NGL Energy Partners LP

Greetings and welcome to the NGL Energy Partners 1Q 2024 earnings call. At this time, all participants are in a listen-only mode and a question and answer session will follow the formal presentation. If anyone should require operator assistance during the call, 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 of NGL Energy Partners. Brad, you may begin.

Good afternoon, and thank you to everyone for joining us on the call today. After the market closed today, we issued an earnings release, investor presentation, and filed our 10-Q. 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. With that, let's get into the quarterly results. We have continued our momentum from fiscal 2023 into the first quarter of fiscal 2024. Our water solutions business is on pace for another record year of adjusted even odds. and disposal volumes with $123.2 million in adjusted EBITDA for the quarter. We are reaffirming our full-year consolidated adjusted EBITDA guidance of $645 million plus. We are getting more capital efficient by spending less growth capital this year, and we are increasing our monetization guidance by 50%, from $50 million to $75 million, thus increasing our free cash flow for the year. Our strategy to reduce absolute debt and leverage continues. as we purchased 99.3 million of the 2025 unsecured notes early in the quarter and reduced total leverage to 4.4 times at the end of the first quarter. As discussed on our last earnings call, all the free cash flow this fiscal year will go straight to the balance sheet and will allow us to pay off the 2025 unsecured notes no later than March 31st, 2024. Our liquidity remains strong for this time of year. Recall earlier this year, we permanently extended our ABL commitment to $600 million through the life of the ABL. As of 6-30, we had approximately $286 million of liquidity and $180 million of borrowings on the ABL. With our continued strong operational performance and the hard work of the entire company over the last two years, we have line of sight to leverage under four times at the end of fiscal 24. This leverage level will have us positioned for a global refinancing in the first half of calendar 2024. As we have discussed before, there is significant seasonality to our liquids logistics segment, especially in our butane and propane businesses. We've built butane and propane inventories in the first and second fiscal quarters, which draws on working capital of the company during these quarters. Butane blending season starts in our fiscal second quarters, and as those inventories are drawn down, the working capital and margin associated with those sales come back to us in the third and fourth quarters. The propane season is similar to the butane season, with inventory draws typically starting in November, as cooler weather starts in the upper Midwest and Northeast regions of the United States. Propane and butane have benefited this year from lower prices during their inventory builds with attractive spreads. With the current contango in the market, both are positioned for a strong back half of the fiscal year. Sizeable moves in propane and butane prices can shift earnings across our fiscal year. When prices decline over the course of the quarter, earnings are shifted into future quarters due to how we hedge and lock in margins with fixed price contracts. As mentioned on the last earnings call, Mike and I both spoke to the seasonality of our EBITDA stream. It's not as simple as taking the full year guide and dividing by four. Internally, we always saw the first quarter of the year as the softest quarter of the year on a consolidated EBITDA basis. Crude logistics suggested EBITDA was $23.8 million in the first quarter, Grand Mesa volumes averaged 72,000 barrels per day in the first quarter as well. Margins for the quarter were impacted by lower crude prices that resulted in lower contracted rates with certain producers. We also saw lower demand for heavier crude oil grades that resulted in lower volumes on the Grand Mesa pipeline. As I mentioned earlier, Water Solutions is on pace for another record year for adjusted EBITDA and disposal volumes. Water achieved strong adjusted EBITDA of $123.2 million, which equates to approximately 17% growth compared to the same quarter in fiscal 2023. Also, the water team handled approximately 2.46 million barrels per day of produced water volume in the quarter, a 14% increase from the prior year. The average disposal fee in the quarter was 64 cents, a 10% increase versus the prior year. This increase is driven by new contracts we have signed over the past 12 months, interruptible volumes we have contracted, as well as spot volumes that hit our system in the quarter. The water team continues doing a great job holding operating expenses down, averaging 25 cents per barrel in the quarter. For the quarter, skim oil recoveries were in line with our historical averages across the basin we operate in. We did have approximately 53,000 barrels of skim oil from the Eagleford in storage at the end of the quarter. Due to tighter pipeline specifications, which reduced the amount of skim oil we sold during the quarter. Early in the second quarter, we solved the skim oil specification issue and sold half of the stored oil so far and expect to sell the remaining volumes in storage by the end of the second quarter and be back on track selling skim oil production going forward in the Eagleford. With the increasing disposal volumes and higher crude oil prices since June 30th, we are expecting a strong quarter from our water solution segment. I will turn the call over to Mike.

Great. Thanks, Brad. Good afternoon and welcome. As you know, we do not provide quarterly adjusted EBITDA guidance, and these summer months are typically the slower ones for NGL. This is a typical first quarter with adjusted EBITDA approximately $11 million above the prior year's first quarter. As we are only three months into the current fiscal year, it is too early to change guidance. So we are reaffirming our previous full year estimated EBITDA guidance of $645. $645 million plus as you've heard. Note that our water solutions adjusted EBITDA this quarter was 123, which times four quarters is $492 million. This exceeds our current water solutions guidance of $475 million for the full year. If the second quarter is similar or better, we will need to increase our water solutions full year adjusted EBITDA guidance. I think we have Doug White on. Doug, if you're there, do you have any color on water?

Mike I think the important thing to point out is we hit a new record peak day in the quarter in June just shy of 2.8 million barrels so that shows our abilities number one to take take the water and have the ready ready capacity but also that we are showing the forecasted growth that we believe in back half of the quarter showed some pretty heavy recycling, which is also not necessarily negative. The positive thing is when the producers are heavily recycling, that just means new completions and new robust volumes to come.

Great. Thanks. Okay. As I discussed in the last earnings call, our accelerated debt reduction was made possible by the non-core asset sales and reduced working capital requirements. During the first quarter, this first quarter, we sold 22 million of such non-core assets. Another 25 million have been sold since the end of the quarter up to this timing of this call for a total of 47 million. So as Brad said, we're increasing our non-core asset sales from 50 million this year to 75 million. And, of course, these additional sale proceeds will be deployed for further balance sheet improvement. With respect to growth capital expenditures, we're reducing our guidance from $75 million to $65 million, a savings of $10 million. This takes our total CapEx, both growth and maintenance, for the full year from $125 million down to $115 million. This reduction in growth capital will not impact any of our water disposal volumes. So finally, to sum it up, we're on track to achieve our adjusted EBITDA guidance, and we are generating an additional $35 million of free cash flow for further debt reduction. We continue to be focused on increasing adjusted EBITDA, reducing indebtedness, and, indeed, leveraging further. Our goal remains repaying the 25 unsecured notes and refinancing the 2026 secured bonds. As such, we do not anticipate paying any preferred dividend arrearages in the current fiscal year. That said, I think we're approaching the time when we will regain a measure of financial flexibility. And I think for that, we open it to questions.

Thank you. The floor is now open for questions. If you would like to join the queue to ask a question at this time, please press star one on your telephone keypad to join the queue. We do ask if listening on speakerphone today that you pick up your handset while asking your question to provide optimal sound quality. Once again, that'll be star one to enter the queue at this time. Please hold a moment while we poll for questions. And our first question today is coming from Sunil Sadal from Seaport Global. Sunil, your line is live, please go ahead.

Yeah, hi, good afternoon, everybody. So I just wanted to understand a little bit the trend in the water business. especially the sequential trends. So I believe the water volumes were essentially flat versus the previous quarter, but your margins were a little bit impacted. Could you talk a little bit about what was going on in that regard? I think we have heard commentaries from some other midstream players about challenges in Permian. Could you address that too?

Doug, do you want to take that?

Yes. Sunil, the difference between the Q4 and Q1, you are correct, we were very close to almost exact volumes in those two different quarters. As you can see, the adjusted EBITDA was very different. The main driver is that we had $12 million of MVC deficiency payments coming in in Q4. of which we did not have those in Q1. We had a smaller amount in Q1. That's typical for us for a physical year-end. But if you see the other metrics within the business, we felt that the Q1 was an improvement over Q2. I'm sorry, over Q4. But the difference of the MVC volumes making the EBITDA look different.

Doug, what about the volumes? What are you seeing? I mean, we all read I think there's been rig reductions in the U.S. I'm not sure much in the Permian, but what are you seeing activity-wise, and what do you expect here back half of this quarter and the next couple quarters?

Yeah, we are forecasted for this second quarter to be our highest volumetric quarter for the fiscal year. There's a lot of recycling going on currently with produced water. We've seen swings of 300,000 to 400,000 barrels a day in the Delaware, the back half of Q1 and early Q2 here. We're starting to see those volumes swing back with completions coming online, and we expect September actually to be our our biggest month of the entire fiscal year. So the recycling and the lower volumes are the investment in the upcoming completions, but we are still very much on track with our forecast for the year that has not changed.

Okay, thanks for that. And then in the liquid logistics segment, I think you mentioned about your hedges with regard to the propane and butanes. And I was wondering if you could quantify that a little bit in terms of where the contango stands right now, or what kind of contangos you have logged in versus previous years.

Why don't we start with the contango? So we have the main storage at Conway, and we have locked in, I think, our Margins around 11 cents a gallon Which is we're very pleased with it's more than the storage cost for that same storage. So it's gonna be in that positive Did you have anything Brad on the That's And I would see the market right now Yeah, it's very frustrating because if you're in a market where you you've purchased at X price and the price falls you know for the next several months and we are actually selling at a loss, and then we end up gaining that back in the second half of the year. We've referred to it as WACOG, which I hate that word, but it's just a timing difference of when we get the profits.

Okay. Thanks for that. Thank you.

Once again, as a reminder, you may press star one on your telephone keypad at this time to enter the queue. Once again, that'll be star one on your telephone keypad at this time if you wish to enter the queue to ask a question. Our next question today is coming from Tarek Hamid from JP Morgan. Tarek, your line is live. Please go ahead.

Hi, this is Nevin on for Tariq. Wanted to ask a little bit more about the timing to begin paying the press and whether the focus is on redeeming the preference of paying the dividend to start.

Yeah, I mean, we're looking at each other.

I think, you know, we're hyper focused on the refi, obviously. And I think that's, you know, where we're laser focused. executing operationally in the next two to three quarters and positioning the partnership for that refi. I think post-refi, that will be probably a decision and something we will continue to contemplate and kick around. My guess is it's probably arrearages first and try to get caught up on those. But I think refi first, and that's where we're hyper-focused.

I just want to clarify, we are not allowed to go into the open market and buy the PREF. We know we have the Bs and Cs at trade, but the Ds are with some private equity investors. So it's difficult to go out and buy those. You would have to make an offer to all the Bs, Cs, and Ds. So it would be difficult to buy back the PREF. gotcha and second one to get your thoughts around potential consolidation in the water industry in the Delaware Basin wait we have a lot of silence around here these are I guess that means these are good questions you know it I think it makes some sense We're not in a position where we can do that with a unit price at $4. So I think that's, again, there's a lot of logic to it, but I don't know that it happens right away.

Gotcha. Makes sense. Thank you. Thank you.

And there are no further questions in queue at this time. I would now like to turn the floor back to Brad Cooper for closing comments.

Thank you guys for joining us today. It's the first quarter. We're happy with the progress we've made. Again, continue to be laser focused on the refinance. And we'll talk to you guys here in a few more months. Thank you.

Thank you. This does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.