Western Midstream sees higher Q2 margins
Western Midstream Partners saw margins on gas pipelines in its core US market soar in the second quarter, thanks largely to rising capacity bookings from upstream producers in the Delaware basin, combined with the higher transmission fees that this part of the Permian generates compared to its other midstream assets.
Delaware gas throughput carried by Western hit a record 1.5bn ft3/day in the second quarter, up 13% on January through March, against just a 5% quarter/quarter rise for Western's total 4.3bn ft3/d gas throughput for the period.
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The Delaware region, which spans southeastern New Mexico and western Texas, hosts two gas processing plants operated by Western Midstream with total daily capacity of more than 1.3bn ft3.
In an earnings call August 15, Western's chief financial officer Kristen Shults said: "On the gas side we had higher throughput in the Delaware basin, which has a per 1,000 ft3 margin that is higher than average compared to our other natural gas assets. Additionally, we had favourable plant performance in combination with strong commodity prices that benefited our margin for the second quarter as well."
It was a similar story in the Permian Delaware at Western's crude oil and water transmission assets. According to Rystad Energy, this region is due buoyant output growth of almost 1mn boe/d this year, with half attributed to crude oil. It reflects a resurgent capex landscape for the Permian in 2021, with a further 50% rise to almost $9bn forecast for 2022.
However, Shults predicted Western's Delaware midstream performance would soften over the rest of the year, as more gas inventory is sold off to meet demand.
"I'm expecting that margin to see a little bit of compression, as we go into the remainder of the year, we're offloading more volumes, as we've talked about in the Delaware, and our contracts mix is changing just a little bit as well," Shults added.
Soaring Delaware output lifted Western Midstream's adjusted EBITDA to a record $548.3m, up from $539mn in the first three months. The sustained earnings performance is likely to slow uptake of Western Midstream's $1bn share buyback scheme, with management focusing on share purchases during softer earnings growth. Shults said the share buyback is currently 42% complete.
"I expect we'll still continue to utilise that programme in the same fashion as you've seen us utilising it [previously]. This is about being opportunistic, and when we see market volatility and some weakness there - that's one of the signs we look at when we deploy that programme."
Western Midstream is a listed company but is 50.7%-owned by its largest shareholder Occidental Petroleum. Oxy plans to scale back its involvement in a bid to cut its debt pile, but there is still plenty of scope to collaborate given its expertise in carbon capture and storage. It aims to invest in 12 or more large-scale direct air capture facilities in the Permian, Denver-Julesburg and Powder River Basins using technology developed by Canada's Carbon Engineering that can see each plant draw 1mn mt/yr of CO2 from the atmosphere.
Shults said decarbonisation investment would likely become more attractive following the passage of the US Inflation Reduction Act, a flagship Democratic Party policy that targets rapid adoption of CCS and hydrogen-driven transition projects.
Shults added: "There are various opportunities whether in the traditional midstream space or in the carbon capture side - those are all conversations we have with Oxy, and to see what might the future look like there.
"We'll see how these develop in the long term, but [tax credits under the] Inflationary Reduction Act makes it a lot more economical and appealing for not just us, but other midstream companies to be able to generate that credit and use it to move forward with their carbon capture initiatives."