I’m a bit on a “favorites” streak lately, as I recently covered both my favorite stock in the software industry, an area I don’t really like, and my favorite stock in the Mag-7 group. These were ServiceNow (NOW) and Amazon (AMZN), respectively. 

ServiceNow stood out to me as a gem in an industry with massive disruption risks, while Amazon is a company I expect to win thanks to efficient AI implementation in areas like e-commerce, while benefiting from leadership in cloud computing and hosting services. 

Now, I give you a stock that gives me bittersweet feelings. On the one hand, it is my favorite stock in the midstream industry, which is the group of stocks that owns the pipelines and processing assets used by oil and gas producers. On the other hand, I do not own it, as it’s a Master Limited Partnership. Because I’m a non-American investor, dealing with K-1 forms is too difficult. That’s why I have to stick to C-Corp midstream stocks. 

There are some great stocks in that space, yet none of them come close to Western Midstream Partners (WES), an MLP that still yields 9%, while others have seen yield declines to the mid-single-digit range (I’m talking about stocks like Enterprise Products Partners (EPD)). 

This article is about WES, which has a terrific “toll bridge” business model.

With a market capitalization hovering around $17 billion, it is a massive coiled spring for income investors, perfectly positioned to benefit from structural energy demand while shielding its downside with fixed-price contracts.

So, if you like income and K-1s, this one’s for you!

The 2025 Masterclass: Absolute Scale and Record Cash Flows

For the past twelve months, ending December 31, 2025 (so FY2025), Western Midstream has delivered an absolute masterclass in execution and operational efficiency. 

The company achieved record adjusted EBITDA and free cash flow generation in 2025, bringing in full-year adjusted EBITDA of $2.48 billion. This represents a 6% year-over-year increase, an incredibly impressive feat given the broader volatility in the energy markets.

If you have ever invested in midstream stocks, you probably know why that is, as these companies do not have direct exposure to commodity prices the way their customers are tied to these prices. 

To add some more data (who doesn’t love financial numbers?), in the fourth quarter alone, WES generated more than $630 million in adjusted EBITDA. If you strip out a negative revenue recognition adjustment of nearly $30 million, the underlying performance was closer to $665 million for the quarter. 

This was driven by massive, structural throughput growth. 

In the DJ Basin, natural gas throughput hit 1.53 Bcf/d. In the Delaware Basin, crude oil and NGLs (natural gas liquids) throughput reached 261 MBbls/d, which represents a 7% quarter-over-quarter growth rate, as we can see in the handy overview below. 

That’s good. Really good.

But what matters most for income investors is how management treats that cash. 

They didn't hoard it, which truly may now come as a surprise. In 2025, WES increased its distribution (dividend) by 4% and returned roughly $1.43 billion of capital directly to unitholders. It currently yields roughly 8.8%. Oh, and it also lowered leverage to 3.2x.

What’s really interesting, however, is how the company is growing. To me, that’s way more important than the FY2025 numbers, as critical as these may be for obvious reasons. 

The "Transition Year" Noise and The Power of MVCs

One reason why Western Midstream’s stock has weakened a bit (see below) is that Wall Street wasn’t so happy with its outlook. That’s why WES has lagged some peers. 

Management has openly acknowledged that macroeconomic and commodity price-driven volatility are increasing. More specifically, key producers, including Occidental (OXY), have recently reallocated a portion of their drilling activity away from the acreage that WES services for the time being. Because of this, management is officially calling 2026 a "transition year."

To me, this is exactly where the statistical noise tricks investors into selling top-tier assets, as I think it’s fair to say that analysts often freak out because of short-term developments.

The bearish thesis completely ignores the foundational bedrock of Western Midstream's business model, which is its downside protection. WES operates under stable, long-term contract structures, many of which feature minimum volume commitments (MVCs). When producers like Oxy temporarily drill less, these MVCs trigger. They act as a structural floor that supports the company's financial stability in a lower activity environment.

That sounds good on paper and is actually visible in its results. 

To prove this, management actively uses a distributable cash flow (DCF) calculation to give investors a clean view of what it would cost to keep the business running in a true, worst-case downturn scenario. Because WES has one of the lowest leverage profiles in its entire peer group, the balance sheet is virtually bulletproof. 

Even with the anticipated pullback in drilling activity in 2026, the company's fundamental ability to cover its distribution remains exceptionally strong, as we’re dealing with a 2026 DCF yield range of 11% to 12%. That covers the dividend and leaves more than 3%. 

On a long-term basis, it looks for mid-to-low single-digit annual distribution growth. 

On top of that, WES is proving its operational excellence by aggressively slashing its 2026 capital expenditure program. Previously communicating a spend of at least $1.1 billion, management rapidly adjusted that figure down to a midpoint of $925 million. By actively modifying its capital program to deal with revised producer activity levels, WES guarantees that its cash flow engine won't get hurt by unnecessary, low-return infrastructure buildouts.

That’s often an investor concern, as it’s very easy to waste capital in this space.

Additionally, last year, WES proved it could optimize field-level operations and rationalize corporate processes. By the fourth quarter of last year, they successfully reduced operation and maintenance (O&M) expenses by 12% compared to the same period the year prior. 

Looking at the full year, they decreased O&M by more than $100 million from 1Q25 to 4Q25 on an annualized run-rate basis. This lean cost structure structurally lowers their break-even points, meaning every marginal dollar of revenue drops straight to the bottom line.

Now comes my favorite part, as it’s about the water business. 

The Aris Acquisition and Organic Growth

At the end of last year, the company executed the highly accretive acquisition of Aris Water Solutions. As some of you may know, it traded under the “ARIS” ticker and was a company I wanted to buy. Seeing WES buy ARIS was not something I liked to see for my personal situation, but I think WES made a great deal. 

Water handling is a highly lucrative, sticky business in the Permian Basin, as the Permian is basically a water basin. In most areas, more than five barrels of toxic water are produced per barrel of oil. Because of this acquisition, WES's total produced-water throughput exploded by 121% quarter-over-quarter to 2,744 MBbls/d.

It also uses organic growth to expand. In 2025, WES sanctioned the Pathfinder Pipeline and started construction on the North Loving II facility. When North Loving II comes online in the early second quarter of 2027, it will bring the company's total basin processing capacity to roughly 2.6 Bcf/d. 

I like these projects a lot, as they make WES more critical in the most important Permian bottlenecks. Forget Occidental (so to speak - as it still owns 40% of WES). This is what’s so fascinating.

Speaking of Occidental, the company just renegotiated its natural-gas gathering and processing contracts in the Delaware Basin with an Occidental Petroleum subsidiary, while simultaneously securing a brand-new arrangement with ConocoPhillips.

What makes the Occidental deal so spectacular is the underlying mechanics: these agreements reset Delaware Basin natural gas fees in exchange for WES common units from Occidental. Essentially, this structurally aligns the long-term incentives of the producer directly with the midstream operator. 

It encourages aggressive future development on WES's dedicated acreage and makes sure that when Occidental inevitably ramps up drilling again in 2027 and beyond, WES will capture maximum throughput upside.

What’s not to like here?

Takeaway

We are living in a super volatile market that is heavily influenced by macroeconomic speculation and short-term thinking. What else is new? 

But if you ignore the noise and focus on the math (the math is mathing, as Adam likes to say), the conclusion is unavoidable. Western Midstream maintains an exceptionally strong balance sheet and a highly attractive, low-leverage profile that protects it during localized industry slowdowns.

In my view, the combination of minimum volume commitments, a highly adaptable capital expenditure framework, relentless operation and maintenance cost cuts, and incredibly strategic M&A like the Aris deal makes WES an absolute powerhouse.

At a 9% yield, I think it’s a great deal, and if K-1s weren’t an issue for me, I would have bought this years ago - and more on the current dip.