NGL Energy Partners LP

Greetings. Welcome to the NGL Energy Partners 4Q23 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, CFO. You may begin.

Thank you. Good afternoon and thank you everyone for joining us on the call today where we will discuss our fiscal 23 results, our deleveraging update, and our outlook for fiscal 24. After the market closed today, we issued an earnings release, investor presentation, and filed our 10-K. 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. Fiscal 2023 was truly a transformational year for NGL across all aspects of the partnership, with record EBITDA, significant reductions in our absolute debt, and leverage well below our initial goal of 4.75 times. We achieved record adjusted EBITDA of $632.7 million for the year and $173.3 million for the fourth quarter. This record adjusted EBITDA was driven by the strong growth in our water business, which I will discuss shortly. We completed the sale of our marine assets and other miscellaneous assets, totaling approximately $141 million. The trailing 12-month adjusted EBITDA associated with these assets was approximately $10.7 million, which implies over a 13 times multiple on these asset sales. Selling these non-core and under-equalized assets at these attractive multiples has allowed us to accelerate our strategy to reduce absolute debt and leverage. We started fiscal 23 with a $476 million balance remaining on the 23 unsecured notes and $42 million remaining on the equipment notes supported by the marine assets. Most folks outside the walls of the NGL offices thought the redemption of the 23 unsecured notes wouldn't occur until later this calendar year. But due to the strong operational performance, the non-core asset sales, and our ability to project the release of working capital as commodity prices moderated, we were able to redeem all of the 2023 unsecured notes and pay off the equipment note, both totaling about $518 million by year end. With this debt retired, our leverage at the end of the fiscal year was approximately 4.56 times. Our ABL balance at the end of the fiscal year was $130 million, roughly the same level that it was at the beginning of the fiscal year. You recently saw our progress on the debt and leverage front acknowledged with the upgrade from S&P to B- stable. While this is a nice move in our overall credit rating, it is not the final stop. As we continue to reduce overall debt and drive leverage lower, we would expect to see additional upgrades along the way. We're off to a strong start for fiscal 24 on the debt retirement front, and Mike will get into how we see the year playing out. But through the first two months of this fiscal year, we have purchased approximately $100 million of our 2025 unsecured notes. The current balance on the 25 notes is $281 million, which we expect to have fully retired no later than March 31st of 2024. The debt reduction in fiscal 23 and jumpstart on debt reduction in fiscal 24 significantly reduces our interest expense, thus bolstering our free cash flow on a go-forward basis. Our water solutions business achieved several new records in fiscal 2023. Our consolidated record adjusted EBITDA was driven by water solutions record adjusted EBITDA of $463.1 million and fourth quarter adjusted EBITDA of $131.6 million. Also, water solutions achieved record disposal volumes in the fourth quarter. As the Delaware Basin saw significant drilling and completion activity last year, our water solutions business grew volumes approximately 29% year over year. This growth demonstrates how producers value our integrated pipeline system with large diameter pipe and our track record of service and reliability in the Delaware. In the fourth quarter, water processed approximately 2.46 million barrels of water per day. This is a 28% increase over the prior year's fourth quarter. During the fourth quarter, we also benefited from higher fees on spot volumes that hit our systems. The water team continues to find ways to optimize the cost side of the house and reduce the fourth quarter's operating expense per barrel to $0.24. This is a $0.04 per barrel improvement versus the prior fourth quarter and $0.01 lower than the third quarter of this fiscal year. This decrease was driven by higher disposal volumes and the locking in of three of our largest variable costs, utilities, royalty, and chemical expense. We won't be materially impacted by inflation in fiscal 2024 due to negotiated long-term utility contracts with fixed rates, royalty contracts with no escalation clauses, and a fixed expense per barrel with our chemical provider. Crude logistics adjusted EBITDA was $29.7 million in the fourth quarter versus $54.5 million in the prior fourth quarter. This variance was primarily driven by the sale of higher-priced inventory into a declining crude price market during the quarter. In the prior fourth quarter, crude logistics benefited by selling lower-priced crude inventory into a rising crude price environment. Since our last call, there have been a few noteworthy items in the DJ Basin that could positively impact the Basin in the near future and our Grand Mesa volumes. First, one of the largest operators in the Basin announced strong well results at the end of 2022 and additional drilling and completion activity in the back half of this calendar year. Second, Chevron announced the acquisition of PDC Energy. We view both of these as positives for the DJ Basin and potentially Grand Mesa. As I said on the last earnings call, we continue to be cautiously optimistic on production increasing in the DJ and ideally additional volumes hitting Grand Mesa. As Mike details how we see fiscal 24 playing out, I did want to mention we do not currently have this potential additional activity and positive developments in our fiscal 24 budget. Liquids logistics adjusted EBITDA was $28.5 million in the fourth quarter versus $24.5 million in the prior fourth quarter. This increase was primarily due to higher propane margins during the quarter as customers pulled on their fixed price contracts. The full year results in the propane segment were weaker than we had hoped for due to a warmer than normal winter, reducing the demand for spot volumes. EIA recently reported that propane demand and the U.S. fell to the lowest level since 2010. Margins on our refined products for the fourth quarter and full year increased due to refinery and infrastructure disruptions in certain markets, while the team was able to continue to execute on a successful supply program for its customers. This increase was partially offset by lower butane margins as our product purchased earlier in the season continued to compete with product purchased in a discounted market, reducing our margin on each gallon sold. Fiscal 2024 is off to a good start in the liquid segment, and our expectations are we see a rebound in performance from this segment for the year. Recall that a majority of the EBITDA from our liquid segment occurs in the third and fourth quarters of the fiscal year. So as Mike outlines the guidance for fiscal 2024, our consolidated EBITDA should not assume to be a rateable amount every quarter. With that, I will turn it over to Mike.

Thanks, Brad. So let's discuss how we expect fiscal 2024 to play out. So with respect to our adjusted EBITDA guidance, first we are guiding fiscal 2024 water solutions to a range of $485 to $500 million. Reconciling to fiscal 23 actual results, we begin with $463 million, less $15 million for approximately a $10 per barrel lower realized crude price on skim, plus $37 million for 10% growth in disposal volumes and skim oil barrels. This reconciles to the low end of that range. At the high end of the range, an extra $15 million would put our growth at $52 million instead of $37. Second, we're guiding the full year fiscal 24 for all of NGL at $645 million plus. Reconciling to the fiscal 23X results of $633 million, we deduct the one-time gain of $29 million, then deduct the trailing 12-month adjusted EBITDA on asset sales of approximately 11, so that's 40, then add back the net change in water solutions we just discussed, which is $22 million, which is that 37 minus the 15 of SKIMS. and then add $30 million for the recovery in liquids, crude oil logistics, and reduced corporate overhead. We are being conservative, so we have an opportunity to raise guidance during the fiscal year. Our guidance for fiscal 24 includes positive growth, but it is only one factor in the performance and value equation. Significant cash is raised from the following that are not included in adjusted EBITDA. we continue to identify underutilized assets and monetize them at double-digit multiples. Again, in this fiscal year, we have identified at least 50 million in such assets, and we have already harvested 15 million of those in the first two months of this fiscal year. With $530 million of debt reduction in fiscal 23 and more in 24, our interest expense should decrease by approximately $50 million. another source of free cash flow that costs us no capital. We are focused on reducing working capital to provide additional free cash flow. For example, we are idling or selling certain terminals, no longer shipping on certain pipelines and eliminating line fail. Finally, we are reducing capital expenditures wherever possible. All of these sources of cash will help accelerate the deleveraging of the balance sheet and add value to our activities. It also allows NGL to address the preferred dividend arrearage sooner. So what does this mean? It means we are very comfortable that we will be able to redeem all the 2025 unsecured notes this fiscal year, possibly by December 31 of 2023. Our priority remains lowering absolute debt and reducing leverage. We expect to be under 4.0 times total leverage by March 31 of 2024. This should put us in a strong position to refinance the outstanding balance of the 2026 secured and unsecured bonds, extending those maturities. We do not expect to pay any dividend arrearage on the preferred equity in calendar, again, calendar 2023. Now I'd like to address how Water Solutions is structurally different from other water disposal companies. We are a long-haul pipeline business with large diameter pipes spanning hundreds and hundreds of miles. Producers spend their own capital to tie into our pipeline system. We do not connect to the wellhead. We have long-term contracts with either Acres Dedications or MVCs, and our weighted average contract life is currently more than 10 years. We're the only water disposal company to reduce operating expense per barrel in the face of inflation. We are not focused on recycling or freshwater sales, but do provide volumes for reuse by producers. NGL is comparable to a crude oil transportation pipeline, which typically trades at an 8 to 10 times EBITDA multiple. Finally, a few comments about equity analysts' approach to our company valuation. The endless focus has devolved into a simplified miss or beat consensus EBITDA story, often prior to even listening to the earnings call. There is so much more to a quarterly performance that should be considered as we have outlined. Debt reduction, improving leverage, asset sales, working capital changes, to name a few. None of these are addressed. with a miss or beat label. We provide annual adjusted EBITDA guidance while analysts decide what the quarterly estimates will be. On occasion, some simply have divided the annual guidance by four, ignoring our seasonal business, guaranteeing a miss in the first and second quarters. A few have taken our water business and valued it at a five and a half times EBITDA, multiple similar to a marketing business with few hard assets. while valuing other smaller, lower-growth competitors with higher capital requirements at 7.5 times. We believe there is no true peer comp for NGL, so analysts need to take a deeper dive and understand the current and near-term value being created at NGL. We believe NGL's equity trades where it is due to our capital structure. Our previous elevated leverage levels, preferred equity, suspension of dividends, and near-term maturities created a significant headwind. The good news is that we are growing into our capital structure, and this fiscal year our free cash flow will provide for debt reduction to a level where we can push out the 26 maturities and begin attacking the dividend arrearages in calendar 24. I understand improvement can never happen fast enough for investors, but we are accelerating our balance sheet recovery and ultimately regaining our financial flexibility. On a closing note, I would like to thank our director, Mr. Steve Cropper, for his knowledge, experience, and advice over his many years as a board member of NGL. We will miss him, but are thankful for his guidance over the last few difficult years. And thank you, and with that, let's open it up for Q&A.

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. The 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 before pressing the star keys. One moment please while we poll for questions. The first question. It comes from Patrick Fitzgerald with Baird. Please proceed.

Hey, thanks for taking the questions. Yeah, I appreciate the comments on how to value the company and the guidance in terms of how you're thinking about everything. So just on that, is it safe to say that you – would wait till you refi the 26 maturities before you turn on the distributions again? Is that the correct way of thinking about it?

Yeah, I think that's how we're thinking about the next 12 months.

It makes sense because we want leverage to be as low as possible.

Right. But your covenants would allow it just to... That's correct.

That's correct.

Okay.

Once we get under the 475 leverage, yep, which is where we are.

Okay. Could you provide, working capital was a huge, you know, it had been kind of a headwind for, it seemed like, quite a while. And in the back half of this year, it was certainly a positive thing. How do you see that going forward in fiscal 2024?

Yeah, I think for fiscal 24, I mean, where propane and crude oil prices are today, we won't have near the constraints on our ABL capacity like we did in prior years. One of the other items that historically has pinched our working capital and capacity is the CMA hedge. That's a non-event. We're inside the fiscal year. Crude price with respect to the forward curve is fairly flat. So I don't think you can look at the previous years as really a representation of how we see working capital this year. ABL balance at the end of the fiscal year is around $135 to $140 million. I think we see it in the same zip code at the end of fiscal year 24. Great, thanks.

And then... what is the volume guidance or if you have any update on current volumes that you're seeing in the disposal business? What's the volume guidance underpinning the water EBITDA guidance?

In the investor presentation we published, it's showing fiscal year 24 to average about 2.56%. And that equates to the $485 million of EBITDA that Mike guided to. Again, that's the average for the year.

I think the first two months of this fiscal year, we're just under about 2.5 million barrels a day.

Okay. All right. Thanks, all. I'll hop back in queue. Thank you.

The next question is from Tariq Hamid with JP Morgan. Tariq, your line is live.

Good afternoon. I'd love to dig in a little bit more on the cost performance on the water business. Obviously, very, very impressive. But you talked about some of the, you know, contract pricing being fixed. You know, if you think about things like chemicals, have you ever sort of disclosed how long that contract price is fixed for and maybe just to help us think through kind of how that evolves?

I don't know if we've historically disclosed that in terms of the contract. I think we've got five plus years on it. Doug, are you there? You want to?

Sure. This is Doug. We expect that to be a long-term administration of those prices. I do want to mention we are working on a new initiative on chemicals to actually reduce our chemical-related op-eds by half to three-quarters cents. by using a different strategy on our chemical program and reduce the volumetric usage of chemicals. But that contract is a longer-term contract.

So nothing we should think of as a sort of reset coming in 2025 or anything like that?

That's correct. Like I said, anything coming this new physical year will be lower, not higher, on a per barrel basis regarding chemicals.

It's very helpful. Thank you. And then I want to follow up on just the working capital question. Obviously, the sort of the seasonality of the business and you guys spoke about in your prepared remarks tends to be a little bit punitive in the first couple of fiscal quarters and then a little bit beneficial in the second half. But I just want to sort of tie that to the sort of the hundred and twelve million or whatever of bonds that you've repurchased in the last couple of months. Should we sort of read anything into kind of how working capital is shaping up over this couple quarters?

I don't know if there's anything to read into other than, I mean, Mike alluded to some asset sales that have come through the first two months. With Waters' growth, our free cash flow is obviously more driven by Waters' performance, so maybe it's not as seasonal as you've seen around the organization historically. And again, recall at the end of what was it, early Feb, I guess, we amended the ABL to have that permanent $100 million accordion feature within the ABL. So lower commodity prices and some of these asset sales that we've pulled off here the first two months gave us comfort to lean into the bond repurchases the first two months of the year.

I appreciate that. And then just last one for me. As you talk about addressing the preferred securities, is your focus there mostly just sort of solving for the arrearage? Or do you think about the size of that preferred layer as maybe being a little bit oversized and maybe you should think about redemptions of preferred over time? I'd just love to get your general thoughts on it at this point.

I think you're correct. It's both. And if there was some opportunity to repurchase some of the preferreds, we would definitely consider that. So both.

Okay, that's helpful. I'll jump back to you. Thank you guys very much.

Thank you.

The next question is from Jason Mendel with RBC Capital. Please proceed.

Hi, guys. Thanks for taking the question for all the reasonably detailed guidance. Very helpful. Just specifically on the water business, you touched on this with Tariq for a minute, but the EBITDA growth guidance, can you give us a sense if any more of that is coming from additional cost saves and thus margin expansion, or if that's all volume improvement?

Yeah, I think it's predominantly driven by volume improvement. Our OpEx, and again, in the earnings presentation we released, I think we're showing OpEx fiscal year 24, 25 cents compared to 25 cents for this fiscal year. So you could impute it's all volume driven.

Okay, perfect. Thank you. And then on the buybacks in the quarter, it's a small piece of the puzzle, but there were some buybacks on the unsecured 26s. Was that just opportunistic and shouldn't be a big use of cash going forward?

Yeah, that's fair. They were trading at a pretty decent discount to the 25, so we went and grabbed them.

Got it. Very good. Okay, that's all for me. Thanks, guys. Appreciate it. Thank you.

The next question is from Jay Spencer with Stiefel. Jay, please proceed.

Thank you. Congrats on a good quarter, and congrats on being below the 4.75 times leverage. You know, I just wanted to be clear on kind of your thinking in terms of the order of operations, like as it relates to the arrearages on the preferred. Is the thinking that you would like to push out the 2026 maturities before attacking those arrearages on the prefs? or are you ready to say at this point?

No, it's very transparent. Yes, that's exactly what we're looking at. We have the 26s, and the timing is coincidental perhaps, but the call premium on the 26 secures drops in half in February of this coming, this next February. So I think getting, we'll have, if we can get rid of all the 25s by December 31, and then our cost on the call premium drops by 50%, and that the timing would work out well.

Gotcha. Okay, thanks. You know, and as it relates to the water processing capacity, I mean, you've got your produced water processing, you know, expectations for fiscal year 2024, It looks like it's 2.5 to 2.6 million barrels per day. What would the capacity be at the end of this year?

Doug, can you address that?

I can take that. Our operational capacity at the end of this year If I can clarify the question, is this physical 24, or what was at the end of physical 23? At the end of 24. At the end of 24, we're going to be somewhere between 3.3 million and 3.5 million barrels per day. Permitted capacity, we have been working on additional permitted capacity. for new development in the future, and that's going to be north of $4 million of permitted capacity by the end of fiscal 24.

Okay, great. Thank you. I appreciate it.

Up next, we have Greg Brody with Bank of America. Greg, please proceed.

Good morning, guys, and congrats on the execution. Just you gave us a sense of the first two quarters, the first two months of this fiscal year, showing your confidence in your volumes, expectations. I'm just curious how you think about your visibility today on volumes. How far out do you think you can see based on what producers are doing, takeaway capacity, et cetera?

Well, I'll say next Tuesday, but I'll let Doug take that question.

It's a great question. We are consistently working and planning our future growth. It's a big driver. We have an excellent view 12 months out, and then after 12 months, we really have to rely on permit activity, remaining inventories, et cetera. But as we look at the general growth throughout the Delaware Basin, we see that growth approximately 10% per year, year over year. And I think that's a pretty well-published number out there. We would say our growth with our large dedications, dedicated areas, et cetera, 10-year contracts, we see our growth very comparable to that 10%.

Got it. And then just on the capex spend, what's What's the potential risks up or down when you think about the guidance you gave today?

That's an interesting word to use, risk. We would love if we could get additional contracts and MVCs to spend the money, especially at some attractive rates of return. I don't know if we have any risk of having to spend more money this year, but we can see some new projects next year.

Great. And then just to finish up, you mentioned the $15 million of assets held already seems to be in the books this year. Of the 50 you've identified, of the 15, I think you said we should assume that's high, that's low double digits. And maybe give us a sense of what you did sell and kind of what else you think you are selling, to the extent you can tell us.

Yeah, this is an area where we kind of surprise the market because they're not big enough, you know, other than our marine sale to issue a press release. So they're anywhere from, you know, $200,000, $500,000 up to $10,000, $15,000, $16,000,000. But, you know, we'd rather not disclose it because we have employees at those assets that are – may not be aware they're for sale.

I appreciate that sensitivity. I'll leave it there, and thanks again for the time.

The next question is from Ned Berimov with Wells Fargo. Please proceed, Ned.

Hey, good afternoon. Thanks for taking the question. Brad, in your prepared remarks, you mentioned potential benefits from the Chevron PDC deal. Could you maybe review if you currently handle volumes from any of the two producers? And going forward, do you anticipate competition for incremental transportation volumes to intensify given ample capacity on pipelines going to Cushing?

Yeah, I don't think we can fully disclose volumes going across by customer. But I think our stance is, and I think others feel the same, that a transaction like this, you would assume there'd be some some increase in activity to support the underlying economics. Kind of our overall view.

Yeah, I'll add to it, and Don, maybe you jump in, but, you know, if these majors have ownership in the other pipelines in the basin, that's where they're going to put their volume, but then we would hope we get volume pushed, they would push volume off those lines over in our direction.

Got it. Thanks for that. And then following up on the question of your CAPEX guidance, could you maybe talk about the split between maintenance and growth CAPEX? And then on the growth CAPEX side, are these projects primarily in the water solution segment?

Yeah, majority of it's in the water solution segment. I think in the earnings deck, we're guiding the 75 of growth and then 50 of maintenance. You could assume a chunk of the 75 is water, 70 plus.

Yeah, at least 70 million of it.

That's helpful. Thank you.

The next question is from Sunil Sabal with Seaport Global Securities. Please proceed.

Yeah, hi. Good afternoon, everybody, and thanks for taking my question. So my first question was related to the contractual commitments on your water systems in Permian. I think you mentioned the contract life of around 10 years. I was curious if you could talk about any MECs that you have with the current volumes.

I can take that, Brad. Yeah, go ahead. Go ahead, Todd. Okay. Since our last call, We've amended and extended one of our large dedicated contracts that we inherited from the Mesquite acquisition with a new 10-year term. And we actually were able to execute that at the current market rate, which was a big positive. We added two sizable MVC contracts in the quarter, as well as executed the two-term contracts we've mentioned on the prior call. So our MVC barrels per day It grew this past fiscal year, and we've already grown it by another 20% in this new year. So those terms are, the MBC terms are a 10-year average term with the addition of those new contracts.

Okay. And then the volume was you're saying it grew for fiscal year 24, your MBC volumes would be 20% higher than where you were in 23? Yes.

Yeah, we were, I think, somewhere around 580,000 barrels per day in fiscal 23, and we've already grown that by approximately 20% with MVCs in the new fiscal year.

Okay, got it. And then on the CapEx front, I think you guided to, as a guidepost, you know, delivery volumes growing by 10% year over year for the next few years. So... with the CAPEX that you're guiding for fiscal 24, is that kind of a good way to think about run rate in terms of meeting that 10% growth number in the basin? I'm just trying to get whether there's any lumpiness in your CAPEX or is that kind of a good run rate?

Brad, if I may, I'll go ahead and take that.

Go ahead, Doug.

Okay. You know, we have Prior physical year to this new physical year, our CapEx outlook is pretty close to the same on growth capital, as Mike mentioned and Brad mentioned. Those new projects are there for a portion of the 10% growth. One big project that we actually bring online this week, we've already executed in this first quarter, is to connect our block 76 hillstone assets to the integrated system more fully. That's going to add 300,000 barrels per day of capacity on pipeline from the system to an area that was underutilized, has been underutilized. So we have a nice growth trajectory there on just that project. Of course, we have some others adding additional capacity. We would expect next year's and most likely years after that, based on current contracts, that demand to go down for growth cap as we maximize the integrated system. And as Mike said, if we are able to enter into new MVC-type deals with fully underwritten additional projects, then we would be looking to do that, but we would do those as they were able to be executed.

Got it. Uh, thanks for that. And then my last question was related to your leverage. Obviously, you know, you have nice tailwinds going into 2024 in terms of leverage. Uh, I was curious, you know, and you talked about, you know, how you want to reduce your absolute debt. So I was curious, you know, with the, with the business composition that you have now, uh, where do you think is the right leverage level for this kind of business composition?

I think in the short term, there has to be a tradeoff between the dividend arrearages and leverage. So we definitely want to be under four times to refinance. But then I think we need to maybe continue decreasing leverage somewhat, but it will be difficult to decrease it significantly while we're catching up on the arrearages.

Got it. Thanks for all the color.

Okay, we have reached the end of the question and answer session. I would now like to turn the floor back to Mike Krimble for closing remarks.

Go ahead, Brad.

Yeah, thank you guys for joining today. We appreciate your interest in the company, and we look forward to connecting with you all in August when we report fiscal Q1 of 24. Thank you all.

I would just add it is now very exciting to work at NGL.

Thank you, everyone.

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