Q1 2022 NGL Energy Partners LP Earnings Call
Come to the conferencing center and opera.
Later, we will be with you.
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Good day, and thank you for standing by.
Welcome to the Q1, FY 2020 Q NGL Energy Partners LP earnings Conference call.
Yeah.
Yeah.
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Great. Thank you and and thank you everybody for hanging on and as we got connected.
As a reminder, this conference call includes forward looking statements and information words, such as anticipate project and expect estimate plan goal forecast intend could believe may will and similar expressions and statements are intended to identify forward looking statements.
While NGL energy partners LP believes that its expectations are based on reasonable assumptions there can be no assurance that such expectations will prove to be correct. The.
And number of factors and risks could cause actual results to differ materially from the projections anticipated results or other expectations included and the forward looking statements.
Certain of these factors include changes and general economic conditions, including market and macroeconomic disruptions and related governmental responses.
The prices of crude oil and natural gas liquids gasoline and diesel biodiesel and energy prices generally.
The general level of demand and the availability of supply for crude oil natural gas liquids gasoline diesel and biodiesel.
The level of crude oil and natural gas drilling and production and areas, where we have operations and facilities and.
And the effect of weather conditions on supply and demand for crude oil and natural gas liquids gasoline diesel and biodiesel.
The availability and cost of capital and our ability to access certain capital sources and political pressure and influence of environmental groups upon policies and decisions related to the production gathering and refining and processing fractionation and transportation and sale of crude oil natural gas natural gas liquids gasoline and diesel or biodiesel.
And other refined products.
Other factors that could impact. These forward looking statements are described in risk factors and the partnership's annual report on form 10-K quarterly reports on form 10-Q, and other public filings and releases you should not put undue reliance on any forward looking statements. All forward looking statements speak only as of the date hereof and except as may be re.
Wired by the state and federal Securities laws, we undertake 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 annual report on form 10-K, and quarterly reports on form 10-Q for more information on our use of non-GAAP measures.
As well as reconciliations of differences between any non-GAAP measure discussed on this conference call to the most directly comparable GAAP financial measure.
This information is also available on our website website at NGL energy partners Dot com under the Investor Relations tab.
Yes.
Again apologies for the delay, but welcome to our first quarter fiscal 'twenty 2 earnings call.
We just issued our earnings release and filed our 10-Q. This afternoon and I plan to quickly discuss our financial results and then we will open the lineup for any questions.
Overall, we had a very strong quarter and our water solutions segment with a 19% increase and disposal volumes over our previous quarter and we continue to maximize our EBITDA per barrel, which increased 17% over last quarter, driven by strong disposal rates per barrel and lower operating expenses.
We have some inventory and hedging noise impacting our crude segment this quarter, which we expect to make up this year as we turn our inventory and realize our current hedge positions.
Our liquids segment reported lower earnings and typical for this quarter as we moved out of the peak winter season and started to prepare for storage through this summer and a rising price environment.
We also had some profits embedded and our inventories and hedges and this segment as well.
Remember this is a seasonal business that generates most of its cash flow during the butane blending and propane heating seasons, which run from the fall through the winter and we continue to believe this business will be in line with expectations for the year.
The steep run up and commodity prices during the period, including crude oil propane butane and Biofuels has driven an increase and our inventory balances and working capital.
Working capital needs increased almost $100 million this quarter, we offset a portion of this increase with the sales start to use which we announced and closed in mid June.
The $70 million gross proceeds were utilized to fund transaction costs and reduce debt.
And about $19 million of the 2023 notes with the remaining go and against our revolver during the period.
Our funded capital expenditures totaled $47 million this quarter, including the accrued capital expenditures from the prior quarter our.
Our capital expenditures are front half weighted this year.
This combined with operating cash flow have resulted in an overall increase and debt balance of approximately $49 million for the quarter.
We noted last quarter that we expect to generate significant excess cash flow during the year with a focus on debt reduction and leverage improvement.
The majority of that excess cash flow will be recognized and the second half of the year as we complete most of our capital projects liquidate inventories and monetize our working capital over the coming months.
This assumes were in line with our guidance and there are no significant increases in commodity prices, which could cause our working capital requirements to increase as well.
We are reaffirming our fiscal 2020, 2 EBITDA guidance range of $507.600 million and guiding to the lower end of that range. Following first quarter results and the Sawtooth sales.
Our total capital expenditures are still expected to come and the middle of our $100 million to $125 million range for this fiscal year.
Okay.
We reported a net operating loss for the quarter of $69 million, which includes a $60 million loss on the sale of <unk>.
Our adjusted EBITDA totaled $91 million this quarter.
Water solutions adjusted EBITDA was a record $81.5 million for the quarter, driven by Delaware Basin, and volume growth operating expense reductions and water sales, including fresh water reuse and recycling disposal.
Disposal rates per barrel remains strong at 61 per barrel and operating cost per barrel came in at $26 per barrel.
Overall EBITDA per disposal barrel for this segment was 54 per barrel at the highest level, we have had in quite some time.
Crude oil logistics adjusted EBITDA came in at $13.1 million for the quarter. However, we estimate that about $15 million of deferred profits and our inventory and hedge book and will be recognized in the coming quarters, as we turn inventory and realized current hedge positions and.
This assumes crude prices do not escalate significantly over this period of time.
Grand Mesa volumes came in at 77000 barrels per day, and nice recovery from last quarter as D. J basin completion activity is slowly increasing from last fall and winter.
Liquids logistics reported adjusted EBITDA of $5.6 million this quarter, which is traditionally a lower earnings period for this segment.
Both our butane and propane businesses believe they're well positioned going into the summer storm season, and ultimately the peak demand periods for both businesses.
We continue to see lower volume demand for our refined products business. However, we benefited from an increase and biofuel prices during the period.
Our corporate costs were about $9 million this quarter in line with expectations and with prior periods.
We continue to focus on the following factors for this fiscal year and believe investors should continue to do the same day.
Delaware Basin oil production and completion activity and the associated demand for water services remains a key as noted we saw a significant increase in the quarter and disposal volumes and continue to see growth into the second quarter as well.
We expect ratable growth and this area throughout the fiscal year and we are also growing our resale and recycle services and the basin.
DJ basin production growth from our core producer customers driving volume increases on Grand Mesa pipeline, where we started the year slightly ahead of our initial expectations and expect continue ratable growth throughout the year here as well.
We are also expecting a strong recovery and demand for refined products and blending feedstocks, most notably butane to pre pandemic levels.
We expect blending demand to return to more normalized pre tax pre pandemic levels. However, the recent resurgence in Covid is something we will continue to monitor and react accordingly.
We will also continue to focus on cost reductions across all of our segments and at the corporate level and low to minimize capital expenditures to meet our operational needs.
This corn corn current quarter was impacted by the run up and commodity prices, which drove certain hedge losses, most notably in our crude logistics segment and working capital needs on our balance sheet.
Assuming prices do not significantly increase from these levels, we would expect to recognize offsetting inventory and hedge gains and the coming quarters to bring their crude logistics segment and our working capital borrowings back in line with expectations.
Our liquidity position was about $300 million at June 30, which we believe is adequate to operate our business and this environment.
We purchased a small portion of our 2023 notes during the quarter and expect to repurchase more bonds as we generate excess cash flow throughout the year.
That concludes our prepared remarks for the quarter, Mike is with me and we will now open the lineup for your questions.
Okay.
Yes.
Okay.
Yes.
Okay.
Erica can you. Please open the line for questions.
Yeah.
Yes, I'm sorry.
This time I would like to remind everyone in order to ask a question you will need to press star 1 on your telephone keypad, we'll pause for just a moment to compile the Q&A roster.
Okay.
Your first question comes from the line of Tarek Hamid from Jpmorgan Your line.
Open. Please go ahead.
Good afternoon guys.
I guess, just first on the derivative loss and the crude oil segment, it looks like about $38 million.
And the first quarter.
Can you just talk a little bit about sort of how much of that was realized versus unrealized and again sort of what you would expect to see in terms of derivatives over the remainder of the year.
Sure. So obviously, we had a significant run up and commodity price from April 1 through June 30th right.
And.
Prices have come back down a little bit here over the past couple of days I guess, but.
So.
What happens in that period as we're holding the inventory enrolling those hedges is we're going to recognize those hedge losses and as current period as we roll those through the future youll start to bring back that profit back in.
So during the current quarter and flip into the exact.
The numbers for you so and crude logistics.
We had a realized loss of $52.7 million and we have and unreal had unrealized gains of $14.5 million and Thats. What I was referring to is the $15 million that we would expect to come back to us and the future periods.
Okay.
The realized loss of $52..7 is included in our EBITDA that we reported $14.5 is not yet included but will be recognized in the future.
And in terms of what you would expect from a realized gains or losses Justice Joseph 15 million realized gain you would expect on a go forward basis. Obviously this can change quickly but in terms of word yes.
It would change depending on where commodity prices go obviously, but any offset we should see and the fit on the physical side again, there can be some timing delays, but overall, we would expect to make up any difference on the physicals, which again about $52.7 million loss for the quarter, we made up a significant portion of that.
On the physical side, but we haven't turned all of that inventory yet.
Net.
And then in terms of just the reaffirmed guidance just sort of mathematically kind of getting to low end of guidance for the rest of the year sort of requires EBITDA should be about $160 million per quarter.
And that justified to have any -91 day 1 of my 3.
And I guess, if you think about sort of the bridge to that obviously, a chunk of that is sort of a normalization of the hedge position and crude oil, but how much of that interest growth and water just sort of get you to the sort of earnings numbers to hit guidance.
So we're expecting pretty ratable growth and water water had a very strong quarter I think water water performed I.
I would imagine in line if not above most of the street expectations.
And would expect some continued growth and that business again pretty ratable throughout the year.
Remember our liquid segment generates most of its profit and our third and fourth quarters. So you can't just take first quarter second quarter, and it's not that's not a steady growth.
Our trajectory right you can't just say 3 quarters at 160 million youre going to have some quarters with liquids, particularly the third and fourth quarters that will be stronger than what you see and the first and second quarters and then we do expect again and the crude business to get back more in line with.
And with prior run rate expectations.
Got it.
And then just last 1 for me you talked about kind of Capex being front end loaded.
Anything else, we should think about in terms of uses of cash throughout the course of the year, Besides capex and potentially getting some working capital back.
No no.
And the keys so again.
Getting working capital back back to.
The March levels.
Our uses of cash are going to be interest expense.
And then Capex and again.
And the Capex interest expense were expected to be about $250 million. This year and Capex is 100 to 125 billion.
<unk> would go to debt reduction.
Got it and I'll jump back in the queue. Thank you.
Thanks.
Your next question comes from the line of Philipp Duffner from <unk> Capital Management. Your line is open. Please go ahead.
Hi, Jay and thanks for taking my question. The first 1 on the on include logistics right. When you just ran through the hedging.
Losses, and the unrealized gains, but if you were looking at Q.
Q1.
And kind of a normal lifetime adjusting for whatever was going on with the hedges.
And with BD, and Jocelyn and what would be the EBITDA.
Yes, we would have been and about $29 million per quarter for crude and set of 13.7.
Got it and in terms of the liquid business like what caused it to be.
Alright, and then an asset and in the past.
A couple of things so 1 as I noted commodity prices are significantly higher.
And that causes.
Demand, so youre not having pre buys and some of those things that these high commodity price levels people are generally waiting.
To purchase product and we don't believe that would be significant for the overall year, but it did impact the quarter as well as we had some inventory impact there too. So generally I think if you look at our liquids business.
Between 10, and $15 million and the first quarter that was a pretty normal type quarter.
I think those 2 factors were the biggest driver and why this quarter was behind that level.
And I would probably put about half on each.
So we are expecting demand to pick back up again with the butane business, we are expecting a pickup in and blending for this fall over what we saw last year.
We are being cautious with what's going on and the.
From a COVID-19 perspective, and the Delta variant today, but we still think that there that the economy is not going to shut down and that we're not going to be back in a and a locked down like we saw prior year. So we are expecting a recovery there propane again will be highly dependent on.
And heating demand.
And so again, that's a to be determined.
As of this point and time.
First quarter is not a significant period and we think that we'll still be in line.
Got it and.
1 last question and then.
Cash flow statement under investing activities.
Ah 60 million.
Loss related to the net settlement.
And if it's like how does that relate to the day.
And the numbers, you've mentioned and whats in the income statement.
Yes, I mentioned.
And thats on the crude side Thats, the $52.7 million and you will see 1 additional add back.
Related to some crude positions that we put on related and combination with the extraction the new extraction agreement.
But thats all laid out in the earnings release and the 10-Q.
Okay.
And at that $60 million little over $50 million is related to the crude segment.
Got it.
Your next question comes from the line of Patrick Fitzgerald from Baird. Your line is open. Please go ahead.
Hi, Thanks for taking the questions.
<unk>.
Sorry, if I missed this if you said this but why.
What was thought to be EBITDA.
Okay.
So we'd never disclose saw tooth EBITDA separately, what I would.
I would say about <unk>, because we sold it for $70 million and that was a pretty nice deleveraging multiple.
So so that's I think what I can share from that.
Transaction at this point Patrick.
Fair enough.
So the water.
Water EBITDA margins.
Margins are per per barrel processed.
It looks like it continues to go up.
And I know you have.
The new stuff coming online is there is there any reason to think that your.
Margin per barrel wall.
Change going forward.
These new projects coming online.
Sure a couple of things to note there 1 our disposal rate per barrel.
As we grow Delaware basin volumes could come down a little bit, especially with some of the larger dedications.
While we saw this quarter was we saw higher crude oil prices, so that benefited our margin per barrel.
And the extent that we're not hedged from our skim oil perspective, and then Additionally, we have these.
New services that we're providing including reuse recycle freshwater et cetera, those increase and thats not on a per disposal barrel basis that we've historically reported on a per disposal barrel.
Those revenues will benefit us from a margin per barrel.
Metric.
Okay.
Alright, thanks for that.
Kevin.
And then is there any way to think about.
And your volumes.
Increasing you know what.
They did this quarter.
Is there any way to think about like what was organic versus.
Your Capex was front end and front end loaded there's some growth capex in there.
So is there any way to think about kind of organic vs.
Just kind of new connects for.
For the water volumes.
So the majority of our capital expenditures and completing our infrastructure and completing our our pipeline. So interconnecting the entire system remember, we don't lay to individual wells. So we don't have incremental well connects per se, we may lay into a new area.
Per our producer.
But everything that we've done from a capex perspective has supported our existing system.
Our existing producer customers.
So I would call it all organic remember we have.
Well over 3 million barrels a day of disposal capacity and the Delaware Basin.
We did.
Most of the volume growth was in the Delaware, but we're still utilizing less than half of that capacity. So I would call all of the growth organic.
Okay. Yeah, no. That's that's kind of what I was.
Asking so.
Thank you and then.
I didn't quite get your commentary.
On working capital obviously, it was a headwind this quarter.
Do you expect to unwind by the end of the year or is it just kind of.
And what needs to happen price wise for that to on an unwind and the back half of the year.
Sure.
And you get a chance to get into the 10-Q Youll see that our volumes are up a little bit and then prices are up as well.
If prices come down our working capital comes down if prices continued to rise our working capital could go up but it would have to rise at a similar level that we saw from.
April 1 to June 30, which was about.
15% to $20 per barrel increase and crude price.
And that translated to liquids as well so.
We will have to continue to manage working capital through the fall and winter from a from a liquids perspective, although we're not expecting and and.
Incremental 15 to $20 per barrel increase and commodity price.
And then as we liquidate that inventory that working capital does come back plus the margin associated with it as well.
Okay Alright.
Alright, thank you.
Yes.
Yeah.
Yes.
Your next question comes from the line of <unk> <unk> from UBS. Your line is open. Please go ahead.
Hi, good afternoon, and is there any way to project.
Debt versus EBITDA number.
For the year and does that change from.
The prior quarter or not.
Okay.
It has not changed to this point and time board and.
Again, our quarter over quarter EBITDA.
The first quarter of last year to first quarter. This year is about the same.
Our debt balance increased slightly but.
And that are levered to be consistent from $3.31 to $6.30 at this point and time, we are expecting leverage to decrease as we pay down debt through the year as well as generate incremental EBITDA this year over last.
Okay. Thank you.
Your next question comes from the line of T. J Schultz from RBC capital markets. Your line is open. Please go ahead.
Great good afternoon.
Can you just on the water ramped and you just.
And maybe define what you mean by ratable growth there.
The volume this quarter was definitely a step up.
Our model and pretty good jump from last several quarters and maybe just how you envision.
Volumes, maybe X gene exiting this fiscal year.
And that's kind of and you plan to get to your guidance.
Yes, so thanks T J.
So we would expect volumes to be between about 192 million barrels a day.
And pretty ratable growth trajectory to get to that point.
By March of next year. So I think this quarter was a definitely a positive step towards achieving those targets.
And generally speaking we're looking at a 100 to 125000 barrels per day increase quarter over quarter.
Okay. That's helpful.
Yes.
And I guess just on the other question there or any other asset stable asset sales on the table just as you're thinking about the pace you want for debt reduction.
We're not currently looking at anything significant T. J as we mentioned on our last earnings call. We are happy with the 3 segments that we operate in there may be some 1 offs here are there smaller terminals.
Don't expect anything the size of a Sawtooth I think Sawtooth was 1 that we have been working on.
We we kind of saw that 1 coming last quarter. So that's what we were generally referring to you from <unk>.
Non core asset sale.
So at this point in time and nothing of significance, but there could be some small things here or there.
Okay, great. Thanks.
Yes.
The next question comes from the line of Laurie and Harman from Bank of America. Your line is open. Please go ahead.
Yeah, Hi, guys. Thanks for taking my question and I just had I guess, 1 I guess more of a kind of philosophical or conceptual question for you guys on the crude logistics derivative exposure and can you talk a little bit more and kind of like what is encompassed there I think I guess I just hadn't appreciated that there was that much commodity price exposure during that segment and I guess anything you like what Youre <unk>.
Yeah, and what the derivative exposure pertains to you and how we should think about it going forward it would be would be helpful.
Okay.
Sure. So we're primarily hedging our inventory we carry about 1.2 to 1.4 million barrels of crude.
Soon during a quarterly period.
You'll have year accrued sales that you are selling obviously 1 month after you've made that purchase.
Is when Youll get heavier settlement, you're rolling your inventory hedge as well and a backward dated market you're having to impact your.
Your margin by that role so if the markets.
Backward by 20, or 30 per barrel youre going to be impacting your physical sales by that same amount.
<unk>.
Can and periods when you have a significant increase in commodity price or a significant decrease in commodity price see some mismatch and timing between your physical margin and your hedge position because those hedges are settled on a monthly basis.
And at that current month price our inventory is cost it out on a weighted average cost of goods sold. So there is a bit of a disconnect between the 2 I don't think this is a typical for other.
Midstream companies that have similar types of businesses.
Again, we are expecting that to come back through our <unk>.
If commodity prices stayed the same.
Same we would make all of that margin back and our physical sales and commodity prices fell that could accelerate the timing of making that profit back.
Because youre going to youre going to.
Capitalize on on your hedge position for the current inventory if prices continue to rise you would continue to have a mismatch over that period of time until you were able to get your inventory to catch up with your hedge position.
Yeah.
Does that makes sense.
There are no further questions and thank you I would now like to hand, the call over to Mr. Trade car Davitt. Please go ahead Sir.
Great. Thank you. Thank you everybody for your time again I appreciate you sticking on the line as we are.
As we got connected and if you have any follow ups. Please don't hesitate to reach out and I appreciate it.
This concludes today's conference call. Thank you all for joining you may now disconnect.
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