NGL Energy Partners LP

Good day and thank you for standing by. Welcome to the Q1 FY 2022 NGL Energy Partners LP Learnings conference call. At this time, all participants line are in a listen-only mode. After the speaker's 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 keypad. Please be advised that today's conference is being recorded. If you require any further assistance, you may press star 0. I would now like to hand the conference over to your speaker for today, NCFO Trey Karlovich. Please go ahead.

Great. Thank you. And thank you, everybody, for hanging on as we got connected. As a reminder, this conference call includes forward-looking statements and information. Words such as anticipate, project, expect, estimate, plan, goal, forecast, intend, could, believe, may, will, and similar expressions and statements are intended to identify forward-looking statements. While NGL Energy Partners LP believes that its expectations are based on reasonable assumptions, there could be no assurance that such expectations will prove to be correct. A number of factors and risks could cause actual results to differ materially from the projections, anticipated results, or other expectations included in the forward-looking statements. Certain of these factors include changes in general economic conditions, including market and macroeconomic disruptions and related governmental responses, the prices of crude oil, natural gas liquids, gasoline, diesel, biodiesel, and energy prices generally, The general 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 and facilities The effective weather conditions on supply and demand for crude oil, natural gas liquids, gasoline, diesel, and biodiesel The availability and cost of capital and our ability to access certain capital sources and political pressure and influence of environmental groups upon policies and decisions related to the production, gathering, refining, processing, fractionation, transportation, and sale of crude oil, natural gas, natural gas liquids, gasoline, diesel or biodiesel, and other refined products. 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 releases. You should not put undue reliance on any forward-looking statements. All forward-looking statements speak only as of the date hereof, and except as may be required by the state and federal securities laws, we undertake 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, annual report on Form 10-K and quarterly reports on Form 10-Q for more information on our use of non-GAAP measures, as well as reconciliations of differences between any non-GAAP measure discussed on this conference call to the most directly comparable GAAP financial measure. This information is also available on our website at nglenergypartners.com under the Investor Relations tab. Again, apologies for the delay, but welcome to our first quarter fiscal 22 earnings call. We just issued our earnings release and filed our 10Q this afternoon, and I plan to quickly discuss our financial results, and then we will open the lineup for any questions. Overall, we had a very strong quarter in our water solutions segment with a 19% increase in disposal volumes over our previous quarter, and we continue to maximize our EBITDA per barrel, which increased 17% over last quarter, driven by strong disposal rates per barrel and lower operating expenses. We have some inventory and hedging noise impacting our crude segment this quarter, which we expect to make up this year as we turn our inventory and realize our current hedge positions. Our liquid segment reported lower earnings than typical for this quarter as we moved out of the peak winter season and started to prepare for storage through the summer in a rising price environment. We also had some profits embedded in our inventories and hedges in this segment as well. Remember, this is a seasonal business that generates most of its cash flow during the butane blending and propane heating seasons, which run from the fall through the winter and we continue to believe this business will be in line with expectations for the year. The steep run-up in commodity prices during the period, including crude oil, propane, butane and biofuels, has driven an increase in our inventory balances and working capital. Working capital needs increased almost $100 million this quarter. We offset a portion of this increase with the sale of Sawtooth, which we announced and closed in mid-June. The $70 million gross proceeds were utilized to fund transaction costs and reduce debt including about $19 million of the 2023 notes with the remaining going against our revolver during the period. Our funded capital expenditures totaled $47 million this quarter including the accrued capital expenditures from the prior quarter. Our capital expenditures are front half weighted this year. This combined with operating cash flow resulted in an overall increase in debt balance of approximately $49 million for the quarter. We noted last quarter that we expect to generate significant excess cash flow during the year with a focus on debt reduction and leverage improvement. The majority of that excess cash flow will be recognized in the second half of the year as we complete most of our capital projects, liquidate inventories, and monetize our working capital over the coming months. This assumes we are in line with our guidance and there are no significant increases in commodity prices, which could cause our working capital requirements to increase as well. We are reaffirming our fiscal 2022 EBITDA guidance range of $570 to $600 million and guiding to the lower end of that range following first quarter results and the sawtooth sale. Our total capital expenditures are still expected to come in the middle of our $100 to $125 million range for this fiscal year. We reported a net operating loss for the quarter of $69 million, which includes a $60 million loss on the sale of sawtooth. Our adjusted EBITDA totaled $91 million this quarter. Water Solutions Adjusted EBITDA was a record $81.5 million for the quarter, driven by Delaware basin volume growth, operating expense reductions, and water sales, including freshwater reuse and recycling. Disposal rates per barrel remained strong at $0.61 per barrel, and operating costs per barrel came in at $0.26 per barrel. Overall EBITDA per disposal barrel for this segment was $0.54 per barrel, the highest level we have had in quite some time. Crude oil logistics adjusted EBITDA came in at $13.1 million for the quarter. However, we estimate that about $15 million of deferred profits is in our inventory and hedge book and will be recognized in the coming quarters as we turn inventory and realize current hedge positions. This assumes crude prices do not escalate significantly over this period of time. Grand Mesa volumes came in at 77,000 barrels per day, a nice recovery from last quarter as DJ Basin completion activity is slowly increasing from last fall and winter. Liquid Logistics reported a just debit of $5.6 million this quarter, which is traditionally a lower earnings period for this segment. Both our butane and propane businesses believe they are well positioned going into the summer storage season and ultimately the peak demand periods for both businesses. We continue to see lower volume demand for our refined products business. However, we benefited from an increase in biofuel prices during the period. Our corporate costs were about $9 million this quarter, in line with expectations and with prior periods. We continue to focus on the following factors for this fiscal year and believe investors should continue to do the same. Delaware basin oil production and completion activity and the associated demand for water services remain the key. As noted, we saw a significant increase in the quarter in disposal volumes and continue to see growth into the second quarter as well. We expect rateable growth in this area throughout the fiscal year, and we are also growing our resale and recycle services in the basin. DJ Basin production growth from our core producer customers, driving volume increases on Grand Mesa pipeline, where we started the year slightly ahead of our initial expectations and expect continued rateable growth throughout the year here as well. We are also expecting a strong recovery in demand for refined products and blending feedstocks, most notably butane, to pre-pandemic levels. We expect blending demand to return to more normalized pre-pandemic levels. However, the recent resurgence in COVID is something we will continue to monitor and react accordingly. We will also continue to focus on cost reductions across all of our segments and at the corporate level and look to minimize capital expenditures to meet our operational needs. This current quarter was impacted by the run-up in commodity prices, which drove certain hedge losses, most notably in our crude logistics segment, and working capital needs on our balance sheet. Assuming prices do not significantly increase from these levels, we would expect to recognize offsetting inventory and hedge gains in the coming quarters to bring the crude logistics segment and our working capital borrowings back in line with expectations. Our liquidity position was about $300 million at June 30th, which we believe is adequate to operate our business in this environment. We purchased a small portion of our 2023 notes during the quarter and expect to repurchase more bonds as we generate excess cash flow throughout the year. That concludes our prepared remarks for the quarter. Mike is with me and we will now open the lineup for your questions. Erica, can you please open the line for questions?

Yes, I'm sorry. At this time, I would like to remind everyone in order to ask a question, you will need to press star 1 on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Tarek Hamid from JP Morgan. Your line is open. Please go ahead.

Good afternoon, guys. I guess just first on the derivative loss in the crude oil segment, it looks like it's about $38 million in the first quarter. Can you just talk a little bit about sort of how much of that was realized versus unrealized and, again, sort of what you'd expect to see in terms of derivatives over the remainder of the year?

Sure. So obviously we had a significant run-up in commodity price from April 1st through June 30th, right? You know, prices have come back down a little bit here over the past couple of days, I guess. So what happens in that period is we're holding inventory and rolling those hedges as we're going to recognize those hedge losses in this current period. As we roll those to the future, you'll start to bring that profit back in. So during the current quarter, I'm flipping to the exact numbers for you. So in crude logistics, we had a realized loss of $52.7 million, and we had unrealized gains of $14.5 million, and that's what I was referring to as the $15 million that we would expect to come back to us in the future periods. The realized loss of 52.7 is included in our EBITDA that we've reported. The 14.5 is not yet included, but will be recognized in the future.

In terms of what you'd expect from a realized gains or losses, just the 15 million realized gain you'd expect on a go-forward basis, obviously things can change quickly, but in terms of where it's at now?

It would change depending on where commodity prices go, obviously. but any offset we should see on the physical side. Again, there can be some timing delays, but overall we would expect to make up any difference on the physical, which again, of that $52.7 million loss for the quarter, we made up a significant portion of that on the physical side, but we haven't turned all of that inventory yet.

Got it. And then... In terms of just the reaffirmed guidance, you know, just sort of mathematically kind of getting to low end of guidance for the rest of the year sort of requires EBITDAs to be about 160 million per quarter. That's just the 570 minus 91 divided by three. I guess if you think about sort of the bridge to that, obviously a chunk of that is sort of a normalization of the hedge position in CRUDO, but how much of that is just growth in water to sort of get you to those sort of earnings numbers to hit guidance?

So we're expecting pretty rateable growth in water. Water had a very strong quarter. I think water performed, I would imagine, in line, if not above most of the street expectations. We would expect some continued growth in that business, again, pretty rateable throughout the year. Remember, our liquid segment generates most of its profit in our third and fourth quarters, so you can't just take first quarter or second quarter, and that's not a steady growth. or Trajectory, right? You can't just say three quarters at 160 million. You're going to have some quarters with liquids, particularly the third and fourth quarters that will be stronger than what you see in the first and second quarters. And then we do expect, again, the crude business to get back more in line with prior run rate expectations.

Got it. And then just last one for me, you talked about CapEx being front-end loaded. Anything else we should think about in terms of uses of cash throughout the course of the year besides CapEx and potentially getting some working capital back?

No, those are the keys. So again, getting working capital back to the March levels. Our uses of cash are going to be interest expense. and then CapEx. And again, the CapEx interest expense we're expected to be about $250 million this year and CapEx is $100 to $125 million. The remainder would go to debt reduction.

Got it. I'll jump back in the queue. Thank you. Thanks.

Your next question comes from the line of Philip Duffner from Aurelius Capital Management. Your line is open. Please go ahead.

Thanks for taking my question. The first one on the crude logistics, we just ran through the hedging losses and the unrealized gains. But if you were looking at Q1 at kind of a normalized number, adjusting for whatever was going on with the hedges, what would be the adjustment and what would be the EBITDA?

Yeah, we would have been at about $29 million for the quarter. for Crude instead of 13.7.

Got it. And in terms of the liquid business, what caused it to be weaker than it has been in the past?

A couple of things, Philip. So one, as I noted, commodity prices are significantly higher. That causes demand to So you're not having pre-buys and some of those things at these high commodity price levels. People are generally waiting to purchase product. And we don't believe that would be significant for the overall year, but it did impact the quarter, as well as we had some inventory impacts there, too. So generally, I think if you look at our liquids business, if it did between $10 and $15 million in the first quarter, that was a pretty normal-type quarter. I think those two factors were the biggest driver in why this quarter was behind that level. And I would probably put about half on each. So we are expecting demand to pick back up. Again, with the butane business, we are expecting to pick up in blending for this fall over what we saw last year. We are being cautious with what's going on from a COVID perspective and the Delta variant today. But we still think that the economy is not going to shut down, that we're not going to be back in a lockdown like we saw prior year. So we are expecting a recovery there. Propane, again, will be highly dependent on heating demand. So again, that's a to be determined. But as of this point in time, first quarter is not a significant period and we think that we'll still be in line.

Got it. And one last question. In the cash flow statement under investing activities, you have a $60 million loss related to the net settlement of derivatives. How does that relate to the numbers you've mentioned and what's in the income statement?

Yeah, I mentioned most of that's on the crude side. That's the $52.7 million. You will see one additional add-back related to some crude positions that we put on related in combination with the new extraction agreement. But that's all laid out in the earnings release in the 10Q. Okay, thank you. Of that $60 million, a little over $50 million is related to the crude segment. Got it.

Your next question comes from the line of Patrick Fitzgerald from Baird. Your line is open. Please go ahead.

Hi. Thanks for taking the questions. Sorry if I missed this, if you said this, but what was Sawtooth EBITDA?

So we never disclosed Sawtooth EBITDA separately. would say about Sawtooth is we sold it for $70 million and that was a pretty nice deleveraging multiple. So that's I think what I can share from that transaction at this point, Patrick. Fair enough.

So the water EBITDA margins are per barrel processed. Looks like it continues to go up and I know you have the new stuff coming online. Is there any reason to think that your margin per barrel will change going forward with these new projects coming online?

Sure. A couple of things to note there. One, our disposal rate per barrel as we grow Delaware Basin volumes could come down a little bit, especially with some of the larger dedications. What we saw this quarter was we saw higher crude oil prices, so that benefited our margin per barrel to the extent that we're not hedged from a skim oil perspective. And then additionally, we have these new services that we're providing, including reuse, recycle, freshwater, et cetera. As those increase, that's not on a per disposal barrel basis. So we've historically reported on a per disposal barrel. Those revenues will benefit us from a margin per barrel metric.

Okay. All right. Thanks for that. And is there any way to think about your volumes Increasing what they did this quarter. Is there any way to think about what was organic versus your capex was front end loaded. There's some growth capex in there. Is there any way to think about organic versus new connects for the water volumes?

So the majority of our capital expenditures is in completing our infrastructure and completing our pipeline, so interconnecting the entire system. Remember, we don't lay to individual wells, so we don't have incremental well connects per se. We may lay into a new area for a producer, but everything that we've done from a CapEx perspective has supported our existing system, our existing producer customers So I would call it all organic. Remember, we have well over 3 million barrels a day of disposal capacity in the Delaware Basin. Most of the volume growth was in the Delaware, but we're still utilizing less than half of that capacity. So I would call all of the growth organic.

Okay, yeah, no, that's kind of what I was asking. So thank you. And then, you know, I didn't quite get your commentary on working capital. Obviously, it was a headwind this quarter. Do you expect it to unwind by the end of the year or is it just kind of like what needs to happen price wise for that to unwind in the back half of the year?

Sure. When you get a chance to get into the 10Q, you'll see that our volumes are up a little bit. and then prices are up as well. If prices come down, our working capital comes down. If prices continued to rise, our working capital could go up, but it would have to rise at a similar level that we saw from April 1st to June 30th, which was about a $15 to $20 per barrel increase in crude price. And that translated to liquids as well. So We will have to continue to manage working capital through the fall and winter from a liquids perspective, but we're not expecting an incremental $15 to $20 per barrel increase in commodity price. And then as we liquidate that inventory, that working capital does come back, plus the margin associated with it as well.

Okay. All right. Thank you. Yep.

Your next question comes from the line of Ward Blum from UBS. Your line is open. Please go ahead.

Hi. Good afternoon. Is there any way to project your debt versus EBITDA number for the year end? Has that changed from the prior quarter or not?

It has not changed to this point in time. Again, our quarter over quarter EBITDA, first quarter of last year to first quarter of this year is about the same. Our debt balance increased slightly, but our leverage would be consistent from 331 to 630 at this point in time. We are expecting leverage to decrease as we pay down debt through the year, as well as generate incremental EBITDA this year over last.

Okay, thank you.

Your next question comes from the line of P.J. Schultz from RBC Capital Markets. Your line is open. Please go ahead.

Great. Good afternoon. Hey, Trey, just on the water ramp, can you just maybe define kind of what you mean by rateable growth there, the volumes this quarter? We're definitely a step ahead of our model and pretty good jump from the last several quarters. So maybe just how you envision growth. Volumes, maybe exiting this fiscal year. That's kind of in your plan to get your guidance. Yep.

So thanks, TJ. So we would expect volumes to be between about 1.9 and 2 million barrels a day and pretty rateable growth trajectory to get to that point by March of next year. So I think this quarter was definitely a positive step towards achieving those targets. You know, Generally speaking, we're looking at 100 to 125,000 barrels per day increase quarter over quarter.

Okay, that's helpful. I guess just only other question. Are there any other asset sales on the table, just as you think about the pace you want for debt reduction?

We're not currently looking at anything significant, TJ. As we mentioned on the last earnings call, we're happy with the three segments that we operate in. There may be some one-offs here or there, smaller terminals. I don't expect anything the size of a sawtooth. I think sawtooth was one that we have been working on. We kind of saw that one coming last quarter, so that's what we were generally referring to from a non-core asset sale perspective. So at this point in time, nothing of significance, but there could be some small things here or there. Okay, great. Thanks. Yep.

The next question comes from the line of Lauren Herman from Bank of America. Your line is open. Please go ahead.

Yeah. Hi, guys. Thanks for taking my question. I just have, I guess, one question. I guess more kind of philosophical or conceptual question for you guys on the crude logistics derivative exposure. Can you talk a little bit more kind of like what is encompassed there? I think, I guess I just hadn't appreciated that there was that much commodity price exposure during that segment. So I guess anything you're like, you know, what you're hedging or what the derivative exposure pertains to and how we should think about it going forward would be helpful.

Sure. So we're primarily hedging our inventory. We carry about 1.2 to 1.4 4 million barrels of crude. So during a quarterly period, you'll have your crude sales that you're selling obviously one month after you've made that purchase is when you'll get to have your settlement. You're rolling your inventory hedge as well. In a backward-dated market, you're having to impact your margin by that roll. So if the market's Thank you for joining us. costed out on a weighted average cost of goods sold. So there is a bit of a disconnect between the two. I don't think this is atypical for other midstream companies that have similar types of businesses. Again, we are expecting that to come back through. If commodity prices stayed the same, we would make all that margin back in our physical sales. If commodity prices fell, that could accelerate the timing of making that profit back. because you're going to capitalize on your hedge position for the current inventory. If prices continued to rise, you would continue to have a mismatch over that period of time until you were able to get your inventory to catch up with your hedge position.

Does that make sense?

There are no further questions in the queue. I would now like to hand the call over to Mr. Trey Karlovich. Please go ahead, sir.

Great. Thank you. Thank you, everybody, for your time. Again, I appreciate you sticking on the line as we got connected. And if you have any follow-ups, please don't hesitate to reach out. Appreciate it.

This concludes today's conference call. Thank you all for joining. You may now disconnect.