Key Highlights

● Record Natural Gas throughput and higher adjusted EBITDA

● Full quarter of Brazos Delaware contributed

● Guidance reaffirmed with EBITDA above midpoint expected

● Capital spending slightly above range after Solitude pipeline

Western Midstream Partners, LP (NYSE:WES), among the oil and gas infrastructure operators listed on the New York Stock Exchange, announced third quarter results that combined record natural gas throughput with adjusted EBITDA above the prior-year quarter. The Partnership reaffirmed its full-year ranges for adjusted EBITDA, distributable Cash Flow and free cash flow, and said it now expects adjusted EBITDA to finish above the midpoint of its range.

Those strong volumes did not translate into a sequential Earnings gain. Adjusted EBITDA slipped modestly from the second quarter, and adjusted gross Margin and distributable cash flow eased as well. The release attributes the decline to lower Crude Oil and natural gas liquids pricing, reduced throughput in the DJ Basin and slightly higher operation and maintenance expense, which it described as typical for the third quarter.

Results also differ depending on the comparison chosen. Revenue rose substantially from a year earlier, while Net Income and diluted net income per unit declined slightly, as higher depreciation, operation and maintenance, and interest costs absorbed the gain. For a Business built through acquisitions over the past year, the prior-year quarter does not represent the same asset base.

What Changed in the Delaware Basin

The Delaware Basin drove most of the Volume gain. Gas throughput there climbed strongly from the second quarter and set a record, largely because of a full quarter from the Brazos Delaware acquisition. Partnership-wide natural gas throughput also set a record, rising at a more modest rate. Crude oil and natural gas liquids volumes in the basin grew slightly, and produced-water throughput set its own record.

The acquired system is substantial. Pipeline & Gas Journal reported that Brazos Delaware II includes the Comanche processing complex, a long pipeline network and a large dedicated acreage position across Reeves, Ward, Pecos, Winkler, Culberson and Loving counties in Texas. The purchase was funded with roughly equal amounts of cash and new common units, and the Quarterly Report filed with the Securities and Exchange Commission gives a closing date in June. According to market data, the acreage is held under long-term agreements.

According to Pipeline & Gas Journal, the deal significantly raised the partnership's dedicated Delaware Basin acreage and its gas processing capacity there, and it was expected to bring the majority of adjusted EBITDA from Delaware operations. When the Acquisition was announced, Chief Executive Officer Oscar K. Brown called it "a highly complementary and strategically compelling bolt-on addition" to the existing platform.

The quarterly report also refers to the produced-water Assets acquired from Aris in October of last year, which were not part of the prior-year quarter. Together, those purchases help to explain the rise in revenue and costs against the year-ago period.

Terms and Throughput of the Brazos Purchase

Details of the transaction help to size the record. Market data and Pipeline & Gas Journal both reported that the assets handled natural gas and crude oil volumes last year under long-term agreements, with Pipeline & Gas Journal describing the producer contracts as fixed-fee. According to market data, the weighted average remaining contract term ran for many years. The partnership issued a large block of common units for the Equity portion, and its quarterly report records the related unit issuance in the second quarter.

Pipeline & Gas Journal reported that the transaction was expected to add to distributable cash flow per unit while keeping Leverage at an investment-grade level. The first of those claims will take time to test, since new units raise the count that any added cash flow is spread across. The third quarter's distributable cash flow, which fell from the second quarter, is an early and incomplete data point, because the tie-ins that are expected to reduce offloads were still pending.

Other Basins Tell a Different Story

Away from the Delaware, the picture was mixed. DJ Basin natural gas volumes and crude oil and natural gas liquids volumes both declined from the prior quarter. That mattered enough for the release to name it among the reasons for lower sequential earnings. Powder River Basin gas throughput barely moved, while liquids volumes in that basin declined by a larger rate from a small base. Volumes from the other assets grouping increased.

Per-unit margins fell across every product line. Natural gas, crude oil and natural gas liquids, and produced water each recorded a lower gross margin per unit than in the prior quarter, with the crude and liquids category showing the largest percentage decline. The company's fee-based service revenues rose from a year earlier and form the bulk of total revenue, which limits Commodity exposure, but the release still identifies crude and liquids pricing as a direct Factor in the sequential decline.

Margins are a function of mix as well as price. Adding a large block of Delaware gas volumes alters the average per-unit figure, so the fall in per-unit gross margin cannot be read purely as a pricing effect. The release itself names commodity prices and basin throughput without assigning a precise share to each.

Reading the Guidance Language Closely

The reaffirmation came with a few important qualifications. Ranges for adjusted EBITDA, distributable cash flow and free cash flow were unchanged, but Mr. Brown said he expects strong fourth quarter results and a full-year adjusted EBITDA figure above the midpoint. He noted that this would be substantially above the original midpoint and above the current midpoint even with Brazos excluded, a comparison intended to show growth that does not depend on the acquisition.

Capital expenditures went in the other direction. The partnership now expects to finish slightly above the high end of its range, citing accelerating producer activity and its Investment in the Solitude Pipeline System. For a pipeline and processing company, higher customer activity tends to bring higher connection and expansion spending ahead of the resulting volumes.

Integration timing affects the near-term outlook. Mr. Brown said Brazos integration is progressing as expected, with tie-ins to the West Texas Complex expected by mid-December. Those connections are expected to reduce offloads, which suggests that part of the acquired system's benefit has yet to appear in the figures.

A Stake in Permian Takeaway

One of the quarter's more notable developments is outside the existing footprint. The partnership acquired a minority equity interest in the Solitude Pipeline System, a joint venture operated by WhiteWater. The system consists of large-diameter natural gas pipelines running from the Permian Basin to Katy, Texas, with initial takeaway capacity expected late in the decade and incremental capacity to follow the year after.

The logic is linked to the basin's production profile. The US Energy Information Administration's October outlook projects rising US crude production through next year, and associated gas tends to accompany Permian oil output. A share in long-haul capacity offers exposure beyond gathering and processing to moving gas out of the region, although the release does not identify the other partners and the system's start-up is several years away. Its spending begins well before its revenue.

The partnership described the interest in the context of its Capital plan, in which the Delaware Basin remains the main destination. The Solitude investment therefore sits alongside North Loving II in next year's spending plans.

Next Year's Building Blocks

Mr. Brown outlined the elements he expects to support growth next year. They include incremental customer activity, a full year of Brazos, the start-up of the Pathfinder pipeline, North Loving II coming online and new gathering and processing agreements in the Powder River Basin. He said he expects throughput growth across every product line, a broader claim than the third quarter's gas-led gain.

Capital spending next year is expected to be roughly in line with this year. The large majority is directed to the Delaware Basin, including the Solitude investment and completion of North Loving II, with most of the remainder going to the Powder River Basin to support the new agreements. That allocation shows where management sees growth, and it leaves little room for the DJ Basin, whose volumes declined in the quarter.

Formal guidance for next year had not been issued in the release. The statements are directional, and their realization depends on customers following through on activity and projects arriving on schedule.

Distribution Coverage and Cash Flow

The partnership kept its quarterly distribution in line with the previous quarter, as it announced in October. The payment date falls in mid-November, with a Record Date at the start of the month, according to the announcement. For income-focused unitholders, the absence of an increase and the absence of a reduction are both worth noting.

Free cash flow fell from the second quarter and did not fully fund the distribution, leaving free cash flow after distributions negative for the period. The release attributed this to organic growth capital expenditures. Distributable cash flow, a different measure that excludes growth spending, remained higher than free cash flow, and free cash flow after distributions shows the claim that growth spending places on cash.

Quarter-end cash was far below the level at the end of last year, reflecting the cash portion of acquisitions and other uses, and long-term Debt rose over the same period. The Cash Flow Statement also shows net Commercial Paper borrowings during the year to date. Current liabilities exceeded current assets at quarter-end, while management pointed to what it described as a solid Liquidity position and an investment-grade balance sheet. The release did not give a leverage ratio.

How the Year-to-Date Cash Flows Add Up

The year-to-date cash flow statement shows how much the partnership has taken on. Operating Cash Flow was modestly lower than in the same period last year, while capital expenditures rose substantially and third-party acquisition payments appeared where there had been none a year earlier. Distributions paid to unitholders also increased. Earlier this year, the partnership additionally spent a considerable sum redeeming units from Occidental (NYSE:OXY), as the quarterly report records.

Total assets and total liabilities both rose from the end of last year. Interest expense rose from the prior-year quarter as well, and Depreciation increased by a similar proportion to reflect the larger asset base. The partnership, which is headquartered in The Woodlands, Texas, reports a single segment, so the basin-level detail appears in its operating statistics and not in separate segment accounts. That makes throughput the main public window on how each region is performing.

The Occidental Connection

The quarterly report underlines how closely the partnership remains tied to Occidental Petroleum, which is a related party. Related-party revenue accounted for close to half of total revenue during the quarter and over the year to date. Operations are also governed by a services agreement with Occidental. Earlier this year, the partnership redeemed units held by Occidental, adding another strand to the financial relationship.

This matters when weighing where volume growth comes from. Third-party systems such as Brazos broaden the customer base, and their contribution may gradually alter that revenue mix.

Related-party receivables at quarter-end add a Balance Sheet dimension to the same relationship. The general partner is Western Midstream Holdings, LLC, and the filing treats Occidental's dealings with the partnership as related-party transactions throughout its financial statements, so the connection runs through revenue, receivables and governance alike.

Commodity Signals and Near-Term Checkpoints

The partnership's fee-based model means it is not a direct proxy for oil prices, but its customers respond to them. The Energy Information Administration raised its Brent forecasts in October, citing constrained Middle East Supply and tight diesel markets, while expecting Henry Hub prices to be lower next year because of above-average gas inventories. Stronger crude tends to encourage drilling, and the partnership's reference to accelerating producer activity fits with that environment, although the release did not directly connect those points.

Beyond that, the markers are clear from the partnership's own statements: completion of the West Texas tie-ins by mid-December, a fourth quarter strong enough to carry the year above the guidance midpoint, and capital spending that does not move further beyond the top of the range.

The third quarter thus offers a straightforward tension. Volumes reached new highs, and the outlook language was confident. At the same time, per-unit margins narrowed, earnings slipped from the prior quarter and growth spending exceeded what free cash flow could cover after distributions. Whether those trends converge depends largely on how quickly Brazos and the projects scheduled for next year begin contributing.