1 Dividend Giant Yielding Over 9%, With Big Things Coming Manali Pradhan, The Motley FoolJuly 15, 2025 at 12:42 AM Key Points Western Midstream boasts robust financials and several longterm tailwinds being driven by rising energy demand.
- - - 1 Dividend Giant Yielding Over 9%, With Big Things Coming
Manali Pradhan, The Motley FoolJuly 15, 2025 at 12:42 AM
Key Points -
Western Midstream boasts robust financials and several long-term tailwinds being driven by rising energy demand.
The company's dividend is sustainable and well-covered by its cash flows.
With 95% of its natural gas contracts and 100% of its liquids contracts operating on a fee basis, the company's revenues are well cushioned against commodity price risk.
10 stocks we like better than Western Midstream Partners ›
Investing has not been relaxing so far in 2025. The U.S. stock market has been highly volatile, with many stocks experiencing sharp declines earlier in the year before recovering in recent months.
However, midstream infrastructure player Western Midstream Partners (NYSE: WES) stands out. At its current share price, the master limited partnership (MLP) offers a robust 9.4% yield that is supported by a defensive, durable, and inflation-resistant business model.
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A resilient business model
Western Midstream has a vast footprint across several prominent oil and gas basins, with gathering and processing systems, as well as over 14,000 miles of pipeline. It uses this infrastructure to process, transport, and store natural gas, crude oil, natural gas liquids (NGLs), and produced water (the chemically treated wastewater that is a byproduct of oil and natural gas extraction operations).
What makes Western Midstream appealing in the current turbulent economic environment is its predominantly fee-based business model, which has very low direct exposure to commodity prices. Roughly 95% of its natural gas contracts and 100% of its liquids contracts operate on a fee basis. The company has long-term contracts with clients, many of which include cost-of-service protections and/or minimum volume commitments. These deal structures help protect its cash flows from being impacted by inflation or volatile commodity prices.
Western Midstream also stands to benefit from global geopolitical tensions. Amid Russia's ongoing war with Ukraine, European Union countries have been gradually reducing their use of pipeline natural gas from Russia, replacing it with liquefied natural gas (LNG) exported from the U.S. Russia's share of the EU's pipeline gas imports has dropped from over 40% in 2021 to about 11% in 2024. And when measuring pipeline gas and LNG combined, Russia's share of the EU's imports in 2024 was below 19%. On the other hand, the U.S. contribution to the EU's LNG imports surged from 26% in 2021 to 70% in the first half of 2025.
Because Western Midstream's Permian basin and Rocky Mountain infrastructure is a critical part of the U.S. natural gas system, it has been a significant beneficiary of this tailwind. Additionally, with tensions high in the Middle East, the U.S. has remained a reliable energy supplier, which is turning out to be a significant advantage for Western Midstream.
Financial strength
Western Midstream's recent financial performance has been impressive. In the first quarter, it posted $594 million in adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) and $399 million in free cash flow. It ended the quarter with a cash balance of $2.4 billion and guided for free cash flows in the range of $1.275 billion to $1.475 billion for 2025. As such, it should have more than enough financial flexibility to maintain its dividend payouts in the coming quarters.
Western Midstream had a dividend coverage ratio of 1.6 times in the first quarter -- in other words, its net income was 60% more than the amount it distributed in dividends. The company has also increased its quarterly dividend distribution by 4% for 2025, highlighting management's confidence in its ability to return capital to shareholders. Furthermore, Western Midstream has a debt-to-EBITDA ratio of 3.07, which is lower than the average of 3.7 for the investment-grade midstream sector as of the end of 2024.
That kind of financial cushion matters, especially for investors who are counting on their dividend income to help them cover their immediate expenses.
Business expansion
Western Midstream commissioned its North Loving natural gas processing plant in the Delaware Basin in mid-February, completing it ahead of schedule and under budget. This plant has increased the company's natural gas processing capacity in West Texas by approximately 13% or 250 million cubic feet per day.
Western Midstream is also focusing on building its long-haul Pathfinder pipeline, which will transport 800,000 barrels per day of produced water for disposal. Although it is not expected to go into service until January 2027, Occidental Petroleum has already entered into a long-term produced-water agreement for the 42-mile, 30-inch steel pipeline, which significantly reduces Western Midstream's execution risk.
Attractive valuation
Trading at an enterprise-value-to-EBITDA ratio of 9.8, Western Midstream appears to be discounted compared to many of its peers. Despite its robust midstream assets, investors seem concerned about the company's business concentration risk. In 2024, client Occidental Petroleum accounted for nearly 60% of its total revenues. However, while that's not ideal, the market seems to be taking an exaggerated view of the risk that creates, as Occidental is financially healthy. Its interests are also well aligned with those of Western Midstream, considering that it holds a 44.8% ownership stake in the MLP.
Western Midstream offers a rare combination of 9% yield, a business that's protected against inflation, and exposure to a strong U.S. energy sector. Considering all that, the stock appears to be an attractive pick now.
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Manali Pradhan has no position in any of the stocks mentioned. The Motley Fool recommends Occidental Petroleum. The Motley Fool has a disclosure policy.
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