(Moody’s, 4.Mar.2022) — Moody’s Investors Service upgraded the ratings of Western Midstream Operating, LP, including the Corporate Family Rating (CFR) to Ba1 from Ba2, the Probability of Default Rating to Ba1-PD from Ba2-PD and the senior unsecured notes rating to Ba1 from Ba2. Its Speculative Grade Liquidity Rating is unchanged at SGL-1. The outlook remains positive.
“The upgrade for WES Operating reflects a similar change to the Corporate Family Rating for Occidental Petroleum, WES Operating’s primary customer and owner of Western Midstream Holdings, LLC, which owns the general partner interest in WES Operating’s parent,” stated James Wilkins, Moody’s Vice President. “WES Operating’s financial metrics improved in 2021, but the rating is effectively capped by OXY‘s Ba1 rating.”The following summaries the ratings activity
Upgrades: Issuer: Western Midstream Operating, LP
Probability of Default Rating, Upgraded to Ba1-PD from Ba2-PD
Corporate Family Rating, Upgraded to Ba1 from Ba2….
Senior Unsecured Regular Bond/Debenture, Upgraded to Ba1 (LGD4) from Ba2 (LGD4)
Outlook Actions: Issuer: Western Midstream Operating, LP
Outlook, Remains Positive
RATINGS RATIONALE
The upgrade of WES Operating’s CFR follows the upgrade to Occidental Petroleum Corporation’s (OXY) CFR to Ba1 as well as WES Operating’s supportive business profile and credit metrics, which by strengthening WES Operating’s financial profile will bolster its capacity to withstand negative credit impacts from carbon transition risks. While financial performance of WES Operating will continue to be influenced by industry cycles, compared to historical experience Moody’s expects future profitability and cash flow in this sector to be less robust at the cycle peak and worse at the cycle trough because global initiatives to limit adverse impacts of climate change will constrain the use of hydrocarbons and accelerate the shift to less environmentally damaging energy sources.
WES Operating’s CFR is effectively capped by OXY’s Ba1 CFR, reflecting the significant majority of WES Operating’s throughput volumes and EBITDA that is generated by OXY as its primary customer, and the control OXY exerts as the owner of the general partner of WES Operating’s parent. Moody’s recently upgraded OXY’s CFR to Ba1 to reflect the improvement in OXY’s credit profile resulting from the surge in its earnings and cash flow, as well as the material repayment of OXY debt during 2021 and Moody’s expectation that OXY will continue to reduce its debt. OXY continues to have elevated debt balances resulting from the 2019 acquisition of Anadarko.
WES Operating benefits from a high proportion of fee-based revenue that provides cash flow stability, and commodity and basin diversification. Its direct commodity price exposure is limited as a result of having long-term fee-based natural gas and crude oil gathering and processing, and water handling contracts, with a portion of natural gas and liquids contracts backed by either minimum volume commitments (MVCs) or cost-of service contract constructs. However, it does have exposure to fluctuations in production volumes, particularly in its large gathering business. The partnership continues to have good growth visibility from organic projects tied to its operations in the Permian’s Delaware Basin and the DJ Basin. Many of WES Operating’s credit attributes could support a Baa3 rating, but the rating is capped by OXY’s Ba1 rating. WES Operating’s high customer concentration risk with OXY combined with OXY’s controlling ownership of Western Midstream Holdings, LLC limits WES Operating’s rating to that of OXY. Financial leverage decreased in 2021 as EBITDA rebounded on higher volumes and free cash flow was applied towards reducing debt.
The positive outlook for WES Operating reflects its credit metrics that are supportive of a higher rating and the positive rating outlook for OXY. OXY’s positive outlook reflects Moody’s expectation that OXY’s credit metrics will continue to improve in 2022 as it remains focused on debt reduction. Current high oil and gas commodity prices will allow OXY to generate significant positive free cash flow and reduce its leverage.The SGL-1 Speculative Grade Liquidity rating reflects Moody’s expectation that WES Operating will have very good liquidity through mid-2023, supported by cash flow from operations, existing cash balances and available borrowing capacity under its $2bn unsecured bank revolving credit facility. The company has generated positive free cash flow since cutting its distribution rate for the second quarter 2020. As of 31 December 2021, there were no borrowings outstanding under the revolving credit facility and available capacity of $2bn, after accounting for $5.1mn of outstanding letters of credit. The revolver, which has a scheduled February 2025 maturity date ($100mn will mature in February 2024), is unsecured and has a financial maintenance covenant limiting debt to EBITDA to 5x. Moody’s expects WES Operating to remain in compliance with the covenant through mid-2023. WES Operating’s next scheduled debt maturity is its $502mn of senior notes due in July 2022.
WES Operating’s ESG Credit Impact Score is neutral-to-low (CIS-2). This reflects the company’s dependence on OXY, its high environmental risk exposure and high social risk exposure, as well as moderately negative governance risks. The company is exposed to the risk of increasingly restrictive regulations in Colorado. Sizeable natural gas gathering & processing assets as well as natural gas pipelines will have less exposure to carbon transition risk.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSWES
Operating’s ratings could be upgraded if OXY’s CFR were upgraded and WES Operating’s leverage (Debt / EBITDA) remained below 4x (3.6x as of December 31, 2021) and distribution coverage was above 1.3x. WES Operating’s CFR could be downgraded if OXY’s CFR is downgraded or if WES Operating’s debt to EBITDA rises above 5x or if distribution coverage approaches 1x. Significant earnings declines from lower throughput volumes could also lead to a downgrade in the CFR.
WES Operating, headquartered in The Woodlands, Texas, provides midstream energy services primarily to Occidental Petroleum Corporation (OXY, Ba1 positive), as well as other third-party oil and gas producers and customers. Western Midstream Partners, LP (WES), a publicly traded MLP, owns a 98% limited partner interest in WES Operating and a 100% equity interest in Western Midstream Operating GP, LLC, which holds the non-economic general partner interest in WES Operating. OXY owns Western Midstream Holdings, LLC, WES’s general partner.
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