NGL Energy Partners LP

Good morning, ladies and gentlemen, and welcome to the first quarter of fiscal year 2020 NGL Energy Partners LP earnings conference call. At this time, all participants are in a liaison-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press star, then zero on your touchtone's telephone. As a reminder, this conference call is being recorded. I would now like to turn the conference over to our host, Craig Karlovich, CFO. You may begin.

Thank you and welcome, everybody. Reminder, this conference call includes forward-looking statements and information. Words such as anticipate, project, expect, plan, goal, forecast, intend, could, believe, may, and similar expressions and statements are intended to identify forward-looking statements. While NGL Energy Partners believes that its expectations are based on reasonable assumptions, there can be no assurance that such expectations will prove to be correct. A number of factors could cause actual results to differ materially from the projections, anticipated results, or other expectations included in the forward-looking statements. These factors include prices and market demand for natural gas, natural gas liquids, refined products, and crude oil, level of production of crude oil, natural gas liquids, and natural gas. the effective weather conditions on demand for oil, natural gas, and natural gas liquids, and the ability to successfully identify and consummate growth opportunities and strategic acquisitions at costs that are accreted to financial results and to successfully integrate and operate assets and businesses that are built or acquired. Other factors that could impact these forward-looking statements are described in risk factors in the partnership's annual report on Form 10-K, quarterly reports on Form 10-Q, and other public filings and press releases. NGL Energy Partners undertakes no obligation to publicly update or revise any forward-looking statements as a result of new information, future events, or otherwise. This conference call also includes certain non-GAAP measures, namely EBITDA, adjusted EBITDA, and distributable cash flow, which management believes are useful in evaluating our financial results. Please see the partnership's earnings releases investor presentations, and annual and quarterly reports on Form 10-K and Form 10-Q on our website at www.nglenergypartners.com under the investor relations tab for more information on our use of non-GAAP measures as well as reconciliations of differences between any non-GAAP measures discussed on this conference call to the most directly comparable GAAP financial measures. I will now turn the call over to our CEO, Mr. Mike Krimbill.

Thanks, Greg. Thanks for joining us. You know, I'd like to set the stage and really start off in a constructive, positive manner. We have, as you know, signed an agreement to sell Refined. We thought that would crater the stock price, going down at least a dollar or two. We're only down 38 cents, so we have a lot to celebrate. So... As you know, we are continuing our trend of significant events today as we announce the signing of an agreement to sell Transmontane Fine Products units. The proceeds based on June 30 values will approximate $300 million and be used to reduce debt. There will also be a reduction in our letters of credit. Both the cash and LC reductions will increase availability on our bank line of credit for growth opportunities that may arise. This transaction, in our opinion, should increase the value of NGL common units and reward our unit holders. Of course, that is yet to be seen. On to the Mesquite transaction, the Mesquite assets are being connected to the NGL infrastructure, namely our 24-inch pipelines. The Lee County Express to the east is now in service taking water, and the Western Express is in construction with an expected service date in late September. There are numerous opportunities that we are working on to fill these pipelines, as well as the Mesquite system. The liquid assets, which we had purchased earlier this year, are performing very well, particularly at the Chesapeake butane export facility. We are expanding the rail car capacity there to bring in more butane. Going forward, we expect more stability and predictability cash flows. We continue to focus on long-term contracts in all three businesses, so repeatability of our cash flows increases. Finally, we are positioned for organic growth in our business at attractive multiples. With that, I'll turn it back to Trey for specifics.

All right. Thanks, Mike. So first off, here's how I think about the tips of sale. This business has been significantly volatile over the past five years. However, the EBITDA over the past 12 months is essentially zero. The volatility has now been removed. The proceeds we receive will be used to pay off all of the working capital associated with this business, plus about 10%. So assume our total debt is reduced from $2.6 billion to $2.3 billion with no reduction in LTM EBITDA. This reduces leverage by about half a turn. Additionally, the value assigned to this business, based on guidance, was generally $100 million, assuming a four to five times EBITDA multiple by the market. But the debt level was $300 to $350 million, depending on working capital values, resulting in a negative sum of the parts valuation of $200 to $250 million. We didn't sell the business for just $100 million. We eliminated all the debt associated with it, which should increase our overall valuation by almost $2 per unit using the sum of the parts. We also reduced our interest cost savings from the sale by $15 million per year, which is not factored in to the EBITDA valuation. Looking at some multiples, if you look at last year's multiples, this is over a 35 times multiple on fiscal 19 results. It was an infinite multiple based on the last 12 months, and based on our current year guidance as originally published, it would be about a 16 to 17 times multiple. This was a great transaction for NGL in this market. My kit on some of the other benefits of this transaction and also talked about Mesquite. One of the questions that we've been getting quite frequently is around our financing of Mesquite. So I'll dive into that first. Our stated objective with the Mesquite transaction was to fund it in a leverage neutral manner. The total purchase price was $892 million and our forecasted EBITDA for the acquisition was between $110 to $120 million for year one, which allowed us to use approximately $400 million in debt to remain at our 3.25 times compliance leverage target. We funded the initial purchase with $400 million of newly issued Class D preferred units 100 million of existing Class B preferred units, and 250 million of debt through a senior secured loan. The remaining purchase price is expected to be funded through borrowings under a revolving credit facility once certain volume thresholds are met. We received several questions about the use of preferred equity, and our belief is that this preferred issuance was at a lower cost than our common equity over the long run, especially considering the size, and provided much more surety of execution. Following the closing of the refined products transaction, we will continue to have a portion of our credit facility allocated to working capital. However, with the elimination of this inventory and the expected reduction in letters of credit, the balance will be reduced by an estimated $300 to $350 million going forward, which, as I stated, will reduce all in leverage by over half a turn and interest costs by approximately $15 million per year. We will continue to target a 3.25 compliance leverage as well as an all-in leverage under five times. We will also continue to look at ways to reduce working capital borrowings and appropriately manage our balance sheet and cost of capital. We are slightly above those thresholds at 630. However, pro forma for the refined product sale, our all-in leverage would be approximately 4.6 times.

I'll now go through the results for each of the segments

and overall for the first quarter of fiscal 19. Fiscal 20, I'm sorry. Adjusted EBITDA sold $87 million for the quarter, which included an $11 million loss in refined products, which included the TIPSL business that is being sold. Removing the TIPSL business would have resulted in pro forma adjusted EBITDA of $97 million for the quarter, which would be right in line with our expectations for our core businesses and with street consensus. Our full-year fiscal 2020 adjusted EBITDA guidance target remains $600 million despite the sale of refined products as we remain in the forecast ranges for our core segments. I'll now go through each segment. The crude segment generated approximately $52 million of adjusted EBITDA this quarter. Consisted with the prior several quarters and right in line with our guidance. Grand Mesa volumes averaged 133,000 barrels per day this quarter. We continue to see strong demand out of the detailed ASIN on Grand Mesa and other areas of our crude business are operating on forecast. We've seen some commodity price fluctuation in crude oil over the past quarter, but this has had minimal impact on our crude logistics segment. We are not expecting any changes to our business at this time and maintain our adjusted EBITDA guidance range for fiscal 2020 of 190 million to $210 million. Moving to water, water adjusted EBITDA was 41 million for the quarter, with approximately 849,000 barrels per day of disposal volumes and 2,900 barrels per day of skim oil. This is the first full quarter subsequent to sale of our South Pecos assets in the Permian, and we did not close the Mesquite transaction until July 2nd after the end of the quarter. We are expecting Mesquite to contribute significantly to both disposal and skim volume for the remainder of this fiscal year. Disposal and skim oil revenues were better than budget for the quarter. Freshwater sales were slightly lower than expected as we worked on completing the joint marketing arrangement with Intrepid Potash that was announced last week. We expect freshwater sales to catch up to budget through the remainder of the year as we have a limited volume that we can sell. Skim oil production was approximately 2,900 barrels per day during the quarter with an average crude cut of about 34 basis points, which is in line with our expected recovery during the spring and summer. We have recently increased our forecasted skim oil production with the addition of mesquite and added to our hedge position. We are hedging approximately 3,500 barrels per day for the remainder of fiscal 2020 at a weighted average price of just over $60 per barrel. We are expecting significant growth in our water business for the remainder of this year within our legacy assets as well as mesquites. Our adjusted EBITDA expectation for water solutions for fiscal 2020 remains a range of $290 to $320 million. Adjusted EBITDA for our liquid segment totaled $12 million this quarter as we benefited from our recently acquired terminals, including our Chesapeake export facility. Volumes and margins were stronger than prior year, especially for butane, where we had strong performance due to favorable market conditions. This is typically a slow period for propane as we prepare for our upcoming supply seasons. We are capitalizing on opportunities to use our storage positions, quality asset base, and favorable market conditions to better supply our customers and generate strong profits on forward sales. We have also grown our customer base through both acquisition and organic business development efforts. Our fiscal 2020 adjusted EBITDA guidance range for liquids remains $75 to $90 million. Finally, refined products, adjusted EBITDA, refined and renewables was a loss of $11 million for the quarter with the TIPSL division as being sold generating a $10 million loss. We're expecting to close the sale by the end of September. We would have owned the TransLontane business for approximately five years once this transaction closes. Remember, we purchased that business for about $200 million plus the working capital in 2014. Since that time, we have sold the equity in that business for almost $500 million, not to mention realizing over $300 million in EBITDA over the period and recovering the working capital. It may have been a rollercoaster ride for earnings, but you cannot argue with the overall return generated by this business. We will continue to operate the business through closing. Additionally, we will continue to own our rag marketing, gas blending, and renewable businesses. These businesses are much smaller than TPSL, and we will look at ways to optimize them going forward. We will also retain our biofuel tax credits earned through the closing of the sale, should they be passed by Congress, which could total over $25 million benefit to NGL. Assuming a September 30 closing of the transaction, we are updating our FY 2020 guidance range for the refined products segment to $15 million. to $30 million. Finally, we declared a $0.39 per unit, $1.56 annualized distribution for the quarter. We continue to target 1.3 times coverage or better on a trailing 12-month basis, at which point we will evaluate the best use of funds to benefit of our unit holders, including reinvesting in the business, repurchasing equity, or increasing our distribution rate. That decision will be made based on numerous factors, but keeping our balance sheet healthy will continue to be a priority. That concludes our prepared remarks. We will now open the line for questions. Friends, do we have any questions?

Ladies and gentlemen, if you have a question at this time, please press star and then the number one key on your touchstone telephone. If your question has been answered or you wish to remove a result from the queue, please press the pound key. Our first question comes from TJ Schultz, RBC Capital. Your line is now open.

Great, thanks. First on the CapEx, It's been in the first quarter, $215 million. Can you break out what was acquisition-related versus organic? How much is spent on some of the pipe projects you have and any change to expectation for the organic growth capex range that you gave earlier this year?

Sure. So about $215 million, TJ, almost $200 million was in water. About $82 million of that was on acquisitions. The rest was on growth capex, including the pipelines. We did make a pretty significant payment on pipe order for both the Western Express and Lee County Express projects. So we've purchased that pipe. That will all be installed over the next quarter or so.

Okay. No change to your expectation for organic growth for the rest of the year?

No, no changes to the growth capex guidance.

Okay. And then just sticking with water, as we think about trajectory and volumes going forward, just any commentary on what you're seeing from producer activity plans for the year now versus when you gave guidance earlier, and then maybe when you get mesquite tied in. Just expectations on where you think you can exit this year on water volumes.

Are you going to want to exit? TJ, we see, I'll call it a wall of water coming starting at the end of September. So the second half of the year is going to be, I think, much greater volumes. I don't know if we have an end of year, or did we come out on our budget? We didn't guide to a water volume. Okay. So I don't see a change. The timing may be a month or two behind where we thought it was going to be. And the next quarter we should see the exit at September 30.

We'll see, I think, much higher quality. TJ, what I'll add is disposal volumes were really right on through the first quarter. We did our budget in April and May. We're not seeing any significant change. We do it with a little bit slower ramp the first part of this year, but we are expecting a very significant ramp through the back half of the year. As we guided, we'll obviously see the big jump in the ski volumes in the second quarter, but we are expecting legacy volumes to grow in second quarter as well.

Okay, got it.

The biggest jump will be through third quarter.

On the Intrepid joint marketing deal, can you just expand on the benefit to you all? Are there any cost-sharing arrangements on development of freshwater or disposal services?

Yeah, Intrepid, I believe they have more water rights in New Mexico than any other entity in They bought the Dinwiddie Ranch, which is sandwiched in between McCloy and Beckham. And so they have water on their ranch from the same aquifer as us. So they clearly are, I think, should be the ones that market both our water. So they'll be marketing Dinwiddie as well as Beckham water. Then we'll also work together on disposal water off the three ranches. So we're very excited. They're just a great group of... people, and we're not out there trying to buy fresh water. Really, that's the intrepid folks have their own fresh water. So it makes sense to team up there and then team up on the produced water off all three ranches.

Okay, understood. Just last one, Trey, just to clarify the revised guidance on refined products, I think you said 15 to 30 Does that include the negative contribution of 11 in the first quarter or is it pro forma? I'm just trying to understand what's expected.

That does include the negative 11 from the first quarter. We are expecting to make up some of that in second quarter prior to the sale on TIPSL, and then the remaining businesses will make up the difference.

Got it. Thanks, guys.

Next question is from Dennis Coleman from Bank of America. Your line is now open. Yeah, thanks.

I guess maybe just to pick up on that last question to start with, Trey, please.

Can you say again the businesses, what's left in refining?

Of the 50 to 30, can you give us a little bit better sense of what the run rate is on those?

Sure. So what will be retained is what we call our rack marketing business, which is our flash title business, very little working capital. We market across the United States at terminals. That business has been the most profitable refined product business over the past couple of years as it does not carry inventory risk. So we are maintaining that business. We are maintaining our gas blending business. We started that business about a year and a half ago. That business has been profitable, but it does carry some inventory risk. That business did have a loss during the first quarter. However, we are expecting to make that up as we go into blending season in the fall. So we'll maintain that business. And then finally, our renewables business, which is a very small component where we market ethanol and biodiesel. So When you look at historicals, obviously it's a little bit challenging because of some of the volatility. But generally speaking, the TPSL business has made up about 60% of our overall portfolio. There have been years that it's been much higher than that, and there have been years that it's been lower because of the challenge performance. But approximately 60% of the working capital in the entire business is associated with TPSL. Additionally, we are looking to minimize inventories in the businesses that we're retaining so that we can continue to reduce working capital, lower the cost of operating that business. At this point in time, it becomes 5% of the overall portfolio, so a much smaller component. And again, we've got... We've got some opportunities that we think we can continue to either improve that business or reduce the cost associated with it.

Okay, that's helpful. And then if you can just remind me, the tax credits, the $25 million, that was not in the original guidance, right?

We have not included that in guidance. So the way that we think about that is if the tax credit is realized, we ought to be above the higher end of the guidance range.

Okay. And it goes with the assets that are being sold? The buyer gets that tax credit if it trips beyond the closing date?

Not for what has been earned to date. So if it is passed subsequent to the sale, we retain the rights to those credits as we incur the costs to build those credits. Anything generated subsequent to the sale would go to the buyer.

Ah, I got it. Okay, okay. That's helpful. And then... I guess switching gears, Mike, you obviously have continued to expand in the water business, and I think the M&A market in that sector remains pretty active. Can you maybe talk about what you're seeing there or how you're thinking about M&A additional opportunities, particularly now that you've sort of improved the balance sheet?

Yeah, I think first of all, we're not going to screw the balance sheet up now that we fixed it. So we're not going to go on a buying spree. But I think there are one or two attractive assets remaining in the Permian from our perspective. So we will participate in any processes that are initiated. As you know, we've had the EIG folks come in and invest. There's a $200 million preferred basket there, and that's there on purpose so that we'll have an equity ability to fund an additional acquisition properly with equity in debt. So we are actively looking to really enhance our position in the Delaware if there's an opportunity, but not at the expense of the balance sheet.

Okay, okay. And any updated thoughts on the share repo?

Well, it's much more attractive today than it was Friday. So that's something that we are looking at seriously. When you start trading up here at 11%, 12%, it's cuckoo after everything we've done over the last 18 to 24 months and continue doing. So it's certainly something we're going to seriously consider. Okay, that's it for me. Thank you.

Thanks, Dennis.

Next question is from Suneer Gershuni from UBS. Your line is now open.

Hi, this is Michelle on for Suneer. Just a quick one for me. I might have missed it earlier, but is there a work in capital release or how much less is needed going forward as a result of the sale?

Thanks, Michelle. It depends, obviously, on market prices. Working capital was lower as of June 30. Values were lower and our inventory balances were a little bit lower. But generally speaking, it's about $300 to $350 million of working capital plus LCs that could make up another $25 to $50 million.

Okay, perfect. That's it for me.

Thank you.

Again, ladies and gentlemen, if you have a question at this time, please press the star and then the number one key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. We have Pierce Hammond from Simmons Energy. Your line is now open.

Good morning, and thank you for taking my questions. My first question is, what drove the strong results during the quarter in the crude oil logistics business?

Hey, Pierce. So the biggest driver is obviously Grand Mesa. Our forecast for Grand Mesa as we gave guidance was 129,000 barrels a day. We ran slightly above that, 133,000 barrels a day. So we did get a benefit there. The rest of our logistic assets performed right in line with plan. So that includes our marine business, our rail and trucking business, as well as our business out of Cushing, our terminals at Cushing and Point Comfort along the Gulf Coast. Commodity crude price, absolute crude price does not have a significant impact on our crude business. It's really a differential or basin differential is what would have the most significant impact and we did not see a lot of swing there. So generally speaking, The base business operated at budget. The Grand Mesa asset performed slightly ahead of budget, which drove the beat. Our midpoint of our guidance is $200 million for the year, which is $50 million a quarter, which should be consistent throughout the fiscal year.

Great. Thanks for the color, Trey. And then my follow-up is, I know it's really early days, but how is the integration of Mesquite proceeding? I mean, it's very, very well. You know, we only have one month of an indication of what's going on there, but we're connecting them to our infrastructure. We're actually expanding their pipe system to some new customers, and we're seeing the skim oil hitting our budgeted, you know, quantities. I may have spoken to the hedging, but we've hedged what percentage of our For this fiscal year, I think for the next three or four months, we're about 100% hedged.

So for the current quarter, we're about 90% hedged. For the entire fiscal year, we're 75% to 80% hedged on skim oil volumes. That includes the mesquite volumes. And we hedged when we had the run-up to $60.

Great. Well, thank you for the color.

I am showing no further questions at this time. I would now like to turn the conference back to Mike Krimbill.

Well, I have many more thoughts, but you probably don't want to hear them. So, thank you, and we'll end the call.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may all disconnect.