Q2 2020 Earnings Call
20, NGL Energy Partners LP earnings Conference call at this time, all participants are in listen only mode. After the speakers presentation. There will be a question and answer session to ask a question during the session you'll need to press star one on your telephone.
A reminder to lease program is being recorded I would now like to introduce your host for todays program Trey Karlovic Chief Financial Officer. Please go ahead Sir.
Great. Thank you and welcome everybody.
As a reminder, this conference call includes forward looking statements and information words, such as anticipate project expect plan goal forecast intend it could be leave me similar expressions and statements are intended to identify forward looking statements.
Oh NGL energy partners believes that expectations are based on reasonable assumptions there can be no assurance that such expectations will prove to be correct.
There are factors could cause actual results could differ materially from the projections anticipated results or other expectations included in the forward looking statements.
These factors include prices and market demand for natural gas natural gas liquids refine product crude oil.
Level of production of crude oil natural gas liquids and natural gas the effect of weather conditions on demand for oil natural gas natural and natural gas liquids and the ability to successfully identify and consummate growth opportunities and strategic acquisitions I'd costs that are accretive to financial results and to successfully integrate and operate assets and businesses.
That are built or acquired.
Other factors that could impact. These forward looking statements are described in risk factors and the partnership's annual report on Form 10-K .
Really reports on Form 10-Q .
Public filings and press releases.
The LNG partners undertakes no obligation to publicly update or revise any forward looking statements as result of new information future events or otherwise.
This conference call also includes certain non-GAAP measures, namely EBITDA adjusted EBITDA industrial cash flow, which management believes are useful in evaluating our financial results.
Please see the partnership's earnings releases Investor presentation, and annual and quarterly reports on Form 10-K , and Form 10-Q on our website at Www Dot NGL energy partners Dot com under the Investor Relations tab for more information on our use of non-GAAP measures as well as reconciliations of differences between any non-GAAP .
Measures discussed on this conference call the most directly comparable GAAP financial measures.
We have only call with us today, our CEO Mr., Mike Krimbill as well as our executive Vice President of water solutions, Doug why I will now turn the call over to Mike for his prepared remarks.
Great. Thank you try and doesn't jump in whatever you think of appropriate.
This has been an incredible quarter of significant achievements for NGL, we close the mosquito acquisition.
Largest water solutions company in the Delaware with capacity of 1 million barrels per day disposal, 95% pipe and long term contracts with large producers.
Then we signed the Hillstone piano say, which has one of the best producer contract profiles.
Mbcs 10 to 20 year acreage dedications with large credit worthy producers.
Next we closed on the sale of our refined products business, reducing indebtedness by 300 million.
For those of you look in the rear view mirror to make investment decisions.
In the last 2024 months, we have sold assets.
Approximately 2.1 billion, while retaining Grand Mesa of course.
And purchased assets.
For approximately 1.5 billion math that would lead one to believe that EBITDA would have declined but no EBITDA, it's actually increased over 50%.
About 380 million to nearly 600 million.
So what do we accomplished the business has become more simplified and focused with three segments versus five.
The three businesses are much less volatile with the sale of refined products and less seasonal with the sale of retail propane.
Crude and NGL logistics are repeatable predictable cash flow streams.
Water solutions less so currently as a result of as it significant growth going forward.
We have reduced total leverage by nearly two turns already and have a couple of hundred million dollars of working capital debt to eliminate by 12 31.
We have established largest water system in the U.S. with nearly 3 million barrels a day of disposal capacity and many hundreds of miles of pipeline.
More importantly, we invested in the Delaware basin with the highest rates of return for producers, meaning less commodity risk. It is also the base with the highest water to oil ratio. We exited other basins that we felt had greater commodity price or seismic risk.
We have focused on creating a profile for the water business similar to the GNP business long term contracts five to 20 years.
Significant acreage dedications minimum volume commitments.
A focus on pipe water not truck.
Skied as I said is 95% pipe Hillstone is 100%.
We have created massive redundancy for our producers.
By building, many 24 inch pipelines.
And to 30 inch pipelines all connected to our SWT.
We're not a water disposal company, but rather water solutions partner.
We offer many services to customers.
Disposal of course.
A second recycle.
This is extremely important in the new Mexico in new Mexico, where we need to protect and conserve freshwater and utilize recycle waterfront fracking instead.
Recycle is not a small volume mobile unit, but rather an extensive produced water pipes system that provides produced water to recycle ponds throughout Lea and Eddy County.
NGL can provide frac quality water.
Taking out on dissolved solids, and corrosive metals like iron So producers don't need to add chemicals.
We own ranches in Lea County.
Approximately 200000 acres.
On our fee land, we are building recycle ponds.
Landfills that are important to dispose of the Unders all solids removed from produced water cliche mines for building roads and drilling pads. We're even currently evaluating construction of solar fields on our fee land to produce electricity.
So what's in store for the next 18 months.
A significant increase in water volumes, we have built the infrastructure to handle large increases you produced and flowback water.
Two we continued reduction in working capital debt.
Limited if any acquisition opportunities on a much smaller scale.
And reduce capex for internal growth.
No more than 10 to 20 SWT may be required annually up in addition to pipeline construction.
Before closing I would like to address our substantial an exciting E.S.G. efforts for the first time.
For over a decade, we have operated our large scale 60000 barrels a day anticline recycle and discharge facility in Wyoming.
We believe we have the most experience and expertise in treating produced water to a recycle standard for reuse and a discharge standard which is better than drinking water quality for discharge into the new Ford River.
We have treated and discharged over 60 million barrels in this uppermost tributary of the Green River, which eventually flows into the Colorado.
Our water meets the highest quality quality specifications.
Wyoming and as possible and supportive of fish.
This expertise and our 14th step Panted treatment process is ideal for use in new Mexico, where there's a shortage of fresh water and a massive amount of produced water.
To that end, we have entered into two research collaborations first with the color in school mines, where we donated research facility in equipment that $800000. This effort will support research and analysis of produced water.
Second we recently committed $1 million to the new Mexico State University.
For a produced water research consortium with the objective of filling scientific data gaps in identifying compounds in produced water and associated testing methods.
We have two specific goals in mind presently one is to work with the state in Mexico to create a net zero carbon footprint in the state.
And two is to treat produced water to various standards that can be useful for agricultural purposes recycle river discharge uneven municipal possible purposes.
With our partners, we are analyzing our ranch soil to determine what can grow and the water treatment cost to support such purpose. This is called fit for purpose.
Can we grow noncash consumable agricultural products, such as cotton in alfalfa can we grew agricultural products for human consumption, what does it cost to treat to a standard that allows water to be discharged into the rivers.
A substantial amount of carbon can be sequestered in the soil, if we grow Perry grasses and other plans NGL can produce the water quality is needed.
The question is at what cost and how do we get a return on our investor.
In closing our freight our future is very bright our infrastructure is built our business simplified unpredictable.
In spite of fake news analyst stepping to the sidelines and short sellers, we have executed the right transactions to create value for our unit holders. One day, we believe it will be reflected in the enterprise in the meantime, smile and continue collecting the dollar 56th annual distribution.
That future.
Okay, great. Thanks, Mike [noise].
After that there are quite a few things to cover from a financial perspective for the quarter as well as updates on the recent closing of Hillstone.
First for the transactions included in the quarter as Mike mentioned, because mesquite on July 2nd because there were refined products typical sale on September thirtyth. So both transactions are reflected in our quarterly results.
The sale Jets was included in discontinued operations and our September 30 financial statements and prior periods have been adjusted accordingly.
This should allow investors to understand the impact this business has had on our historical results.
These results are no longer included in our covenant calculations, which is consistent with the treatment of the retail propane segment, we sold last year.
The proceeds from the tips wholesale were used to repay borrowings on the revolving credit facility and de lever the business by approximately half a turn in total.
Pro forma for the mesquite acquisition and the typical sale as well as growth Capex invested year to date.
Our LTM pro forma adjusted EBITDA at 932019 is approximately $575 million as calculated for debt covenant compliance purposes compared to a total debt balance of approximately 2.8 billion, which results in total leverage of approximately 4.8 times, which is a reduction of about.
<unk> 0.4 turns from the June 32019 period.
With the recent change in our business strategy and the reduction in working capital needs with the typical sale and the expected further wind down of certain remaining refined products businesses, we have reallocated, our revolving credit facility and adjusted our covenants to be more in line with market.
We are now governed by total leverage covenant, which will include working capital borrowings going forward.
And is currently some subject to a 5.75 times limit where the step down to 5.5 times beginning June thirtyth of 2020.
We expect our leverage to remain at its current level and then reduced once hillstone volumes ramp with the poker Lake dedication coming online next year.
Our target leverage is below four times total leverage.
The current total leverage metrics are in line with where they have been over the past year and significantly improved from prior periods. However, we believe the cash flow profile and predictability of earnings as Mike mentioned and significantly improved with our transition from retail propane and refined products marketing to water solutions infrastructure.
Looking at the change changes in our debt balances for the quarter. The typical sale resulted in approximately 300 million dollar reduction in working capital as timber thirtyth.
You should note that our total working capital reduction since June Thirtyth was 252 million with the offset being primarily incurred as seasonal increase in our liquids working capital.
We funded 250 million of the mesquite acquisition with a new term loan in July our.
Our growth Capex for the quarter was almost 100 million almost all of which was incurred in our water segment as we built out pipelines and completed our infrastructure.
Additionally, we funded $50 million Hillstone acquisition with a deposit in September that was funded on our expansion facility.
And which is also reflected on our balance sheet as an increase in borrowings.
Following the ended the quarter, we closed on Hillstone, which was funded with 200 million of incremental preferred equity and the remaining balance was funded with proceeds from our credit facility.
A portion of this transaction funding will be offset with the remaining wind down of a portion of our refined products business, which is expected to be completed during the current quarter and should reduce working capital needs by approximately $200 million to $250 million.
That translate to a net debt increased at approximately 150 to 200 million for Hillstone, well under our four times leverage targets.
Now I will cover the operating results for the quarter as well as our updated guidance for fiscal 2020.
Adjusted EBITDA, excluding discontinued operations totaled approximately 119 million for the quarter and over 212 million year to date.
We are adjusting our forecast ranges for fiscal 2020 for each of our business units to the following.
Crude increases to $200 million to $220 million of adjusted EBITDA for the year.
Water will be 270, a 300 million, which includes mesquite for nine months and Hillstone for five months.
Liquid increases to 85 to 95 million.
And refine products, excluding discontinued operations remains the same at $15 million to $30 million for the year.
Our DNA forecasts also remains unchanged at $30 million.
We are not adjusting our forecasted organic growth capital or maintenance capital expenditures for the fiscal year and as Mike mentioned, we expect to maintain our dollar 56 per unit annualized distribution.
Jumping to the crude segment. The crude segment continues to show steady performance generated approximately 54 million of adjusted EBITDA This quarter and 106 million year to date.
Grand Mesa volumes averaged 128000 barrels per day this quarter very slight decrease last quarter, but remain in line with our expectations. We're currently seeing volumes trend higher through October and November on Grand Mesa as producers of ramp production in the DJ Basin, which has been facilitated by increased natural gas and NGL take takeaway recently coming online.
Yes.
We believe most the current crude takeaway is being fully utilized at this time, which benefits our marketing efforts in the basin as well.
We have not seen any significant changes in the remaining crude segment as we continue to see high utilization of our Cushing storage as well as our logistics assets.
The results to date, along with our expectation for the remainder of the year have allowed us to increase our earnings target for this segment.
Moving to water water adjusted EBITDA was 57 million for the quarter and 98 million year to date, which includes one quarter at mesquite results.
Total disposal barrels were 1.26 million barrels per day.
And our skim oil volumes totaled 3100 barrels per day during the quarter.
We received an average disposal fee of 64 cents per barrel and realize skim oil after hedges totaled approximately $58 per barrel with an average skim oil cut of 24 basis points.
Approximately 60% of this those volumes were delivered via pipeline during the quarter.
We are expecting pipe volumes to continue to increase on our existing systems and all the Hillstone Delaware basin volumes are delivered via pipeline as well.
Which should result in over 70% of our volumes delivered via pipe once Hillstone has integrated.
Mike discussed some of the mesquite transition and integration we're continuously an increase in their volumes, which were just under 400000 barrels per day in October compared to approximately 350000 barrels per day average during the quarter.
Hillstone volumes were over 300000 barrels per day in October as well.
Freshwater sales continue to be lower than expected during the quarter. However, we are negotiating agreements that would commit all of our freshwater for next calendar year to certain producers under agreements the cover acreage dedications for multiple years.
Additionally, as Mike mentioned, we're developing waste water recycling projects on our ranch's with long term acreage dedications on those as well.
Our current city solids facility in Eagle Ford was down during the last two quarters for unplanned maintenance, but as back operational at this time.
The work performed on this facility as well as certain well workovers pump replacements and upgrades drove our maintenance capital expenditures during the quarter.
We are expecting an increase in our solids for the back half of the year going going forward.
Operating expenses were 38 cents per barrel for the quarter compared to 40 cents per barrel year to date Opex remains higher than budget as we work to automate facilities increased utilization integrate acquisitions and streamline operations. We're also moving additional facilities off of diesel generators as we connected to the power grid.
We continue to focus on reducing operating expenses across the system with a target of 30 cents per barrel by the end of the year.
We are continuously growth in volumes across the system, particularly in our core Northern Delaware Basin operating area, where most of our producer customers are large independents are major integrated companies.
Skeet volumes are increasing and we will start recognizing the hillstone volumes in November .
We are expecting to exit the year with disposal volumes between 1.8 to 2 million barrels per day, which is reflected in our updated guidance range.
Jumping to liquids adjusted EBITDA for our liquid segment totaled 19 million this quarter and as total almost 32 million year to date.
We continue to benefit from our recently acquired terminals, including our Chesapeake export facility and our butane business has shown strong volumes and margins so far this year.
We have loaded 19 shifted the Chesapeake Virginia export facility this fiscal year and completed certain optimization projects contemplated with that acquisition from DCP. This has been a nice addition to our liquid asset mix.
Butane sales remained strong as we progress for the season and we're just entering the heating season for propane, where we believe we are well positioned from an inventory and average cost perspective.
We are forecasting based on a normal heating degree winter.
We increased our guidance range for this segment based on our results to date and expectations for the remainder of this year.
Finally, refine products are remaining refined products business will primarily consist of Iraq marketing business, which carries minimal inventory and markets barrels through third party terminals across the United States and a renewables business, which is centered around biofuel marketing.
We're in the process of winning down or other marketing operations, which required significant amount of inventory storage and has contributed minimal earnings over the past year.
We have maintained our distribution this quarter and do not expect any changes to the distribution to at this time.
Our coverage has continued to increase we are just over one times on an LTM basis.
And we expect to hit or exceed our 1.3 times LTM coverage target at the end of this fiscal year.
It seems like we always get caught up in a moment for the quarter, but if you look at what we had proactively accomplished to redirect the strategy of this business reduce leverage improved cash flow predictability strengthen contract terms grow fee based revenues extend debt maturities among other efforts many of which.
Dress the always growing list of market concerns, it's pretty remarkable what has been accomplished in NGL in the past two years.
Mike said, we have sold over 2.1 billion of assets acquired 1.1 billion in high quality water assets.
And increased our EBITDA cash flow.
And still reduced leverage by about two times over this period.
We believe we are doing the right things for all of our business stakeholders.
That concludes our prepared remarks, Jonathan please open the lines for questions.
Certainly ladies and gentlemen, if you have a question at this time. Please press Star then one on you've touched on telephone. If your question has been answered and you'd like to limit yourself from the Q. Please press the pound key our first question comes from the line of T.J. Schultz from RBC capital markets. Your question. Please.
Great. Thanks, maybe for Doug what percent of the expected Delaware volumes by the end of next year will be on contractor or part of an acreage dedication and what percent is supported by Mbcs.
Hey, TJ. Thank you.
Right now I believe were somewhere close to 70% of all either acreage dedicated RMB season, the Delaware.
That really is pretty in line with what percentage of our piped water also.
Really are trucked water is the on dedicated.
Portion of our portfolio in the Delaware.
As we continue to bring on more facilities and then also.
We see the poker Lake contract ramp next year.
We'll see that 70% pushing more towards the 80, 85%.
MVC basis.
I would say on NBC basis in the Delaware of that 70%.
Emitted.
30% of that's NBC.
Okay. Thanks.
And then maybe a question on.
Recycling.
More high level, you've indicated building. These these times so.
Recycling now is done via some of these mobile units and how does that evolve or is that evolve into something different more quickly that would utilize these these ponds and pipes just trying to understand.
The opportunity that sit there for you all as you looked at contract.
Recycling business.
Sure.
The mobile units are more focused on on the fly or lower volume production.
With our long history of recycling and treating.
We've been down that road and consider them, we didnt see it as an answer for that for the thing we could scale.
That's why we do not focus on those.
Because we have such a large pipeline system in place now.
We're able to strategically placed very low capex.
Pits and recycle equipment that is really centralized but not on big plant basis more of a.
Central facility.
With equipment and pits that store the water.
Our interconnect to our produced water systems, where we received the produced water to treat.
Our average facility country 50000 barrels per day scalable for 200000 barrels per day for not a lot more capex and our goal is to and what we've already entered into we have a 10 year acreage dedication on our first facility on our Mcaulay ranch.
We are delivering that water to the anchor dedication, but then that is open up opportunities for us and the other dedications or other contracts.
Within eight eight to 10 mile radius of that facility all delivered by pipe as well.
Okay, Great that's helpful.
Just lastly, microchip.
The implied valuation on on the GP and some recent transactions that were disclosed.
Imply plans I would think to grow the distribution over the next few years, but how do you view.
Distribution growth versus buybacks, just given where the stock trading right now thanks.
But to you but.
We think.
Number one.
We probably end up in the midstream space, where everyone eliminates there I'd ours.
So when do you do it.
How do you make it.
I would say fair to a GP owner, but.
Very attractive to the partnership so when we look at our.
Next few years projections and we look at.
More of whats the DCF per unit was clearly we're not going to raise the distribution for trading at 12 or 13%.
We currently are.
We think it's very attractive divide GP interest back today.
It would ultimately would become a.
Multiple below say the current market, where we're seeing whatever nine to 15 times.
I don't know that answers the question.
Sure you have a.
Just to add TJ obviously.
Okay.
We're not making decisions in a box.
Honestly looking at the market.
Looking at what our expectations are for wherever units will trade to determine whether were.
Buying back units were increasing distributions in the future.
Obviously, the way that we look at running our business and generating excess cash flow.
Supports distribution growth, but obviously that decisions not going to be made.
If you're trading at a 13, 14% yield at that point in time, you would develop those funds to buying back units, which again.
May not support a.
AGP, a higher GP valuation because you don't have the increase in distributions.
But thats what is implied in our overall valuation in how we look at the business on a longer term term basis.
So so hopefully that helps again I think that.
At the current unit price level.
Raising the distribution, we would most likely be buying back units rather than doing that.
We don't expect the units to stay at this level again as as proven out that our distribution is predictable steady coverage increases and leverage continues to decrease in hits our target levels.
We wouldn't expect a trade at this level, but again the market is the market to make that decision at the time.
Okay. All makes sense. Thank you.
Thank you. Our next question comes on line, Justin Jenkins from Raymond James Your question. Please.
Great. Thanks, I guess first on the exit rate for the year for water volumes that fiscal year and not calendar year is that right.
Thats correct just.
Okay.
Then you mentioned try the five months of contribution from Hillstone in the updated guidance can you give us a better sense of potential financial contribution in the early stages here.
And I guess secondarily has has the outlook changed at all for those assets given what we've seen with with operator activity levels heading into the calendar Tony Bonnie.
Theres been no change to our expectations on the Hillstone assets again.
We closed that business a week ago.
The largest dedication.
Is it a 20 year poker leg dedication that development.
Comes online a year from now.
Between now and then our expectation is that.
The hillstone.
EBITDA contribution.
Since we offsets the is not accretive or dilutive it offsets the financing cost of the business and that business is financed with 200 million of 9% preferred the remainder is financed with debt.
During the simple math thats.
Around $50 million the contribution for the first year.
That's how there is a ramp in those volumes overtime, but that's the contribution that we're assuming that our.
In our fiscal guidance.
Got it that's helpful and last one from me if I could just how we should think about.
Maintenance Capex now that the water business is that meaningfully larger portion on a go forward basis.
Sure. So our maintenance Capex, obviously has increased as we have grown the water business.
Theres more infrastructure more assets.
You have regular maintenance on your pumps and your facilities.
We will continue to have a regular maintenance plan.
The maintenance capital will be more tied to volumes as well so as volumes increase we would expect maintenance capital to two also increase.
We we moved our maintenance capital numbers up for this year, we're still in line with that expectation.
It was a range from $50 million to $60 million I would expect next year's maintenance capital numbers to be slightly higher but again I don't think it's it's going to be significant.
Got it thanks.
Thank you. Our next question comes from the line of Shneur Gershuni from Yes. Your question. Please.
Hi, Good morning, guys, Mike. Thank you for the total reference in the prepared remarks.
Just to start off.
You guys had made a lot of progress on leverage over the last couple of years, and then you sort of turned around and get this acquisition. This most recent quarter.
What I think about the backdrop is where the breakdown is producer expectations and so forth.
We do you take a pause.
In sort of.
Produce where you're at in sort of focus on letting the earnings catch up to two where your leverage actually as at this stage.
Sure.
So I'll start veneer than might can chime in as Mike mentioned.
We have.
Weve reduced leverage by two turns.
Over the past two years.
Weve.
Weve completed these acquisitions with.
Perfect amount of preferred equity.
So we raised 600 million of of preferred classes. These we also issued another 100 million.
Preferred class B, so approximately half of these transactions was financed with preferred.
I think whats lost in some of the translation is the amount of debt that's coming off related to the typical sale as well as the wind down of remain refined products, that's going to be $500 million. So.
From from our perspective.
Yes.
We have continued to reduce leverage.
Our overall target is lower than where our current leverage is because we do we will grow in to the these two acquisitions. The volumes are expected to ramp but these are too.
Significant transactions that we have actually been discussing for about a year now.
These are these were.
Assets that we identified in our valuation of the basin.
That we thought we are core to the to the further development of the basin.
There are underpinned by long term contracts with the best producers in the basin as well so.
We do feel confident in the assets that have been acquired.
The question to Whats next my you mentioned are continuing growth capital.
We'll be focused on on timing these assets together via pipeline.
Expanding pipeline capacity, where necessary, we have 2.8 million barrels a day disposal capacity in the basin.
So.
Over the next 12 to 18 months, we should see higher utilization of that capacity and a reduction and growth capital and there's not any significant M&A that we're evaluating at this point in time.
Mike if you want to add anything more to that.
Yes.
It's.
It's wonderful to see thank you can just sale I'm going to put up the business on pause and I'm not going to lose any competitive advantage, but that's not the way it works.
You have in this space and there was a shortages disposal capacity in new Mexico. So producers were signing contracts to make sure that could get rid of their water.
Those.
Producers are our larger independents and majors.
As a limited number so we.
We have to.
Get as many contracts as we can.
For the future growth in the health of the business. So in the basin you had us ourselves with skeet.
Hillstone I'll and Soleris that was it really is the large systems.
That we felt the two best were muskie.
And.
No stone in physics with their physical assets, but also their contract profile.
As you know all went in star and Solaris is doing whatever they're doing today. So.
If we just had two.
Purchase these two businesses and leverage will increase somewhat by the this yours.
Our business really of being the.
The franchise in the Delaware.
So now what's what's left well, there's really nothing left.
So the there may be a few producer systems out there that may come up for sale, but otherwise, there's all the systems or divvied up and the producers are pretty much divvied up.
So.
By getting Hillstone EMS ski done I think we're at the point now where we.
We're just waiting for the water too.
Flow to us and there is nothing.
In the large any kind of larger medium scale acquisition to be done.
Okay. So so to paraphrase your mostly done with acquisitions and we can sort of expect the operating leverage of everything you put into place where you just have the the connection capital going forward and we should see a faster clip or faster growth rate it from a from an EBIT.
Perspective on a go forward basis is that is that.
Encapsulate with what you're basically saying.
Yes, it in that we tried to say that as well with this.
SW DS next year on year after being in this 10 to 20 as you know the ones in.
But on the Texas side, or one and a half to $2 million each.
So theres, we've spent the capital, but it's because we expect the water.
Here, we're seeing an already in November ramp up.
But yes so.
I think now it's just that we're going to see the growth in the water EBITDA and.
Leverage should decline will decline overtime.
Okay.
One of your peers reported this week and had some really strong auto results.
Should we expect similar performance.
In terms of what Rottler posted.
Earlier this week.
Do you have like some similar metrics to them and so forth or.
Are there are differences, we based on where you are and where they are and so forth.
You have any thoughts around that so.
Sure Rattlers tied specifically to their parent one primary producer they are not in the the exact same area that we are in the basin.
We.
No I don't think you should be loss that we have seen growth in our volumes over the past quarter. It may not be as as significant as as we had originally thought in the first part of the year.
Or as the market had anticipated, but it has continued to grow and we're seeing that growth through October and November as well.
So I think if you look at.
Our system and you understand the producers that are behind that system.
You can see that their rig counts are not really.
Following.
Either staying steady or even increasing and their volume expectations are increasing through the remainder of not just this calendar year, but next calendar year as well so I think thats the read through in where you should be focused.
From an NGL perspective.
Perfect. Thank very much guides and have a great weekend.
Thank you here.
Thank you. Our next question comes from the line of James Spicer from TD Securities. Your question. Please.
Hi.
You mentioned, an additional 200 to 250 million reduction in working capital borrowings.
Given that the tips wholesale is close can you just clarify exactly what's driving that and then how much in total is going to be drawn on the credit facility pro forma for all these transactions.
Sure Jay so.
Our risk so our total when you looked at our total.
Borrowings at the end of June it was about $900 million.
That was about $600 million of refined products and about.
$300 million of crude and liquids.
At September 30, we sold to upsell working kit capital came down about 250 million in total again reflect the typical sale is 300 offset by a slight increase in our liquids that seasonal.
But the 600 million of refined products working capital was only reduced in half.
The remaining businesses, we're utilizing that.
300, approximately $300 million of working capital.
And generating a very small amount of EBITDA. So we are in the process of winding those businesses down or looking for other opportunities associated with those business and we expect that to be completed by the end of.
This quarter, which would be December 31.
Our estimate right now that's another $200 million to $250 million reduction in borrowings under the working capital facility the way we've.
We've reallocated our credit facilities, we have about 1.2 billion available on the expansion facility 600 million available on the working capital facility, we would expect that working capital facility to be in the $400 million range from an outstandings perspective.
And that would cover.
Crude logistics Ngls, which at at December 31, we'll still have a a fairly significant inventory position for propane as we move through the heating season, and then what is remaining in our refined products business, which is primarily.
The rack marketing and a small piece of renewables business.
Okay. Great. Thanks, that's helpful. And then just on Capex for next year I understand this is primarily connection capital onetime things together, but can you just directionally provide a little guidance relative to the 233 30 million this year.
So so right now we're we're looking at growth Capex in total across all of our businesses.
Probably 200 $250 million range.
At this point in time that would.
Included no.
No M&A activity.
And I think Thats, a a a reasonable number at this point that would primarily be the water infrastructure and then as Mike mentioned, you got a few disposal wells that you would add as needed through the year.
Okay got it thank you very much.
Thank you. Our next question comes on the line to appear stemming from Simmons Energy. Your question. Please.
Good morning, and thanks for taking my question I know this has already been kind of addressed in the queue today, but I was just curious what attracted you to the Hillstone assets is there like one or two attributes that you want to point out about those assets that attracted you, especially relative to the other water related businesses that have been up for sale.
Yeah that was an easy one their contract profile the contract they have on poker Lake in particular.
Very attractive.
We're not able to tell you who the customers are.
Because of the season the contracts.
So.
It's.
It's hard for you to necessarily confirm.
But that was the contract profile they they had 19 wells drilled.
We can drill wells and get permits easily too. So that's that's not a big deal.
But certainly the contracts so thats.
It's difficult I think for analysts you know this better than most.
You can look at the rig count in the U.S. you can look at the oil rig count to use that doesn't matter you can look at the oil rig count in the Permian.
That really doesn't matter.
You've got some of the company's going bankrupt others dropping rigs that enters into that count. The only we can really evaluate us is too.
Look at the rig count for our producers and we're not allowed to tell you all the producers.
So we it's very frustrating when these analysts come out until at the rig count. This this this.
That's nonsense that they don't no one knows except us, but that rig count as we can't say anything.
But the contracts are key poker Lake It was one of the most attractive.
Contracts in the company.
Great and then and then as a follow up to that issue look at other water companies not your own but other ones do you think that there's the chance that they might be facing some pricing related issues.
As you know from from a competitive standpoint.
Maybe an oversupply of systems that are getting built out there.
Just any thoughts on that.
I think it in.
Generally.
Would be true that.
Contracts that were signed let's say five years ago.
Our probably at a higher rate and contracts being signed today has any business as you get more competitors.
Fees come down so I think anyone who has contracts.
From some period of time.
In history as they come up for renewal.
Probably be some pressure on.
Price.
That's great well thanks for the color.
Thank you. Our next question comes on line those and use the ball from Seaport Global Securities. Your question. Please.
Yes, hi, good morning, guys.
A couple of questions for me so starting out with the customer I realized that you can talk about specific customers et cetera, but I was wondering if you could categorize unit customers, especially in the water business.
As large indicated.
And there's companies versus independent entities on by you.
Great clarity.
So is it true yes, so neal our largest customers tend to be large integrated or very very large independents, all investment grade or higher rated that would go I think that would.
Covered the majority.
Our customers and the volumes that were receiving.
Obviously, we have a very large system. So we do have.
Customers of all credit qualities.
But the the.
Contracts that are incurring the system the mbcs that we have.
The large acreage dedications those are all from from extremely high credit quality customers.
Yes.
Let's say that clearly we want all the producers to be successful so.
If we have a line running by a smaller producers were very excited to have.
We have them connect to our system I think we all are looking at this smaller guys.
What are the more likely to financial issues drop rigs. So you really want to base for business on the larger.
Producers that are going to drill through any downturn.
But that said the smaller guys.
Eventually I think the purchase by the larger guys. So.
It would be we don't want to ignore the smaller guys. We want to help them as much as we can and then if they end up becoming part of a larger.
Group that we have new business with.
We will already have their water.
And it will be additive to instead of having a portion of our larger customers water going somewhere else.
Okay.
Just to put a little bit of quantification around dot. So when you see large majority would it be fair to say, it's more than 80, 85%.
Yes in this im sorry, you have to go bye bye.
Shale plays so if you're talking about the Permian.
Yes, if you're looking at the Delaware Basin, Yes.
When when you look at.
The DJ the Eagle Ford.
Midland Basin, no it would be a smaller numbers.
But but the core basin, particularly the assets that we acquired.
I think thats right.
Around 80% is probably a reasonable number.
Got it thanks for that and then just on the leverage question I think you had.
Sorry to keep might do fivex kind of a love it.
Metric for the business.
Sometime back and I realize you know that have been some changes that on the working capital.
How that Brean capital is broken down et cetera. So I was just kind of curious you know is 3.25 till the kind of the number that you're targeting and if so seems like you indicated you will hit for excess so sometime in the next the vendor when can we expect to get to that 2.2.
Fivex.
Right. So the 3.25 times, adding that that metric excluded working capital and if you look at where our working capital was.
Three months ago it was.
$900 million.
That's one and a half terms. So if you took the 3.25 and you add a turn and a half youre at 4.75 times would have been that target.
At that point in time, we've actually for a total leverage comparison, we've actually lowered that target. We're right at that target today were 4.8 times, but we've reduced our working capital we're continuing to reduce working capital continuing to eliminate the business. The primary use of that working capital. However, we will still have.
A little bit under a turn of working capital as I indicated earlier about 400 million. So call that 0.6 0.7 terms. So we really let the 3.25 hasn't changed it's just been adjusted for how the business is now structured and how we how the working capital will be impacted for the business. So we really taking the three.
0.25 from a compliance basis, which excluded working capital to four times, including the remaining working capital.
So we really have not changed that target and we're expecting to be there.
In about a year once.
We see the ramp up of volumes on Hillstone in Muskie.
And again, the elimination of the remaining working capital intensive businesses.
Associated with refine products.
Okay got it thanks for that clarification, that's all I had.
No problem.
Thank you. Our next question comes from the line Spiro Dounis from Credit Suisse. Your question. Please.
Hi, Good morning, guys. Thanks for squeezing me in year, two quick ones just on drilling SBD next year seems like there's actually considerable headroom just with your current injection capacity and relative to where your run rate is just curious why you think there's a need to drill that many overall.
Then just on that 20, or so figure that you are drilling should we expect that something that probably declines decent that the following year.
I can take that Mike.
Yes.
This is Doug.
We are running a lot of pipe large diameter.
Moved the water from new Mexico to our existing capacities in Texas, our new Mexico capacities, we only have Willie drill seven Devonian inherited.
17, Devonian for mosquitoes.
Those are infield those are staying very full.
When we engaged our three new customers in the Hillstone acquisition.
All three of them told us they are outpacing their forecast and they have come and asked us for additional firm capacity.
Above and beyond what was contracted.
That basis is where we're coming up with the additional wells to be drilled that's particularly in loving County.
Where the demand on the Hillstone systems.
The answer your second part of your question our expectation would then be to only be drilling additional wells in the future based on additional forecasts or contract new contracts, but we are continuing to see.
The forecast of the magnitude of water under our contracts continue to increase that's what would drive obviously additional investment and new wells.
Got it appreciate that color Doug second one Mike just one might fall into the fake news category, but theres been some expanded discussions there are risks to drilling on federal lands, depending on the results of the next election, so sounds like maybe there could be some impact in new Mexico. Just wondering what your thoughts are on risk there how you'd expect the Mexican to react is getting a bite.
So energy is now.
Yes that is fake news. Thank you and we've already been through this once in Colorado with a setback.
So we.
We have opinions, but those really don't matter. So we engaged a law firm.
In the southwest there was an expert in this area.
They have provided us an opinion, which took 10 days or so so wasnt there was well thought out.
What really can.
An executive and someone really shuts down with their shutdown. The produces the next executive order is.
Assuming it doesn't.
It's not something gets through the Senate and house.
Their opinion was that the.
The.
Right.
A democratic President cannot shutdown.
Knocking on the BLM land.
So then we said okay, let what happened in Colorado.
There was a rush to the.
By the producers to.
Get as many additional drilling permits approved as possible. So they would have a large inventory obviously in case it.
Set back past.
That is not happening in new Mexico, Theres, not a rush on that.
On the.
Drilling permit folks to grant thousands and thousands of new permit. So that's an indication I think of what the producers are thinking.
Yeah. So we don't believe.
The.
The change in administration could shutdown fracking on the BLM Lance.
Currently we have some production in north predominately to Mexico that were on our producers are and BLM.
We tried to figure out how much water is coming off of those lands.
But there's no way for us to know the advantage obviously, what we do is all the waters on pipe, but one wonders on pipe you don't know what leases that came from.
So theres no way for us to determine how much of our new Mexico waters coming off appealing land, but we do think thats.
Fake news.
Unfortunately investors do don't.
No any better may react to their detriment, but we saw the same thing happened in the DJ and.
At the end of the day in in the DJ We had our biggest.
Water customer come to us and asked free 15 year contract.
So quite a bit different than the fake news that came out about the setback proposal.
Understood Yes.
Appreciate it sets up my answer so I appreciate that thanks guys.
Thanks for.
Thank you. Our next question comes the line of Mike Private Investor Your question. Please.
My question has been answered.
Thank you.
Hey, Mike.
This does conclude the question and answer session. Then I'd now like they had the broker back to Mike Krimbill for any further remarks.
Again, I have many thoughts, but I think I'll keep to myself.
Thank you and we'll see you next quarter.
Okay.
Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program you may now disconnect good day.