During September, economic forecasters surveyed by Bloomberg lowered their estimated probability of a US recession within 12 months from 60% to 55%. But stocks declined anyway. The Alerian MLP Index was a standout, though, returning 3.24% in September and 9.76% from June 30 to September 30. One MLP I like is Western Midstream Partners, LP (WES), notes Marty Fridson, editor at Forbes/Fridson Income Securities.
The S&P 500 posted a total return of -4.76% in September and -3.26% in the third quarter. What rained on the stock market’s parade was a continued rise in interest rates. The Fed funds effective rate increased by a quarter-point to 5.33% during the quarter, while the 10-year Treasury yield jumped from 3.81% to 4.57%.
That trend produced negative returns in most income categories, including both investment grade and below investment grade bonds, closed-end funds, convertible bonds, preferreds, and REITs. Only MLPs bucked the trend. They were buoyed by an 8.6% gain in the Generic First Crude Oil, West Texas Intermediate contract in September—and a 28.5% advance for the quarter.
As for WES, it is an MLP and a 50.8% owned subsidiary of Occidental Petroleum (OXY), a major energy exploration company. Public unitholders own 49.2% of WES’s outstanding common units. WES owns, directly and indirectly, a 98% limited partner interest in Western Midstream Operating, LP (Midstream Operating). Although WES is not rated, Midstream Operating has senior debt ratings from Moody’s (Ba2), S&P (BBB-), and Fitch (BB+).
The partnership is engaged in the business of gathering, processing, and transporting natural gas, as well as the gathering, stabilizing, and transporting of condensate natural gas liquids and crude oil. WES’s core assets provide midstream services from two of the most active and productive basins in the United States – the Delaware Basin in West Texas and New Mexico and the DJ Basin in northeastern Colorado.
WES reported 2Q 2023 net income attributed to limited partners of $247.1 million or $0.64 per common unit, with 2Q 2023 adjusted EDITDA of $488.3 million and free cash flow of $340.1 million. Net income per common unit missed analysts’ estimates by a penny. Year-over-year revenue was down 17.9% on lower energy prices.
Distribution coverage remains solid. We recommend WES’s common units for medium- to high-risk taxable portfolios. Distributions are taxed on a variable, cost-effective basis. WES issues a K-1 to unitholders.
Recommended Action: Buy WES.
