NGL Energy Partners LP

Greetings. Welcome to the NGL Energy Partners LP3Q23 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note, this conference is being recorded. I will now turn the conference over to your host, Brad Cooper. You may begin.

Thank you. Good afternoon and thank you to everyone for joining us on the call this afternoon. After the market closed today, we issued an earnings release, investor presentation, and filed our queue. Comments today will include plans, forecasts, and estimates that are forward-looking statements under the U.S. securities law. These comments are subject to assumptions, risks, and uncertainties that could cause actual results to differ from the forward-looking statements. Please take note of the cautionary language and risk factors provided in our SEC filing and earnings materials. Let's get into the quarterly results. With three quarters in the books, fiscal 23 is coming to fruition, and we are extremely happy with what we are seeing. The plan that Mike outlined to employees in the spring of 22 and communicated externally on the fourth quarter call of fiscal 22 is becoming reality. As we enter the home stretch of this fiscal year, I want to thank all of our employees for their hard work and tenacity to get us to this very exciting spot for the company. We're increasing our water solutions adjusted EBITDA guidance from over $430 million to over $440 million for fiscal 23. This strong performance out of water and the return of working capital has allowed us to lean into the repurchasing of our 23 unsecured notes over the last few quarters. We started this fiscal year with an outstanding balance of $476 million on the 23 notes. At the end of the third quarter, the balance on the 23 notes was $302 million, and during the first few weeks of January, we retired an additional $100 million of the 23 notes, leaving a current balance of $203 million. This is significant progress in reducing the balance on these notes, and our plan is to fully retire the remaining balance no later than June 30th while maintaining our strong liquidity position to run all of our businesses. From a balance sheet perspective, we have reported total liquidity at the end of the third fiscal quarter of approximately $280 million and borrowings on the ABL facility of $156 million. As a reminder, we are entering the liquidation phase of the propane season, and we would expect to see the ABL balance decrease over the fourth fiscal quarter. At the beginning of February, we started the process with our bank group to extend the $100 million accordion feature within our ABL that will allow us to have an ABL commitment of $600 million. This process should be completed by mid-February. With our strong trailing 12-month adjusted EBITDA and the reduction of the 23 notes, our total leverage should be below 4.75 times at the end of this fiscal year. This is a very important milestone, but we will not rest as we continue our laser focus on strengthening the balance sheet over the next fiscal year. As I mentioned earlier, our water solutions business continues to see strong growth. Water Solutions is benefiting from owning and operating the largest integrated network of large diameter produced water pipelines and disposal wells in the Delaware Basin. Our water disposal volumes have grown approximately 32% this quarter over the same quarter a year ago and 7% versus last quarter. Our Delaware system experienced three days of sub 2 million barrels of oncoming water due to cold weather in December. But with our fully integrated system, we were able to quickly recover and take advantage of unexpected volumes from non-contracted customers to achieve record volumes of over 2.7 million barrels for several days. Our third quarter EBITDA for water was not impacted by weather, thanks to our excellent field staff's efforts. The water team has continued to focus on reducing operating costs in the face of inflationary pressures while maintaining rapid growth. Operating costs were 25 cents per barrel in the quarter versus 27 cents per barrel in the second quarter. As volumes continue to grow, there is an opportunity to further lower our per barrel operating costs. All of this positions our water segment for continued EBITDA growth. It's important to note that water's strong financial performance has not been driven by $100 plus crude oil on our skim oil barrels. We hedged our skim oil in the first half of the year, and our average realized price for fiscal 23 is approximately $80, which is about where the market is today. The Grand Mesa pipeline continues to be negatively impacted by producer permitting delays in the DJ Basin. Grand Mesa averaged approximately 77,000 barrels per day compared to approximately 83,000 barrels per day in the third quarter last year. We are closely monitoring the basin activity, and as the permitting issues get resolved, we are encouraged that we could see more production out of the basin in the future. And if so, Grand Mesa is well positioned to capture its fair share of those volumes. Our RAC marketing and biodiesel businesses have benefited from the tight gasoline and diesel market to capture higher margins, and in the case of biodiesel, has benefited from cheaper additional supply driving their strong financial performance. Our butane margins, excluding the impact of derivatives, were lower as product purchased earlier in the blending season continues to compete with product purchased in a currently discounted market. Recall that the majority of the EBITDA from our wholesale propane business occurs in the months of December through March. Propane results for the quarter were below expectations, partially due to an overall warmer-than-normal winter so far. With that, I'd like to turn the call over to Mike.

Thanks, Fred. I would like to summarize the significant growth in our water disposal volumes a little bit here. If you remember a year ago, we thought we would have 10 percent a year growth, and we were way off. This first year, our water volumes grew 30 percent. In the first quarter, we saw disposal volumes grow 12 percent in one quarter versus the fourth quarter last year. In the second quarter versus first, we grew another five, and then this quarter, versus second, we saw a 7% growth rate. And we'll see some additional growth in the fourth quarter. So a 30% growth rate in water in just one year is really incredible, and kudos to our guys for being able to accomplish that. But, you know, a lot of it is we're dependable, and the producers know that if they give us the water, we will get rid of it. This impressive growth is the driver for why we increased adjusted EBITDA guidance from 430 to 440 for this year. Recently, a couple of our largest customers indicated publicly they're increasing their activity in the Delaware. This gives us confidence that water solutions volumes in EBITDA will continue growing in 2024. And again, our costs at 25 cents a barrel is pretty incredible with the inflation we hear about every day. Maybe a little perspective. We're at, I think, 331 million EBITDA for the nine months. Third quarter was 121.7. So if we were to duplicate that in the fourth quarter, we'd be at 453. above the 440 plus guidance. We are trying to be a little conservative and make sure that we beat our numbers. Now I'd like to focus, discuss our strategic focus in a short-term and intermediate goals strategy. So first, our key focus has been addressing the 23 unsecured notes. As Brad mentioned, we've made a lot of progress. Current balance, $203 million. and we will pay the rest off by June 30. I think this is well before most folks anticipated, and we'll see if we can do better than that. So we get the immediate debt hurdle out of the way, get us some breathing room. Second, regardless of when we pay off the 23s, we think by the end of this fiscal year, March 31, our leverage will be at or below 4.75 times. Again, I think that's well in advance of any of the estimates I've read on the street. And contrast that with our leverage in the third quarter fiscal 22, 7.2 times. So just within four quarters, we have reduced total leverage by approximately two full turns and possibly two and a half turns by March 31. This is remarkable progress. Third, our 26 secured notes mature in February of 26, so they will become a current liability February of 25. That is only two years away. We do not want to get into the same situation with these that we did with the 23s. Therefore, we will continue to drive down leverage in our absolute debt to position the partnership to roll and extend all remaining maturities with the best possible terms. And then fourth, We will also address the preferred dividend arrearages and thereafter the preferred dividend at the appropriate time. They're certainly on our radar. Now that we've talked about increased water solutions guidance and debt reductions, I'd like to point out that these debt reductions achieved in these first nine months, year to date, were accomplished without any significant asset sales. We continue to make progress on several non-core asset sales. which we hope to sign and close in the fourth quarter. If these are completed, the proceeds will go directly to the balance sheet and drive leverage even lower by the end of the year, giving us even more financial flexibility.