Will Distributions Continue to Flow for Western Midstream Partners?

Western Midstream Partners (NYSE: WES) gathers and processes oil and natural gas liquids and transports them via pipeline – primarily in west Texas, New Mexico and Colorado.

The company just announced a giant 52% increase in its distribution (partnerships pay distributions, not dividends). The quarterly distribution is now $0.875, which means the stock yields 9.9%.

Let’s see whether that big boost is sustainable.

Last year was not a great one for Western Midstream Partners. Free cash flow slid 24% to $926 million. It’s forecast to rebound to $1.16 billion this year, but that’d still be the second-lowest figure in the past five years.

And the picture gets even murkier…

In 2023, the company actually paid shareholders more than it took in. Shareholders received $978 million in distributions, while the company generated only $926 million in free cash flow. That comes out to a 106% payout ratio.

In other words, Western Midstream paid out $1.06 for every $1 it made in free cash flow.

This year, though, the payout ratio is forecast to drop to 89%, as the company is projected to pay $1.04 billion in distributions against $1.16 billion in free cash flow.

That 89% number would be back below my 100% threshold for partnerships, but it’s still close to the top of my comfort zone. Considering that the payout ratio exceeded 100% last year and could easily do so again if free cash flow comes in lower than expected, it’s hard to see how the company maintains this new elevated distribution.

Furthermore, management has shown a willingness to cut the payout. It sliced its distribution in half in 2020.

So we’ve got a recent distribution cut, declining free cash flow and an unsustainable payout ratio in 2023.

It may not happen in the next quarter or two, but I suspect we will see a distribution cut within the next 12 to 18 months.

Dividend Safety Rating: F

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