Western Midstream Partners, LP 2026 Q2 Earnings Call

Good morning. Welcome to Western Midstream second quarter 2026 conference call. Today's call, the accompanying slide deck, last night's press release contain important disclosures regarding forward-looking statements and non-GAAP reconciliations. Please reference Western Midstream's most recent Form 10-K and 10-Q, other public filings for a description of risk factors that could cause actual results to differ materially from any forward-looking statements we discuss today. Relevant reference materials are posted on our website. With me today are Oscar Brown, our Chief Executive Officer, Danny Holderman, our Chief Operating Officer, Kristen Shults, our Chief Financial Officer. I'll now turn the call over to Oscar.

Thank you, Daniel. Good morning, everyone. Yesterday, we reported record adjusted EBITDA of $737 million, an increase of 8% sequentially, 19% compared to the prior year period. Our strong second quarter results reflect record throughput from our natural gas and produced water businesses in the Delaware Basin, approximately two and a half weeks of contribution from the Brazos acquisition, the benefit of our fixed-recovery natural gas processing contracts in conjunction with higher overall commodity pricing. In mid-June, we closed the $1.6 billion acquisition of Brazos Delaware II, funded with approximately $800 million in cash and $800 million of West common units based on the volume-weighted average unit price at the time the acquisition agreement was signed. The Brazos acquisition expands our gathering and processing footprint in the Delaware Basin, reflects our discipline of only deploying capital that sustains or grows the distribution over time.

It is accretive to per-unit metrics, protects the partnership's balance sheet, investment-grade credit ratings, diversifies our customer base and ownership. The integration is off to a strong start. Our teams are focused on optimizing the legacy Brazos system, connecting it to the legacy West system, which we expect to be completed by year-end. This will enable us to direct more volumes to Brazos's processing plants that have spare capacity, enabling us to process more volumes internally, offload fewer volumes, thus creating more value for West unit holders. We also expect to capture approximately $15 million-$20 million of cost synergies over the coming quarters in connection with the Brazos acquisition, primarily through general and administrative cost elimination, reduced operation and maintenance expense from supply chain efficiencies.

Additionally, we have recently seen a number of wells previously planned for 2027 move into the second half of 2026 from several customers on the Brazos acreage. We will continue to remain in close contact with these new customers regarding their near-term plans, but we would expect these developments to result in increased throughput relative to our initial underwriting assumptions when we consummated the deal. For the remainder of the year, higher commodity prices continue to incentivize our customers to increase activity, particularly in the Delaware and Powder River Basins, positioning us for incremental throughput growth in 2027. In the Delaware Basin, multiple customers have communicated that they intend to accelerate activity into the second half of the year, which should drive throughput growth as we exit 2026 and into 2027.

We also recently entered into new gathering and processing agreements with 2 of the most active producers in the Powder River Basin. These long-term agreements increased dedications to West by approximately 270,000 acres, which contain over 1,000 remaining drilling locations and are backed by substantial minimum volume commitments. These agreements, plus the associated volume commitments, demonstrate producers' increasing focus on the Powder River Basin as they begin to more fully develop their vast acreage positions in the basin. Based on the strength of our first half results, continued elevated commodity prices, and the Brazos acquisition, we are raising the midpoints of our full year 2026 adjusted EBITDA, distributable cash flow, and free cash flow guidance ranges by 10%, 10%, and 20% respectively.

We now expect 2026 adjusted EBITDA to be between $2.75 billion and $2.95 billion, implying a midpoint of $2.85 billion, an increase of $250 million compared to our original guidance range. Additionally, we now expect 2026 distributable cash flow to be between $2.05 billion and $2.25 billion, and 2026 free cash flow between $1.1 billion and $1.3 billion, which represents increases of $200 million at the midpoints. Kristen will provide more detail on our updated guidance ranges shortly. Finally, as we announced in mid-June, JIP2, our second produced water treatment demonstration facility near Red Bluff Reservoir in Reeves County, Texas, was placed into service during the second quarter. It is now delivering approximately 1,000 barrels per day of reclaimed fresh water, roughly 10 times the volume of JIP1.

The facility is designed to refine operating cost, evaluate reliability, and demonstrate consistent reclaimed fresh water recovery for fit-for-purpose applications, including industrial cooling, surface discharge, and non-consumptive agriculture irrigation, while protecting existing water sources for surrounding communities. We view JIP2 as a critical step towards sanctioning our first commercial-scale facility. In the Permian, crude oil and natural gas flow assurance does not happen without a solution for produced water, and each step forward on beneficial reuse deepens what we can offer producers across all 3 streams. Over the past few quarters, produced water handling has been our fastest-growing product line, and we believe that beneficial reuse provides another path for growth as water-to-oil ratios continue to increase and as produced water continues to outpace natural gas, crude oil, and NGL throughput growth.

With that, I'll turn the call over to our Chief Operating Officer, Danny Holderman, to discuss our operational performance in the second quarter.

Danny? Thank you, Oscar, good morning, everyone.

Second quarter natural gas throughput increased 3% sequentially, driven by 2 and a half weeks of contribution from the Brazos acquisition and another quarter of record natural gas throughput from the DJ Basin. Additionally, our crude oil and NGLs throughput increased slightly, and our produced water throughput increased by approximately 5% on a sequential quarter basis. Our second quarter per Mcf adjusted gross margin for natural gas assets increased by $0.03 compared to the prior quarter, primarily driven by higher overall commodity pricing on excess natural gas liquids volumes under our fixed recovery contracts and by 2 and a half weeks of contribution from the Brazos acquisition.

We expect third quarter per Mcf adjusted gross margin to be slightly lower than the second quarter as commodity prices have moderated, we now expect our full year 2026 adjusted gross margin to average approximately $1.30 per Mcf. Our second quarter per barrel adjusted gross margin for crude oil and NGLs assets increased by $0.14 compared to the prior quarter, primarily driven by higher deficiency fees in the Delaware Basin. We expect our third quarter per barrel adjusted gross margin to be slightly lower than the second quarter, we still expect our full year 2026 to range between $3.10 and $3.15 per barrel for 2026. Our second quarter per barrel adjusted gross margin for produced water assets increased by $0.06 compared to the prior quarter, primarily driven by higher throughput.

We expect our third quarter per barrel adjusted gross margin to be slightly lower than the second quarter, we still expect our full year 2026 to average approximately $0.91, especially if the crude oil strip for 2026 remains elevated. For the remainder of the year, we now expect portfolio-wide average year-over-year throughput to increase by mid-single digits for natural gas and to decline by low double digits for crude oil and NGLs, reflecting 6 and a half months of Brazos contribution and higher customer activity in the back half of the year. Additionally, we now expect average produced water throughput to increase by approximately 85% year-over-year, driven by the Aris acquisition and strong performance from our legacy water business, which is slightly higher than our original expectation of approximately 80% growth coming into the year.

In the Delaware Basin, we now expect average year-over-year throughput to increase by low- to mid-teens percentage growth for natural gas and for crude oil and NGLs to increase by low single-digits percentage growth in 2026, with the Brazos acquisition being the primary driver of the improved forecast. During the second quarter, we again saw certain customers curtail Delaware Basin throughput due to negative Waha natural gas pricing, but we exited the quarter with no curtailments as certain long-haul pipes returned from maintenance and the GCX expansion and the Hugh Rinson pipeline entered service. We expect Waha pricing to be less volatile through the remainder of the year, particularly as the Latcom pipeline comes online later this year. In the DJ Basin, throughput outperformed in the first half of the year, primarily driven by strong well performance and higher on loads from other midstream companies.