Western Midstream Partners, LP Q4 FY2025 Earnings Call

Good morning. My name is Rebecca, and I will be your conference operator today. I would like to welcome everyone to the Western Midstream Partners Fourth Quarter 2025 Earnings Conference Call. I will now 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 Fourth Quarter 2025 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-K 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. I'm pleased to inform you that the Western Midstream Partners K-1 will be available via our website beginning Wednesday, March 11. Hard copies will be mailed out the following week. With me today are Oscar Brown, our Chief Executive Officer; Danny Holderman, our Chief Operating Officer; and Kristen Shults, our Chief Financial Officer. I will now turn the call over to Oscar.

Thank you, Daniel, and good morning, everyone. 2025 was another incredibly successful and strategically meaningful year for Western Midstream that can be defined by record adjusted EBITDA and free cash flow generation, primarily driven by throughput growth across all products and from the Delaware and DJ Basins while focusing on cost competitiveness to support our long-term growth plans. Throughout the year, the Delaware and DJ Basins set multiple quarterly throughput records, enabling WES to meet or exceed our annual throughput expectations and full year financial guidance ranges. Additionally, the Aris acquisition in late 2025 further enhanced our asset base by expanding our produced water solutions capabilities and establishing a more substantial presence in New Mexico. Taken together, our 2025 achievements, including successful organic growth projects, accretive M&A, efficiency gains and cost reduction successes as well as contract renegotiations, all strengthen our operating leverage and position us for sustainable growth while maintaining a strong balance sheet and low leverage profile. As we progress later into 2025 and now into 2026, macroeconomic and commodity price-driven volatility have increased. Kristen will provide more details on our 2026 guidance metrics shortly, but based on recent discussions with our producing customers and taking into account their updated forecast, it has become clear that many of our producers will reduce previously expected activity levels on acreage that we service, including portions of the Delaware Basin. This, in combination with lower adjusted gross margin per unit for our natural gas assets, driven by changes in contract mix and lower commodity prices are expected to result in more moderate rates of growth for overall throughput and adjusted EBITDA in 2026 relative to our initial expectations. While we had already anticipated and communicated lower activity levels and declining production in the DJ and Powder River Basins, Oxy has recently reallocated a portion of their activity from acreage that we service in the Delaware Basin. Based on Oxy's most recent forecast, we expect a portion of that activity to begin returning to our acreage starting in 2027, although scenarios are still being evaluated and will continue to maintain flexibility. This activity shift moderates our expected 2026 throughput growth in the Delaware Basin relative to earlier expectations, and we now expect partnership-wide natural gas throughput to be flat and crude oil and NGL throughput to decline by low to mid-single digits on average year-over-year. With that said, our long-term outlook of mid- to low single-digit adjusted EBITDA growth remains intact as evidenced by our 6% adjusted EBITDA growth reported in 2025 and our expectation of 5% adjusted EBITDA growth in 2026 at the midpoint of our guidance range. We remain confident in our producers' long-term development plans, especially when you consider the fact that the majority of undrilled inventory within Oxy's Delaware Basin portfolio remains located on acreage that we service. While 2026 is proving to be more of a transition year than we initially anticipated, our business remains underpinned by stable long-term contract structures, many of which include minimum volume commitments that support financial stability in a lower activity environment. As you can see from the reduction in our 2026 capital expenditure program from at least $1.1 billion in prior communications to $925 million at the midpoint of our updated guidance range, we are able to quickly modify our capital program to align our spending with revised producer activity levels. In short, our long-term growth strategy is unchanged. The Aris acquisition will contribute meaningfully to adjusted EBITDA in 2026. And by issuing equity for a portion of the Aris consideration, we preserve the financial flexibility necessary to continue pursuing value-accretive opportunities and commercially creative solutions such as the restructuring of our Oxy Delaware Basin natural gas gathering contract in exchange for WES units. Additionally, our cost reduction initiatives are making WES a leaner, more efficient organization, positioning us to better compete for new business and to benefit from operational leverage when activity levels recover, especially considering extremely bullish power-driven natural gas demand fundamentals expected in the coming years. Returning to our recent accomplishments and focusing specifically on the fourth quarter, we generated record adjusted EBITDA of $636 million, even after $29.5 million of negative noncash cumulative revenue recognition adjustments. Excluding these adjustments, we would have recorded adjusted EBITDA of $665 million, representing an approximate 5% sequential quarter increase. Our fourth quarter performance was primarily driven by increased crude oil and NGL throughput in the Delaware Basin, the contribution of 2.5 months of produced water volumes from the Aris acquisition and reduced operation and maintenance expense from legacy WES's assets, which excludes the impact of Aris. The Delaware Basin remained our primary growth engine during the quarter with crude oil and NGL volumes rebounding as more wells came online and produced water volumes increased driven by the Aris acquisition. However, this was mostly offset by lower natural gas volumes in the Delaware Basin, largely due to third-party curtailments tied to low Waha hub pricing throughout the quarter as well as expected volume declines in the Powder River Basin and lower crude oil and NGL volumes in the DJ Basin. Waha Hub pricing remains a persistent industry-wide challenge affecting producers and midstream providers. While WES's direct commodity price exposure to Waha is limited, some of our third-party producers are more directly tied to Waha pricing, which led to throughput curtailments throughout the fourth quarter. These curtailments have continued intermittently in the first quarter of this year and near-term Waha pricing remains volatile. We expect continued pricing pressure through at least the first half of 2026 which will likely impact Delaware Basin natural gas throughput over the next 2 quarters. However, we expect new egress coming into service in the second half of the year to begin alleviating some of this pricing pressure. With that said, our marketing team is actively working with our producing customers to identify more diversified near-term pricing exposure to maintain economic production as well as to secure longer-term solutions, including long-haul capacity to the Gulf Coast. For full year 2025, throughput increased across all 3 products and was driven by throughput records in both the Delaware and DJ Basins, which resulted in some of the highest levels of adjusted EBITDA and free cash flow in our partnership's history. Other key operational and financial milestones include the sanctioning of the Pathfinder Pipeline and the execution of long-term produced water gathering and disposal agreements, the completion of North Loving Train I, which was brought online ahead of schedule and under budget in the first quarter and expanded our West Texas complex processing capacity by 250 million cubic feet per day to approximately 2.2 billion cubic feet per day. The sanctioning of North Loving Train II, which is still expected to commence operations early in the second quarter of 2027, the acquisition of Aris Water Solutions, which materially increased our produced water solutions capabilities, established a more substantial presence in New Mexico and provided a much stronger foothold in the produced water gathering and disposal, recycling and treating for beneficial use businesses. A 4% year-over-year increase in the distribution, which allowed WES to maintain a strong capital return profile and leading total capital return yield and maintaining our strong balance sheet with net leverage around 3x throughout 2025, including the financing of the Aris acquisition. Focusing specifically on the Aris acquisition, integration has progressed exceptionally well and is ahead of schedule and mostly complete. The acquisition has strengthened our commercial organization, expanded our capabilities and increased direct engagement from our producing customers now that the platform has been fully brought under the WES umbrella. WES now has one of the largest and most integrated water footprints in the Delaware Basin with the ability to provide all of today's water solutions, including freshwater, recycling, gathering, long-haul transportation and disposal as well as a leading position in the emerging beneficial reuse treatment technology business. We have also achieved $40 million of targeted cost synergies and approximately 85% of those savings should be realized by the end of the first quarter, with the remainder by year-end 2026 as legacy contract and license terms expire. To date, we have completed several major integration milestones including the full consolidation of ERP and purchasing systems, the consolidation of operations and project management systems, vendor contract harmonization and the complete integration of IT and HR systems, which includes the migration to WES's payroll and benefit plans. I would like to extend my sincere appreciation to all teams across both WES and Aris. This was an extremely complex undertaking, and our teams rose to the challenge with tremendous professionalism and dedication. In addition to the successful integration of Aris and the associated cost savings, we made substantial progress enacting process efficiency improvements across the organization under our multiyear cost reduction initiatives. Kristen will provide more details later, but when excluding the Aris acquisition impact, we achieved 3 consecutive quarters of declining operations and maintenance expense in 2025. In fact, when excluding mostly reimbursable utility costs and the Aris acquisition impact, operations and maintenance expense decreased by more than $100 million when annualizing the first quarter of 2025 relative to the fourth quarter of 2025. Additionally, excluding acquisition-related expenses and noncash equity-based compensation, 2025 general and administrative expense would have been flat year-over-year even after strategically retaining select personnel and functions from Aris, like beneficial reuse and commercial operations and taking routine annual compensation growth into account. Our engineering and construction team has also reevaluated certain facility designs, which will lower a portion of our expansion capital outlay in 2026 and beyond. This demonstrates the continued commitment from all teams to lower costs while pursuing our growth mandate and maintaining operational excellence. You will continue to see the benefits of our cost reduction efforts throughout this year as our teams fully execute on already identified initiatives and advance the next set of opportunities. As the legacy WES and Aris operations, engineering and construction teams continue to integrate, we expect to unlock additional efficiencies beyond the previously communicated $40 million of targeted synergies. The teams have already identified several incremental opportunities across both produced water systems, and we will continue evaluating and prioritizing these throughout the first half of 2026. With that, I'll turn the call over to our Chief Operating Officer, Danny Holderman, to discuss our operational performance in the fourth quarter.

Thank you, Oscar, and good morning, everyone. Our fourth quarter natural gas throughput decreased by 4% on a sequential quarter basis as a result of lower volumes from the Delaware Basin due to certain customers curtailing volumes in response to low Waha Hub pricing and lower volumes from the Powder River Basin. These decreases were partially offset by record throughput from the DJ Basin. Our fourth quarter crude oil and NGLs throughput decreased slightly on a sequential quarter basis, primarily due to decreased throughput from the DJ Basin, which was mostly offset by increased throughput from the Delaware Basin as expected wells came online in the fourth quarter. Our fourth quarter produced water throughput increased 121% on a sequential quarter basis as a result of 2.5 months contribution from the Aris acquisition. Our fourth quarter per Mcf adjusted gross margin for our natural gas assets decreased by $0.01 compared to the prior quarter, mostly due to contract mix associated with Delaware Basin volumes and lower overall throughput from the basin. Going forward, we expect our first quarter per Mcf adjusted gross margin to decline modestly, and we now expect our average natural gas adjusted gross margin to be approximately $1.22 per Mcf in 2026, driven mostly by a change in contract mix in the Delaware Basin and lower overall commodity pricing. Our fourth quarter per barrel adjusted gross margin for our crude oil and NGLs assets decreased by $0.33 compared to the prior quarter, mostly due to an unfavorable revenue recognition cumulative adjustment recorded in the fourth quarter associated with lower cost of service rates at our DJ Basin oil system and South Texas system. Going forward, we expect our first quarter per barrel adjusted gross margin to range between $3.05 and $3.10 and our average crude oil and NGLs adjusted gross margin to range between $3.10 and $3.15 per barrel in 2026. Our fourth quarter per barrel adjusted gross margin for our produced water assets decreased $0.11 compared to the prior quarter, driven by 2.5 months contribution from the Aris acquisition. We expect our first quarter per barrel adjusted gross margin to increase slightly and our average produced water adjusted gross margin to be approximately $0.85 per barrel in 2026 due to increased throughput expectations and associated contract mix. Turning to our full year results. For the second consecutive year, average throughput across all 3 products increased year-over-year, adjusting for the sale of several noncore assets that closed in the first half of 2024. For full year 2025, natural gas throughput averaged 5.2 billion cubic feet per day, representing a 4% year-over-year increase, in line with our expectations of mid-single digits growth. For full year 2025, crude oil and NGLs throughput averaged 514,000 barrels per day, representing a 1% year-over-year increase, in line with our expectations of low single digits growth. Full year 2025 produced water throughput averaged 1.6 million barrels per day, an increase of 40% compared to full year 2024, driven by 2.5 months contribution from the Aris acquisition. Produced water throughput from WES' legacy assets averaged 1.2 million barrels per day, representing a 7% year-over-year increase and in line with our original expectations of mid-single-digit growth. Turning our attention to 2026. We expect that most of our throughput growth will occur in the Delaware Basin and will be driven by the Aris acquisition. As Oscar discussed, due to lower overall customer activity levels across our asset base, we now expect our growth rates for crude oil and NGLs and natural gas in the Delaware Basin to moderate to low to mid-single digit average year-over-year growth in 2026. Overall throughput decreases in the DJ and Powder River Basins are now expected to result in portfolio-wide average crude oil and NGLs throughput to decline by low to mid-single digits and natural gas throughput to remain relatively flat year-over-year. For produced water, we estimate that the throughput will increase by over 80% year-over-year, driven by the Aris acquisition. More specifically, in the Delaware Basin, even though we expect the number of rigs to decline year-over-year and the resulting number of wells that we expect to come to market to decrease by a little more than 1/3, we still anticipate throughput growth mostly due to drilling efficiencies that continue to be achieved by our producing customers. As we mentioned on our third quarter call, we expect a more challenging environment in the DJ Basin that should result in average year-over-year throughput declining for both natural gas and crude oil and NGLs in the mid- to high single digits range as we expect the overall number of wells that come to market to decline. With that said, we expect natural gas throughput to be supported by steady onload activity from Phillips 66. We also expect Oxy's Bronco CAP development to offset basin-wide crude oil and NGLs throughput declines with volumes that are expected to come to market in the second quarter of 2026. Once we begin to see results from the initial production of the Bronco CAP, we will be in a better position to provide a clearer view of year-over-year trends in the basin in 2026 relative to 2025. Also, as previously discussed, we expect average year-over-year throughput for natural gas in the Powder River Basin to decline in the range of 10% to 15% based on the most recent producer forecast. The Powder River Basin tends to be more commodity price sensitive, but several of our producing customers have indicated the return of rigs to the basin in 2027. We will remain in close contact with our producing customers and continue monitoring the commodity price environment before making any decisions to allocate additional growth capital back into the Powder River Basin. Finally, we expect average natural gas throughput for our other assets to increase in the mid-single digits range year-over-year. This is mostly due to a full year's contribution from Williams Mountain West Pipeline expansion, the tie-in of Kinder Morgan's Altamont pipeline into our Chipita processing plant in Utah in early 2025 and steady throughput levels at our Versad plant in South Texas. With that, I will turn the call over to Kristen to discuss our financial performance during the quarter.

Thank you, Danny, and good morning, everyone. During the fourth quarter, we generated net income attributable to limited partners of $187 million and adjusted EBITDA of $636 million. Our net income was negatively impacted by $120 million of transaction costs from the Aris acquisition that were added back to adjusted EBITDA for comparability purposes and due to the onetime nature of those costs. Relative to the third quarter, our adjusted gross margin increased by $60 million. This was primarily driven by the incremental gross margin contributed from the Aris acquisition, which was partially offset by the recording of approximately $30 million of unfavorable noncash revenue recognition cumulative adjustments associated with redetermined cost of service rates on certain contracts associated with our assets in South Texas and at our DJ Basin oil system. In fact, without these fourth quarter adjustments, we would have recorded adjusted EBITDA of $665 million, a 5% increase relative to the prior quarter. Our operation and maintenance expense increased by $40 million or 19% sequentially, which was primarily driven by the inclusion of 2.5 months of Aris. When excluding Aris, our fourth quarter operation and maintenance expense decreased by 12% compared to the fourth quarter of the prior year, and our full year operation and maintenance expense decreased by 2% on average year-over-year, demonstrating the success of our cost reduction plan that we commenced in the second quarter of 2025. In fact, excluding Aris and utility costs, the majority of which are reimbursed through producer contracts, operation and maintenance expense decreased by more than $100 million from the first quarter to the fourth quarter of 2025 based on the difference between the first and fourth quarter annualized run rates. As we transition into 2026, we estimate further year-over-year reductions in operation and maintenance expense related to our legacy asset base, acknowledging the normal seasonality we typically see in quarterly spend. Going forward and including the full year's contribution from Aris, we expect our operation and maintenance expense to increase by approximately 10% to 15% on average year-over-year. This is significantly below the combined company's pro forma operation and maintenance expense, reflecting the realization of identified cost reductions and additional efficiencies we continue to capture. On a reported basis, our general and administrative expense increased quarter-over-quarter, primarily due to transaction costs associated with the Aris acquisition. When excluding those costs, the modest quarterly increase mostly pertained to higher personnel costs. Excluding acquisition-related costs, 2025 cash G&A expense would have been approximately $235 million, essentially flat compared to 2024, even after taking into account the increased size of the business and strategically retaining select personnel and functions from Aris, like beneficial reuse and commercial operations. Going forward, we expect our 2026 cash, general and administrative expense to again remain flat year-over-year due to continued cost reduction initiatives even after accounting for a full year of the retained functions from Aris and accounting for routine annual compensation increases. Turning to cash flow. Our fourth quarter cash flow from operating activities totaled $558 million, generating free cash flow of $341 million. Free cash flow after our third quarter 2025 distribution payment in November was a use of cash of approximately $39 million. Distributable cash flow in the fourth quarter was approximately $527 million compared to $547 million in the prior quarter. In January, we declared a distribution of $0.91 per unit, which is consistent with our prior quarter distribution that was paid on February 14 to unitholders of record as of February 3. Turning to our full year results. We recorded $1.15 billion of net income attributable to limited partners, generating record adjusted EBITDA of $2.48 billion, exceeding the midpoint of our 2025 adjusted EBITDA guidance range of $2.35 billion to $2.55 billion. Our record adjusted EBITDA performance was primarily driven by increased throughput across all 3 products, several quarters of record throughput from the Delaware and DJ Basins, successful cost reduction initiatives and 2.5 months of contribution from the Aris acquisition in the fourth quarter. This growth positioned WES to deliver record cash flow from operations of approximately $2.22 billion in 2025. Our capital expenditures totaled $722 million, within our 2025 guidance range of $625 million to $775 million and consisted of capital largely associated with the construction of both North Loving Train I and II, the Pathfinder produced water pipeline and associated systems and other expansion projects to support the growing needs of our customers, primarily in the Delaware Basin and in our other core operating basins, but to a lesser extent. We also generated record free cash flow that totaled $1.53 billion in 2025, exceeding the high end of our guidance range of $1.275 billion to $1.475 billion. This was primarily driven by our strong adjusted EBITDA performance, diligent working capital management and capital expenditures coming closer to the midpoint of the guidance range, less than our most recent expectations from the third quarter. Finally, WES declared distributions that totaled $3.64 per unit for 2025, including our recent fourth quarter distribution of $0.91 per unit. Distributions paid within calendar year 2025 were in line with our full year distribution guidance of $3.61 per unit. Turning to our 2026 financial guidance and taking producer forecast into account, we expect our adjusted EBITDA to range between $2.5 billion to $2.7 billion for the year, implying a midpoint of $2.6 billion, which represents growth of approximately 5% year-over-year at the midpoint. We expect that the Delaware Basin will remain the primary driver of throughput growth, especially considering the full year's contribution from the Aris acquisition and will help offset expected throughput declines in the DJ and Powder River Basins. Our range also includes continued cost reduction initiatives and first quarter winter storm impacts of approximately $10 million to $20 million. We now expect our 2026 capital expenditures to range between $850 million and $1 billion, implying a midpoint of $925 million, which is significantly less than our previous estimate from the third quarter of at least $1.1 billion. Due to the shifting commodity price environment and recent changes in producers' forecast, we have remained disciplined and reduced our expansion-oriented capital expectations for the year. Approximately half of our expected 2026 capital program is directed towards the construction of the Pathfinder produced water pipeline and associated systems and North Loving II, both of which are still expected to come online in the first and second quarters of 2027, respectively. Our actions also demonstrate our ability to materially reduce the remainder of our expansion-oriented capital expenditure program when needed, thereby limiting the impact on free cash flow. As we enter a year with elevated expansion capital spending, we are also providing distributable cash flow or DCF guidance, which we expect will range between $1.85 billion to $2.05 billion in 2026, implying a midpoint of $1.95 billion. On a per unit basis, we expect DCF to range between $4.59 and $5.08 per unit. While we continue to believe that free cash flow is a meaningful indicator of the partnership's financial strength, DCF also provides investors with an additional measure of our capacity to fund the distribution and a substantial portion of our expansion capital program. As such, we will continue to provide both metrics going forward, and we estimate that our 2026 free cash flow will range between $900 million and $1.1 billion, implying a midpoint of $1 billion. Turning to the distribution. We intend to recommend a distribution increase of $0.02 per unit starting with our first quarter distribution to be paid in May. And as such, we are guiding to a full year distribution of at least $3.70 per unit, which includes distributions to be paid within calendar year 2026. This represents an approximate 3% increase compared to our prior year's annual distribution of at least $3.61 per unit, and the distribution increase will equate to approximately $3.72 on an annualized basis. Going forward, we will continue to target mid- to low single-digits annual percentage adjusted EBITDA growth, but we will most likely pursue a rate of growth slightly less for the distribution in order to increase distribution coverage naturally over time. With that, I will now turn the call over to Oscar for closing comments.

Thanks, Kristen. In closing, our 2025 achievements, which included organic growth, accretive M&A, meaningful efficiency gains and cost reductions and constructive contract renegotiations, all strengthen our operating leverage and reinforce the durability of our business. Our performance reflects the strength and resilience of our diversified asset base, the dedication of our teams, the execution of our strategic growth plan and our commitment to disciplined capital allocation and operational excellence. Despite near-term activity shifts, our long-term strategy of mid- to low single-digit growth remains firmly intact supported by producers' development plans and the depth of undrilled inventory on acreage that we service. In short, our strategy hasn't changed. The Aris acquisition will meaningfully contribute to 2026 results. Our reduced cost structure will inure to our benefit. Our balance sheet remains a source of strength and issuing equity for a portion of the Aris consideration preserves the flexibility needed to continue pursuing value-accretive opportunities and creative commercial solutions. With an expanded footprint in New Mexico, we now service some of the most economically attractive acreage in the Delaware Basin, and we will continue to see this basin grow within our portfolio, while the DJ Basin continues to generate strong free cash flow. Additionally, as natural gas demand rises, particularly to meet growing power generation and LNG demand, we expect to call on natural gas production from basins beyond the Permian and Haynesville, which should result in increased capital allocation and throughput growth in the Powder River Basin in the years ahead. WES's leading position as the number one gatherer and processor in the basin, in combination with a large inventory of undrilled locations, all provide a strong foundation for future throughput growth and success. Combined with the progress we have made on cost reductions, WES is a leaner, more resilient organization and is well positioned to capture operational leverage as activity recovers. With that said, I am confident in our ability to deliver sustainable value for our stakeholders over time, and I look forward to another year of growth and operational success. I would also like to thank the entire WES workforce for all their continued hard work and dedication to our partnership, which enabled us to achieve landmark accomplishments in 2025. I look forward to seeing what we can achieve in 2026 and updating our stakeholders on our progress toward our goals on our first quarter call in May. With that, we will open up the line for questions.

Your first question comes from the line of Gabe Moreen with Mizuho.

I have a quick question regarding the cost of service restructurings, your entrance into the water sector, your current balance sheet, and how you are approaching mergers and acquisitions and inorganic growth at this time.

Thanks, Gabe. That's an interesting question, and I appreciate it. First of all, nothing has changed. As I mentioned in our prepared remarks, our strategy remains the same, including our approach to M&A. Our capital deployment strategy is clear and focused. We only invest capital, whether through organic or inorganic means, to sustain or grow our distribution. We demonstrated that discipline last year, and it will continue going forward. I'm a little frustrated that there seems to be some doubt about this due to market conditions. Regarding M&A, we prefer bolt-on opportunities where synergies exist, aligning with our assets and geographical presence, and we have a valid reason and ability to own these assets. As a relatively new CEO, I've connected with nearly every CEO in this sector, both private and public. If anyone wants to meet for coffee and share their story, they are welcome. We have a clear strategy for growing the business. I hope you’ll agree that the Aris acquisition was executed in a disciplined manner. We faced some criticism for issuing equity in that deal since it was a bolt-on, but if you look at the last 16 months, everything came together well. We managed to reclaim 15.3 million units of the 26.6 million issued due to contract renegotiations that afforded us flexibility. We will continue to execute. Looking back a year, we were also clear in updating our strategy and for the first time provided long-term growth guidance. We are not aiming for the rapid growth rates like NVIDIA; instead, we are targeting around 5% growth annually, with some minor variations over the long term. I believe you can see our setup for 2026, despite some headwinds from customer drilling outlooks this year, indicates that our model holds strong. We are positioned to deliver similarly this year, and with our organic projects like Pathfinder and North Loving II, we are gearing up for an excellent 2027. To emphasize, as we establish visibility for consistent growth over time, the two major organic projects prepare us well for 2027. The Aris acquisition has provided us with a clear visibility runway for 2 to 3 years, supporting our growth as we expect the water segment to grow faster than gas, which in turn will likely outpace oil. We have a solid runway ahead. There is no need to alter our strategy regarding capital deployment, and we will remain disciplined in that regard. Lastly, I want to clarify that we will not use this call to engage in unfounded speculation or rumors. I hope that addresses your concern, and I am happy to answer any specific questions regarding our perspective on the M&A market or any shifts in our approach.

Very comprehensive. And maybe if I can just pivot to 2 follow-ups around, one is Waha. I think you mentioned sort of trying to ameliorate some of the negative pricing impacts. Can you maybe just elaborate on that a little bit more? And would that also imply down the line that maybe you feel WES needs to participate in some of the egress solutions coming out of the basins for commercial reasons? And then just wondering if I can get an update in terms of further commercialization on Pathfinder with additional third-party interest.

Yes, those are perfect. Thank you, Gabe. Regarding the Waha situation, I believe we align with the market on the perception that the upcoming egress in the second half of the year and beyond will significantly help reduce some of the volatility in Waha pricing. Most of our customers are large, often public integrated oil companies or major independents, and many have found ways to manage by bypassing or accessing other pricing hubs. Some companies still have direct exposure to Waha, which is where we've seen production shut-ins and volatility. We are optimistic that the Waha solution in the second half will benefit everyone in the basin, as it will reduce uncertainty for those with exposure. We are engaged with customers who have substantial exposure to develop commercial solutions, enabling them to commit to downstream options they might be hesitant to pursue independently. We aim to aggregate the right services to support these commitments. We are also planning for various backup strategies for our customers over the next five years to ensure they are prepared regardless of the egress situation. Regarding Pathfinder, it's been intriguing. Following the Aris transaction, our customer conversations have shifted due to our expanded footprint and comprehensive solutions for water management, whether recycling, long-haul transport, or disposal. In the long term, we believe we are positioned as a leader in water treatment and desalination, which we anticipate will become increasingly important. This evolving dynamic has changed discussions, and with Pathfinder being the first long-haul project to complete, interest has surged in integrated solutions across New Mexico and Texas. Producers are getting more specific about where they want to dispose of water, and we can provide clarity in that area. We are also seeing strong commitments to the pipeline from both our customers and some competitors, which we need to manage effectively. The interest in this project is robust. From a capital perspective, we’re excited about the commercial transaction we completed last year, enhancing our access to land and SWD opportunities. This has allowed us to optimize the Pathfinder project and reduce its costs significantly. Even with the existing contracts we have, we expect the returns from this project to improve. There is noticeably more interest in the pipeline compared to the last few months.

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

Just wanted to dive into the water side, maybe a little bit more, but thank you for all that color. I was wondering, you talked about for the business, low to mid-single-digit EBITDA growth. But if you parsed out the water side, what would that look like?

Probably the lower end, right? So in terms of the core, like that part of the business, long-term growth, I mean, we're going to closely follow just general basin growth given our size and our footprint, and we're kind of in the core areas. So barring any sort of producer-specific movement, I would think the long-term growth when we sort of combine gas and oil assets is a couple of 2%, 3% sort of on average over time. We're going to have cyclicality and all that related to it. Again, gas will be higher than oil. But we do believe water is for at least the next several years is going to have a higher growth rate than both those businesses. The wildcard, of course, and I think what you're seeing in the general exuberance of the market for infrastructure here in the last few weeks is sort of the realization that the gas pull demand is going to be real. And so that may change the dynamic, especially as we have sort of solutions for Waha and things like that. So if gas demand really does pick up meaningfully, there will be a producer response. So you might see gas do a little better than even we think in that sort of blended hydrocarbon throughput growth rate. But water will follow that along as well because you're going to get lots of water with that production, too. I don't know if that's your question, but I hope it helps.

That's helpful. Shifting focus, when we look at the entire industry, there's been considerable midstream consolidation over the years. I'm curious about your thoughts on how WES compares, especially since many competitors have grown significantly. Would it be beneficial for WES to expand further in order to compete more effectively with these larger entities, or do you believe that your current size is sufficient?

Yes, I apologize for the confusion. I believe we are at a good size, but we can always grow. With the consolidation among our customers and within the midstream sector, scale will continue to be important. One reason we will remain a leader in the water business is that we are ten times the size of our next significant competitor in this sector, which allows us to tackle projects that would challenge their capabilities. This principle applies across all the markets we operate in. Scale is certainly important, but we don't intend to get larger for the sake of it; we will continue to execute our growth strategy. Where we are limited, we don't compete. We are a gathering and processing company, so we aren't involved in long-haul pipeline activities. The types of projects that fit our expertise—like gathering systems, new compression facilities, gas processing plants, and potentially expanding into CO2 solutions—are all manageable at our current size. North Loving II is a great example. We indicated last summer that we were making a significant move on that plant. Instead of following our typical approach to build a portfolio of projects before commencing construction, we had sufficient insight into our customer needs and our processing capabilities, allowing us to start building the plant. If we finish on schedule, great; if we're slightly ahead of schedule, that’s fine too. Most of our projects range from $200 million to $300 million. Even on the water side, we believe a $25 billion company can handle being a quarter or two early on some of these initiatives.

First question, now that you've modified the Permian G&P cost of service contract with Oxy, are there other contracts that you're interested in amending at all in the near term? Or is that not a priority at this point?

We currently don't have any remaining. As you may remember, about 8% or 9% of our revenues after the restructuring come from cost of service contracts, which is relatively small. Interestingly, the noncash adjustment for cost of service revenue recognition this year, totaling $29.5 million, is proportionate when compared to our $3.8 billion in revenues. It would be beneficial if we could simplify these contracts economically, but given their small size and the considerable effort required from all involved parties, it isn't a top priority right now. While everyone tends to want precise forecasts, these contracts are minor in the overall picture and don't significantly affect the key areas of our business, so they rank lower on our to-do list.

Got it. And then wanted to follow up on distribution coverage. So the strategic recontracting with Oxy cleaned up contracts and dealt with an overhang, but came with an upfront cash flow headwind. And now you're in a bit of a down cycle this year. So how are you thinking about distribution coverage right now? And how would you kind of characterize some of the levers you can use to improve upon your distribution coverage over time?

Yes, that's a valid point. We've been discussing distribution coverage for over a year, particularly regarding our plan to grow it slightly behind our EBITDA growth. The outlook we plan to present to the Board, with the $0.08 increase, reflects this expectation. We anticipate 5% EBITDA growth this year, translating to just over a 2% increase on a run-rate basis. This gives us a 300 basis point spread, which is usually larger than we would have. The market is a bit uncertain, but this demonstrates that our model works when viewed as a whole. Growth was slightly below our expectations, leading us to adjust our distribution growth down a bit. Our leverage remains low, and we feel confident about the future, allowing us to continue progressing. However, as you mentioned, we've also scaled back our capital expenditure from an initial guidance of over $1.1 billion to a midpoint of $925 million. This change highlights the flexibility of our model. The levers we have include how we deploy capital and manage CapEx, as well as our success in organic growth and potential additional growth avenues that may help bolster or enhance distribution coverage. Our actions in 2025 have positioned us for a resilient model moving forward, demonstrating that while we may encounter challenges, we expect to achieve a mid-single-digit growth rate on average.

Just wondering if you might be able to comment on sort of the commodity price backdrop here. Obviously, budgets set in a lower price environment than where they are today. So maybe if you could help walk us through how that dynamic might play out this year, if you want to parse it out by basin or operator type, that would be great.

Yes. Maybe I'll let Kristen just sort of reemphasize sort of the basin look in general. But I'd say I agree, right, the budget we've built and responding to are based on customer forecasts that we've got over the last many weeks. It does feel strange because it does feel like at least the sentiment at the moment, is more bullish than that. So there could be upside. But if you want to walk through sort of the basis in terms of.

Yes. When looking at each basin individually, the Powder River Basin is clearly the most sensitive to commodity prices. We mentioned in our script that we're anticipating a natural gas decline there of 10% to 15%. The actual outcome will depend on whether commodity prices increase slightly, which could result in more activity on that acreage. However, significant throughput would likely occur in the latter half or last quarter of the year if that happens. Regarding the DJ Basin, we've noted a decrease there as mentioned in our script. A key factor for the DJ is Oxy's entry into their Bronco CAP area, which is new for them. We'll see if their actual results meet their expectations, as we are basing our forecasts on their anticipated outcomes for that area. Moving on to the Delaware Basin, as we stated in the prepared remarks, some producers are particularly sensitive to Waha prices. Even if oil prices rise, the situation will largely hinge on Waha's conditions and whether producers reduce output rather than increase activity. The private operators in the Delaware Basin are particularly unpredictable because they can adjust their capital spending more rapidly. I hope that clarifies things.

No, that's great. Thanks so much, Kristen. Oscar, you mentioned, you made a couple of comments, I think in passing a couple of questions ago, maybe in Jeremy's question. But I heard you say something about expanding more into CO2. And I think I heard you also say you will have a solution for power at some point. I'm wondering if you could maybe elaborate on those 2 comments, if you don't mind.

Absolutely. About a year ago, we established a new ventures group to focus on our long-term strategy. While we're addressing short-term growth visibility, we also recognize the dynamic nature of the oil and gas industry. Water plays a key role for us, but we want to explore other opportunities as well. We've been investigating unconventional enhanced oil recovery (EOR) to ensure we're positioned to support and develop relevant infrastructure if it becomes significant in the shale sector over the coming years. Our relationship with Oxy, a leader in CO2, motivates us to look for ways to assist them and others in enhanced oil recovery initiatives. Our expertise in handling molecules, managing pressure, and valve operations aligns well with CO2 applications. We are optimistic about the potential growth in unconventional EOR, particularly in the Permian Basin and beyond. Concerning power, the Permian grid is well-known for its instability. With the increasing demand from data centers and other power consumers, we recognize our responsibility as a significant user of power. We have a collaborative relationship with Oxy, we can build transformers, and our compressor and turbine capabilities are closely related. Therefore, we see potential in the power sector for building, operating, and generating services. However, we will approach these opportunities as we did with water, ensuring that commercial models align with our midstream business and MLP structure. We need commercial contracts that support sustained growth and reliable distribution to meet our return requirements. We are keen on ventures like CO2 power as long as they align with our core competencies. The commercial aspect is crucial before pursuing speculative opportunities. One area where we are focusing is beneficial reuse, which presents scaling challenges rather than technological obstacles, but given our size, we can significantly impact and advance what Aris has initiated.

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

Great. I want to thank everybody for their interest. Thank our teams for really a great year in 2025, and we're really looking forward to continuing to deliver consistent results for our investors. So we look forward to seeing folks on our next call and on the investor conference service. Thanks again.

This concludes today's conference call. You may now disconnect.