Co-authored by Treading Softly
It’s often said everything happens in cycles. There was a time when bell-bottom jeans were popular, then there was a time when they were completely out of fashion, and now they’ve worked their way back into the trend again.
The cyclical nature of human society and culture can be seen in a number of different areas — fashion being one of the easiest. Old ideas become new, then old again, and the cycle goes on. There’s no exception to this when it comes to hot topics within the geopolitical sphere. For a while it was extremely popular to be exceptionally green energy-focused. Then it became popular to be against this push. We then went through a time when everyone was for it again and now there’s significant support against it again. One thing I’ve learned is that there’s no need to try and dance with your portfolio regarding every change within the geopolitical sphere.
Energy is a hot topic once again in world affairs. After years of depressed market pricing, hydrocarbon exploration and production companies are currently sporting rich equity valuations and solid balance sheets. They’re in a strong position to repurchase shares and reward investors with growing dividends. E&P companies depend on midstream firms to ensure safe transportation, storage, and processing of their output. As such, midstream firms have seen significant valuation improvements in this post-pandemic economy with considerable global tensions.
Pipeline operators can easily pass on higher costs to customers each year through inflation escalators built into long-term contracts. Amidst soaring energy demand, there’s the potential for growth capital spending to creep higher, but companies are likely to remain focused on capital discipline and delivering free cash flow. Dividend increases and buybacks are high-focus areas for midstream firms to return capital to investors. A handful of companies have already announced or provided guidance for dividend increases, notably our favorite MLPs – Enterprise Products Partners (EPD) and Western Midstream Partners, LP (NYSE:WES), yielding 8.8%. Earlier this year, WES delivered a 52% distribution raise, and EPD recently announced a 5% YoY distribution raise to $0.525/share.
Let’s take a deeper look at WES today.
Note: WES is a Master Limited Partnership that issues a Schedule K-1 for tax purposes.
Buying with diamond hands
With highly defensive business models and generous shareholder returns, MLPs and midstream will continue their outperformance relative to broader energy in the near future. WES continues to sport a massive 8.8% distribution yield and cheap valuation.
WES is actively following EPD’s footsteps by divesting non-core assets, reducing debt, repurchasing units, and growing distributions while maintaining modest capex spend and generating FCF after distributions. Source

Q1 Investor Presentation
During Q1, WES reported record throughput in Natural Gas and Produced Water, with adjusted gross margins of $1.32/Mcf (up from $1.29) and $0.95/Bbl (up from $0.86), respectively. The partnership establishes long-term contracts with credit-worthy customers and reported a weighted average remaining life of over eight years in the Delaware Basin and over five years in the DJ Basin for each product.
WES is quite integrated with Occidental Petroleum (OXY) both from an ownership and operations perspective. OXY owns 49.9% of WES common units, and in Q1 2024, 31% of WES’ natural gas throughput, 89% of the crude oil and NGL throughput, and 77% of the produced water throughput were attributable to production owned or controlled by OXY, a Warren Buffett-backed credit-worthy E&P firm.
WES is using discounted fixed-income prices to its advantage by retiring its debt on the cheap. During Q1, WES repurchased $150 million in senior notes at an average of 96% of par and is on track toward satisfying its set criteria for an enhanced (special) distribution in FY 2025. One such criterion is to generate FCF in excess of distributions, which has been satisfied by the midstream operator during Q1. WES guides $1.05-1.25 billion in FCF for the fiscal year, exceeding the projected annual shareholder distribution. The second is the partnership’s goal to reduce leverage to a target ratio of 3x. We believe WES is well positioned to achieve that, having ended Q1 at a 3.3x level.

WES has had a fantastic year so far, but with an 8.8% yield, investment-grade balance sheet, and industry-leading leverage levels, we expect much more growth and valuation upside from this company.
Given its defensive qualities like fee-based multi-year contracts, the midstream business is expected to hold up better in a recession than other energy sectors. Midstream MLPs did well during the 2001 recession and held up better than broader energy and the S&P 500 during the Great Financial Crisis. If you’re bracing yourself for a deep recession, midstream energy’s predictable cash flows will provide much-needed defense.
Conclusion
There’s an old adage that a company only pays dividends when they have nothing better to do with the money. I wholeheartedly disagree with this viewpoint. Many companies desire to richly reward shareholders through some form of capital return or another. It could be through cash distributions or through buybacks to reduce the overall number of shares in existence and, therefore, reduce the number of holders of shares and try to raise the market price over time. Scarcity can then drive prices higher. We can see that WES is taking a twofold approach. Not only are they trying to pay out strong distributions for income, but they’re very focused on reducing the number of units that trade hands in the market.

Over the last five years, WES has been able to retire 16% of all of their outstanding units. They took strong advantage of their price drop in 2020 to eliminate a large swath of shares rapidly. The fewer units in existence, the more money per share exists to reward current holders. It’s the kind of company that I enjoy buying and not letting go.
When it comes to retirement, no-nonsense, straightforward income is a must. Having portfolio holdings that reward you through multiple avenues is terrific – something that should be sought after. You’re highly valuable, and the companies you own should treat you as such. That’s the beauty of my Income Method. That’s the beauty of income investing.
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