Q2 2021 NGL Energy Partners LP Earnings Call

Ladies and gentlemen, we signed by Nike's fiscal year 2021, NGL Energy Partners LP earnings Conference call will begin momentarily again. Please stand by your conference call will be get in a minute. Thank you.

Again, ladies and gentlemen, please send by your cheat sheet fiscal year 2021, NGL Energy Partners LP earnings Conference call will begin momentarily again. Please stand by your conference call will begin in a minute. Thank you.

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Good morning, ladies and gentlemen, and welcome to the Q2 fiscal year 22, anyone NGL Energy Partners LP earnings Conference call at.

At this time all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time, if anyone should be smartest essentially you're going to constrain.

Please press Star then zero on your Touchtone telephone.

This call is being recorded I would now like to try to conference over to your host Mr. treat cartilage see Oh. Please go ahead Sir.

Great. Thank you and good evening everybody.

Sure reminder, this conference call includes forward looking statements and information words, such as anticipate forget expect plan goal forecast intend could believe may and similar expressions or statements are intended to identify forward looking statements.

NGL energy partners believes that its expectations are based on reasonable assumptions there can be no assurance that such expectations will prove to be correct.

Factors that could cause actual results to 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 refined products and crude oil level of production of crude oil natural gas liquids and natural gas the effect.

Weather conditions on demand for oil natural gas and natural gas liquids and the ability to successfully identify and consummate growth opportunities and strategic acquisitions at costs that are accretive to financial results 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 in the partnerships annual report on form 10-K quarterly reports on form 10-Q, and other public filings and press releases.

NGL energy partners undertakes no obligation to publicly update or revise any forward looking statements as a result of new information future events or otherwise.

This conference call also includes certain non-GAAP measures, namely EBITDA, adjusted EBITDA and distributable cash flow, which management believes are useful in evaluating our financial results.

Please see the partnership's earnings releases Investor presentations, 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 rule that Rick.

Mr 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 to the most directly comparable GAAP financial measures.

I'll now turn the call over to our CEO Mr., Mike Krimbill I think strike a good.

Good afternoon, and thanks for joining us.

Our second fiscal quarter EBITDA is 138 million as you know as compared to 123.5 million last year.

With respect to our water solutions business. It appears that volumes have bottomed out this quarter the.

The rigs working on acreage dedicated to NGL customers in the Delaware is increasing.

I was October volumes, averaging about 1.5 million barrels a day.

Volumes under the poker like contract began on October 1st and will increase.

January one 2021, so less than 60 days and each year thereafter through January one 2024.

We have added additional dedications with a focus on increasing our market share and the Delaware. During this downturn, we've issued numerous press releases announcing those.

Reducing operating costs has been a significant priority this year, even the water volumes have declined our cost per barrel.

Well from 38 cents last year to 27 cents per barrel this quarter.

As volumes increase we expect this per barrel cost to fall even further.

We have done this to reducing headcount in excess of 25%.

Consolidating W.D.'s and eliminating most diesel power generation.

With respect to crude oil logistics, they put performed well led by Grand Mesa with financial volumes at 123000 barrels per day.

Oh, the liquids logistics is performing well in the in the face of its uncertainty.

In the first six months or so co bid.

There was a question about how much butane blending would be happening with gasoline demand down so much but logistics is performing.

Budget.

Regarding the balance sheet.

NGL has already built out its stellar waters Super system, such that Capex. This fiscal year and going forward is reduced to allow us to be free cash flow positive.

Even so we have reduced capex below the guidance provided earlier in the year for this fiscal year. This will significantly reduce leverage over time.

We did evaluate again are coming a distribution situation and determine that we are better served in the short term.

We reduced that didn't pay a yield exceeding 20%.

This is not because we are not earning the distribution. Our common unit coverage is about four times I think it was five times for the quarter, but rather to retain our cash to de lever and reduce bank commitments.

We are pursuing numerous asset sales and joint venture opportunities to raise capital sooner and again use this to reduce leverage and bank commitments.

Trey will address the credit facility extension, but I will comment that we have a good bank group that is under pressure to reduce their energy commitments. We understand that are working to accelerate the reduction that is naturally occurring from our free cash flow position.

So where do we go from here I'm very simply.

We have transitioned to a simplified business model the three top tier segments reduced volatility lessen seasonality and significantly cut working capital needs our.

Our contract profile is greatly improved through long term dedications with strong counterparties when.

You already have our Capex is behind us as we have built our Delaware system.

Large diameter pipe system, we are long water disposal capacity. So we can take all the produced water producers have to send this week.

We are set to grow the business without acquisitions or significant capex.

Second we are focused on reducing indebtedness leverage and bank commitments.

Third we are focused on reducing indebtedness leverage and bank commitments.

Fourth reread, two and three and with that trade I'll turn it back to you.

All right. Thank you bye.

So.

Mike mentioned I was I spent a little time discussing the credit facility extension, we added process before going through the results for the quarter first I'd like to express my appreciation for the banks and their teams that have been working on this important extension, especially with everything going on in our industry.

We launched our extension last month and had been working with our bank group to finalize terms generally speaking we're looking to extend our credit facility by at least a year. We are working with the group on ways to reduce the commitments under the facility as well as trying to address certain financial covenants based on the impacts we have had from the pandemic as well as extractions bankruptcy filing.

We understand our borrowing cost maybe going up and there will be limits on cash flows, leaving the company other than to reduce indebtedness.

His conversations have been constructive and we are working diligently to complete this extension as soon as possible.

Our current leverage ratio is about 5.3 times calculated in accordance with our credit facility in line with prior quarter and we are working on opportunities like the ones, Mike mentioned to reduce our secured debt and lower leverage that will be our core focus through the remainder of this year and into fiscal 2002.

Since July 1st we have repurchased and retired an additional $75 million notional.

Face value of unsecured notes, bringing our total repurchases for this year to around $125 million face value at about 60 cents on the dollar resulted in a net $50 million debt reduction.

Moving to our financial results for the quarter, Mike mentioned, how well our operating segments performed during the period. Despite some of the continued macro challenges.

Our adjusted EBITDA for the quarter came in at a $138 million, which includes a full quarter of operating cost savings in water.

Sales skim oil we held in inventory through our first quarter the benefit of a large portion of our contango crude sales and was offset by continued weak demand for refined fuels natural gas liquids lower rig counts across the areas, we operate and certain onetime corporate legal costs.

As I cover some of the specifics of each segment as a reminder, that we're referring to adjusted EBITDA and other non-GAAP measures, which should be reconciled in our earnings release, investor presentations and quarterly reports to operating income or other GAAP measures.

Starting with crude oil the crude segment reported approximately 65 million of adjusted EBITDA This quarter and 96 million year to date. This includes the sale of a majority of our crude barrels held and take the cash of the contango market that were deferred from the June quarter.

Mike mentioned Grand Mesa is financial volumes averaged 123000 barrels this quarter and our physical barrels were approximately 109000, the difference between financial and physical barrels relates a minimum volume commitments that were invoiced in charge, but not physically delivered during the period. This.

This difference has been minimal over the prior several quarters.

Grand Mesa is expected to be the primary contributor to this segment's earnings for the remainder of the year as our transportation storage and logistics assets continue to operate just above breakeven levels, when including all of our overhead costs in the current market and not having a contango in place.

Moving to water water adjusted EBITDA was 61 million for the quarter and has totaled $118 million year to date total.

Total produced water volumes averaged about 1.3 million barrels per day during the quarter roughly in line with our average volumes in the prior quarter.

We are seeing these volumes continue to increase particularly in the Delaware basin.

Delaware Basin volumes averaged about 1.1 million barrels per day, which currently represent about 82% of total volumes and our growing with the startup of the poker leg deliveries in October.

Eagle Ford and DJ Basin volumes remain challenged by the lower crude oil prices rig counts and completions, coupled with production declines we.

We are expecting a slow recovery of volumes in these basins pending increased rig activity and crude production.

We received an average disposal fee of 63 cents per barrel for the quarter consistent with pricing in prior quarters.

Our skim oil sales included volumes out of the inventory from the prior quarter as we mentioned Additionally, flowback water volumes have declined and we are receiving incremental water volumes via pipelines, which has resulted in lower skim oil recoveries per barrel.

Our recoveries have averaged about 12 and a half basis points. This year about half the recoveries, we saw last fiscal year.

Our skim oil volumes remained hedged for the remainder of calendar 2020, with approximately 3000 barrels per day hedged at an average price just over $56 per barrel through December.

We have also started to layer in some 2021 positions as well and we'll continue to look at opportunities to add to our hedge position into the future periods.

Operating expense reductions exceeded our targets as we were able to bring average operating expenses down to 27 cents per barrel for the quarter.

Are you looking to maintain this level or even continue to reduce on a per barrel basis as we bring on larger pipeline connections like poker Lake.

The poker poker like pipeline was completed during the quarter and accounted for most of our growth Capex for the period initial volumes flowed on October Onest and I've been right in line with our expectations.

We're expecting growth in this pipeline as production ramps from the poker like unit over the next several quarters. We're also seeing other producers increased activities in the basin, which should benefit our volumes during the second half of the year as well.

Going now to liquids in refined products adjusted EBITDA in this segment totaled 21 million this quarter, and 33 and a half million year to date.

Product margins were generally in line with our expectations during the quarter as we are moving into our peak periods of butane blending and propane demand.

Volumes continued to be impacted by weaker demand, but segment performance is consistent with our expectations coming in the period and we are well positioned to manage our customers needs through the upcoming winter season.

I wanted to also point out that our corporate costs have been reduced from prior levels as well, excluding approximately 2 million of legal expenses that we consider to be onetime excluding those costs. Our corporate costs would have been less than 7.5 million this quarter, almost 4 million less than the same quarter last year.

Finally, I want to briefly discuss our capital expenditures our growth Capex totaled approximately $18 million for the quarter and 38 million year to date as we completed our water infrastructure projects, including the poker Lake time.

We have minimal growth capital expenditures requirements going forward and believe we can service our producer customers utilizing our existing pipeline system interconnected disposal assets.

We also focused on reducing our maintenance capex, which came down again in the second quarter to $7 million and has totaled $16 million year to date, our combined capital expenditures forecast is now expected to come in below the $100 million guidance for the full year.

In summary, our business performed well during the quarter and generated significant cash flow, we're very focused on growing our customer relationships, improving our cost structure and reducing leverage going forward. We appreciate the support of all of our stakeholders that concludes our prepared remarks, and we'll now open the line for questions.

And ladies and gentlemen, you have a question at this time. Please press the star and then the number one key on your Touchtone telephone.

Question have been answered or you wish to remove yourself from the queue. Please press the pound key.

Your first question comes from the line of TJ Schultz from RBC capital markets. Your line is open.

Hey, good afternoon.

Yeah, So you've given the extension proposal on the credit facility to the lenders are there any specific terms.

Of that extension proposal that they've come back with at this point that is moving the process along or do.

Do you expect to need more resolution on Grand Mesa and maybe.

Maybe some of these jvs first and would that include a JV of your water business.

So TJ I'll start Mike you can chime in or we have come we have gone back and forth on a few items again everything's been constructive conversations.

Hi, some of these things are going to take longer than.

Then a week or two necessarily but we are moving pretty quickly, particularly on some of these other transactions.

Our objective is to have the credit facility expansion completed prior to that.

Again, I think thats something that.

That were endeavoring towards and Weve had positive feedback from the group as well.

Yes, TJ the last part of your question there, but there was an article I think about three or four weeks ago.

That discussed.

I guess, perhaps a rumor that we were looking for.

JV partner on our water business, so that is correct.

We've been yes.

Through a process so.

We are.

When we refer to JV opportunities, that's what we're talking about.

Okay. So.

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What's the timing on that process for the water business.

I would say definitely prior to 12 31.

Okay understood and then just on.

It's extraction currently shipping on Grand Mesa or does it have another.

Bible option to move product as you consider.

Potentially discussing new commercial terms.

So so TJ, we can't talk about specific shippers on Grand Mesa and less Dave disclose it publicly.

So I can't specifically address that but what we can say is that physical volumes on the pipe.

Have not significantly changed recently so.

I think that's that's how we can answer that question right now.

Okay fair enough thanks, guys.

Thanks TJ.

Once again, ladies and gentlemen, if you have a question at this time. Please press star and then the number one key on your Touchtone telephone. If your question has been answered or you wish to remove yourself from the queue. Please press the pound key.

Your next question comes from Pearce Hammond from Simon's Energy Your line is open.

Good afternoon, and thanks for taking my questions. Just following up on T. Jays question with Mike's comments and trace comments. So on the shade perspective JV for the water business are you, referring to part of the water business or the whole water business.

A portion.

Of course, okay. Thank you.

And then congratulation.

Congratulations on bringing the operating costs down in the water business to 27 cents a barrel just curious if that opex number included any royalties and if so what sort of royalty rates are you seeing in the Delaware basin, both in Texas and New Mexico.

You know any royalties we've.

Hey, art is they are in that number.

We have a mix we have quite a few as you know properties, we'd like to own or lands for the R.R.

No royalties.

And a lot of that land is up and down to 85.

But we also take.

Take a lot of water over too.

One of the ranchers there in block 74.

For 70 654.

So it's a combination of both but yes. They are all in the numbers.

Okay, Great and then one last one for me just.

From a high level, you'd mentioned evaluating asset sales and joint venture opportunities and we just talked about joint venture opportunities.

What are you thinking from a high level from from an asset sale standpoint, because you did a good job paring down the company and simplifying it over the course of the last.

Year to 18 months.

Yes.

And jump into as we looked at our assets to see where are there are some assets that are perhaps off by themselves I wouldn't call stranded, but they're not really connected to the rest of the assets by pipe or.

Naturally in a certain geographic areas. So there are a few of those that we've we've looked at this.

We are taught.

Talking to some potential buyers.

Yep appears just to add I mean, we talked about non.

Non core and non core assets again. This is a tougher time just from a macro environment perspective, but.

We have seen some interest.

I wouldn't say, there's anything significant we focused on where our core competencies are where our strengths are within each of one of our business segments. So.

There are a few things on the fringes, but.

Yeah, but most of those are relatively small right now.

Okay. Thanks, guys appreciate it.

Your next question comes from the line of Jason Mandel from RBC capital markets. Your line is open.

Hi, guys. Good afternoon. Thanks for taking the question. It's two separate questions first off the the crude oil margin benefit in the quarter. The portion that comes from sort of cheaper purchased inventory barrels.

And maybe I just haven't seen it yet, but can you give any kind of quantification for how much of that was.

As part of the quarter and then I have a separate question on Grand Mesa.

Yes, Jason Thanks, we didn't disclose the specific amount, but it's kind of in the low to mid teens that we capture from first quarter into second quarter. So that has been enrolled.

That was deferred from first quarter captured into this the second quarter.

And then your second question again.

Oh, sorry, that's low to mid teens what.

EBITDA EBITDA and I got your question. Thank you.

Great. Thank you and then the second question is on the exit and on the extraction issue.

There's limits around what you can well you can talk about but specifically for any potential for.

Commercial negotiations or renegotiation of the contract any impacts we should be considering for other shippers that have deals on the pipe that could potentially cause those pricing to come down or you have able to kind of structure around that.

Well, so much like last quarter, we've never heard a peep out of the bond holders.

So we.

Sit here continuing to perform.

So we don't have really anything to say in terms of of that.

But we feel file a lot of appeals.

So for our other a press release.

Things are active.

And Jason with regard to I.

Well just regards to have other.

Contract again, so we can't disclose any specifics on other contracts unless they've been disclosed.

Publicly by the shipper or producer.

And we do have our tariff its public.

But within the tariff there is no most favored nations tight language with in that tariff again, its all based off of volume.

Volume and term of commitment.

Very good thanks for help.

Yes.

I'm showing no further question at this time I would now like to turn the conference back to Mr., Mike Krimbill CEO.

Well, thank you very much and we'll see you next quarter.

And ladies and gentlemen. This concludes today's conference. Thank you for your participation and have a wonderful day you may all disconnect.

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