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.

So with that, let's open up for Q&A. Absolutely.

Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset by pressing the star keys. One moment, please, while we poll for questions. Once again, that's star one if you have a question or a comment.

First question comes from Patrick Fitzgerald with Baird. Patrick, please proceed.

Hey, thanks for taking the questions. So could you provide any help on the, you know, the $29.5 million charge that was, I guess, reversed in the quarter.

Hey, this is Brad. I think what we need to do is point you to the queue on that when there's language in the queue with respect to that. That's about all I can really say. Kirsten McMurray, our general counsel, is on the call as well. Kirsten, I don't know if you want to elaborate on that.

Yeah, sure. Sure, Brad. Yeah, what we can say is what's in the queue. And, you know, is this a legal matter? So, appreciate your respect and our need to be confidential. Thank you.

Okay. That wasn't a cash benefit in the quarter, though, was it? Cash benefit? Yes, it was. Okay.

All right. In terms of the water segment, obviously, very strong results there. One of your competitors actually came out and said that they had to lower their guidance because of the winter storms. Obviously, your volumes look great, but were they actually tamped down a little bit by the winter weather that impacted the region in December?

I'm going to let Doug answer, but in my prepared comments, we talked about three days or so that were sub 2 million, and then we had a handful of days that were over 2.7. So I think if you average across those handful of days, it's probably right in line with where Doug's average was for the quarter. Doug, anything to add there? No, I would confirm that, Brad.

Okay. Thanks. Um, in terms of your fourth quarter, usually see a working capital release. And you've, you know, paid down 100 million. Is that, you know, do you expect a significant working capital release in the in the, in the fourth quarter? Or did you use the revolver balance to take out the 100 million of additional bonds since the since the quarter end?

No, the bond reduction was done with working capital release and we would expect further working capital release as we move through through the rest of our propane season.

OK, like could you give us a sense of the magnitude?

From where we are at the end of the third quarter, I think it's fair to say that the ABL balance could be there might be 40 to $50,000,000 on it at the end of the fiscal year. Assuming no more debt retirement from this point forward.

So nothing on our 40, 50 on the, on the ABL and, you know, a hundred million dollars less on the 23s.

Correct.

Okay. That's great. Um, in terms of the NGL segment, any, you know, like I think at the start of the year, you guys said that, um, you would kind of be flat this year in the liquids logistics and you're trending, you know, you know, not, not, not so close to flat implying a big fourth quarter. Is that still your expectation or, or is kind of this year been a little bit worse than you expected because of the unseasonably warm weather?

Yeah, I think the weather, the lack of weather, I would say, up in our key areas has been a driver. We do expect a nice fourth quarter from the team, but I think for the year down relative to expectations across the full liquids logistics business. The biodiesel and our rack marketing group and the butane blending have done well, but wholesale propane a little bit lighter than we would have liked to see at this point in the year. I think we'll still see a strong fourth quarter from them, but probably under what our expectations were for the full year.

Jeff, do you have anything to add? Jeff Penner is here who runs the division. I think your comments captured it well. All right, great. Thanks a lot, guys. Thank you.

Okay, up next we have Tarek Hamid with J.P. Morgan. Please proceed.

Good afternoon, gentlemen. On the water business, the performance was particularly impressive. And I just wanted to sort of get a sense of some of the drivers there of how you were able to continue to reduce costs in that business.

Doug, do you want to take that one?

Yes, sir. One of the important factors in our per barrel metric on OPEX certainly is the fixed costs. Every barrel that we add as we grow and as we grew the volume so ratably this year, it's really reduced our fixed cost per barrel. We're always working to reduce any expense that we can, but on a total basis, our variable costs are higher on a cumulative basis, but we've held them very steady on a per barrel basis. But the you know, the large amount of volumes that we see today and going forward, it really, really washes out and reduces the fixed cost. We're doing as much, you know, and more water as we did, you know, in the past, but our employee headcount has not increased. You know, that's an example. You know, we look at, you know, what's it cost to to run the business, and we really focus on those fixed costs and keeping those down. Those are ones that we can certainly control. And then on the variable cost side, like we've mentioned many times, we were fortunate to hedge our power costs in Texas at extremely low natural gas prices, and those go through 2028. So that's a big, big help. So every barrel we bring on and we're able to apply these low costs to our per barrel metric continues to get better.

Got it. So really a huge fixed cost absorption benefit over time.

That's correct.

And I know you can't say much about it, but on the $29.5 million one-time gain, is it fair to say the matter is closed at this point?

Yes.

And then, you know, you touched on potential for further asset sales, you know, on an encore basis. You know, any sense you can give us of kind of the size or nature of kind of the assets we should be thinking about would be helpful.

Mike, you want to take that one?

Not really. Yeah. I guess we can give a range. The range is $20 million to $100 million.

Fair enough, Mike. I mean, I get paid to ask the question. You get paid not to answer it. I guess just the last one for me, and I'll get back in the queue. As you think about sort of your 24 and beyond, I'd just love to get your sense of kind of how much additional capital it will take to keep the water system growing at the, and I know you can't sort of repeat the incredible rate you're at right now, but sort of at the rates you're targeting over time.

Doug, you want to?

Yeah, I'll take a mic.

Yeah.

Go ahead.

I think the guidance we've given in the past is that we had fully really built out our system after this year where we had a couple big new pipelines. I would have Doug comment after me, but we were thinking more in the, I'll say, $40 to $50 million range going forward. I think that's going to increase because of the new opportunities. But we haven't budgeted yet, so we don't have a number. Do you have anything, Doug?

Yes. Yeah, it's important to note, you know, we took this quarter as well, this this third quarter, and we amended and extended some of our term contracts, acreage dedications. We picked up a few new contracts that are long-term that have added to our acreage dedications, and then we're working on a couple of, another couple 10-year dedications currently that are very close to being signed. Those all include additional acreage So then the other important thing to note is the super majors, you can see it in their public comments, they are really planning to ramp up in the Delaware and certainly within our footprint. So we're going to do everything we can to take every barrel of water and do it from a very smart and contracted basis and not overbuild our system, but be there to capture these great margins.

I appreciate it. I'll jump back in the queue. Thank you, guys.

Once again, if you have a question or a comment, please press star one. Up next, we have Greg Brody with Bank of America. Please proceed.

Good afternoon, guys. Hello. You had very strong volume growth this quarter. I'm just curious about Was there any benefit from the seismic activity leading to some of your competitors not being able to inject in their deeper water wells? Is that something that you can quantify and talk about how you may benefit from that going forward?

That's a question where we can knock on wood to answer that one. We have been very fortunate that our footprint has not been materially affected by the seismic review areas. Certainly, it maintains as a risk to our business, but we feel like both the OCD in New Mexico, the Railroad Commission in Texas have taken really large steps toward remediating that risk or reducing that risk, which is good. That's very positive. We have certainly benefited from From this system that we have all these years in Hillstone, Mesquite, we've spent the money to fully integrate. We have benefited greatly from that due to seismicity, but we certainly aren't out of the woods yet as an industry, but I believe everyone's working together along with regulatory agencies to reduce the future risk.

Got it. There was no water moved from other regions over to you. That was material.

No, I would say it's material from a volumetric basis, approximately 150,000 barrels a day to 200,000 barrels a day. That would be an estimate I would give that comes our direction due to reductions or limitations on others.

Got it. Do you think it's fair to say that that's going to stay, you're going to continue to see that volume?

We would expect it to this time.

Great. And just one more for you. You highlighted two of your producers in your operating area highlighted increased reactivity. Have they indicated to you timing on when you would potentially see those volumes or are you just looking at the rig announcements? interpreting from there that there's activity on there.

I would say their needs are very immediate.

Okay. Thank you for your time, guys.

Okay. The next question is coming from Med Baramov with Wells Fargo. Please proceed.

Hey, good evening. Thanks for taking the questions. Mike, you touched a little on capital allocation after you get to the 4.75% leverage target maybe next quarter, but could you elaborate a little bit more on how you think about allocating between further debt reductions, as you noted, maybe the 2026s, and the payment of preferred distributions in arrears?

Yeah, we really haven't discussed that with our board yet. We're mindful of the arrearage So it's really balancing. Your balance sheet needs to be in a certain condition to be able to roll out your debt, right? So it's 4.75 is too high a leverage to be able to do that. So we'll be talking with our bankers, figure out is it 4.0, 4.25, you know, what is it that allows us to launch? And then we push out the debt so we don't have to worry about that anymore. and then we'd address the prep.

Got it. And then on your corporate initiatives, just curious why we haven't seen an announcement yet. Is it a function of lower demand and lower bids in the current environment? Is it complexity of the transactions you're trying to finalize or maybe something else? Whatever color you could provide would be helpful.

Yeah, it's

You know, they're all a little different. One is requiring consent from, let's say, third parties, and those are, they take longer to receive. Others, it just took... Well, let's say we wanted to sell into the strength of the market, so we waited until the market was much stronger, and then we launched, and I think we'll end up with a more attractive price. So it wasn't a fire sale. We were very thoughtful about timing, and I think one was pushed back some from like the third quarter to the fourth quarter. One we have signed, and now we have to go get consents. Another one, the buyer was having difficulty getting financing, and it appears that they've been able to secure financing. So different reasons, but we didn't want to push because you're right. If you do that, then you're going to get a lower price.

Got it. Appreciate that. And then maybe can you just remind me what's the remaining contract? Average term on Grand Mesa?

Geez, I don't know for sure. I know two of the contracts. Is Don Robinson on?

Don, you there?

Yeah, two of those contracts have about four years left on them today.

Three to four years. Got it. Thank you. That's all I had. Thank you. Thanks.

Okay, the next question comes from Jason Mandel with RBC. Please proceed.

Hi, guys. Thanks very much. Most of my questions have been answered, but just a quick follow-up on the asset sales. If possible, can you confirm if those asset sales are outside of the water business, or may they include some?

Yeah, they're... Well, I can't confirm that. There is a small one that's in the water side that's a no-growth asset, and the other two are larger. I call it kind of pruning. If there's a no-growth asset, then you basically just have an annuity. That's a good one because you're not really giving up any future growth. The other ones are in areas where we can get multiples over 10 times.

All right, that's great. You guys have answered all my other questions. Thank you for helping.

Okay, we've reached the end of the question and answer session. I would now like to turn the call back to management for any closing remarks.

Yeah, thanks everyone for your participation today. As you've heard, we're excited about our progress this fiscal year. We look forward to speaking with you this summer when we discuss our fourth quarter and full year results.

Have a good day.

This concludes today's conference and you may disconnect your lines at this time. Thank you for your participation.