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Western Gas stock downgraded as hefty dividends cap future growth - Morgan Stanley

EditorEmilio Ghigini
Published 25/10/2024, 10:28
WES
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On Friday, Morgan Stanley downgraded Western Gas Partners (NYSE:WES) stock from Equalweight to Underweight, adjusting the price target to $40 from the previous $42. The firm’s analyst cited a full valuation screen following the company's strong performance in 2024. The new price target suggests a potential total return of 13.9%, which includes a dividend yield of 9.6%.

The downgrade was influenced by the limited potential for incremental return of capital after Western Gas Partners increased its distribution significantly in the first quarter of 2024. This substantial distribution rise has tempered expectations for further capital returns to investors in the near term.

Additionally, the analyst noted concerns regarding the uncertainty that could stem from potential further secondary sales by the company's sponsor, Occidental Petroleum (NYSE:OXY) (Oxy). This situation might lead to a persistent overhang on Western Gas Partners' stock.

Western Gas Partners' solid performance throughout 2024 has been a significant factor in the stock's valuation. However, with the recent distribution increase and the possibility of additional stock sales by its sponsor, the outlook has become more cautious, as reflected in the updated analyst rating and price target.

Investors holding Western Gas Partners shares will be monitoring the situation closely, taking note of the revised expectations from Morgan Stanley and the potential impact of Occidental Petroleum's future decisions on their investments.

In other recent news, Western Gas Partners reported strong Q2 2024 results, including a net income of $370 million and adjusted EBITDA of $578 million. The company also priced an $800 million senior notes offering, intending to use the proceeds for repaying existing debt and general partnership needs. Analyst firm Mizuho Securities maintained an Outperform rating for Western Gas, buoyed by recent commercial agreements expected to enhance growth prospects.

Conversely, Morgan Stanley downgraded the company's stock from Overweight to Equalweight, citing a shift in valuation. RBC Capital Markets increased its price target for Western Gas to $38, following a steady Q2 financial report and reaffirmed guidance for the full year. These are the recent developments for Western Gas Partners.

InvestingPro Insights

Western Gas Partners (NYSE:WES) presents a mixed picture for investors, as highlighted by recent InvestingPro data and tips. Despite Morgan Stanley's downgrade, WES boasts a strong dividend profile with a current yield of 9.06% and a history of raising dividends for 3 consecutive years. This aligns with the article's mention of the company's significant distribution increase in Q1 2024.

The company's financial health appears robust, with a perfect Piotroski Score of 9, indicating strong operational efficiency and financial stability. This strength is further reflected in WES's impressive year-to-date price total return of 40.98% and a one-year return of 51.97%, underscoring the stock's strong performance mentioned in the article.

However, investors should note that WES is trading at a high Price / Book multiple of 4.49, which may support Morgan Stanley's view on the stock's full valuation. Additionally, the stock's price movements are described as quite volatile, which could be a consideration for risk-averse investors.

For a more comprehensive analysis, InvestingPro offers 11 additional tips for Western Gas Partners, providing deeper insights into the company's financial position and market performance.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.

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