Western Midstream (WES) is a midstream MLP known for its high tax-deferred yield (9.1% at the time of writing with a strong potential for distribution increase in Q2 25) and investment grade rating. The distribution seems safe and, for many US retirees and other investors, WES is a major holding within their investment portfolios.
On October 28, WES appointed Oscar Brown as its new CEO. Michael Ure, WES’s CEO since 2019 stepped down. Here is the text of the announcement: “The Board of Directors of the General Partner (the "Board") and Michael Ure agreed that he will step down from his position, including as Director.”
The quote above suggests an initial disagreement between Mr. Ure and the Board, ultimately resulting in an 'agreement' imposed on Mr. Ure. In other words, Mr. Ure did not resign voluntarily due to health issues or other reasons.
The press release does not explain why he suddenly stepped down several days before announcing Q3 results. Mr. Ure has successfully transformed WES into a leading midstream player. The last quarter was outstanding and in yesterday’s press release, WES reaffirmed its existing guidance: “In addition to today's leadership transition, the Partnership also reaffirmed its previously stated 2024 Adjusted EBITDA and Free Cash Flow guidance ranges of $2.2 billion to $2.4 billion and $1.05 billion to $1.25 billion, respectively, and continues to expect 2024 results to be toward the high end of these ranges.”
Summing it up, I would exclude the company’s performance as the reason for Mr. Ure’s replacement. It appears more likely that the Board and General Partner were at odds with Mr. Ure over a strategic issue. Quite likely, the latter could be a change of control.
In early 2024, Occidental Petroleum (OXY) owned ~49% of WES including its limited and general partner stakes combined, and simultaneously is, by far, the biggest WES customer. In February 2024, Reuters reported that OXY is exploring a sale of WES to slash its debt. Enterprise Products (EPD), Williams (WMB), Kinder Morgan (KMI), and private equity were reportedly interested.
Due to its then pending acquisition of CrownRock, OXY needed to slash its debt which was the reason behind Reuters’ report. The acquisition was closed in August and OXY quickly presented its plan to sell assets to reduce leverage. As it turned out, the plan included a sale of ~10% of its WES holdings or ~5% of WES units outstanding through the secondary public offering. Currently, OXY controls close to 45% stake.
If OXY intends to sell its remaining units, it would likely pursue a full sale of WES, as potential acquirers would prefer to purchase the entire company rather than a partial stake and would be ready to pay more per unit. If Mr. Ure opposed this strategy, it could explain his replacement. While other factors may have contributed to Mr. Ure's replacement, the reason we've suggested appears to be the most plausible.
Enter Mr. Brown, whose background lies in banking with a focus on oil and gas acquisitions. Formerly a Senior VP at OXY, he played a key role in the 2018 takeover of Anadarko, of which future WES was a part (together with CEO Vicky Golub he flew to Omaha to meet Warren Buffett who helped to finance the takeover). Since then, Mr. Brown has been a WES Director. He knows WES well and, perhaps, is an ideal candidate to navigate complex negotiations and processes related to the sale. Since OXY does not have a controlling stake, there are plenty of possible scenarios going forward.
We may learn more about it in several days when WES announces its Q3 results. OXY sold WES units in August for about ~$36. I would assume a higher price for the entire WES, perhaps something in the low forties. Inferior comps were sold at 9.6 EV/EBITDA (for example, WES sold some assets for this price in early 2024 and Energy Transfer paid the same multiple for Crestwood). Using $2,400M as the upper range of projected 2024 EBITDA, we estimate a potential sale price of at least $41–42 per unit.
Despite being higher than the current price, the scenario is negative for long-term holders. First, it may lead to negative tax consequences for unit holders with a low tax basis. Secondly, the stand-alone WES would be likely to deliver superior returns in the coming years.
Despite my best efforts, from the company's communications, I could not figure out why Mr. Ure was suddenly replaced. On the earnings call, new CEO Mr. Brown stated that the replacement was not sudden... That certainly, was not my impression. Still, I had a feeling that M&As are higher on WES's agenda now.
The quarter was mediocre for WES but nothing that concerned me. I would call it normal business fluctuations. Importantly, free cash flow was higher than the distributions paid and all 2024 targets were reaffirmed. The distribution appears safe.
When I bought the stock earlier in 2024, I was hopeful that the distribution could be noticeably increased in 2025 because of two reasons: 1)Increase in natural gass revenues and margins due to two new natural gas plants (one is already commissioned in April, the other one is planned for commissioning in Q1 25; 2) Decrease in growth capex once these two plants are commissioned.
While Mr. Ure stated all this rather directly, Mr. Brown did not touch on any of these things on the earnings call. WES simply stated that all plans would be announced on the next call three months from now. Perhaps this is natural as long as Mr. Brown's appointment is more sudden that he is willing to acknlowledge.
WES is down today. I do not see any fundamental reason for it since WES has reaffirmed its financial targets. Most likely, it is because Mr. Ure stepping down is seen as an unpleasant surprise by many. However, if the company is going to be sold, the price per unit is likely to be higher than today. If the company remains stand-alone, the price should go up as well due to strong yield and free cash flow, new gas plant coming online in early 2025 and associated reduction in Capex.