NGL Energy Partners LP

Ladies and gentlemen, thank you for standing by and welcome to the Q1 FY 2021 NGL Energy Partnership LP earnings conference call. At this time, all participants are in a listen-only mode. After this speaker's presentation, there will be a question and answer session. To ask a question during this time, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. and if you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Mr. Trey Karlovich, CFO. Please go ahead, sir.

Great. Thank you and welcome, everybody. First, I hope everyone is staying safe and healthy. 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 NGO 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 effect of 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 accretive 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. 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. We believe it is important to cover our first quarter financial results before Mike gives his thoughts on the business and the rest of fiscal 2021. I will discuss our operating results for the quarter for each segment and then turn the call over to Mike before opening up the line for questions. We also have our EVPs, Doug White for water, Don Robinson for crude, and Jeff Pinter and Don Jensen for liquid and refined, along with other members of management on the call to assist with Q&A. Starting with crude, the crude segment reported approximately $31 million of adjusted EBITDA this quarter. There are several items impacting the crude segment this quarter, including a benefit of contango with our storage assets, offset by costs related to the CMA plus roll component and the pricing of barrels purchased and shipped on Grand Mesa. the timing of recognition of hedge gains and losses, as well as profit embedded in our inventory for July sales. We have estimated approximately $16 million of profit embedded in our inventory, which is valued at weighted average cost that we expect to recognize during our second quarter. We have already realized the majority of the hedge losses associated with these barrels when we rolled those hedges forward from June, so this is just a matter of timing. Grand Mesa volumes averaged 119,000 barrels per day this quarter, Thank you for joining us today. Finally, for crude, we benefited from contango storage for a portion of the quarter. However, the forward curve has flattened considerably, and we do not expect to see any significant contango for the remainder of this fiscal year. So, from an earnings perspective, crude generated $31 million of adjusted EBITDA. We have deferred earnings estimated at $16 million to be recognized later this year, most likely second quarter, and we lost approximately $11 million compared to historical results from the CMA roll. Moving to water, water adjusted EBITDA was $57 million for the quarter. Total disposal barrels averaged 1.4 million barrels per day during the quarter as volumes declined significantly in May. Delaware basin volumes totaled 1.1 million barrels per day, approximately 80% of total volumes. Eagleford volumes averaged 95,000 barrels per day, down 64% compared to last year, and have been the most impacted by the decline in prices, rigs, and production shut-ins. We were expecting a slower recovery of volumes in this basin. DJ volumes were down as well to about 132,000 barrels per day compared to about 170,000 barrels per day in the comparable quarter last year. We received an average disposal fee of 63 cents per barrel for the quarter, very consistent with pricing in prior quarters. Of note, we did not sell all of our skim oil recovered during the quarter. Instead, we utilized our storage at each facility to hold barrels and we have been selling those barrels at higher pricing during the current quarter. This should be a nice benefit to the second quarter when we are expecting about $4 million of incremental revenues. Our skim oil volumes remain hedged for calendar 2020 with approximately 3,000 barrels per day hedged at an average price just over $56 per barrel through December. Operating expenses came down significantly and averaged $0.32 per barrel for the quarter, a 25% reduction on a per barrel basis from last year. We completed a significant reduction in headcount as well as reductions in chemicals and other supplies and utilities costs. We only benefited from these reductions in the last month or so of the quarter and expect our operating costs per barrel to continue to decrease in the second quarter and beyond as we target OPEX per barrel of less than 30 cents. Moving to liquids, adjusted EBITDA for our liquids and refined products segment totaled $12 million this quarter. Volumes for propane were strong through the quarter and compared to last year as we saw little to no impact in propane demand as a result of the pandemic at this time of the year. Butane, refined fuels, and other liquids were down compared to last year, primarily as these products are utilized in transportation. We have seen a pickup in volumes heading into the second quarter. However, we continue to be cautious on our volume expectations for these products this year. Product margins were generally in line with our expectations during the quarter. as this is the period that we are building inventory and preparing for the blending and heating seasons. Overall, our quarterly results were impacted by the pandemic like many others. However, we took the opportunities to capitalize on our asset positions and maximize value, most of which will be recognized in future periods. Had those items been fully reflected in the first quarter, our financial results would have been more in line with market expectations. Based on these results and expectations for the rest of fiscal 2021, We are adding a range to our adjusted EBITDA guidance of $560 to $600 million. Turning to capital expenditures and cash flows, our growth capex totaled approximately $21 million for the quarter as we are completing the water infrastructure projects we started last year, including the Poker Lake tie-in for Exxon, which we expect to bring online this fall. We have entered into incremental acreage dedications recently that require minimal, if any, growth capex to meet the producer's disposal needs. We have made no changes to our target growth capex for fiscal 2021. Note, we did fund a significant amount of our growth capital expenditures that were incurred prior to and accrued on March 31, 2020, coming into this fiscal year, as well as approximately $66 million of the $100 million remaining for the deferred purchase price of Mesquite. The remaining $34 million for Mesquite will be funded ratably through December 2020 and has been accrued on our balance sheet. We also focused on reducing our maintenance capex, which came down again in the first quarter to $9 million. Our combined capital expenditures forecast remains approximately $100 million for both growth and maintenance capex for the entire year. Our common unit distribution of 20 cents per unit for the quarter, 80 cents per unit on an annualized basis, was declared a couple weeks ago, along with our preferred unit distributions, and will be paid on August 14th. We continue to expect FY 2021 coverage to exceed two and a half times based on our Justice EBITDA guidance and also continue to expect fiscal 2021 to be free cash flow positive with excess cash flow used to reduce indebtedness and improve leverage. Our leverage remains around 5.3 times at June 30th and we expect to stay at this level for the next couple of quarters under current operating conditions. We are also evaluating other opportunities to reduce leverage including joint ventures and non-core assets. Finally, as a general matter, we do not generally comment on pending litigation. However, as many of you are aware, one of our customers is taking the steps within his Chapter 11 bankruptcy to attempt to reject our transportation contracts relating to the Grand Mesa pipeline. Unfortunately, those contracts are currently subject to litigation. Last week, we filed an objection to their motions to reject the two contracts and we separately filed a motion to lift the automatic stay so that we can seek the proper input from FERC, which we believe has jurisdiction over the contracts. The hearing related to these matters is set with the court for September 3rd. Obviously, our filings are public record and you are welcome to review them. Basically, at this time, I cannot add anything additional here that isn't contained in those filings. As in any disputed matter, NGL is always amiable to resolving matters in a commercially reasonable way, but there are times where we owe it to our unit holders to seek validation of our contractual rights and use the courts to do so. And we believe this circumstance is one of those matters. So we will be considering all legal possibilities with respect to defending the value in these contracts for our stakeholders. That concludes my prepared remarks. I'll now turn it over to Mike.

Thanks, Trey. The past quarter presented us with many challenges and opportunities which we have been managing like all of our peers and most companies in general. We have seen unprecedented volatility in crude prices and other commodities, significant reductions in demand for crude, refined fuels, and certain liquid products, and an increase in upstream producers facing significant financial difficulties. We have taken numerous steps to reduce operating costs and capital expenditures while optimizing our assets. We've been working closely with our producer customers to make sure we are meeting their operational needs and helping them to manage through this environment as well. We took advantage of an extremely steep, contangled, crude environment in April-May, only to see the forward curve flatten considerably in June and through July. It's traced that a significant portion of our profits are embedded in our inventory at June 30, and we expect to recognize these margins when the product is sold in our second quarter. We held skim oil barrels in tank and expect to monetize those in the upcoming quarter as well at higher average prices than we saw throughout the first quarter. We have also taken this opportunity to add acreage dedications, expand our market share, and further solidify our core operating areas in the water solution business. In the Delaware Basin, we have all of our large diameter pipe online and flowing water. The 24-inch LEX pipeline east to Andrews County, Texas is in service. The 24-inch WEX pipeline from Eddy County to Mentone, Texas is operational, as is the 24-inch Orla Express from Lee County to Mentone. Our new 30-inch pipeline in southern Eddy County south to Texas is in service and flowing water as well. This is a major milestone for NGL as these capital expenditures are now behind us. Water volumes are currently increasing with additional substantial contracted volumes coming on the remainder of the year. As Trey mentioned, we have reduced operating expenses in our water segment by approximately $2 million per month beginning in June, which we will continue to fully realize in our future quarters. In closing, we took this quarter to focus on items that we can control as we continue to position NGL for long-term success, focusing on the future while managing the short-term obstacles and opportunities. With that, shall we open it up for questions?