NGL Energy Partners Q3 2023 Earnings Call Transcript

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February 9, 2023

Key Takeaways

  • Water Solutions adjusted EBITDA guidance raised from over $430 million to over $440 million for fiscal 2023 on strong performance and working capital release.
  • Repaid $273 million of 2023 unsecured notes (from $476 million to $203 million) with plans to fully retire the remaining balance by June 30 while preserving liquidity.
  • Water disposal volumes grew 32% year-over-year and 7% sequentially with operating costs falling to $0.25 per barrel, driven by fixed cost absorption and hedged power costs.
  • Grand Mesa pipeline throughput averaged 77,000 barrels per day, down from 83,000 prior year, due to permitting delays in the DJ Basin.
  • Wholesale propane results fell short of expectations amid an overall warmer winter season, offsetting strong margins in rack marketing and biodiesel.
AI Generated. May Contain Errors.
Earnings Conference Call
NGL Energy Partners Q3 2023
00:00 / 00:00

There are 8 speakers on the call.

Operator

Greetings. Welcome to the NGL Energy Partners LP 3Q23 Earnings Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. Please note this conference is being recorded.

Operator

I will now turn the conference over to your host, Brad Cooper. You may begin.

Speaker 1

Thank you. Good afternoon and thank you to everyone for joining us on the call this afternoon. After the market closed today, we issued an earnings release, Investor presentation and filed are Q. Comments today will include plans, forecasts and estimates that are forward looking statements under the U. S.

Speaker 1

Securities law. These comments are subject to assumptions, risks and uncertainties that could cause actual results to differ from the forward looking statements. Please take note of the cautionary language and risk factors provided in our SEC filing and earnings materials. Let's get into the quarterly results. With 3 quarters in the books, fiscal 2023 is coming to fruition and we are extremely happy with what we are seeing.

Speaker 1

The plan that Mike outlined to employees in the spring of 2022 And communicated externally on the Q4 call of fiscal 2022 is becoming reality. As we enter the home stretch of this fiscal year, I want to thank all of our employees Our hard work and tenacity to get us to this very exciting spot for the company. We're increasing our Water Solutions adjusted EBITDA guidance From over $430,000,000 to over $440,000,000 for fiscal 2023, this strong performance out of water and the return of working capital Has allowed us to lean into the repurchasing of our 23 unsecured notes over the last few quarters. We started this fiscal year with an outstanding balance of $476,000,000 on the 23 notes. At the end of the Q3, the balance on the 23 notes was 302,000,000 And during the 1st few weeks of January, we retired an additional $100,000,000 of the 23 notes, leaving current balance of 203,000,000 This is significant progress in reducing the balance on these notes and our plan is to fully retire the remaining balance no later than June 30, while maintaining our Strong liquidity position to run all of our businesses.

Speaker 1

From a balance sheet perspective, we have reported total liquidity at the end of the 3rd fiscal quarter of Approximately $280,000,000 and borrowings on the ABL facility of $156,000,000 As a reminder, we are entering the liquidation phase of the propane season and we would Expect to see the ABL balance decrease over the 4th fiscal quarter. At the beginning of February, we started the Process with our bank group to extend the $100,000,000 accordion feature within our ABL that will allow us to have an ABL commitment of $600,000,000 This process should be completed by mid February. With our strong trailing 12 month adjusted EBITDA and the reduction of the 23 notes, our total leverage should be below 4.75 times at the end of this fiscal year. This is a very important milestone, but we will not rest as we continue our laser focus on As I mentioned earlier, our Water Solutions business continues to see strong growth. Water Solutions is benefiting from owning and operating the largest integrated network of large diameter produced water pipelines and disposal wells in the Delaware Basin.

Speaker 1

Our water disposal volumes have grown approximately 32% this quarter over the same quarter a year ago and 7% versus last quarter. Our Delaware system experienced 3 days of sub-two million barrels of oncoming water due to cold weather in December. But with our fully integrated We were able to quickly recover and take advantage of unexpected volumes from non contracted customers to achieve record volumes of over 2,700,000 barrels for several days. Our Q3 EBITDA for water was not impacted by weather, thanks to our excellent field staff's efforts. The water team has continued to focus on reducing operating costs Operating costs were $0.25 per barrel in the quarter versus $0.27 per barrel in the 2nd quarter.

Speaker 1

As volumes continue to grow, there is an opportunity to further lower our per barrel operating costs. All of this positions our Water segment for continued EBITDA growth. It's important to note that Water's strong financial performance has not been driven by $100 plus crude oil on our skim oil barrels. We hedged our skim oil in the first half of the year and our average realized price for fiscal 2023 is approximately $80 which is about where the market is today. The Grand Mesa pipeline continues to be negatively impacted by producer permitting delays in the DJ Basin.

Speaker 1

Grand Mesa averaged approximately 77,000 barrels per day Compared to approximately 83,000 barrels per day in the Q3 last year, we are closely monitoring the basin activity and as the permitting issues get resolved, we are Encouraged that we could see more production out of the basin in the future. And if so, Grand Mesa is well positioned to capture its fair share of those volumes. Our Rack Marketing and Biodiesel businesses have benefited from the tight gasoline and diesel market to capture higher margins and in the case of bio Diesel has benefited from cheaper additional supply driving their strong financial performance. Our butane margins excluding the impact of derivatives Or lower as product purchased earlier in the blending season continues to compete with product purchased in a currently discounted market. Recall that the majority of the EBITDA from our wholesale propane business occurs in the months of December through March.

Speaker 1

Propane results for the quarter were below expectations, partially due to an overall warmer than normal winter so far. With that, I'd like to turn the call over to Mike.

Speaker 2

Thanks, Brad. I would like to summarize the significant growth in our water disposal volumes A little bit here. If you remember a year ago, we thought we would have 10% a year growth And we were way off. This 1st year, our water volumes grew 30%. In the first quarter, we saw disposal volumes grow 12% in 1 quarter versus the Q4 last year.

Speaker 2

In the 2nd quarter versus 1st, we grew another 5%. And then this quarter Versus second, we saw a 7% growth rate, and we'll see some additional growth in the 4th quarter. So A 30% growth rate in water in just 1 year is really incredible and kudos to our guys We're being able to accomplish that, but a lot of it is we're dependable and the producers know that They give us the water, we will get rid of it. This impressive growth is the driver for why we increased adjusted EBITDA, A guidance from $430,000,000 to $440,000,000 for this year. Recently, a couple of our largest Customers indicated publicly, they're increasing their activity in the Delaware.

Speaker 2

This gives us confidence that Water Solutions Volumes and EBITDA will continue growing in 2024. And again, our costs at $0.25 a barrel is pretty incredible with the Inflation, we hear about every day. Maybe a little perspective. We're at, I think $331,000,000 EBITDA for the 9 months. 3rd quarter was 121.7 So if we were to duplicate that in the Q4, we'd be at $453,000,000 above the $440,000,000 plus guidance.

Speaker 2

We are trying to be a little conservative and make sure that we beat our numbers. Now I'd like to focus discuss our strategic focus and our short term and intermediate goals strategy. So first, our key focus has been addressing the 23 unsecured notes. As Brad mentioned, we've made a lot of progress, current balance 203,000,000 And we will pay the rest off by June 30. I think this is well before most folks Anticipated, and we'll see if we can do better than that.

Speaker 2

So we get the immediate debt hurdle out of the way, get us some breathing room. 2nd, regardless of when we pay off the 23s, We think by the end of this fiscal year, March 31, our leverage will be at or below 4.75 times. Again, I think that's well in advance of any of the estimates I've read on The Street. And contrast that with our leverage in the Q3 fiscal 2022, 7.2 times. So just within 4 quarters, we have reduced total leverage By approximately 2 full turns and possibly 2.5 turns by March 31.

Speaker 2

This is remarkable progress. 3rd, our 26 secondured notes mature in February of 2026, So they will become a current liability February of 'twenty five. That is only 2 years away. We do not want to get into the same situation With these that we did with the 23s. Therefore, we will continue to drive down leverage in our absolute debt to position the partnership to roll and extend All remaining maturities with the best possible terms.

Speaker 2

And then 4th, we will also address the preferred dividend arrearages and thereafter the They're certainly on our radar. Now that we've talked about increased water solutions guidance And debt reductions, I'd like to point out that these debt reductions achieved in these 1st 9 months year to date We were accomplished without any significant asset sales. We continue to make progress on several non core asset sales, which we hope to sign and close in the Q4. If these are completed, the proceeds will go directly to the balance sheet and drive leverage Even lower by the end of the year, giving us even more financial flexibility. So with that, let's open up for Q and A.

Operator

At this time, we will be conducting a question and answer session. First question comes from Patrick Fitzgerald with Baird. Patrick, please proceed.

Speaker 3

Hey, thanks for taking the questions. So could you provide any help on the $29,500,000 charge that was, I guess reversed in the quarter.

Speaker 1

Hey, this is Brad. I think what we need to do is Point you to the queue on that when there's language in the queue with respect to that. That's about all I can really say. Councils on the call as well. Carson, I don't know if you want to elaborate on that.

Speaker 2

Yes, sure. Sure, Brad. Yes. What we can say is what's in the queue. And is this a legal matter?

Speaker 2

So, we appreciate your respect Need to be confidential. Thank you.

Speaker 3

Okay. That wasn't a cash benefit in the quarter though, was it?

Speaker 1

Cash benefit? Yes, it was.

Speaker 3

Okay. All right. In terms of the Water segment, obviously, very strong results there. One of your competitors actually came out and said that they had to lower their guidance because of the winter storms. Obviously, your volumes look great, but were they actually tamped down a little bit by the Winter weather that impacted the region in December?

Speaker 1

I'm going to let Doug answer. But in my prepared comments, we talked about 3 days or so that were sub-two million and then we had a handful of days that were Over 2.7. So I think if you average across those handful of days, it's probably right in line with where Doug's average was for the quarter. Doug, anything to add there?

Speaker 4

No, I would confirm that, Brad.

Speaker 3

Okay. Thanks. In terms of your Q4, usually you see a working capital release, And you've paid down $100,000,000 Is that do you expect a significant working capital release In the Q4 or did you use the revolver balance to take out the $100,000,000 of additional bonds since the quarter end?

Speaker 1

Now the bond reduction was done with working capital release and we would expect further working capital release as we move through the rest of our propane season.

Speaker 3

Okay. Like could you give us a sense of the magnitude?

Speaker 1

From where we are at the end of the Q3, I think it's fair to say that the ABL balance could be There might be $40,000,000 to $50,000,000 on it at the end of the fiscal year, assuming no more debt retirement from this point forward.

Speaker 3

So nothing on the our forty-fifty on the ABL and $100,000,000 less on the 23s?

Speaker 1

Correct.

Speaker 3

Okay. That's great. In terms of the NGL segment, any like I think at the start of the year, You guys said that you would kind of be flat this year in the liquids logistics And you're trending not so close to flat, Implying a big 4th quarter, is that still your expectation? Or is kind of this year been a little bit worse than you expected because of the Unseasonably warm weather.

Speaker 1

Yes, I think the weather the lack of weather, I would say, up in our key areas has been a driver. We do expect a nice Q4 from the team, but I think for the year, down relative to expectations across the full Liquids Logistics Business. The biodiesel in our rack marketing group and butane blending have done well, but wholesale propane a little bit lighter than we Would have liked to see it at this point in the year. I think we'll still see a strong Q4 from them, but probably under what our expectations were for the full year. Jeff, you have anything to add?

Speaker 1

Jeff Penner is here, who runs the division.

Speaker 2

I think your comments captured it, Paul.

Speaker 3

All right, great. Thanks a lot, guys.

Speaker 5

Thank you.

Operator

Okay. Up next, we have Tarek Ahmed with JPMorgan. Please proceed.

Speaker 6

Good afternoon, gentlemen. On the water business, the performance was particularly impressive. And I just wanted to sort of get a sense of some of the drivers there of how you're able to continue to reduce costs in that business?

Speaker 1

Doug, do you want to take that one?

Speaker 4

Yes, sir. One of the important factors in our Per barrel metric on OpEx certainly is the fixed cost. Every barrel that we add as we grow And as we grew the volume so ratably this year, it's really reduced our fixed cost per barrel. We're always working to reduce any expense that we can. But on a total basis, our variable costs are higher on a cumulative basis, But we've held them very steady on a per barrel basis.

Speaker 4

But the large amount of volumes that we See today and going forward, it really, really washes out and reduces the fixed cost. We're doing As much and more water as we did in the past, but our employee headcount has not increased. That's an example. We look at what the cost to run the business and We really focus on those fixed costs and keeping those down. Those are ones that we can certainly control.

Speaker 4

And then on the variable cost side, Like we've mentioned many times, we were fortunate to hedge our power costs in Texas At extremely low natural gas prices, and those go through 2028. So that's a big, big help. So every barrel we bring on and we're able to apply these low costs to, our per barrel metric continues to get better.

Speaker 6

Got it. So really a huge fixed cost absorption benefit over time.

Speaker 4

That's correct.

Speaker 6

And then, and I know you can't say much about it, But on the $29,500,000 onetime gain, is it fair to say that the matter is closed at this point?

Speaker 1

Yes.

Speaker 6

And then you touched on potential for further asset sales On a non core basis, any sense you can give us of kind of the size or nature of kind of the assets we

Speaker 1

Mike, do you want to take that one?

Speaker 2

Not really. I guess we can give a range. Range is $20,000,000 to $100,000,000

Speaker 6

Fair enough, Mike. I mean, I get paid to ask the question, you get paid not to answer it. And I guess Just last one for me and I'll get back in the queue. As you think about sort of your 2024 and beyond, Just love to get your sense of kind of how much additional capital it will take to keep the water system growing at the I know you can't sort of repeat the incredible rate you're at right now, but sort of at the rates you're targeting over time.

Speaker 7

Doug,

Speaker 2

I'll just Yes,

Speaker 4

I'll take the mic.

Speaker 2

Yes. Go ahead. I think the guidance we've given in the past is that we had fully really built out our system after this year where we had a couple of big new pipelines. I would have Doug comment after me, but we were thinking more in the, I'll say, $40,000,000 to $50,000,000 range going forward. I think that's going to increase because of the new opportunities.

Speaker 2

But we haven't budgeted yet, so we don't have You have anything, Doug?

Speaker 4

Yes. Yes. It's important to note, we took this quarter as well, this Q3, and we amended and extended Some of our term contracts, acreage dedications, we picked up a few new contracts there long term That have added to our acreage dedications and then we're working on

Speaker 7

a couple

Speaker 4

of, another couple of 10 year Dedications currently, they're very close to being signed. Those all include additional acreage. So Then the other important thing to note is the super majors, you can see it in their public comments. They are really planning to ramp up in the Delaware and certainly within our footprint. So we're going to do everything we can to take every barrel of water and Do it from a very smart and contracted basis and not overbuild our system, but be there to capture these great margins.

Speaker 6

Got it. I appreciate it. I'll jump back in the queue. Thank you, guys.

Operator

Up next, we have Gregg Brody with Bank of America. Please proceed.

Speaker 7

Good afternoon, guys.

Speaker 1

Hello.

Speaker 7

Just you had very strong volume growth this quarter. I'm just curious, Was there any benefit from the seismic activity leading to some of your competitors not being able to inject in their deeper water wells? And Is that something that you can quantify and talk about how that how we may benefit from that going forward?

Speaker 4

That's a question where we get to knock on wood to answer that one. We have been very fortunate That our footprint has not been materially affected by the seismic review areas. Certainly, it maintains as a risk to our business, but we feel like both the OCD in New Mexico, the Railroad Commission in Texas Have taken really large steps toward remediating that risk or reducing that risk, Which is good. That's very positive. We have certainly benefited from this System that we have that all these years in Hillstone Mesquite, we've spent the money to Fully integrate.

Speaker 4

We have benefited greatly from that due to seismicity, but we certainly aren't out of the woods yet as an industry, But I believe everyone's working together and along with the regulatory agencies to reduce the future risk.

Speaker 7

Got it. There was no water moved from other regions over to you. That was material?

Speaker 4

No, I would say it's material from a volumetric basis, approximately 150,000 barrels a day to 200,000 barrels a day, that would be an estimate I would give that comes our direction due to Reductions or limitations on others.

Speaker 7

Got it. Do you think it's fair to say that that's going to stay excellent? Do you continue to see that volume?

Speaker 4

We would expect it to this time.

Speaker 7

Great. And just one more for you. You highlighted 2 of your producers and your operating area have highlighted interest rate activity. Have they indicated to you timing When you would potentially see those volumes or are you just looking at the rig announcements and interpreting from there that there's activity color?

Speaker 4

I would say their needs are very immediate. Okay.

Speaker 7

Thank you for your time guys.

Operator

Okay. The next question is coming from Med Bahramov with Wells Fargo. Please proceed.

Speaker 5

Hey, good evening. Thanks for taking the questions. Mike, you touched a little on capital allocation after you get to the 4.75 Leverage target maybe next quarter, but could you elaborate a little bit more on how you think about allocating between Further debt reductions, as you noted, maybe the 2026s and the payment of preferred distributions in our years?

Speaker 2

Yes. We really haven't discussed that with our Board yet. We're mindful of the arrearage. So it's really balancing your balance sheet needs to be in a certain Conditioned to be able to roll out your debt, right? So it's 4.75 is too high a leverage to be able to do that.

Speaker 2

So we'll be talking with our bankers, figure out is it 4.0, 4.25? What is it that Allows us to launch, and then we push out the debt, so we don't have to worry about that anymore, and then we'd address the pref.

Speaker 5

Got it. And then on your corporate initiatives, Just curious why we haven't seen an announcement yet. Is it a function of lower demand and maybe lower bids in the current environment? Is it Complexity of the transactions you're trying to finalize or maybe something else, whatever color you could provide would be helpful.

Speaker 2

Yes. It's they're all a little different. One is Requiring consent from, Well, I'll say 3rd parties, and those are they take longer to Receive. Others just took, well, I'd say we wanted to So into the strength of the market, so we waited until the market was much stronger. And then we launched, and I think we'll end up with a more attractive price.

Speaker 2

So it wasn't a fire sale. We We're very thoughtful about timing and I think one was pushed back some from like the Q3 to the Q4. 1, we have signed and now we have to go get consents. Another one, the buyer was having difficulty getting financing and It appears that they've been able to secure financing. So different reasons, but we didn't want to push because you're right, if you do that, then you're going to get a lower price.

Speaker 5

Got it. Appreciate that. And then maybe can you just remind me what's The remaining contract average term on Grand Mesa?

Speaker 2

Geez, I don't know for sure. I know 2 of the contracts. Is Don Robinson on?

Speaker 1

Don, you there?

Speaker 6

Yes. 2 of those contracts are about have about 4 years left on them today, 3 to 4 years.

Speaker 5

Got it. Thank you. That's all I had. Thank you. Thanks.

Operator

Okay. The next question comes from Jason Mandel with RBC. Please proceed.

Speaker 1

Hi, guys. Thanks very much. Most of my questions have been answered, but just a quick follow-up on the asset sales, if possible. Can you confirm if those assets are outside of the water business or maybe include some?

Speaker 2

Yes. There Well, I can't confirm that. There is a small one that's in the Waterside that's a no growth asset, and The other 2 are outside the other 2 are larger. But it's I call it kind of pruning. If there's A no growth asset, then you basically just have an annuity.

Speaker 2

And then if it's that's a good one because You're not really giving up any future growth. The other ones are, in areas where we can get multiples over 10 times.

Speaker 1

All right. That's great.

Speaker 2

You guys have answered all

Speaker 1

my other questions. Thank you for your help.

Operator

Okay. We've reached the end of the question and answer session. I would now like to turn the call back to management for any closing remarks.

Speaker 1

Yes. Thanks everyone for your participation today. As you've heard, we're excited about our progress this fiscal year. We look forward to speaking with you this summer when we discuss our Q4 and full year results. Have a good day.

Operator

This concludes today's conference. And you may disconnect your lines at this

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