NGL Energy Partners LP

Greetings. Welcome to the NGL Energy Partners 3Q24 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. Good afternoon, and thank you to everyone for joining us on the call today. Our 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 presentation materials and our other public disclosure materials. Before we get into the third quarter's financial results, I wanted to take some time to discuss what we've accomplished this quarter. I first want to thank all the NGO employees for their dedication and extra efforts over the last few months. What we have accomplished over the last few months is astonishing, and we should be proud of what we have achieved. We have been able to execute on our long-term plan faster than we anticipated. Operationally, we recently held an open season on the Grand Mesa Pipeline. On January 5th, we close the open season on the Grand Mesa pipeline and have a new five-year MBC with the same counterparty whose prior contract expired on December 31st. Outside of entering into a new five-year MBC agreement, this counterparty will also be the shipper on the pipeline, freeing up $18 to $20 million of working capital. This is a permanent release of working capital. As we continue to negotiate new contracts, pre-contract on the pipeline, we should continue to see further reductions in working capital. These reductions in working capital require us to hedge fewer barrels, thus reducing earnings volatility, and turns crude logistics into a more rateable, long-term, fee-based type of business with more MVCs. A few weeks ago, we issued a press release on the expansion of the Lex-produced water pipeline system into Andrews County. This expansion of the Lee County Express pipeline system takes the existing capacity of 140,000 barrels of water per day up to 340,000 barrels per day in 2024. The addition of a second large-diameter pipeline, new disposal wells, and new facilities will greatly expand the capabilities of NGL's existing produced water super system and create a significantly larger outlet for Delaware basin produced water. The construction of the 27-mile, 30-inch produced water pipeline will transport water to areas outside the core of the basin, thereby further diversifying NGL's geographic location on its disposal operations. The LEX 2 expansion is fully underwritten by a recently executed minimum volume commitment contract that includes an acreage dedication extension with an investment grade oil and gas producer. This is a strong example of the types of transactions we are able to execute upon with our continued demonstration of being the most reliable and dependable water disposal company in the lower 48. Financially, on February 2nd, we close on the refinancing of our debt maturities. With this $2.9 billion refinancing, we extended the weighted average maturity of our debt by approximately three years, while rebalancing the corporate maturity stack towards prepayable debt, providing us the optionality to further accelerate our deleveraging plans. The new term loan also provides additional exposure to floating interest rates. With projected rate cuts on the horizon, we should be able to capture lower interest expense in the future. The combined three tranches were the largest midstream sector financing effort since 2022 and the most significant capital raise effort in NGL's history. We have been very clear with our strategy over the last few quarters. Our plan was to address the debt maturities in the first half of calendar 2024, and we've been able to execute this refinancing months earlier than anticipated. With high yield energy spreads trading the tightest they have been over the last two years, we decided to accelerate this refinancing while simultaneously amending and extending the ABL. In connection with this transaction, all three rating agencies issued new ratings, with S&P and Moody's both raising the corporate credit rating one notch to single B. Fitch initiated coverage on the company as well and issued a corporate credit rating of single B and double B minus on the secured notes and permalink. ABL has been extended five years to 2029. The commitment level stayed the same with $600 million of commitments from the bank group. while at the same time getting relief within the documents across a few key covenants that provide us more flexibility. The new debt consists of $2.2 billion of senior secured notes with $900 million of five-year non-COL II notes at eight and one-eighth interest due 2029, and $1.3 billion of eight-year non-COL III notes at eight and three-eighths due 2032. In addition to the secured notes, we entered into a seven-year, $700 million term loan facility. The term loan facility is floating rate debt, and as I mentioned earlier, we went into the refinancing wanting a mix of fixed and floating rate debt. The term loan also gives us the ability to reprice the facility as we continue to execute on our operational plan and as we strengthen the balance sheet along the way. The net proceeds from the transactions are being used to fund the redemption of the 25 unsecured notes, the 26 unsecured notes, and the 26 senior secured notes. including any applicable premiums and accrued and unpaid interest. The funds will also be used to pay fees and expenses in connection with the transaction and to repay borrowings under the ABL. This refinancing allows us to take the next step in addressing our capital structure. On Tuesday of this week, we announced the payment for 50% of the outstanding arrearages on the three classes of the preferred securities. Over the last few months, we have been using free cash flow to pay down our ABL, and position ourselves to quickly address the arrearages after the refinancing. We believe we are catching up on these arrearages quicker than anyone anticipated. The first 50% payment will be made to holders of record as of February 16th, with payments being made on February 27th. For the holders of the Class B preferred securities, they will receive $4.44 per unit, and each holder of the Class Cs will receive approximately $4.07 per unit. In addition to the payments of the Class B and C holders, we are also making a $115 million payment to the holders of the Class D preferreds. The first question we expect to receive in the Q&A session is when do we plan to make the second half payment and declare we are current on the preferred distributions. In the press release we issued after market today, we are raising the full year guide on asset sales from $100 million to $150 million. The remaining asset sales should close by 3-31. With free cash flow, asset sales, and the release of working capital in the liquid segment, we will make the remaining 50% payment in the very near future. We will be thoughtful on the timing of this payment as we assess what the fiscal 2025 cash flow and capital budget could be as we kick off the budget process in late February. Over the last several quarters, we have positioned the partnership to take advantage of a market window to address the debt maturities. Our ability to execute quickly allows us the flexibility to take the next step of our long-term strategy, addressing the preferred arrearages. As we achieve these milestones, our long-term strategy will continue to evolve. We have additional steps to complete, but all of our stakeholders should feel comfortable with the progress we have made and our consistent messaging along the way. With that, let's get into the third quarter financial results. Water Solutions adjusted EBITDA was 121.3 million in the third quarter versus 121.7 million in the prior third quarter. Water disposal volumes were 2.38 million barrels per day in the third quarter versus 2.43 million barrels per day in the prior third quarter. As Mike mentioned on the previous earnings call, we expected water disposal volumes would be down versus the fiscal second quarter. There are two main drivers that impacted our third quarter disposal volumes. First, producers are keeping produced water on location for completion activity. This activity will create lumpiness in our disposal volumes going forward. The good news is NGL will receive these disposal volumes once all completion activity is completed at that location. NGL isn't losing any volumes, it's just a timing issue on when those volumes will be received. Second, we have a large MVC with an investment grade integrated energy major. This producer pressured up its own water gathering system and was limited to the amount of water volumes they can get on our system. This producer is currently working on reducing pressures on their water gathering system. The volume impact for the third quarter was approximately 178,000 barrels per day for the quarter. It's important to remember that we get paid for these volumes, and these deficiency volumes are not included in the physical disposal volumes we report. Also, this MVC has approximately nine years remaining. Water Solutions continues to maintain operating expenses at 25 cents per barrel, best in the industry. This is primarily due to lower chemical expenses, lower generator rental expenses, and utilities expenses. These decreases were partially offset by higher repairs and maintenance expense due to the timing of repairs, preventative maintenance, and tank cleaning. Crude oil logistics adjusted EBITDA was $17 million in the third quarter versus $33.3 million in the prior third quarter. The adjusted EBITDA decrease was primarily due to lower crude sales margins as we received lower contracted rates with certain producers as WTI pricing went below $75. T. And lower contract differentials negatively negatively impacted certain other sales contracts volumes decrease due to lower production on a bridge dedicated the Grand Mesa pipeline. T. And also our adjusted even when compared to the same quarter in the previous quarter is slightly impacted by the sale of our marine assets in March on March 30 of 2023 We remain constructive on the DJ basin and believe the results of the most recent open season on Grand Mesa demonstrate the importance to producers of having long-term capacity contracted on the pipeline. We will continue to work with the producers and the DJ and look forward to having additional contracting updates in the near future. Liquids logistics EBITDA, adjusted EBITDA was 22.4 million in the third quarter versus 20.5 million in the prior third quarter. This increase was due to higher margins and higher demand for butane blending. This was partially offset by lower propane margins and volumes due to warmer weather in the third quarter. Also, lower margins on refined products as supply issues seen in certain markets in the prior year have been alleviated and have tightened margins. Corporate and other adjusted EBITDA was a loss of $11.9 million in the third quarter versus income of $19.5 million in the prior third quarter. I want to remind everyone that in the prior year third quarter, it included other income of $29.5 million to settle a dispute associated with commercial activities. I would now like to turn the call to Mike Krimble, our CEO. Mike? Thanks, Brad.

As you have heard, in the last year we have achieved significant milestones as we position NGO for success, but at the same time continue exceeding expectations. First, as Brad described, we have reduced leverage on the balance sheet faster than expected due to the free cash flow and asset sales of attractive multiples. Second, this deleveraging allowed us to complete the refi of all of our indebtedness earlier than expected, reducing our refinancing risk and providing financial flexibility. And third, we announced the payment of 50% of the preferred dividend arrearages sooner than expected. We are trying not to disappoint, but rather establish a reputation for beating expectations. Looking forward, we are focused on the following. Payment of the remaining preferred distribution arrearages as soon as possible. Then reinstatement of the Class B, C, and D distribution as soon as possible. Third, continued deed leveraging through debt reduction and increased EBITDA balanced with addressing the Class D preferred. Debt reduction can begin six months after the recent refi as the new high-yield debt has non-call provisions of two to three years, and the term loan incurs breakage fees if repaid within the next six months. Four, improve our credit rating with the agencies, debt reduction, payment of the distribution of rearages, and increased EBITDA can accelerate this process. Five, emphasize internal growth opportunities at attractive rates of return, underwritten and supported by MVCs. Rather than limiting growth capital as we have up until now, We will look for investments to expand our footprint, strengthen our competitive position, that will also increase the quality, consistency, and amount of our adjusted EBITDA. One example of this is the recently announced expansion of the county express pipeline system. The growth capex and adjusted EBITDA for this project will be included in our fiscal 2025 guidance. Another example is the outcome of the open season Brad spoke about. We are currently working on multiple new growth projects and contracts, which we will announce if successful. Finally, we expect to grow adjusted EBITDA each year for the foreseeable future, led by our Delaware Water Solutions business. With respect to our adjusted EBITDA, we are affirming the previous guidance of $500 million plus for water and $645 million for the partnership. Our guidance for adjusted EBITDA and growth CapEx in fiscal year 25 will obviously be higher than the current fiscal year, but we will announce that at our year-end call. In closing, over the last few years, we have made tremendous progress in many areas. Increased efficiencies, cost reduction, asset sales, reduced leverage, and increasing EBITDA. Going forward, we will have fewer opportunities to capitalize on most of these areas. So our renewed focus will be on internal growth with MVCs and hitting our numbers. NGL was one of the best performing equities in the energy space in calendar 23. We will do our utmost to repeat that performance.

Thank you. Questions?

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'd 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 comes from Paul Chambers with Barclays. Please proceed. Yeah, great.

Thanks. I'll surprise you here and not ask about the press. Brad, you brought up working capital release in crude logistics, and obviously your March quarter historically has had the largest swings towards the positive working capital change. I know there are a lot of factors involved, including seasonal inventories, but any color or range you can kind of point us to for what the fourth quarter could look like or what you're targeting for the full year?

Fourth quarter ABL balance?

Paul? No, sorry, working capital change. Working capital change. I think the last two quarters it was like 120, and I think the previous year it was like 60 million. I know it's a big swing for you every year.

Yeah, that's probably a decent zip code. It's a little bit challenging to think through. I'm thinking through the ABL balance because we've been using free cash flow to pay down the ABL to address the PREF. I would think we'd probably be a $40 to $50 million working capital number at 331, Paul.

Okay.

Great. 55, sorry.

Yeah, so fourth quarter working capital would be somewhere around, do you think, in the 50-ish plus or minus range?

Yeah, that's a good estimate. Apologies, can you hear me? Yes. Yeah, operator, next question.

Oh, absolutely. Next, we have Patrick Fitzgerald from Baird. Please proceed.

Hey, congrats on the refi. What is, if you wouldn't mind, could you provide an update on the ABL balance, you know, as of today or recently?

It's zero today.

Okay. So you're making the preferred payments, I guess, all with free cash flow and asset sales?

Yeah, I mean, we'll be using a little bit of the ABL balance just because we've been using free cash flow in the third quarter to get the ABL down to zero. So back to the kind of the opening question about the ABL balance at 331 will represent a little bit of usage for the preferred. Otherwise, it's free cash flow.

Is the moderator there?

Apologies, having technical difficulties here. On to the next question. Your next question comes from Greg Brody from Bank of America. Please proceed.

Hey, guys, and congrats on all the work you did on refining and getting the first slugger preferred addressed. I know it's been a long road, so congrats on all of that. My question is more just on the asset sales. Maybe give us a sense of what some of those might be and if that will lead to any revision to your guidance once it's done.

Yeah, good question. What's really left, and I spoke to the working capital release that's coming our way as a result of the new The shipper on the Grand Mesa pipeline that just occurred through the open season, we've accounted for that $18 to $20 million of working capital release in our asset sale number because it's a permanent release of working capital. And there's a second transaction that is a land position that generates mid to high single digit EBITDA that we're close to wrapping up. It would be a similar type multiple from what we've been executing this year.

And just as you talk about shifting to organic growth opportunities, you've highlighted the one that you announced in the last month. How significant do you think that could be? And is there – you sounded like you would try to pay off the rest of the preferred near term. Is it possible that gets delayed as a result of organic growth opportunities or do you think you can do it all at the same time? Do you think you can do it all?

Yeah, we can, you know, we're committed to getting caught up on the preferred arrearages. We've been very clear, I think, with the press release that went out Tuesday in the first payment. We wouldn't have committed to making a first payment if we didn't see line of sight to having the second payment being made. We do want to see the release of working capital come our way in the third quarter, the free cash flow we typically generate come our way in the fiscal fourth quarter, and then be in a position to make that payment. But the The growth projects that Mike spoke to does not impede our ability to address those arrearages.

All right. That's it for me, guys. Thanks for the time. Congrats again. Thank you.

The next question comes from Paul Chambers with Barclays. Please proceed.

Hey, guys. Thanks for letting me back in. I think I got bumped there. Follow-up question on kind of oil skimming, and I think as we look, you know, at fiscal 25 and the ramp of the new contract commencing in the second half, will the oil skimming daily volumes grow commensurate with that? Or maybe put another way, is it fair to assume that oil skim volumes will be higher in fiscal 25?

Yeah, the relationship between skim and disposal volumes that we've had the last couple years should hold for fiscal 25.

Okay. And then I guess, Brad, one, the clarity on, you know, on the income statement, the water solutions cost of sales was a benefit. I know it's a small number, but can you add any clarity on why that is?

The cost of sales, that might be we've got hedges. We've hedged the skim oil with costless collars. That could be rolling through that line item. Let us look at that real quick, and we can circle back with you, Paul, if that's not the answer. We had about 80% to 90% of our skim oil hedged with collars through the end of the fiscal year.

Okay.

Fair enough. Great. Thanks for that.

Okay, the next question comes from Ward Blum from UBS. Please proceed.

Good afternoon. Great accomplishment on the refi. Sort of looking forward, you know, perhaps a quarter or so when you, you know, have the free cash flow and the asset sale proceeds to bring your preferreds current, how do you view the, you know, sort of the the priorities between getting rid of the be preferred with a 12% coupon or starting to pay distributions to the company unit holders?

I think we got a bad connection.

No, the issue on the Ds is there is a maturity of those at June 30 of 27. So it's not perpetual. We just can't let it hang out there. So we're not fans of the cost of those funds either. So that would say we have to do something in the next three and a half years.

I was referring to the B as in boy. Oh, the 12% coupons.

The B's being perpetual, they're not our first. No. Not the first security in the preferred that we would go after. Getting caught up on the B, C, and D arrearages allows us now to make, to start making redemption payments on the class fees. To Mike's comment, those have the obligation or the put right in the summer of 27, and we will go after the D's before we address the B's and the C's.

Would that preclude you from making common distributions at that point when you were going after the, you know, pay down of the D?

No. Once we have paid the arrearages, we refer to the financial flexibility. We can reduce debt further. We can pay, you know, buy out the Ds over time, and we could then do something with the common.

Thank you very much. Yep, thank you. Okay, the next question comes from Ned Baramov with Wells Fargo.

Talk about how big the contract is with the one shipper which signed up for capacity, and then when are the remaining contracts on Grand Mesa rolling off?

TAB, Alex Weinheimer, yeah we've got.

TAB, Alex Weinheimer, Maybe a smaller contract that's rolling off towards the latter part of this calendar year and the second contract of size equivalent to want to just roll off a couple years on it.

TAB, Alex Weinheimer, Okay got it and then maybe on on the water system expansion project, can you can you give us a sense for. the CapEx dollars associated with the expansion. I know that you mentioned next year's growth CapEx is going to be higher than the current year, but just looking for additional color there.

Yeah, at this time we can't. It'll be part of our fiscal 25 budget. And I think as Mike spoke to, we'll roll that all out on the June year end call.

Understood. Thanks for the time. Thank you.

Okay, the next question comes from Ben Niedermeyer from MBW Capital. Your line is live.

Yes. I'm just wondering, you know, with the desire to get a higher debt rating, what you're thinking is a debt to EBITDA aspirationally, where you want to see it? And I know you've got to counterbalance that with the fact that some of the debt you can't pay down right away. and it's more of an EBITDA gross thing. But nonetheless, where do you see EBITDA two, three years out?

So, Ben, I think their agencies consider the arrearages as indebtedness, and they also consider the Class Ds as indebtedness. So by, you know, we're not looking at our just kind of your plain vanilla leverage. It's really all three of those. So by paying down the arrearages and going after the Ds, that will be reducing leverage from the agency's point of view.

And what are you looking at in terms of goals?

Are you looking for leverage to be three and a half debt to EBITDA?

Yeah, just plain vanilla without the arrearages or the draft.

We'd like to be, Brad, what are you? Yeah, I think while we continue to address the prep, class D specifically, I think we're in this three and three quarters to four times range. And then once the Ds are taken care of, something sub that level, like we're probably three and a half is a nice long-term goal for us to have post-class Ds.

Now, can I do a follow-on question on another topic? The former question on not being able to disclose the cost of the new pipe that I'm interested in knowing, if you can disclose it, the length of those MVCs. And I'm assuming the return on invested capital is going to be much higher than the company norm because you've got it on an existing right-of-way. You're building another pipe right next to another one, and so an existing one. Can you give us some sense of what type of returns the length of those MVCs, just beyond, without disclosing the costs.

It's Doug. Doug, are you there?

I'm here. Can we say the length of the MVC? Yeah, as the press release, I believe, stated, Mike, the MVC, the five-year MVC was public.

And returns, is this thing, are you putting this up at, you know, a very low multiple VIVA dollar? Can you give us some sense of the returns on the project you envision?

So your comment on right-of-way is correct. We previously purchased that right-of-way. We had two, and we built the LEX1. This is LEX2. So there is not, you know, significant right-of-way costs. We can't disclose the return, but I think the important thing here, the whole story is we got an extension of the acreage dedication. There's value to that. There's EBITDA from obviously what gets shipped over these five years. But what we're very excited about is the total capacity is 500,000 barrels. So we have a couple hundred thousand barrels of capacity to sell to other producers. So ultimately, the return or the rate of return is going to be very attractive. We can't give you a number.

Okay. Thank you. Thank you.

I would now like to turn the call back to Brad Cooper for closing remarks.

Well, thanks, everyone, for your interest in the call today. We've accomplished a lot this last quarter and look forward to talking to you all in June with our year-end results and fiscal 25 budget. Thank you. Thank you.

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