Western Midstream: A High-Yield MLP With Favorable Risk Profile

Western Midstream is a top yield-to-risk MLP pick due to its favorable valuation, stable cash flow, and strong balance sheet. Compared to MPLX LP, Western Midstream has a higher dividend yield and lower leverage ratio. Its stable cash flow and strong balance sheet position it well for the current market environment, making it a better pick for investors seeking a high-yielding MLP with manageable risk.

In the volatile 2025 market, Western Midstream Partners (NYSE: WES) stands out as a top yield-to-risk Master Limited Partnership (MLP) pick. With a robust 9.4% yield and a defensive business model, the company offers investors a compelling combination of high income and manageable risk [1].

Western Midstream's financial strength is evident in its recent performance. In the first quarter of 2025, the company posted $594 million in adjusted EBITDA and $399 million in free cash flow, ending the quarter with a cash balance of $2.4 billion [1]. The company's dividend coverage ratio of 1.6 times indicates a strong ability to maintain its dividend payouts, with management guiding for free cash flows in the range of $1.275 billion to $1.475 billion for 2025 [1].

What sets Western Midstream apart is its predominantly fee-based business model, which cushions the company against commodity price risk. Roughly 95% of its natural gas contracts and 100% of its liquids contracts operate on a fee basis, with long-term contracts that include cost-of-service protections and/or minimum volume commitments [1]. This structure helps protect Western Midstream's cash flows from inflation and volatile commodity prices.

The company's vast infrastructure, spanning several prominent oil and gas basins, also positions it well for growth. Western Midstream's recent commissioning of the North Loving natural gas processing plant in the Delaware Basin has increased the company's natural gas processing capacity by approximately 13% [1]. Additionally, the company is focusing on building its long-haul Pathfinder pipeline, which will transport 800,000 barrels per day of produced water for disposal.

Comparatively, Western Midstream's higher dividend yield and lower leverage ratio make it a more attractive option than MPLX LP for investors seeking a high-yielding MLP with manageable risk. While MPLX LP has a higher dividend yield, Western Midstream's lower leverage ratio indicates a stronger balance sheet, positioning it better for the current market environment.

In terms of valuation, Western Midstream appears to be discounted compared to many of its peers, trading at an enterprise-value-to-EBITDA ratio of 9.8 [1]. Despite its robust midstream assets, investors seem concerned about the company's business concentration risk, with Occidental Petroleum accounting for nearly 60% of its total revenues in 2024 [1]. However, Occidental's financial health and its 44.8% ownership stake in Western Midstream align its interests with those of the MLP.

Overall, Western Midstream offers investors a rare combination of 9% yield, a business that's protected against inflation, and exposure to a strong U.S. energy sector. Considering all factors, the stock appears to be an attractive pick now.

References:
[1] https://www.aol.com/1-dividend-giant-yielding-over-074200800.html