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Why Units of Western Midstream Slumped Another 16% in January

By Matthew DiLallo – Feb 4, 2020 at 11:53AM

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The high-yielding MLP continues to tumble.

What happened

Units of MLP Western Midstream Partners (WES 4.41%) fell 15.9% in January, according to data provided by S&P Global Market Intelligence. The factors weighing on the company were the signing of several new agreements with its parent Occidental Petroleum (OXY 3.26%), as well as the formal release of its 2020 outlook. 

So what

Western Midstream and Occidental Petroleum signed several agreements last month that will enable the MLP to operate as a stand-alone business independent of Occidental Petroleum. These moves will allow Occidental to reduce its stake in the MLP below 50% so that it can remove Western's debt from its balance sheet. That will improve Occidental's financial picture without having to sell too much of its stake in the beaten-down MLP, which has lost nearly 50% of its value in the past year.

Red pipelines at an oil storage terminal.

Image source: Getty Images.

Western Midstream also fleshed out its guidance for 2020. The energy company expects to produce between $1.875 billion and $1.975 billion of adjusted EBITDA this year, which at the low end would be 10% above 2019's expected tally. That matches its initial forecast that adjusted EBITDA would "grow approximately 10% year over year." Meanwhile, the company plans to invest another $875 million to $950 million into capital projects this year, which at the midpoint, is 32% below last year's projected spending range of $1.3 billion to $1.4 billion. That's a larger decline than the 20% to 30% spending reduction it initially expected. 

Now what

Western Midstream has been under pressure due to its relationship with Occidental and the impact of lower oil and gas prices on its operations. The company is aiming to remove one of those weights through the planned separation from Occidental. However, investors remain concerned with the company's ability to generate enough cash to cover its distribution -- which currently yields a sky-high 14.6% -- and its capital expenses, given its tight financial situation. Until its metrics improve, the company's value will likely remain under pressure.

Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Western Midstream Partners, LP Stock Quote
Western Midstream Partners, LP
$24.48 (4.41%) $1.03
Occidental Petroleum Corporation Stock Quote
Occidental Petroleum Corporation
$60.44 (3.26%) $1.91

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