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Why Units of Western Midstream Are Sinking Today

By Matthew DiLallo - Jul 31, 2019 at 12:15PM

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The MLP isn't as optimistic as it was earlier this year.

What happened

Units of Western Midstream ( WES 1.11% ) declined more than 12% by 10:45 a.m. EDT on Wednesday. Driving the MLP's slump were its second-quarter results and outlook for 2019.

So what

Western Midstream's second-quarter report looked good on the surface. The MLP generated $432 million of adjusted EBITDA during the period, or 39% above the year-ago level. Distributable cash flow, meanwhile, surged 35% to $335.5 million, which was enough to cover its high-yielding distribution by a comfortable 1.2 times.

However, the main factor fueling that growth was the acquisition of more than $4 billion of midstream assets from its parent, Anadarko Petroleum ( APC ). Still, the company's legacy assets did perform well, highlighted by record-setting volumes in both its West Texas and DJ Basin complexes during the quarter.

A bright red arrow going down.

Image source: Getty Images.

The company also had some good news on the strategic front. It signed a contract with a third-party producer for a portion of the processing capacity at its Latham II facility. That deal not only helps diversify its revenue away from its current parent but also will fill up that new plant, which should start up in the second half of this year.

Despite those positives, the company is reducing its full-year outlook due to several headwinds, including the impact lower natural gas prices are having on production in its operating regions. The MLP now sees its adjusted EBITDA ranging between $1.675 billion and $1.725 billion, which is down from its initial estimate of $1.8 billion to $1.9 billion. The company also reduced its distribution growth outlook from a 6% to 8% range down to 5% to 6%. Even with that slower growth rate, the company only expects to cover its payout with cash flow by 1.15 times this year. That's down from its initial view that it would cover the payout by at least 1.2 times.

Now what

Another factor that has been weighing on Western Midstream is its unclear future. That's because oil giant Occidental Petroleum is acquiring Anadarko. Given the amount of cash Occidental is paying, it might need to sell the stake in Western Midstream that it will inherit as part of the deal. Because of that uncertainty, Western Midstream isn't an ideal option for income-seeking investors to consider buying right now, even if the yield is going up after today's sell-off.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

Western Midstream Partners, LP Stock Quote
Western Midstream Partners, LP
$20.09 (1.11%) $0.22
Anadarko Petroleum Corporation Stock Quote
Anadarko Petroleum Corporation

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