NGL Energy Partners LP

Ladies and gentlemen, and welcome to the NGL Energy Partners LP4Q and year-end 2022 earnings call. At this time, all participants have been placed on a listen-only mode, and we will open the floor for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Linda J. Bridges, CFO. The floor is yours.

Hi, and welcome to NGL's fourth quarter and year-end fiscal 2022 earnings call. To start, I'd like to call your attention to our safe harbor language, which can be found towards the end of the partnership's earnings release, which was filed after the market closed this afternoon. Today's remarks may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In accordance with the act, I would also like to direct your attention to the management's discussion and analysis section and the risk factors discussed in the partnership's annual report on Form 10-K for the year ended March 31, 2022, and in other SEC filings made by the partnership, which are available on our website and on the SEC's website. These, together with the safe harbor statement and the earnings release, set forth important factors that could cause actual results to differ materially from those contained in any such forward-looking statements. Looking back at fiscal 2022, our financial performance has started to produce results that reflect the quality of our asset base and validation of our strategy. Our water solution segment saw tremendous growth in fiscal 22 with adjusted EBITDA of $342 million, growing 42% or more than $100 million year over year as underlying volumes grew over 30% on a volume basis and as our skim oil sales benefited from higher realized crude oil prices. Fourth quarter volumes grew nearly 5% over the preceding fiscal quarter, and as expected, we exited the year at approximately 2 million barrels of processed volumes per day. Additionally, the partnership reported total recycled volumes of approximately 34 million barrels for fiscal 2022. We expect processed water volumes for fiscal 2023 to average 2.2 million barrels per day, a level that we have already seen in May. Margin for fiscal 2022 totaled 46 cents per barrel, which includes disposal and skim oil revenue offset by OPEX per barrel. We believe this is a reasonable estimate for margin going forward. The liquids logistics segment reported total adjusted EBITDA for fiscal 2022 of 96.5 million. Our wholesale propane business had a challenging fourth quarter and full fiscal year due to lower volumes and margins as we experienced lower demand and increased competition in the areas in which we operate, as well as challenging market conditions related to a backward-aided propane price curve over the course of our fiscal year. Despite a difficult year in propane, our butane, refined products, and biodiesel businesses performed exceptionally well with elevated margins due to tight supply markets, increases in demand for these products, and favorable location differentials. As a whole, this segment should perform slightly better than this past fiscal year as we expect to see some rebound in our propane business in fiscal 2023 based off of current market conditions as well as earnings from Ambassador Pipeline, which was not in service during fiscal 2022. Please remember, however, the majority of cash flow for the liquids logistics segment is and will continue to be generated in the second half of our fiscal year. Drivers include winter weather and agricultural demand for propane, gasoline demand, refining activity, and market disruptions. Crude logistics reported adjusted EBITDA for the year of $146 million, which was higher than expected due to realized gains on the sale of inventory due to rapidly increasing crude oil prices. These gains are expected to be offset by approximately $12 to $13 million of net realized losses related to commodity derivatives in the first quarter of fiscal 2023. Similar to what we saw in fiscal 22, going forward, should we continue to experience a highly volatile crude price environment, we would expect to continue to see fluctuations in our quarter-over-quarter adjusted EBITDA numbers due to timing differences between the physical and financial settlements of inventory sales. Again, these fluctuations relate to timing, and any increase or decrease due to timing in a particular fiscal quarter will be offset in subsequent fiscal quarters, leaving the underlying business neutral. For fiscal 23, we expect the underlying crew logistics business to perform relatively in line with fiscal 2022. Moving to the balance sheet, we repurchased approximately 86 million of unsecured notes during the fiscal year. The remaining majority of free cash flow generated in fiscal 22 remains on the balance sheet, driven by an increase in inventory values due to higher commodity prices. Should inventory values decrease, we should see this cash flow come back to us, at which time we expect it will be utilized for debt reduction of the 2023 senior notes. Additionally, our distributable cash flow for fiscal 2022 includes approximately $55 million related to certain realized losses on commodity derivatives related to our previously discussed CMA differential role hedge strategy that will return to the partnership in the form of realized gains on or before the expiration of the hedge strategy in December of 2023. Liquidity on March 31st totaled $233 million. In light of rapidly increasing commodity prices, we proactively reached out to our bank group to increase our ABL commitment to accommodate higher working capital needs. Subsequent to the quarter end, our commitment was temporarily increased from $500 to $600 million with full participation from our bank group. This increase, along with certain other initiatives being pursued, should give us sufficient liquidity to fund elevated working capital requirements, as well as repay most, if not all, of our 2023 notes by the end of this fiscal year. While we're not prepared to discuss the specifics of these initiatives on this call, we hope to have updates in the coming months. With that, I'll turn it over to Mike for his comments.

Thank you, Linda. Well, this is a very exciting time for NGL. We are turning the corner and have strong momentum going into fiscal year 2023. Our water solutions business is continuing to grow significantly. Our prior year's capital investment is fueling that momentum, allowing us to provide capacity to our upstream customers without delays. Before we get into the specifics, briefly review our current focus. One, prudent management of the balance sheet, reducing absolute debt and leverage. 2023s are the primary target. Two, reduce leverage below 475 in order to reinstate the preferred dividends and increase our financial flexibility. We will achieve this through a combination of reduced debt and increased EBITDA. Three, generate significant free cash flow from operations to provide the cash to repay the debt. Four, enhance that free cash flow by reducing working capital requirements, decreasing CapEx, and monetizing underutilized assets. While at the same time, continue to pursue growth opportunities, leveraging volume capacity in our water solutions network with a minimal new investment. We do not turn down any water offered at a reasonable price. Due to the breadth and redundancy of our water pipeline system, our customers know they can depend on NGL when we commit to take their water. Now let's discuss fiscal 23. Our EBITDA guidance is in excess of 600 million. We do not have an upper range as it could vary significantly depending upon the continuing strong commodity price environment. We are increasing our water solutions EBITDA forecast from 385 million to at least 400 million. The fourth quarter of the recently completed fiscal 22 was the first $90 million EBITDA quarter for water solutions. We have clarity into the first quarter of fiscal 23, where it appears we will realize our first $100 million EBITDA quarter. In terms of volume, the fourth quarter of last year averaged 1.93 million barrels a day, and we expect the first quarter of 2023 to average 2.2 million barrels a day. both excluding any recycled volumes. This is more than a 10% increase in just three months. Volumes in excess of this level during the subsequent quarters of this year could allow us to further increase EBITDA guidance. As a result of increased water volumes, we are capturing additional skim oil and realizing higher revenues due to both more volume and higher crude prices. At this time, we do not have clarity into the first quarter estimates for crude oil and liquids logistics segments, as they have significant inventory quantities subject to the timing of physical versus financial results. In other words, hedge gains or losses versus the offsetting financial gains and losses. We are cautiously optimistic, but conservative at this time with respect to these segments, guiding EBITDA roughly flat for fiscal 23. We will have the Ambassador Pipeline fully operational and in service, connected to Marysville this summer, such that we will realize a full winter of performance this year from our investment in Michigan. Continuing with items that determine our free cash flow, interest expense is about 95% fixed for NGL, so the increase in interest rates is not impactful. As we repay indebtedness, lower interest costs provide additional free cash flow each year of 15 to 25 million depending on the debt reduction. Regarding CapEx, due to our legacy investments, our CapEx should decrease annually. In fiscal 22, maintenance and growth CapEx were 47 and 75 million respectively, about 120 million. Fiscal 23 is forecasted to be about 20% lower at 39 and 60 million respectively. Approximately 50% of the growth capex in 23 is committed to the new long-term produced water transportation recycling disposal agreement announced February 10th this year. This agreement contemplates a 24-inch pipeline with four new SWDs and surface facilities. In addition, we are twinning the 30-inch Poker Lake pipeline to provide combined capacity of the two 30-inch lines of 700,000 barrels per day. plus a 16-inch pipeline in SWD for a third customer. We are currently negotiating with additional producers that could result in further dedications and thus connections that would require some capital. We continue to monetize underutilized assets as every dollar helps reduce debt. We realized about 20 million of sales in 22, and we are progressing towards another 20 million this year. In summary, we're expecting a strong beginning to the current year, with the potential for an even stronger back half of the year. And finally, I would like to tell KJ65 and JHH2020 that, yes, I am dancing. With that, we'll open it up for questions.