Fitch Ratings has assigned a 'BBB-' rating to Western Gas
Partners, LP's (NYSE: WES) $500 million issuance of senior
unsecured notes due 2025. The Rating Outlook remains Positive.
The Positive Outlook reflects WES' relationship and credit
linkage with its ultimate sponsor, Anadarko Petroleum Corporation
(APC, rated 'BBB'/Stable Outlook by Fitch), as well as WES' stable
cash flow profile and relatively strong credit profile relative to
similarly rated peers.
WES credit quality has historically been tied closely to APC.
APC controls WES through its ownership and control of Western Gas
Equity Partners, LP (WGP), which owns WES' 2% general partner
interest, all of WES' incentive distribution rights, and a 34.7%
limited partner (LP) interest. APC also directly holds a 8.25% LP
interest in WES. Throughput and cash flow exposure to APC remain
significant and are largely under fixed-price and/or fee-based
contracts. In addition, APC provides financial support to WES
through its willingness to retain commodity price risk at APC
through fixed-price arrangements. As a result, WES has 99% of gross
margin tied to fixed-fee or fee-based arrangements, which provides
for significant earnings and cash flow stability.
KEY RATINGS DRIVERS
Relationship with Anadarko
WES benefits from its strategic and operational relationship
with APC. APC has a significant position in North American onshore
basins, which should benefit WES through allocation of APC
production volumes. WES and APC have swap agreements that mitigate
WES' commodity price exposure associated with percent-of-proceeds
and keep-whole volumes. APC also has minimum throughput and
production dedication arrangements with Wes on specific systems.
APC's inventory of midstream assets remains a significant advantage
for WES, and enables the company to be selective in capital
allocation with regard to acquisitions and organic growth
opportunities. In addition, APC retains a significant LP stake in
WES, through its ownership and control of WES' general partner,
Western Gas Equity Partners (WGP), giving APC a strong economic
incentive to effectively steward WES from a growth and cash flow
perspective.
Fee-based Contract Structure
WES has approximately 99% of margin tied to fixed-fee or
fee-based arrangements. This minimizes margin volatility and
provides earnings and cash flow stability. Volumetric risk is a
concern as lower throughput can be driven by reduced drilling
activity by producers in light of lower commodity prices in the
first half of 2015. However, in the near term WES is favorably
positioned to the extent that APC continues to focus on developing
its domestic resource base and increasing volumes connected to WES
systems.
Conservative Financial Policy
LTM debt to Adjusted EBITDA was 3.7x for the period ending March
31, 2015, essentially flat from the period ending Dec. 31, 2014.
Fitch notes that the size and timing of dropdowns from sponsors can
have a material effect on leverage numbers when using actual EBITDA
vs. pro forma numbers. Fitch takes these considerations into
account when evaluating credit quality on a forward-looking
basis.
Good Liquidity, Visibility on Distribution Increases
The company maintains a $1.2 billion credit facility, which
provides adequate liquidity in addition to funding growth in
between capital raises. Revolver availability was $567 million as
of March 31, 2015, but will increase after the anticipated revolver
pay down with proceeds from the $500 million senior notes issuance.
Management has publicly announced annual distribution growth
targets of 15% over the next few years, which is achievable given
expected dropdowns from APC and associated cash flow generation.
Distribution coverage has been around good over the past few
periods, with management retaining flexibility to fund growth and
maintain a consistent pace of distribution increases.
KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for the issuer
include:
--WTI oil price that trends up from $50/barrel in 2015 to
$60/barrel in 2016 and a long-term price of $75/barrel; and Henry
Hub gas that trends up from $3/mcf in 2015 to $3.25/mcf in 2016 and
a long-term price of $4.50/mcf consistent with Fitch's published
Base Case commodity price deck;
--Moderate revenue growth on existing assets through volume
growth;
--Balanced funding of projected growth capital spending with a
mix of debt and equity funding
RATING SENSITIVITIES
Positive: Future developments that may, individually or
collectively, lead to a positive rating action include:
--Debt/Adjusted EBITDA sustained at or below 3.5x, along with
continued diversification into third-party throughput volumes.
--A continuation of balanced growth funding;
In previous releases, Fitch has listed the upgrade of APC as a
potential positive rating trigger for WES. APC was upgraded to
'BBB' by Fitch on March 16, 2015. Upon the next full WES review,
Fitch will reevaluate financial support from APC, credit linkage to
APC, and the subsequent effects on WES credit quality.
Negative: Future developments that may, individually or
collectively, lead to a negative rating action include:
--Negative rating action at APC;
--Material unfavorable changes in sponsor support, contract mix,
or in hedging arrangements;
--Debt/Adjusted EBITDA sustained above 5.0x or distribution
coverage sustained below 1.0x.
The Rating Outlook is Positive.
Date of Relevant Rating Committee: July 28, 2014
Additional information is available at
'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology Including Short-Term Ratings and
Parent and Subsidiary Linkage' (May 28, 2014);
--'Fitch Oil and Gas Assumptions Summary Feb. 2015' (Feb. 11,
2015);
--'Full Cycle Costs Drop for North American E&Ps (Efficiency
Gains Show Up in 2014 Numbers)' (March 24, 2015);
--'High-Yield E&P Stress Test (Examining Exposure to the
Downturn)' (April 20, 2015);
--'Liquidity Review: Pipelines, Midstream and MLPs' (July 21,
2014);
--'Rating Pipelines, Midstream and MLPs - Sector Credit Factors'
(Jan. 13, 2014).
Related Research
Fitch Oil and Gas Assumptions Summary Feb 2015 [862009 -
11-FEB-2015]
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=862009
Full Cycle Costs Drop for North American E&Ps (Efficiency
Gains Show Up in 2014 Numbers) [863880 - 24-MAR-2015]
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=863880
High-Yield E&P Stress Test (Examining Exposure to the
Downturn) [864216 - 20-APR-2015]
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=864216
Liquidity Review: Pipelines, Midstream and MLPs [752807 -
21-JUL-2014]
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=752807
Rating Pipelines, Midstream and MLPs - Sector Credit Factors
[722082 - 13-JAN-2014]
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=722082
Additional Disclosures
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=985411
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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Fitch RatingsPrimary Analyst:Brad Bell, +1-312-368-3149Associate
DirectorFitch Ratings, Inc.70 W MadisonChicago, IL 60602orSecondary
Analyst:Peter Molica, +1-212-908-0288Senior DirectororCommittee
Chairperson:Michael L. Weaver, +1-312-368-3156Managing
DirectororMedia Relations:Alyssa Castelli, New York,
+1-212-908-0540alyssa.castelli@fitchratings.comElizabeth Fogerty,
New York, +1-212-908-0526elizabeth.fogerty@fitchratings.com