership through increased natural gas processing capacity. The Meritage acquisition was consummated at an extremely attractive valuation which should result in approximately $155 million to $175 million of incremental adjusted EBITDA based on the five to six times pre-synergy multiple we highlighted when we announced the transaction. Additionally, we continue to be focused on returning capital to stakeholders, which is demonstrated in our leading total capital return yield amongst midstream companies. Our view is that M&A opportunities like Meritage enhance capital return opportunities overtime with expanded adjusted EBITDA and increased free cash flow generation. We remain committed to a balanced approach to capital return as seen with the additional increase in the base distribution upon closing of the Meritage transaction and our opportunistic unit buyback from Occidental in September. Finally, WES continues to screen favorably relative to midstream companies and members of the Russell 3000 Index. When comparing the midstream sector relative to the Russell 3000 Index WES is now the leading midstream investment opportunity with an investment grade credit rating and a trailing 12-month distribution yield of nearly 9%. I would like to close the call by thanking the entire WES workforce for all of their hard work and dedication to our organization. I would also like to extend additional thanks to all of our employees that have been part of the Meritage acquisition. Your efforts enabled us to close the transaction quickly and begin moving forward with integration. Whether it's working on strategic acquisitions or enhancing our daily operations, our employees' contributions continue to yield substantial results that are creating additional value for our stakeholders. I look forward to finishing the year on a strong footing and updating you on additional progress as we transition to 2024 on our fourth quarter call in February. With that we'll open the line for questions.

[Operator Instructions] Your first question comes from the line of Spiro Dounis with Citi. Your line is open.

Thanks. Good afternoon team. Maybe starting with Meritage if we could, Michael, as you said in your prepared remarks, M&A really hasn't been part of the strategy historically. So this is kind of new. So just curious, is this a shift in strategy or just seeing a more conducive M&A environment? And if you can maybe just provide a little more context on how Meritage came together?

Yes. Thanks, Spiro. Definitely not a shift in strategy. Our strategy has always been that we would be opportunistically looking for M&A opportunities. This is an acquisition opportunity as we looked at our existing footprint out there. From our perspective it was either we needed to potentially exit the area or get larger. As we looked at this particular opportunity and at the area as a whole, we got really excited about what this might be able to become for us and for the company overall. And so it's a company and an opportunity that we've actually been following for quite some time. And then the timing just made a lot of sense post our transformation for us to be able to feel confident that we can tuck in these assets and be able to achieve greater synergies and potential opportunities for growth on the heels of the work that we've been doing in order to get more efficient across the board in our operations. So definitely not a shift in strategy, just executing opportunistically as we had indicated and that opportunity really found a home as we executed that transaction in the third quarter.

Got it, got it, helpful. And switching gears a bit to CapEx, Kristen, sounds like in your remarks there a few factors coming together that maybe keep CapEx a little bit elevated next year. Sounds like Delaware obviously those two processing plants are your biggest spend which makes sense. But in looking at the DJ and Meritage, once again kind of a two-part question here, DJ growing again, should we expect more capital to be allocated there as a result or do you kind of have a long run rate of sort of available capacity? And then with Meritage you also mentioned higher capital needs next year, just maybe a sense of what is the nature of that spending, is that well connect CapEx or something more substantial?

Yes. So on the DJ, you're right, Spiro, we've got extra capacity in the DJ right now. So I'd say any capital that we're spending there will be relatively minimal kind of what you've seen in 2023, just as we're connecting new pads so forth and so on. For Meritage, yes, there's a little bit more growth capital next year for Meritage. And so well connect compression, things of that nature that I would expect to hit the 2024 budget.

Got it. Helpful color. Thanks for the time, guys.

Thanks, Spiro.

And your next question comes from the line of Brian Reynolds with UBS. Your line is open.

Hi, good afternoon everyone. Maybe to follow up on Spiros CapEx question, Kristen, I think you mentioned that you expect the processing plants to effectively open full. So how should we be thinking about the next processing plant just given that you know it seems like WES is gaining more and more acreage dedications on the Delaware? Thanks.

Yes, Brian, thanks. It's great question. Yes, the way that we've managed that is we've offloaded volumes in order to bridge the timing between when it is that we receive the commitments from our customers as to when those commitments kicked in to take sort of the interruptible volumes we've offloaded in order to bridge that timing to when that plan comes online. And so that's our expectation of when those plans come online that they're ultimately full. As we sit here today, first we expanded the North Loving area in a new Greenfield area with the opportunity for us to expand more that footprint should the need arise. But as we sit here today, we don't currently see the need in order to offer up additional expansions on North Loving.

Great, thanks. I appreciate that. And then looking ahead to 2024, it sounds like there'll be some growth. Clearly the Delaware is growing and the processing plants are running full. But is there any way to sensitize how many volumes are currently being offloaded and potentially the impacts that will have on margin as that comes back onto your system? And then as it relates to DJ some tailwinds there, but the first quarter of growth, when should we expect to be above those NBCs [ph] at this point? Is it second half of 2024 or early 2025 at this juncture? Thanks.

Yes. So on the growth side of things, as Michael was saying, we're offloading volumes today and so as we're bringing Mentone III online, that -- the capacity of that train right, you would expect that to get on our system and decrease those offloads so quite a bit. That's being offload today obviously when we're saying that we expect Mentone III to be full on day one. And then sorry, if you can repeat your last question that you asked [indiscernible]?

Just as it relates to margin, I mean could we see some margin benefits just given that you're not, no longer offloading the volumes and some unit…

Yes, we definitely will, we expect to see a little bit of margin benefit incremental every month from that. So higher OpEx on our side as we're obviously running that plant and we've got the people to run that plant maintenance as well and that, but yes, would expect to see some adjusted gross margin benefit as the offload fees are reduced.

And then Brian to answer your question on the DJ, we would -- we currently would still expect that there would be minimum volume commitments received primarily on the oil side throughout 2024 as it sits here today.

Great. All makes sense. I'll leave it there. Enjoy the rest of your afternoon.

Thanks, Brian.

And your next question comes from the line of Jeremy Tonet with JP Morgan. Your line is open.

Hi, good afternoon.

Hey, Jeremy.

I just wanted to take a step back and think about the -- your portfolio as it stands right now your base business and if you think about just the organic growth that's possible, how do you think about that right now in general as far as the low single digit, mid-single digit, otherwise just wondering how you think about organic growth, obviously not giving 2024 guide, but just trying to get a sense for how you think about the business at this point?

Yes. So I would, I'd call your attention to Slide 9 in the deck where we talk about our estimated growth rates for 2023 and as we look into 2024 our expectation that that will actually grow on top of 2023. And so we're seeing positive tailwinds frankly pretty much throughout our operated portfolio which are contributing overall to an expected growth in 2024 over 2023.

Got it. And from an EBITDA perspective, any color that you could share there?

No color just yet. We haven't actually put out our 2024 guidance, but definitely look forward on the next quarter call to walk through our expectations for 2024. We're still in the process of receiving full information from a lot of our producers in terms of what their drilling plans and expectations are for the back half of this year and into the first part of next year that will be the primary drivers for what our expectations might be on volumetric growth for 2024. So as we gather that information and then are able to share that with the market on our call in the first quarter of next year, then we'll definitely be able to walk through what our expectations might be on EBITDA growth.

Got it. That's helpful there. And just want to shift to the DJ for a minute if I could and see that Williams kind of got a bit bigger in the base and I think they're now the number 3 processor. Just wondering if this changes the competitive dynamics in any way or any other thoughts that you could share with us on the DJ at this point?

Yes, it's a great question. Definitely don't foresee that having a meaningful impact on us in terms of the competitive dynamics. Williams is a great company and so the fact that they're investing as much as they are on the DJ, obviously is very positive sign from our perspective, corroborates our view of the basin as a whole and the highly prolific nature of that basin, but certainly wouldn't expect that it would have a meaningful impact on us.

Got it. And if I could just sneak one last one in for the Meritage acquisition, just wondering on a per unit basis, is this accretive or dilutive to per MCF or per barrel fee and just how do you see the trajectory from this business over time?

It's -- so it would be accretive on a per MCF basis. So I actually expect in Q4 to see our gross margin per MCF increase just a little bit as we add those Meritage volumes into our throughput numbers.

Got it. That's helpful. I'll get back in the queue. Thanks.

Thanks, Jeremy.

[Operator Instructions] Our next question comes from the line of Neel Mitra with Bank of America. Your line is open.

Hi, thanks for taking my question. I just wanted to understand maybe the rationale going forward underpinning distribution increases now that Meritage is in the mix and debt is a little bit higher. I wanted to understand the priorities with capital allocation and when you look at distribution increases, do you have a formula where you look at payout ratios or a percentage of CFO? Just wanted to understand the background behind that and how you're looking at that going forward?

Yes, it's a great question, Neel. So our primary driver is that we want to be able to set the base distribution at a level that we believe is sustainable over time. And so the reason for actually now the multiple increases in the base distribution that we've had this year were primarily for the first one, the fact that we had received close to BCF of incremental commitments overall since we could established that primary base distribution level and the fact that we're spending as much growth capital as we are, which would indicate stronger sustainability from a free cash flow perspective as we go over time. With the most recent increase in the distribution, it was the fact that we're bringing on incremental free cash flow through the Meritage acquisition, so therefore our expectation of a sustainable level increased in light of that new free cash flow is coming online with that transaction. And so when we look at it on a quarterly basis, we're looking at what do we believe is actually a sustainable base distribution level going forward. We haven't actually made any changes at all in terms of our prioritization of return of capital for the remaining free cash flow that we have on an annual basis. We're always looking at opportunistic ways that we can deploy that capital. So for example if in a particular period we think it's of greater benefit to pay down debt, then we'll pay down debt. If there's greater opportunities on the unit repurchase side, then we'll do that. And obviously this year you've actually seen pretty much both of those things through debt repurchases, unit repurchases as well as the addition of Meritage into the company. And so that's going to continue to be our levers that we pull and as we have potentially continued progress in terms of our expectations, sustainability of that base distribution going forward, then we'll look at it on a quarterly basis with the Board and determine whether or not we think it warrants an increase overall. If we have superior year-on-year performance relative to expectations and that puts us in a place to be able to pay an enhanced distribution as we meet those criterion that we've highlighted in our slides and then that's where the base distribution comes in to pay out that incremental value relative to our expectations for that period. So I hope Neel that answers your question.

Yes, that's very helpful. I appreciate it. And just as a follow up, I know you can't answer where the numbers shake out, but maybe you could just kind of outline the factors that go into cost of service for the calculation next year? I know the wells return on line later than expected, similar commodity prices, but as I understand it, it's backward looking and forward-looking and there's some other components. So are there any general themes that we should look at going into next year?

Yes. It's a great question, Neel. So the way that that calculation works is that it takes the previous period, so in this instance it would be 2023 relative to our expectations of free cash flow under those contracts for 2023 and combines that with the expectations of the free cash flow out through the end of the period of those contracts and then determines in accordance with what the predetermined rate would be, what the fees would ultimately need in order to generate that rate of return. So in a scenario where there's under performance on the volumes, if all expectations were held flat the same as they were before into future periods, you would expect that those rates would have to go up in order to generate the same expected rate of return that was expected as of the previous year when that rate was determined. So does that hopefully give you a little bit of context to how that works? As we sit here today, we don't know quite yet what those long-term forecasts would be in order to generate that rate and then what the cost would be in order to bring those volumes onto the system to generate that return. That will occur throughout the end of this year and into the first part of next wherein we'll be able to give a little bit more information on our expectations for 2024 EBITDA and capital.

Okay, got it. That's very helpful. Thank you.

Thank you, Neel.

And the next question comes from the line of Gabe Moreen with Mizuho. Your line is open.

Hey, good afternoon everyone. Maybe if I could just start with a quick clarification on the CapEx spend next year. What Kristen talked about it being a heavier year, is that just heavier compared to 2023? I just wanted to clarify that.

Yes, that's right, Gabe. So heavier compared to what Meritage was spending in 2023. I think when we looked at doing the due diligence on that, historically you're looking around $50 million kind of a run rate CapEx spend for an asset like that and so heavier relative to that, just slightly.

Got it. Okay and then maybe if I can ask, it's been a couple quarters here when you talked about South Texas volumes being up. I know you don't talk about that very much considering the other basins that you've got, but can you just talk a little bit about what's going on there WES's competitive position, are you spending any capital out there? That'd be helpful.

Yes. So actually that's frankly a reflection of the incredible job the team is doing down there and establishing new relationships and with those new relationships garnering increased confidence in those counterparties actually bringing more volumes onto our system. So actually not a meaningful amount of capital. It's really more of a reflection of the team's excellent job and gaining confidence from new customers coming into the area. So we believe we're definitely competitively positioned there, but as much as anything speaks to the strong customer service element of the way that we think about the business and the high touch nature with our customers that is resulting in increased volumes coming under our system.

Thanks, Michael. And maybe if I can just stay in that third party customer vein. You know earlier you mentioned the milestone that you kind of crossed in third party volumes overall. But as it pertains to getting more third party volumes, particularly in the Delaware Basin, can you just talk about WES's positioning in terms of being a little bit less integrated than peers in terms of your downstream assets? Are you viewing that as a hindrance because you don't have that integration that you might need it or is it really the shoe is on the other foot because everyone's looking to add downstream capacity to your third party producer customers can kind of pick and choose between different options?

Yes, it's a great question. Actually the way that we look at it is, obviously we can provide an integrated solution for our customers by combining all of the marketing needs and then creating flow assurance through the marketing process that we do at no cost to us. It's all passed back. But we actually view it as a as a positive that we can then differentiate ourselves through the high touch nature of our customer service operations. And through our ability to be so concentrated on making sure that those volumes that are coming from their customers are cared for properly and that we are focusing exclusively on making sure that they're optimizing their throughput coming through the system overall as opposed to necessarily providing some arbitrage through the system down to the water. And so for us it's inherent in making sure that we provide a superior customer service product, making sure that our operability which incidentally has increased every quarter this year, that our operability is high and sustained such that our customer base knows that we're going to be strong stewards of the relationship that we have overall with them. So frankly we view it as a great opportunity for us to differentiate ourselves. And what you're seeing by virtue of that third party growth as well as those increased commitments from our customers is that it's ringing true in terms of our new customer acquisition and retention.

Got it. Thanks, Michael.

And your next question comes from the line of Ned Baramov with Wells Fargo. Your line is open.

Hi, good afternoon. Thanks for taking the question. You've had the Meritage asset for several weeks now. Could you maybe talk about the integration progress and any early findings on the magnitude of potential synergies?

Yes. So thanks for the question. Actually what we found is a great excitement. Overall between the two companies we've as far as an integration perspective, it's literally like hand in glove at the field level. The teams are working very well together overall. The team was very excited about being a part of a franchise like a Western Midstream and we're obviously very excited to have them into our organization. So it's still a little early to be able to determine what our expectations might be from a synergies perspective because we're trying to make sure that we're diligent and finding all opportunities that we can potentially drive greater EBITDA growth out there. But I would say overall that the integration is going very positively and the teams are really excited to work well together.

Thanks for that Mike. And then on the new customer contract are the economics of the extended agreement comparable to what you had in place with this customer before the amendment?

So it's -- it is an extension from this existing customer that we would say are done at very competitive rates overall. So it's an addition of incremental acres into the system and an extension of an existing agreement and at competitive rates. So it's a customer that we have had a long standing relationship with an incredible rapport. We have the highest amount of respect for them and obviously it appears as if they'd do the same for us. So we're really excited about being able to continue that relationship long into the future.

Thanks. That's all I had.

And I will now turn the call back over to Michael Ure.

Thank you everyone for joining for the third quarter call. I would like to wish everyone an early happy holidays and look forward to speaking again in the first quarter of next year.

And this concludes today's conference call. You may now disconnect.