The best relationships are those that benefit both parties: peanut butter and jelly, salt and pepper, Simon & Garfunkel, Martin and Lewis and Batman and Robin.
The midstream equivalent is Anadarko Petroleum Corp. and Western Gas Partners LP. The successful match occurred in 2006 when Anadarko Petroleum purchased Western Gas Resources Inc. The transaction, in conjunction with Anadarko’s simultaneous acquisition of Kerr-McGee Corp., provided Anadarko with the initial assets that it contributed to Western Gas Partners in 2008. Since then, Western Gas Partners has enabled Anadarko to enhance the value of its midstream portfolio, while also providing Western Gas with the perfect customer.
“With Western Gas’ ability to fund Anadarko with midstream capital, Anadarko has additional capital it can dedicate to its upstream resource development plans, which have significant value for Anadarko shareholders,”
Don Sinclair, president and CEO of Western Gas Partners, told Midstream Business. “The ability of Anadarko to contribute assets to Western Gas while retaining operational control is a huge benefit to Anadarko. They can be confident that the midstream infrastructure needed to get their product to market is being built with a focus on asset run times, safety and in-service dates. The relationship has generated tremendous value for both parties from both a financial and midstream services perspective.”
This service benefit was particularly evident last year, when Anadarko was able to market all of its production out of the Denver-Julesburg (DJ) Basin, home to its premier U.S. onshore asset, the Wattenberg Field, while other producers in the basin faced issues and delays.
“Midstream companies generally provide high-value services, but in our case, that value is enhanced by the close relationship and coordination between Anadarko and Western Gas,” Sinclair said.
Mutually beneficial relationship
Western Gas Partners, which went public in May 2008, was formed by Anadarko to acquire, own, develop and
operate midstream assets located in East, West and South Texas, the Rockies, north-central Pennsylvania and the Midcontinent. These assets include gathering, processing, compression, treating and pipeline systems that move natural gas, condensate, NGL and crude oil for Anadarko and third-party customers.
The relationship isn’t just a one-way street. Anadarko’s role as both a sponsor and a customer provides Western Gas with the ability to steadily grow while also maintaining a strong financial profile. Western Gas can acquire assets from Anadarko to maintain its growth profile, with both parties efficiently structuring the transaction in a way that maximizes value for both sides. This flexibility is helping Western Gas weather the current downturn in commodity prices.
For example, Western Gas acquired Anadarko’s 50% interest in its Delaware Basin joint venture (JV) gathering system in March. No consideration was paid at the time of the closing, but Western Gas will make a future payment on March 31, 2020, equal to eight times the average of the asset’s 2018 and 2019 EBITDA, less capital expenditures incurred from the closing date through Feb. 29, 2020. It is currently estimated that the final payment will be around $280 million.
On the conference call announcing the transaction, Sinclair noted, “The financing of the acquisition reflects the fact that the JV is an early-stage asset that will require significant capital spending over the next few years. With the support of Anadarko, we have structured a fair and reasonable transaction for an early-stage asset that is immediately accretive to Western Gas.”
The acquisition is expected to add between $15 million to $25 million to Western Gas’ 2015 EBITDA, with further growth over the next decade as drilling economics improve and producers build efficiencies into their development programs.
The assets are located in Loving, Ward, Winkler and Reeves counties, Texas, are 100% fee-based and will complement Western Gas’ $1.5 billion acquisition of Nuevo Midstream LLC, which was completed in November 2014. The Nuevo Midstream assets included a 300 million cubic feet per day (MMcf/d) cryogenic processing complex with an additional 400 MMcf/d of processing capacity scheduled to be inservice later this year, 275 miles of gathering pipeline, 1,800 gallons per minute of amine treating capacity and four compressor stations.
Using past experience
“Our objective is to have all of our Delaware Basin assets operate as one complex, which will allow us to create more commercial opportunities, provide better services to our producers and capture efficiencies associated with the operations of such a substantial footprint,” he said during the conference call.
If West Texas Intermediate crude prices increase above $65 per barrel, Western Gas anticipates basin-wide activity will pick up. According to Sinclair, Western Gas’ operating experience in the DJ Basin serves as a template for how an integrated complex efficiently serves robust drilling activity.
“We’ve been able to build a tremendous footprint in the DJ Basin by combining assets, and we think that model
will carry over well to the Delaware Basin. The Delaware Basin JV gathering system is a solid asset supported by a 10-year cost-of-service contract with Anadarko, which targets an 18% rate of return over the life of the agreement. The integration of that system with the former Nuevo assets, which is already underway, will enhance our ability to gather both Anadarko and third-party gas,” he said.
“Our strategy hasn’t really changed with the downturn in crude prices. Western Gas’ strategy from the very beginning has been to provide quality midstream services to all producers in our operating areas, and to provide our unitholders with steady, predictable distribution growth,” Sinclair said.
Distribution increase
For 2015,Western Gas’ objective is to increase distributions by a minimum of 15% while maintaining its investment-grade rating. On its first-quarter earnings call, the company noted that it believed it could achieve this distribution growth without an additional acquisition in 2015.
“When we told the market we would focus on distribution growth in 2015, our objective was to give investors confidence in our model and our ability to continue to grow. Like any MLP, access to capital is critical for us. In the past, during those periods when access to the capital markets was limited, we were fortunate that Anadarko helped bridge those liquidity gaps. In today’s market, we believe that our ability to show all our stakeholders that our model has delivered consistent results across multiple cycles will enable us to access the capital markets as needed,” Sinclair said.
Western Gas grows both organically and through acquisitions. According to Sinclair, the most important variable in forecasting its 2015 organic growth is the number of wells in an operating area that are being drilled, but not completed. If the company targets growth that is above what it feels the existing portfolio can provide on its own, then it looks to acquisitions as an additional means of growth. According to Sinclair, Western Gas continues to be focused on strategic acquisitions from Anadarko and third parties.
“We don’t just evaluate assets that are located in prolific areas. Quality assets that have contracts with long-term value supporting them are attractive to us even if they aren’t located in the most active plays,” he said. In addition, Western Gas’ strong liquidity position, support from Anadarko and access to capital mean that it has the ability to execute larger deals, as shown by the Nuevo acquisition.
Eagle Ford, Marcellus assets
Anadarko’s midstream asset portfolio includes facilities and pipelines in the Eagle Ford and Marcellus shales, as well as additional assets in the DJ and Delaware basins. The Anadarko midstream portfolio, which is often considered as a source of potential future Western Gas acquisitions, continues to grow as a result of the capital Anadarko invests as well as Anadarko’s occasional acquisition of additional interests in midstream projects. One recent example is Anadarko’s acquisition of a 20% interest in the 550-mile Saddlehorn Pipeline in March, which will transport up to 400,000 barrels per day of crude from the DJ Basin to the storage hub in Cushing, Okla.
When it comes to the third-party mergers and acquisitions market, Sinclair said, “We’ll see how the year shakes out. How we look at it is unchanged from in the past. If there’s a third-party transaction out there that is strategic to us, that we think fits our model and makes sense for us to look at, we’re obviously going to pursue it.”
The diversity of its portfolio has enabled Western Gas to manage the downturn, along with the fact that the majority of its gross margin is either fee-based or hedged. Anadarko is the counterparty of all of the company’s fixed-price commodity swap agreements, further strengthening the strategic linkage between the two parties.
Meeting customer needs
In the seven years sinceWestern Gas’ IPO, there have been many changes in the marketplace, including two downturns, but through it all, the company has been able to continue its growth and remain strong. During the last downturn, in late 2008 and early 2009, Western Gas executives couldn’t have known how large a role West Texas would play in its future.
What they did know was that Anadarko was actively developing its onshore domestic resources. This meant that Western Gas would be called on to build midstream assets to support those resource plays.
While the company’s relationship with Anadarko plays a very important role in its success, Sinclair is quick to give recognition to its third-party customers. “Our objective is to build infrastructure and provide quality services, regardless of whether it’s for Anadarko or a third party. We work to meet their needs and to treat all of our customers the same,” he added. One of the keys to a productive relationship with third-party producers is an open dialogue to ensure that the producer understands Western Gas’ assets and its capabilities. At the same time, the company seeks to get a better understanding of its customers’ development strategies, so it can plan accordingly and have the right assets in place at the right time.

Looking forward
Sinclair said that the current downturn is wellhead driven, based on commodity supply and demand dynamics. “Things were dramatically different in 2008, when there was a significant diruption in the global financial system. This one feels different,” he said.
Outside of the acquisition market, growth will come from capital spending, including the completion of a second processing train at the Lancaster plant in the DJ Basin, where Anadarko has guaranteed 200 MMcf/d of the facility’s 300 MMcf/d capacity. Additional DJ Basin capital will also be directed toward well connections and the installation of more pipeline capacity and compression.
In the Delaware Basin, the company will continue to develop the fourth and fifth trains at its Ramsey processing complex, as well as add well connections, pipeline capacity and compression. Ramsey 4 is expected to come online in first-quarter 2016, with Ramsey 5 coming online later in 2016.
Despite the downturn in commodity prices, Western Gas believes that it has a strong growth profile and a solid inventory of organic growth projects. Both companies play important roles in each other’s growth and it would be wrong to consider them as anything other than true partners.

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