Western Midstream Partners (WES) Q4 2024: 16% Gas Throughput Growth Drives Strategic Expansion in Produced Water Infrastructure
Western Midstream delivered robust throughput growth across all product lines in 2024, underpinning a strategic pivot toward capital-efficient organic expansion, notably via the Pathfinder produced water pipeline. The partnership’s focus on sustainable base distribution growth and leverage reduction positions it for steady midstream growth amid evolving basin dynamics.
Summary
- Throughput Growth Momentum: Double-digit volume increases across natural gas, crude oil, and produced water underpin operational strength.
- Capital-Efficient Organic Expansion: Pathfinder pipeline sanctioning reflects a strategic move into long-haul produced water midstream solutions.
- Distribution Growth Framework: Shift to mid-to-low single-digit base distribution growth aligns with sustainable free cash flow generation.
Business Overview
Western Midstream Partners, LP (WES) operates as a midstream master limited partnership focused on gathering, processing, treating, and transporting natural gas, crude oil, natural gas liquids (NGLs), and produced water across key basins including the Delaware, DJ, Powder River, and Utah. Revenues are primarily fee-based, derived from long-term contracts with minimum volume commitments, insulating cash flows from commodity price volatility.
Performance Analysis
In 2024, Western Midstream achieved record throughput growth, with natural gas volumes averaging 5.1 billion cubic feet per day (Bcf/d), marking a 16% year-over-year increase after adjusting for asset divestitures. Crude oil and NGL throughput rose 12% year-over-year to 530,000 barrels per day (MBbls/d), while produced water volumes expanded 11% to 1.1 million barrels per day (MBbls/d). These volume gains drove adjusted EBITDA to $2.344 billion, exceeding guidance midpoint and representing 13% growth year-over-year.
Sequentially, Q4 2024 throughput increased across all product lines, with natural gas up 4%, crude oil and NGLs up 6%, and produced water up 8%. Adjusted gross margins improved due to higher volumes and favorable contract adjustments, including a $9.2 million positive revenue recognition related to cost-of-service agreements. Operating expenses were managed effectively, with flat operation and maintenance costs offsetting higher personnel and utility expenses. Free cash flow totaled $1.324 billion for the year, surpassing guidance and enabling record base distributions totaling $1.246 billion, including a 52% increase initiated in early 2024.
- Volume Expansion Across Core Basins: Delaware Basin remains the primary growth engine, contributing over half of adjusted EBITDA.
- Operational Efficiency: Stable operating expenses and disciplined capital spending supported margin expansion.
- Strong Cash Flow Generation: Free cash flow growth outpaced EBITDA growth, reinforcing distribution sustainability.
Overall, the financial and operational results reflect a well-executed strategy emphasizing throughput growth, capital discipline, and shareholder returns.
Executive Commentary
"This midstream project is anchored by a new long-term produced water agreement with Occidental Petroleum to provide up to 280,000 barrels per day of firm gathering and transportation capacity and up to 220,000 barrels per day of firm disposal capacity supported by corresponding minimum volume commitments... Pathfinder will enhance our existing water assets, de-risk our crude oil and natural gas businesses, ensure we are attractively positioned to take on growth opportunities as produced water volumes continue to grow in line with all of our customers' development activities."
Oscar Brown, Chief Executive Officer
"Our 2025 capital expenditures guidance range of $625 million to $775 million includes the initial costs for the construction of Pathfinder and the expansion of our produced-water gathering and disposal facilities, the completion of the North Loving Natural Gas Processing Plant, and system expansion opportunities to support our continued commercial success... We expect to generate free cash flow between $1.275 billion to $1.475 billion in 2025, implying growth of 4% year-over-year at the midpoint."
Kristen Schultz, Chief Financial Officer
Strategic Positioning
1. Capitalizing on Produced Water Midstream Opportunity
The sanctioning of the Pathfinder pipeline, a 30-inch, 42-mile long-haul produced water pipeline with capacity exceeding 800,000 barrels per day, marks a strategic expansion into a critical midstream niche. Supported by a long-term agreement with Occidental Petroleum, this infrastructure addresses growing disposal challenges in the Delaware Basin by relocating produced water away from high-intensity disposal zones to strategic eastern Loving County facilities. This initiative not only provides flow assurance but also creates a platform for further organic growth and potential customer diversification.
2. Focused Growth in Core Basins with Diversification
Western Midstream’s growth strategy centers on the Delaware Basin, which is expected to contribute 55% of 2025 adjusted EBITDA, supported by continued producer activity and new asset commissioning such as the North Loving Natural Gas Processing Plant. The DJ Basin and Powder River Basin provide complementary growth avenues, with the latter receiving increased capital allocation to capture mid-teens throughput growth in 2026. This basin diversification mitigates regional risk and leverages the partnership’s operational expertise.
3. Sustainable Distribution and Capital Allocation Framework
The partnership has shifted its distribution growth target to a mid-to-low single-digit annual increase, supported by organic throughput growth and free cash flow generation. Management has retired the enhanced distribution concept to simplify capital allocation, prioritizing base distribution growth alongside capital-efficient organic projects and selective bolt-on acquisitions. This disciplined approach balances growth ambitions with leverage targets, maintaining the investment-grade balance sheet.
4. Operational Excellence and Cost Control
Operational performance in Q4 demonstrated stable adjusted gross margins despite inflationary pressures, with sequential quarter throughput gains offsetting modest increases in field-level personnel and utility costs. Management anticipates first-quarter 2025 operating expenses to normalize, reflecting historical seasonality. This operational discipline supports competitive positioning and margin resilience.
5. Strengthened Customer Relationships and Contract Extensions
Long-term agreements with Occidental, including extensions of produced water and natural gas gathering contracts, underscore the strength of customer partnerships. These agreements provide volume stability and underpin sustainable cash flow, enhancing visibility for future capital planning and distribution growth.
Key Considerations
Western Midstream’s 2024 performance and 2025 strategic initiatives highlight several critical factors shaping its trajectory:
- Midstream Integration: The company’s ability to integrate produced water solutions with gas and oil infrastructure offers a competitive advantage in the Permian Basin’s evolving midstream landscape.
- Capital Intensity of Growth Projects: Large-scale projects like Pathfinder require significant upfront capital, influencing near-term free cash flow and necessitating disciplined execution.
- Leverage Management: Maintaining a leverage ratio near three times EBITDA remains a priority to preserve financial flexibility and investment-grade credit ratings.
- Customer Concentration: Heavy reliance on Occidental underscores the importance of contract renewals and diversification to mitigate counterparty risk.
- Market Dynamics: Basin-level production efficiencies and rig activity fluctuations impact throughput growth assumptions and capital allocation decisions.
Risks
Risks include potential delays or cost overruns in organic growth projects such as Pathfinder, fluctuations in producer drilling activity affecting throughput volumes, and evolving regulatory or environmental constraints related to produced water disposal. Concentration risk with key customers like Occidental also poses a dependency challenge. Commodity price volatility, while partially mitigated by fee-based contracts, may indirectly influence customer capital spending and throughput.
Forward Outlook
For Q1 2025, Western Midstream expects:
- Adjusted EBITDA growth aligned with full-year guidance, supported by stable margins and throughput.
- Capital expenditures reflecting ongoing investment in Pathfinder, North Loving plant commissioning, and Powder River Basin expansions.
For full-year 2025, management projects:
- Adjusted EBITDA between $2.35 billion and $2.55 billion, representing approximately 5% growth at midpoint.
- Capital expenditures ranging from $625 million to $775 million, including $65 million allocated to Pathfinder.
- Free cash flow between $1.275 billion and $1.475 billion, supporting a base distribution increase to $0.91 per unit per quarter.
Management emphasizes a disciplined approach to capital allocation, prioritizing organic growth and sustainable distribution increases over enhanced distributions or aggressive buybacks.
Takeaways
Investors should note:
- Throughput Growth as a Growth Engine: Double-digit volume increases across natural gas, crude oil, and produced water underpin the partnership’s financial strength and provide a platform for future expansion.
- Strategic Expansion into Produced Water Infrastructure: The Pathfinder project exemplifies capital-efficient organic growth targeting a critical midstream need, enhancing customer flow assurance and opening avenues for incremental returns.
- Balanced Capital Allocation Supporting Distribution Sustainability: The shift to mid-to-low single-digit distribution growth aligns with free cash flow generation and leverage targets, reflecting prudent financial stewardship amid growth investments.
Conclusion
Western Midstream’s Q4 2024 results and 2025 guidance illustrate a partnership transitioning from a build and deleveraging phase to one focused on growth and value creation. Through strong throughput growth, strategic organic projects like Pathfinder, and disciplined capital allocation, WES is well positioned to deliver sustainable cash flow growth and steady distribution increases, reinforcing its status as a leading midstream operator in key U.S. basins.
Industry Read-Through
WES’s expansion into produced water midstream infrastructure highlights a broader industry trend where midstream companies are increasingly addressing water management challenges critical to upstream development. The integration of produced water solutions alongside traditional gas and oil gathering assets offers a competitive edge and a potential new growth vector. Other midstream operators in prolific basins may consider similar capital-efficient organic projects to enhance flow assurance and customer alignment. Additionally, the emphasis on long-term, fee-based contracts with minimum volume commitments underscores the importance of stable cash flows in navigating commodity price volatility and regulatory complexities.