NGL Energy Partners Q1 2025 Earnings Call Transcript

Quartr
Provided by Quartr
August 8, 2024

There are 7 speakers on the call.

Operator

Thank you for standing by. My name is Max, and I will be your conference operator for today. At this time, I would like to welcome everyone to NGL Energy Partners First Quarter 2025 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer Thank you.

Operator

I would now like to turn the call over to Brad Cooper, CFO. Please go ahead.

Speaker 1

Good afternoon, and thank you to everyone for joining us on the call today. Our comments today will include plans, forecasts and estimates that are forward looking statements under the U. S. Securities law. These comments are subject to assumptions, risks and uncertainties that could cause actual results to differ from the forward looking statements.

Speaker 1

Please take note of the cautionary language and risk factors provided in our presentation materials and our other public disclosure materials. Let's get into the quarterly results. Our results for the quarter were strong across all three business units. Water Solutions, Crude Oil Logistics and Liquids Logistics all met or beat our internal expectations. Consolidated adjusted EBITDA for the quarter came in at $144,300,000 in the Q1.

Speaker 1

I'm happy to report the performance from the Q1 as carried over to the start of our Q2. The butane blending season will begin soon while wholesale propane is dependent on winter weather and heating demand as you are very well aware. The Water Solutions segment continues to perform quite well with physical disposal volumes averaging approximately 2,700,000 barrels per day in the month of July. When you include deficiency volumes in July, we will be paid on approximately 3,000,000 barrels per day. As mentioned on our year end call in early June, we also achieved other non operational milestones during the quarter.

Speaker 1

First, we announced the sale of 2 ranches in Eddy and Lea counties for a total of approximately $70,000,000 2nd, on April 25, we made our last arrearage payment on the preferred Class B, C and Ds. This made us current on all preferred classes. On June 21st, the Board of Directors of our general partner declared a quarterly distribution for the preferred Class B, C and Ds that was paid on July 15th. 3rd, on June 5, the Board of Directors authorized a common unit repurchase program, which allows us to repurchase up to $50,000,000 of our outstanding units. This program does not have a fixed expiration date.

Speaker 1

Currently, we have not purchased any common units under this program as we've been managing the LEX II spend as well as our seasonal liquids inventory builds. 4th, after the quarter ending June 30 and under the terms of the Term Loan B agreement, we repriced and amended the SOFR margin from 4.50 basis points to 3.75 basis points, which reduces our interest expense by $5,250,000 per year. We closed the repricing earlier this week on August 5. Water Solutions adjusted EBITDA was $125,600,000 in the 1st quarter versus $123,200,000 in the prior Q1. Physical water disposal volumes were 2,470,000 barrels per day in the Q1 versus 2,460,000 barrels per day in the prior Q1.

Speaker 1

Total volumes we were paid to dispose that includes deficiency volumes were 2,590,000 barrels per day in the 1st quarter versus 2,490,000 barrels per day in the prior Q1. So total volumes we were paid to dispose of were up 4% Q1 of fiscal 2025 over Q1 of fiscal 2024. The team continues to find ways to keep operating expenses low in the face of rising costs. Operating expenses in water solutions in Q1 were $0.24 compared to $0.25 for the same quarter 1 year ago. The LEX II water pipeline project with initial capacity of 200,000 barrels per day that is expandable to 500,000 barrels per day is on schedule with an in service date in October.

Speaker 1

Crude Oil Logistics adjusted EBITDA was $18,600,000 in the Q1 of fiscal 2025 versus $23,800,000 in the prior year's Q1. Crude oil margins were lower 1Q over 1Q, primarily due to lower volumes from production on acreage dedicated in the DJ Basin. This was partially offset by higher tariff revenue on the Grand Mesa Pipeline from signing up a new shipper during the open season that ended on January 5, 2024 as well as higher quality differentials realized in the current quarter. Fiscal volumes on the Grand Mesa pipeline averaged approximately 63,000 barrels per day compared to approximately 72,000 barrels per day for the same quarter in fiscal 2024. Liquids and Logistics adjusted EBITDA was $11,500,000 in the Q1 versus $4,700,000 in the prior Butane lending margins and volumes were stronger than our expectations for the quarter.

Speaker 1

This has set the butane business up for a nice fiscal 2025. Products margins excluding derivatives for refined products were lower as the supply issues seen in certain markets in the prior year resulting in higher margins were resolved and supply and demand was more in balance. The Q1 is typically the low point of the EBITDA stream for the liquids segment. So it's nice to see a strong Q1 from this business unit. I would just like to summarize how you should think about our Q1 results before I turn it over to Mike.

Speaker 1

All three segments exceeded our expectations for the year. LEX II construction is on track and is expected to go into service as planned. We are managing our balance sheet during our butane and propane build season and during the build out of the LEX II pipeline that opportunistically reduced interest expense on the term loan B. We are reaffirming our full year guide of $665,000,000 of EBITDA for the partnership and $550,000,000 to $560,000,000 for Water Solutions. With that, I would now like to turn the call over to our CEO, Mike Krimbill.

Speaker 1

Mike?

Speaker 2

Thanks, Brad. Good afternoon, everyone. We are pleased with this quarter and off to a good start this new fiscal year. That said, we do not manage NGL on a quarterly short term basis. As you would expect, we are looking out over multiyear periods of time.

Speaker 2

For instance, in the Water Solutions business, we see positive trends for the short, medium and long term. We have this year's EBITDA guidance above last year actual, but quarterly it is impacted by customer recycling, drilling programs and completion schedules. Medium and long term, we are seeing the Delaware Basin expanding North in Lea County, which will bring additional produced water volumes in the future. We are working on continued expense reductions and new revenue streams, but do not announce them until proven to generate EBITDA. With respect to crude oil logistics in the DJ Basin, we see positive signs for the short and medium terms.

Speaker 2

It appears that volumes produced and are flowing into the basin could be increasing. The long term is still influenced by politics, environmental and regulatory factors. We have not been willing to contract our Grand Mesa capacity at rates below $1 to dollar and a quarter per barrel before expenses. We do believe that we are close to or at the bottom of the cycle for this segment. Regarding Liquids Logistics, this is our most volatile segment, especially with a portion being dependent on normal to cold winter weather, which hasn't shown up for several years.

Speaker 2

This is not a business we anticipate expanding nor do we expect significant growth, but we do have some internal growth opportunities. We continue to focus on the balance sheet, debt reduction and internal growth at attractive multiples. Remember that reduced leverage is a function of both lower debt balances and increased EBITDA. So operator, with that, please open up the line for Q and A.

Operator

We'll now begin the question and answer Your first question comes from Sunil Sibal with Seaport Research Partners. Please go ahead.

Speaker 3

Yes. Hi, good afternoon, everybody. So I just wanted to start off on the water side of the business. It seems like your volumes versus fee per barrel handle has been especially the fee has been moving around a bit. Could you talk a little bit about some of the moving parts there?

Speaker 3

And more importantly, I think you talked about next quarter, your fee based volumes seems like will be pretty strong, but how should we think about per barrel fee number going forward?

Speaker 1

I had a little hard time hearing the question. I think it was around revenue per barrel for the quarter, which I think we're off about a $0.01 I think from the previous year's quarter. I think as we and we've been very clear on how we contract. As we contract on the water side of the world, we're obviously looking for MVCs and acreage dedication. Those MVCs, we're willing to give a little bit, I guess, on rate to get a longer term contract with an MVC.

Speaker 1

We did have, recall the Poker Lake step up January 1 of 24,000 barrels, another 100,000 barrels. That rate is probably a little bit lighter relative to other contracts in the portfolio. So it's a little bit hard to truly reconcile to the penny. But yes, volumes are starting off really strong for the 2nd quarter. Q1 probably a little bit impacted by recycling, but the start of Q2 July looks really strong.

Speaker 3

Okay. Thanks for that. And then since you mentioned that your MVCs are at probably a higher percentage of the total volumes, how should we think about the average remaining length on the contracts that you have with MVCs?

Speaker 1

Yes, I think it's in the presentation materials, I believe. It's roughly 9 years, I think, on contract life.

Speaker 4

Yes, yes.

Speaker 1

This is David

Speaker 4

Sullivan. Yes, we have the MVCs, the percentage of MVC volumes will happen in the water disposal will go up. We were about will be about 40 percent to 45% once the LEX II project comes on. That's where we'll be as far as percentage of our volumes that are MVC related. It'll be some of the stuff.

Speaker 3

Okay. Thanks for that. I'll turn it over.

Operator

All right. Your next question comes from the line of Patrick Fitzgerald with Baird.

Speaker 5

Hi, thank you for taking the questions. And congrats on getting caught up with the preferred, but those are pretty expensive

Speaker 2

instruments at this point.

Speaker 5

Could you talk about your plan to deal with those going forward? And in particular, the Class D, what would it cost to take those out and would you consider doing something with debt to take those out potentially? Thanks.

Speaker 1

You bet. Yes, the way that our free cash flow builds through the year, it's really back end loaded. So a bulk of our free cash flow comes in Q3, Q4. Obviously, with the LEX II project this year, heavy capital burden in the 1st couple of quarters. But as we see the free cash flow unwinding or coming to us, I guess, in Q3 and Q4 and the working capital unwinding the back end of the fiscal year, our plan would be to utilize those dollars to start making redemption payments on the Class Ds.

Speaker 1

I think our free cash flow over the next couple of years can comfortably address the Class Ds. If there was a market opportunity, I guess, to take out some debt to look at additionally knocking down the Ds, we would consider it. But I think for us right now, just being very, very pragmatic with how we spend our free cash flow and the activities through free cash flow and asset sales.

Speaker 5

Okay. But you have nothing on the horizon in terms of like big asset sales too. So you're going to be paying those for and all your preferreds for a while, I guess, is the until free cash flow is generated enough to take them out?

Speaker 1

That's correct. Yes.

Speaker 5

Okay.

Speaker 1

That's our current base plan.

Speaker 5

Okay. You could you just talk about the step up to 2,700,000 barrels a day in July from the average in the fiscal Q1. And then you're getting paid on 3 1,000,000 barrels a day. What did you get paid on in the Q1, I guess, is would be the question? And then why did it step up so significantly?

Speaker 5

Thanks.

Speaker 1

Yes. Really, Q1, I think as I mentioned earlier, impacted by recycling. So as producers are using water on location to frac wells, at some point that flush water production is going to come our way. That's what we're seeing at the start of the Q2. And so I think Mike hit on his comments, we will see some lumpiness in volumes day to day, month to month as a result of producers and their completion cadence.

Speaker 1

For the quarter 1st quarter. Yes, for the quarter, we got paid on about almost 2,600,000 barrels, 2.59.

Speaker 5

All right. Thank you. And then I guess you talked about this last quarter, you talked about this quarter, but like why do you think we're at the bottom here for crude logistics in the DJ?

Speaker 2

I just think that producers are starting to it's more efficient to add rigs. We are anticipating an increase in the volume.

Speaker 5

All right. Thanks a lot guys.

Speaker 1

You bet.

Operator

Our last question comes from the line of Jason Mandel with RBC Capital Markets. Please go ahead.

Speaker 6

Hi, good afternoon. Thanks for taking the question. I just wanted to follow-up from a comment, I think from the last conference call about exploring strategic alternatives on a portion of the liquids business. Any updates to that? It sounds like you may be thinking about some asset sales, but not the whole business.

Speaker 6

So just any clarity would be helpful. Thank you.

Speaker 1

Yes, no updates at this time. I think we'll just continue to look at opportunities that come our way, but no updates on that business at this point in time.

Speaker 6

Okay. Thank you for your help.

Speaker 1

You bet. Thank you.

Operator

Questions. I will now turn the conference back over to Brad Cooper for closing remarks.

Speaker 1

Thanks everyone for your interest in NGL. We look forward to catching up with everyone in a couple of months on the fiscal 2025 Q2 call. Thanks and have a nice weekend.

Operator

This concludes today's conference call. You may now disconnect.

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