NGL Energy Partners LP

Ladies and gentlemen, thank you for standing by and welcome to the Q4 fiscal year 2020 NGL Energy Partners LP earnings conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to end the conference. Over to your host, CFO Trey Karlovich.

Sir, you may begin. Great. Thank you and welcome, everybody. As a 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. The 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 of crude oil, natural gas liquids, gasoline, diesel, and biodiesel, volume of crude oil, natural gas, and natural gas liquids production, level of demand and the availability of supply for crude oil, natural gas liquids, gasoline, diesel, and biodiesel, the level of crude oil and natural gas drilling and production in areas where we have operations, the effect of market and weather conditions on supply and demand for crude oil, natural gas liquids, gasoline, diesel, and biodiesel, and changes in general economic conditions, including market and macroeconomic disruptions resulting from the novel strain of coronavirus pandemic and related governmental responses. Other factors that could impact these forward-looking statements are described in Risk Factors in the Partnership's recently filed annual report on Form 10-K, 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 covering 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'll now turn the call over to our CEO, Mr. Mike Krimbill. Mike?

Thank you, Trey. Good evening. Welcome to the NGL Learnings Call for Fiscal 2020 and what we see ahead in 21. In addition to Trey and myself, we have our Executive VPs of Crude Oil Logistics, Mr. Don Robinson, NGL Logistics, Mr. Jeff Pinter, and Water Solutions, Mr. Doug White, who will be available to answer your questions. We are here to report strong fourth quarter and record fiscal year 2020 adjusted EBITDA results from continuing operations of 590 million. On a GAAP basis, we reported a net loss due to non-cash impairments that Trey will address. Our transition away from retail propane refined products and certain shale oil basins to those that are the most economic is complete, and we are now performing very well on a combined basis in the three segments we are focused on for the future. To recap 2020 results before turning to the new fiscal year, one, crude oil logistics performed at the high end of our previously announced range. Two, NGL logistics significantly exceeded our expectations in both the butane blending and wholesale propane business components, greatly exceeding the high end of the range. Water solutions came in at the low end of expectations due to delayed activity by producers, i.e. lower volumes, and higher costs in several categories, including comp, generator, diesel, and repair and maintenance. These costs have been addressed and will be discussed in a few minutes. We averaged 1.7 million barrels per day in the fourth quarter with a high of 1.9 million barrels a day in March. The Delaware represented nearly 80% of the averages. Based on cruise prices at the time, the volume trend was increasing and we were on pace to exceed 2 million barrels per day. Our water infrastructure is substantially complete as reflected in our reduced fiscal 21 CapEx. In summary, the 24-inch LEX pipeline from Lee County to Texas has been in service since Q3. The 24-inch WEX pipeline from New Mexico south to Orla was in service in Q4, and the extension further south to Mentone will be in service this month. The 24-inch Orla Express from the border of Lee and Eddy County south to Orla and Powers is in service. and the 30-inch Poker Lake pipeline was commissioned two weeks ago. It's flowing volume currently. We expect larger volumes beginning in the second quarter. And as you know, this line we put in service for Poker Lake and the contract we have there that will have substantial future volumes. We now have 3.4 million barrels of disposal capacity in the Delaware Basin and 535 miles of pipeline in service. Now on to fiscal 2021. You have heard many midstream and upstream management teams discuss the impact of COVID on oil price and supply demand. So we're not going to repeat those observations. We all know what happened. As of today, we have witnessed one of the greatest collapses in oil prices and a subsequent recovery in a matter of weeks. This is an extremely challenging market to predict. There are a range of outcomes depending on market development. So we're not going to provide segment guidance this fiscal year. Our diversified asset base and fewer businesses served us well in fiscal 2020. and believe that we'll continue to do so in 21. We are confirming our adjusted EBITDA guidance for fiscal 21 of $600 million. We continue to prioritize the safety and health of our employees while providing the capacity and services required by customers to move crude oil-produced water and natural gas liquids. With respect to our individual segments, crude oil logistics, Grand Mesa volumes are expected to be down 5 to 10 percent due to decreased drilling rig activity. Fortunately, in times of excess supply, our storage assets act as a hedge and provide significant contango opportunities, which we have captured and continue to do so. Certain producers that shut in production in May are coming back online in June due to the recent crude oil price increase. And geologistics. We have transformed this into an asset-based business with 27 terminals and 5,000 rail cars moving butane and propane. The segment includes two different businesses, one providing propane to retailers and the other butane to gasoline blenders. Retail propane demand has not decreased due to COVID-19. It is projected to benefit from an upcoming colder winter compared to the prior winter, which as you remember, was one of the five warmest in history. Butane results will be impacted by gasoline demand, which we're all watching, this winter. In both cases, there are less liquids being produced by refineries from associated gas with crude oil production and shut-ins in the Northeast. We are optimistic about performance in the second half of the fiscal year. Water solutions. We previously decided to focus on the Delaware Basin, as we believe it has the best economics for producers. This is evidenced by the current rig count, whereby more than 50% of the active rigs in the U.S. are concentrated in the Permian. We exited certain shale plays to build the largest pipeline disposal capacity system in the Delaware. We do expect volumes to decline in the first six months of this fiscal year. April volumes averaged 1.6 million barrels per day and May averaged about 1.25 million barrels per day. Of this, 85% of the water is piped company-wide and 96% is piped in the Delaware. We believe the water volumes hit bottom in May. Several large customers that shut in production in May are producing again in June. So what have we done? Doug and his team have analyzed operations and found substantial cost reduction opportunities. I'm always suspicious of synergistic cost cuts in M&A transactions. I also question miraculous savings from companies that previously thought they were efficient. So what are these costs at NGL that will be reduced? Doug and his team have consolidated our SWDs, concentrating produced water in fewer locations. This consolidation allowed us to eliminate all leased generators and diesel where we had no station power. Second, from Feb 28 to the present time, we have reduced headcount nearly 15% through automation and operating fewer facilities. We have also reduced numerous other expenses, such as chemical costs and power usage, including demand charges. Doug may get into more of this, but these improvements amount to over $2 million of cash savings per month. Although we have now cut costs, increasing our efficiency, we are more focused for the long term in pursuing growth in the business through additional customers, MVCs, and acreage dedications. As these opportunities are consummated, we will announce them. We continue to be very bullish about our Delaware Water Solutions position. We can provide any product or service our customers require. So what else are we doing to get through this downturn? We are taking numerous measures to further improve our liquidity balance sheet while maximizing adjusted EBITDA. Growth capex is reduced to 50 million annually as our assets can serve the needs of our current customers. We spent a lot of money in the past few years So this lower level does make sense. We don't have a lot more to do. Maintenance cap is expected to be around 50 million also, an almost 20% reduction, primarily from the water solution segment, as we have upgraded our SWDs in prior years and are operating fewer now than we did. The cost of workovers has declined significantly, so our forecast for 2021 may be high. Additional expense savings, frankly, all the variable costs are going down. Interestingly, we're experiencing reduced medical, dental, and prescription drug costs as we've reduced headcount, and employees are avoiding hospitals, emergency care facilities, and doctor visits, instead utilizing online options and mail-order prescription drugs. Our employees are getting medical care they need at less cost and more convenience. Others, costs like T&E, are obviously down as none of us are traveling or eating out, so we expect a significant reduction in those costs. All of these reductions will improve our adjusted EBITDA performance. Our free cash flow is meaningfully positive based on 600 million EBITDA with distributable cash flow after interest expense, maintenance capital, and preferred dividends being about 295 million prior to the growth capital number we spoke of in common unit distributions. Leverage. We have reduced our leverage from 5.0 times last quarter to 4.6 times at 331. We have also been purchasing our unsecured indebtedness at a discount, such that debt has currently been reduced by another $24 million, not reflected in our 331 numbers. We have numerous small assets we expect to monetize over the next six months and will further reduce debt. And finally, our community coverage ratio has increased exceeding two and a half times as you would expect. In conclusion, we have reduced costs, limited CapEx, improved the balance sheet while focusing on positioning NGL for success over the next 10 to 15 years. We believe that the Delaware infrastructure and the other diverse assets we have will provide years of future growth with minimal capital expenditures. With that, Trey, I'll close my notes.