Western Midstream Partners, LP (WES) stock intrinsic value fair value estimate & owner earnings analysis

Western Midstream Partners (WES) is a pipeline and processing partnership. It gathers, compresses, treats, processes and transports natural gas; gathers, stabilizes and transports crude oil, condensate and natural gas liquids; and gathers, recycles, treats and disposes of the water that comes up with oil and gas. Its systems are in the Delaware Basin of West Texas and New Mexico, South Texas, the DJ Basin in Colorado, and Utah and Wyoming. It is paid mainly by volume, not commodity price: in 2025, 97% of its wellhead gas volume and all of its crude oil and produced-water volume were handled under fee-based contracts. The key fact about this business is Occidental. Production owned or controlled by Occidental accounted for 60% of 2025 revenue (91% of crude and NGL volume, 61% of produced water, 36% of gas). At year-end 2025 Occidental owned the general partner, a 2.2% general-partner interest and 39.7% of the limited-partner units. Occidental is both the largest customer and the controlling owner, so contract terms are negotiated between related parties. What the owners actually earn. We measure the cash the business produces for unitholders: operating cash flow, minus short-term working-capital swings, minus equity pay to employees, minus the capital spending needed to keep the systems running. We also take out the small shares that belong to the general partner and to the outside holders of the operating subsidiary. Two judgements matter here. First, we count most capital spending as upkeep: about $680-730 million a year in 2024-2025, close to depreciation of $650-711 million. Second, changes in other balance-sheet items added about $175 million a year to reported operating cash flow in 2024 and 2025. Most of that came from rising customer prepayments: deferred revenue went from $446 million at the end of 2023 to $767 million at the end of 2025. We treat that as timing, not earnings, and exclude it. On this basis owner earnings per unit were $2.66 in 2020, $2.92 in 2021, $3.25 in 2022, $2.41 in 2023, $3.15 in 2024 and $3.16 in 2025. We start from the median of 2020-2025, $3.03. That period includes the 2020 downturn and the weak 2023, and it is the first stretch in which the unit count and ownership look like today's. Earlier years are left out because the partnership was then a holding entity with a large outside minority interest in its operating subsidiary. First-quarter 2026 owner earnings per unit were about the same as a year earlier, so this level still holds. Recent changes. On October 15, 2025, WES bought Aris Water Solutions for 26.6 million new units and $415 million in cash, and it took on Aris's debt. The deal added about 830 miles of produced-water pipeline. Had it closed at the start of the year, 2025 revenue would have been $4.28 billion instead of the $3.84 billion reported. After year-end, WES and Occidental amended the Delaware Basin gas-gathering contract. Its cost-of-service fee structure was replaced with a fixed fee, and a new minimum-volume commitment was added through the end of 2027. In connection with the amendment and related agreements, Occidental transferred about 15.3 million WES units back to the partnership, which redeemed them on February 3, 2026. No cash changed hands; the redemption was recorded at $610 million. In the same quarter, deferred revenue rose by about $570 million. Any revenue later recognized from that balance is non-cash, and our method does not count it. We treat the Aris purchase and the unit exchange as roughly neutral per unit. That fits the first-quarter 2026 results but has not yet been shown over a full year. Base case ($38.79). Owner earnings stay at $3.03 per unit in 2026, with no growth. That is below 2025's +0.5%, because nothing dated in the filings points to faster growth this year. They then rise 2% in each of 2027 and 2028 as two projects already under construction start up: the 300 MMcf/d North Loving Train II processing plant (expected second quarter of 2027) and the Pathfinder pipeline, which adds water-disposal capacity (expected first quarter of 2027). After that they stay flat through year 10. Our reason for flat: contracted future revenue has been topped up over time ($6.63 billion at end-2021, $6.98 billion at end-2023, $6.59 billion at end-2025, $7.98 billion at March 31, 2026), and earnings per unit held in a $2.41-$3.25 range through a downturn. After year 10 we let earnings fade by 3% a year for 20 years and then stop. The pipes last, but their earnings depend on producers continuing to drill, and nothing in the filings proves that beyond a couple of decades. We credit no basin growth, market-share gains or new acquisitions. Bear case ($21.55). Earnings start at $2.55, roughly the average of the 2020 and 2023 lows, and hold there while the new Occidental volume commitment runs through 2027. From 2028 they fall 5% a year for 18 years, then stop. This reflects three named risks. First, contracted revenue falls from $1.17 billion in 2027 to $0.55 billion in 2030, and the Delaware gas contract now carries a fixed fee instead of a cost-of-service fee, so earnings rest more on Occidental's drilling decisions. Second, debt: $8.64 billion at year-end 2025, including $3.3 billion of notes due 2026-2030. About $2.2 billion of those carry 4.05%-4.75% coupons and may have to be refinanced nearer the 5.45%-6.15% coupons on the partnership's 2033-2035 notes. Third, the record of write-downs: nearly all goodwill written off in 2020, plus $204 million of other asset impairments that year. Bull case ($47.57). Earnings start from the 2024-2025 level of $3.16 and grow 3% a year for five years. That is below the roughly 3.5% a year achieved from 2020 to 2025, and it assumes a full year of Aris, both 2027 projects filling up and the new fixed-fee contract working out well. Earnings then stay flat to year 10 and decline 2% a year out to year 35. All values use a 6% discount rate. Interest is already paid out of the cash flows, so debt is not subtracted a second time. Its risk sits in the bear case instead. One caution: 2025 distributions of $1.43 billion were higher than our $1.29 billion estimate of total owner earnings. Cash on hand fell from $1.09 billion to $0.82 billion during 2025; the 2024 asset sales had raised about $795 million. We therefore do not rely on the current distribution rate lasting. What would make this wrong: Occidental cutting activity in the Delaware or DJ basins after 2027 by more than our bear case assumes; related-party contract changes that shift value from unitholders to Occidental; or refinancing costs well above the coupons on its 2033-2035 notes. On the other side, filling North Loving Train II and the Aris water network faster than assumed would push value toward the bull case.