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Analyzing Western Gas Partners’ Commodity Price Exposure

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WES’s direct commodity exposure

The earnings of both larger midstream companies like Energy Transfer Partners (ETP) and Enterprise Product Partners (EPD) as well as smaller ones like Western Gas Partners (WES) and Antero Midstream Partners (AM) do not have much direct commodity price exposure.

The correlation between WES’s stock price and crude oil (USO) resulted in a correlation coefficient of -0.18 in the last five years while natural gas (UNG) and WES have a correlation coefficient of 0.08 for the same period. However, the correlation between WES and natural gas and crude oil has increased to 0.74x for both companies during the last year, a period of rout in energy prices. A correlation coefficient close to one indicates a strong relation between two variables. However, WES should not have a strong correlation with crude oil and natural gas, considering its minimal direct commodity price exposure.

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WES’s indirect commodity exposure

Midstream companies are indirectly exposed to commodity prices through production levels. If crude oil and natural gas prices continue to stay low, upstream producers might cut their production, which could result in lower throughput volumes and lower earnings for these MLPs eventually. WES natural gas throughput volumes fell in the third quarter, driven mainly by the Dew/Pinnacle divestment and decreases in Marcellus and Uinta basins.

On the decline in 3Q natural gas throughput volumes, Don Sinclair, WES’s CEO, said in the 3Q15 earnings call that “we have seen declines in Marcellus. Marcellus is I think an area of longer-term interest for Anadarko. But at these price levels, it doesn’t compete for capital with DJ and Delaware. So you have seen rigs move away, same with the Winter Basin.” Anadarko Petroleum Corporation (APC) is WES’s sponsor. WES forms 0.62% of the PowerShares S&P International Developed Low Volatility Portfolio (IDLV).

For more such company overviews and indicator analyses on master limited partnerships, you can refer to our Master Limited Partnerships page.

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