[source: U]

Volumes Resist Rig Reduction

Earnings per unit (EPU) shy of expectations

WES reported adjusted 1Q09 EPU of $0.30, slightly below both UBS and consensus estimate of $0.33 and $0.31, respectively. Lower than anticipated fixedprice processing margins on the recently acquired assets drove results lower than expected.


Volumes ride out rig count reduction, drop-down could be on the horizon

Despite the reduction in rig count, WES throughput volumes only decreased ~1% YoY as increases in the Haley, Fort Union and Helper systems offset reductions in East Texas and MIGC. We are encouraged that drilling weakness was already incorporated into guidance and mgmt does not expect volumes to decline more than ~6% from current levels. Importantly, mgmt reiterated plans of completing regular drop-downs (possibly twice a year); we would not be surprised to see another over the next several months.

Distribution run-rate remains at $1.20; attractive 1.25x coverage ratio
We continue to believe WES will proceed cautiously with distribution increases until there is more visibility surrounding the potential for longer term producer curtailment (due to low commodity prices). Of the gathering and processing focused MLPs, we believe that WES is the best positioned to weather any future turbulence due to: 1) APC’s demonstrated support (facilitating the Dec ’08 dropdown in a turbulent market); 2) strong distribution coverage; and 3) predominantly fixed-fee business model.


Valuation: Maintaining 12-month price target of $17.50
Our DDM derived price target of $17.50 implies a 7.9% yield on our 1Q10 target distribution run-rate of $1.38, versus the peer median of 8.7%.