Western Midstream Operating LP Downgraded To 'BB+', On CreditWatch Negative

  • Based on our revised commodity price assumptions, we now expect volumes to decline on Western Midstream Operating LP's (Western's) gathering and processing systems, leading to lower cash flows than previously expected. As a result, we no longer think Western will be able to deleverage as planned over the next few years.
  • At the same time, we downgraded Occidental Petroleum Corp. (OXY), which is Western's majority owner and main customer, to 'BB+' and placed it on CreditWatch with negative implications. The rating on Occidental caps the rating on Western in our analysis.
  • We are revising the issuer credit rating on Western to 'BB+' based on deterioration of its stand-alone credit profile and its relationship as a nonstrategic subsidiary to 'BB+'-rated OXY.
  • We are lowering the issue ratings on Western's senior secured debt to 'BB+', with a '3' recovery rating (expected recovery: 55%).
  • We are also placing Western on CreditWatch with negative implications, which reflects the CreditWatch negative placement of OXY, because a downgrade at OXY would trigger a downgrade at Western.
NEW YORK (S&P Global Ratings) March 26, 2020--S&P Global Ratings today took the rating actions listed above.
We now expect lower volumes on Western's gathering and processing systems in 2020 given the material decline in commodity prices in the first quarter of 2020. The company has limited direct exposure to commodity prices given its fixed-fee contract profile that is heavily weighted to demand charges. However, we expect OXY and other customers to revise drilling plans downward, which will lead to declining volumes in our base case over the next two years. As a result, we are now expecting EBITDA to decline year over year in 2020 and 2021, while leverage will remain in the 4.75x – 5x range over the next few years. Prior to the updated volume decline, we were expecting Western to grow its EBITDA and deleverage gradually, but we no longer think that's likely given the market stress.
The CreditWatch listing reflects the likelihood of a downgrade at its parent company, OXY. We could lower the ratings on OXY if it does not address its debt maturities in 2021. We expect to resolve the CreditWatch placement of both companies toward the end of this year.
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