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Why Western Gas Is Likely to Meet Its Distribution Targets

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Sep. 26 2016, Updated 7:06 a.m. ET

Western Gas’s distributable cash flows

Western Gas Partners’ (WES) distributable cash flow for 2Q16 was $199.3 million compared to $211.7 million in the second quarter of 2015. That’s a YoY fall of 5.9%. This drove its distribution coverage lower. However, WES still has an impressive distribution coverage of 1.22x.

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Western Gas’s distributions

Western Gas Partners declared a distribution of $0.83 per share for 2Q16. This represents an 11.0% YoY increase compared to 2Q15 and a 1.8% sequential increase over 1Q16. WES’s general partner, Western Gas Equity Partners (WGP), has declared a quarterly distribution of $0.43 per share for 2Q16, which represents a 19% rise over 2Q15.

WES expects a distribution growth rate of 10% for 2016, while WGP’s 2016 distribution growth rate could be 19%–21%. WES will most likely meet its distribution growth target in 2016, given its strong distribution coverage, strong Delaware volumes, and more than 10% YoY distribution growth in the first two quarters of 2016.

Based on its recent distribution, WES is currently trading at a distribution yield of 7.1%. WES’s peers Antero Midstream Partners (AM) and EQT Midstream Partners (EQM) are trading at 4.6% and 4.7%, respectively.

Western Gas’s capital expenditure

In its 2Q16 earning release, Western Gas increased its 2016 capex (capital expenditure) guidance by $40 million to $490 million–$530 million compared to its previous guidance of $450 million–$490 million. The rise in capex is mainly due to increased drilling activity by its sponsor Anadarko Petroleum (APC) in the Delaware Basin and the signing of new third-party contracts in the region.

According to Donald Sinclair, WES’s CEO (chief executive officer), “They [Anadarko] have six rigs standing up. So that’s an activity level that we continue to put midstream gathering and compression infrastructure in for, as well as we’ve been successful in third-party side of the business and signed some new contracts out there. So along with those new contracts come CapEx.”

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