Western Midstream and Occidental Petroleum: Recent Developments and Implications
Last time I posted about Western Midstream ($WES) on October 1, and the recent events triggered a short sequel to that post. Since WES has probably the highest reliable tax-advantaged yield of all US issues, a lot of investors might be interested in these events. I will not repeat all the well-known facts about WES and refer readers to my older posts about it instead.
Several days ago, WES published a rather long press release about its Delaware Basin natural gas operations with implications that appear unclear at first glance. Let me quote it, though the language is uneasy to digest:
WES and Occidental have amended their existing Delaware Basin natural-gas gathering contract, previously the most significant cost-of-service agreement between the parties, effectuating an earlier transition to a fixed-fee structure than previously provided for under that agreement, aligning interests and further positioning WES as a standalone midstream enterprise.
Following this amendment, approximately 9-percent of WES’s total revenue will remain subject to cost-of-service rates, with approximately 1-percent of total revenue subject to cost-of-service rates expiring in the late 2020s. The remaining cost-of-service rate provisions extend into the midto-late 2030s and include provisions to convert to fixed-fee structures at that time. All significant fixed-fee contracts with Occidental, including the contracts being amended, are effective through the mid-to-late 2030s.
The amended Delaware Basin natural-gas gathering contract with Occidental provides volumetric protection via substantial minimum volume commitments (“MVCs”) through the original cost-of-service term, and from that point forward, the existing acreage dedication and fixed-fee structure continues through the duration of the contract. Additionally, the Delaware Basin natural-gas processing contract continues to provide volumetric protection via MVCs through 2035. The
amendment to the Occidental Delaware Basin natural-gas gathering agreement includes a fixed-fee structure that will further enhance the economics and attractiveness of these top-tier properties in Occidental’s portfolio.
Additionally, WES has entered into a new natural-gas gathering and processing agreement with ConocoPhillips related to a portion of ConocoPhillips’ Delaware Basin natural-gas production, further diversifying WES’s revenues by reducing total related-party revenue by more than 10-percent. The contract with ConocoPhillips is also fixed-fee, includes an acreage dedication, and has a tenor through the early 2030s.
In consideration for these transactions, Occidental will transfer to WES 15.3 million WES common units currently owned by Occidental, representing approximately $610 million of limited partnership interests. This transfer was structured on terms intended to represent a value-neutral exchange for the economic concessions reflected in the agreements and corresponding decrease in
WES’s operating cash flow over time. As a result of the redemption and cancellation of common units, Occidental’s ownership of WES will decrease from approximately 42-percent to approximately 40-percent.
Over the remaining term of the amended Occidental Delaware Basin natural-gas gathering agreement, WES expects that the cumulative reduction in operating cash flows from these transactions will largely be offset by the cumulative distribution savings in financing cash flows as the result of the common unit redemption.
The value of the common units transferred will be added to the existing contract liability associated with the Occidental Delaware Basin natural-gas gathering agreement of approximately $560 million. The aggregate contract liability balance will be recognized to revenue, averaging approximately $165 million a year through 2032, the original term of the agreement. Of the $165 million, approximately $90 million relates to the reset of Delaware Basin natural-gas gathering fees executed in exchange for common units, while $75 million relates to previously established fixed-fee provisions under the Occidental Delaware Basin natural-gas gathering agreement.
Based upon our most recent forecasts and including recognition of revenue associated with the contract liability, the conversion to a fixed-fee structure is not expected to reduce Adjusted EBITDA through 2027; after that time and until 2032, the conversion will have a minimal impact to Adjusted EBITDA.
Beginning in 2026, operating cash flows will reflect only the new fixed-fee rates, but revenues and Adjusted EBITDA will also include the recognition of revenue associated with the contract liability through 2032. Beginning in 2033, both Adjusted EBITDA(1) and operating cash flows associated with the natural-gas gathering contracts will include only the fixed-fee rates.
Beginning in 2026 and thereafter, ongoing distribution savings from the common unit redemption, together with cost reduction initiatives which were launched in 2025 and are partially reflected in WES’s 2025 results, are expected to fully offset the reduction in Free Cash Flow after distributions resulting from these transactions and the transition to a fixed-fee structure.
Taking into account WES’s acquisition of Aris Water Solutions, and anticipated 2026 growth-oriented capital program of approximately $1.1 billion, WES still expects to maintain net leverage at or near 3.0x Adjusted EBITDA in 2026.
The new contract terms with Occidental will be effective as of January 1, 2026, the new contract terms with ConocoPhillips will be effective as of February 1, 2026, and the common units will be redeemed on February 3, 2026.
What does this press release tell us about WES’s strategy and intentions? Does it have any straightforward implications for investors?