Good afternoon. My name is Brent, and I will be your conference operator today. At this time, I would like to welcome everyone to the Western Midstream Partners Second Quarter 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the conference over to Daniel Jenkins, Director of Investor Relations. Please go ahead.

Thank you. I'm glad you could join us today for Western Midstream's Second Quarter 2023 Conference Call. I'd like to remind you that today's call, the accompanying slide deck and last night's earnings release contain important disclosures regarding forward-looking statements and non-GAAP reconciliations. Please reference Western Midstream's most recent Form 10-Q and other public filings for a description of risk factors that could cause actual results to differ materially from what we discuss today. Relevant reference materials are posted on our website. With me today are Michael Ure, our Chief Executive Officer; Kristen Shults, our Chief Financial Officer; and Danny Holderman, our Senior Vice President Southern Operations. I will now turn the call over to Michael.

Thank you, Daniel and good afternoon everyone. During the second quarter, we experienced increased natural gas and crude oil and NGLs throughput, which was driven by continued throughput growth from our Delaware Basin assets, a recovery in volumes from our assets in Utah and Wyoming and higher throughput from our equity investments. In fact, this was our second consecutive quarter of record-breaking natural gas and crude oil and NGL throughput in the Delaware Basin and the inclement weather that impacted our Utah and Wyoming assets during the first quarter subsided during the second quarter. While our natural gas and crude oil and NGLs throughput, and the associated adjusted gross margin increased on a sequential quarter basis, our adjusted EBITDA declined slightly, primarily due to higher operation and maintenance expense due to the seasonal increase in utilities and higher field level personnel expenses and increased property and other taxes. As a reminder, our first quarter property and other taxes decreased substantially due to a reduction in the ad valorem property tax accrual. As such, second quarter property and other taxes have returned to a more normalized level. While the Delaware Basin, natural gas and crude oil and NGLs throughput increased on a sequential quarter basis, these increases were below our initial expectations, primarily due to producer operational challenges that appeared during the second quarter. Based on our analysis, producer operational challenges include delays in wells coming to market, unplanned maintenance and base well performance issues. Several new wells that came online during the second quarter outperformed relative to initial expectations and this outperformance led to challenges across the production chain, specifically with producer-based wells. Based on discussions with our producers and after analyzing their revised forecasts, we expect these issues to be temporary in nature, but will continue into the second…

Thank you, Michael, and good afternoon, everyone. Our second quarter natural gas throughput increased by 4% on a sequential quarter basis. This was primarily due to continued throughput growth from the Delaware Basin and increased throughput from our assets in Utah and Wyoming, which were negatively impacted by inclement weather in the first quarter. We also experienced increased throughput from our natural gas equity investments during the quarter. Our crude oil and natural gas liquids throughput increased by 3% on a sequential quarter basis. This was primarily due to increased throughput from our assets in Utah, which were negatively impacted by inclement weather in the first quarter and continued throughput growth in the Delaware Basin. We also experienced increased throughput from our crude oil and NGLs equity investments during the quarter. Produced water throughput decreased by 1% on a sequential quarter basis, mostly due to temporary volume curtailments associated with activities to support adjacent producer development. While Delaware Basin natural gas and crude oil and NGL throughput increased on a sequential quarter basis and produced water volumes would have increased on a sequential quarter basis if not for the above-mentioned reasons. These increases were below our initial expectations coming into the second quarter, primarily due to the previously discussed producer operational challenges. We do expect these issues to impact our second half of 2023 throughput expectations and our momentum entering 2024, which I will discuss in more detail shortly. Our per Mcf adjusted gross margin for our natural gas assets decreased by $0.04 compared to the prior quarter. This was primarily driven by increased throughput from our assets in Wyoming and Utah, which have a lower-than-average per Mcf margin as compared to our other natural gas assets. We expect our third quarter natural gas per Mcf adjusted gross margin to…

Thank you, Kristen. I want to highlight that we are preparing to release our annual sustainability report in the coming weeks, which will detail our 2022 sustainability accomplishments. From achieving our goal of completing capital projects to reduce WES' methane intensity by 5% on an annualized basis between 2020 and 2022 to launching new greenhouse gas tracking and reporting processes, we have continued to look for ways to minimize our environmental footprint through emissions reductions and by considering the impact of new and existing infrastructure on our environmental footprint. In fact, we received the GPA Midstream Association's Environmental Award for our work to reduce crankcase emissions from our natural gas-fired compressor engines. You'll be able to read more about these accomplishments along with discussions pertaining to our volunteering program in the forthcoming 2022 report. We look forward to building on this momentum in the years ahead as we continue to advance energy by enhancing the sustainability of our operations. Before we open it up for Q&A, I would like to highlight a few key points and reiterate why we believe WES and its stakeholders continue to be well-positioned. We continue to be a market leader in generating a superior total capital return yield amongst midstream companies when taking into account distribution increases and unit buybacks. This is even more pronounced when considering the enhanced distribution that was paid on May 15th. When comparing the midstream sector relative to members of the Russell 3000 Index, WES and select midstream companies are some of the only investments with an investment grade credit rating and at least a 7% annual dividend or distribution yield. Considering the changes to current year volume expectations, I feel it is important to reiterate that WES is supported by stable, long-term contract structures that include either minimum volume…

[Operator Instructions] Your first question is from the line of Brian Reynolds with UBS. Your line is open.

Hi, good morning or good afternoon, everyone. Maybe to start off on just the return of capital. Just kind of curious of how we should think about WES' forward total return yield after the announcement of the North Loving Plant. I'm just kind of curious of how potentially unit buybacks could perhaps be part of the return of capital structure in periods of dislocation here going forward, while still using the enhanced distribution on an annual basis to kind of target that optimized capital structure of three times. Thanks.

Hey, Brian, it's a great question. We are obviously, going to continue to utilize the unit repurchase on an opportunistic basis as we see dislocations in the marketplace. We've actually repurchased a significant amount of units, I believe peer-leading in that regard. And so it's a tool that we're firm believers in and we'll definitely deploy if we see dislocations out there in the marketplace. As we think about the enhanced distribution again, the point of the enhanced distribution is that if we can't find a better use of that capital whether that's through incremental growth projects like Mentone and North Loving or opportunistically buying back units or debt throughout the year then we're going to give that back to our unitholders. So that is a philosophy that still holds today and we'll continue to hold as we go into the future. Obviously, our confidence as it relates to the free cash flow yield after it is that we complete these new plants is very strong in light of the fact that we were comfortable increasing the base distribution because we do expect that that free cash flow yield will continue to improve as we get those projects online after that capital is spent to bring them online.

Great. Really appreciate all that. Maybe to switch to operations. I appreciate all the color on just the quarterly performance around some of the new well designs at OXY. Well productivity for E&Ps has been topical year-to-date. So just kind of curious if you can discuss how some of these new wedge wells how interacting with legacy wells. And I think you talked about how there's some near-term impacts that may reverse to some long-term improved efficiency. Just kind of wondering if you can give us a time line of maybe when is that expected? Could we see some 3Q performance, or is that more 2024 2025 kind of long-term lower decline rates that we should be seeing? Thanks.

Yes. No, thanks Brian. Great question. So again, as we highlighted based on our analysis, it appears as if the factors really driving the underperformance again, it's relative to expectations. We are still expecting volume growth on all three products for us. But relative to expectations it's really challenges related to time to market some operability challenges, primarily driven by unplanned maintenance and then the high-performing wells really impacting base production. And again that latter part of it really is just impacting the rate of growth that we're able to achieve. And as we work together to optimize some of those system constraints, which we expect that we'll start to see some improvements in the back half of this year should impact the – or improve the ability to increase that rate of growth going forward. We wouldn't expect though that we'd be able to be complete in this regard until probably 2024, but we certainly expect that we'll be able to debottleneck some of those challenges in the back half of this year.

Great. Super. I’ll leave it there. Have a great rest of your afternoon. Thanks.

Thanks, Brain.

Your next question is from the line of Jeremy Tonet with JPMorgan. Your line is open.

Hi, good afternoon.

Hi, Jeremy.

I just wondered if you might be able to expand a bit more on the operational issues that were experienced during the quarter. It seems like the stronger well performance that kind of choked back the legacy wells as far as the flow is concerned. And just wondering if that's the right way to think about it and the time line and ultimate scope of capital required to address these if you could provide a bit more color there that would be very helpful.

Yeah, sure. So I think you highlighted that effectively in terms of the impact that we're seeing and so the only real impact is that it's just pushing a little bit to the right the volumes that we expect to come in system. There's nothing that we've seen that would cause us any concern around the productivity of the wells in the area. In fact, it's all incredibly positive. This is about just sort of pushing a little bit to the right, the growth rate that we're expecting to come out of the assets. So long-term story, very, very well intact. While a little disappointing in the short term definitely not discouraging. The team's very excited about the long-term prospects going forward. Right now, it's difficult to say in terms of the capital requirements again on our side would expect that it would be relatively minimal. And if there are -- if there is some capital requirements then we'll take the same approach that we always have which is that it needs to come with a requisite rate of return that is measured by the improved performance that we're able to gather out of that in order to justify the capital spend.

Got it. And any rough scope for kind of time line to kind of rejigger the system to get past these issues?

Again, we would expect that we'll start to see some improvements in the back half of this year with the expectation that the challenges across the production value chain really will be finalized through 2024.

Got it. And then just coming back to the distribution increase here the level that was increased. Just wonder if you could expand a bit more on why now why less -- why that level if not less or more just how you settled in on that amount?

Yes. So, what we did is we took a look at the business and over the past 12 to 15 months, we've been able to receive close to one Bcf, a day of increased firm commitments. Overall, we sanctioned Mentone III as well as the North Loving plant. And so, as we forecasted out a sustained level of free cash flow, we always take a look at it as a management team and as a Board on a quarterly basis. And we take a look at what we believe to be a sustainable level through cycle that we can justify, overall. And in light of the business success that, the organization has been able to achieve, we then analyzed that this felt like a very sustainable level for us to be able to justify on the base distribution side, still allowing for increased free cash flow to utilize opportunistically on debt repurchases, on unit repurchases and/or new projects that might come in line. So, it's really a reflection of a lot of the positive dynamics that we've seen in our business, that it felt like now is a great time to increase that base distribution overall, to highlight the confidence that we have and being able to sustain at that level, all things considered.

Got it. That’s very helpful. I’ll leave it there. Thanks.

Thank you.

[Operator Instructions] Your next question is from the line of Keith Stanley with Wolfe Research. Your line is open.

Hi, I just had one question about the declining leverage targets for 2023 and 2024. Do you think of those the leverage targets as solely for purposes of determining, if you can pay and enhance distribution, or is lower leverage in getting to 3x, an important priority for where you want the balance sheet when you're thinking about capital allocation more broadly including buybacks and other initiatives?

Yes. So, it's a great question, Keith. That target was established first, because we feel like that's sort of a prudent level for us to have leverage that provides us, both a derisked enterprise as well as the opportunity for us to go out and be proactive, as it relates to unit repurchases, potential M&A activities. We've operated at much higher leverage obviously, and so we feel comfortable the business can sustain higher leverage. But at those levels, we feel like it provides us with opportunities to be able to increase it on occasion, if there are business opportunities that we can pursue at that time. And so, again, those are targets in order to pay out the enhanced distribution, but the fundamental rationale for it, is that. We want to make sure that as we make those decisions that we have flexibility to do so, as opportunities come up, by putting us at the lower leverage threshold -- to lower leverage levels to be able to do that without materially harming the risk of the enterprise.

Got it. Thank you.

Thank you, Keith.

There are no further questions at this time, Mr. Ure, I turn the call back over to you.

Thank you, everyone for joining the call. I would like to again, thank everyone, all the WES stakeholders and employees for their efforts thus far this year, and look forward to the third quarter call coming up. Thanks, all.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.