Q2 2022 NGL Energy Partners LP Earnings Call

[music].

Good afternoon, ladies and gentlemen, and welcome to the NGL energy partner is a second quarter 2022 earnings call.

At this time all parties are in a listen only mode and the floor will be open for your questions and comments following the presentation.

It is now my pleasure to turn the floor over to your home even the bridges CFO at N G. L Energy partners Ma'am the floor is yours.

Thank you.

Good afternoon, and again welcome to NGL second quarter of fiscal 2022 earnings call to start I'd like to call your attention to a safe Harbor language, which can be found towards the end of our partnership earnings release, which was filed aftermarket closed this afternoon.

Today's remarks may contain forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995 in accordance with the Act I would also like to address direct your attention to the management's disclosure in analysis section in the risk factors discussed in the partnership annual report on Form 10-K for the year ending March 31 2021.

And and other ethnic groups finally made by the partnership which are available on our website and on the S. B C's website.

These together with the Safe Harbor statement in the earnings release set forth important factors that could cause the actual results to differ materially from those contained in any such forward looking statements.

[noise] I'm gonna start the call with a few brief comments on the partnership financial results for the quarter, and then I'm going to turn it over to Mike Crumble for additional remarks focused on the operations in the future of the business.

Overall NGL had another very strong quarter in our in our water solution segment as it reported adjusted EBITDA of $87.4 million.

Process barrels totaled approximately 1.8 million barrels per day and grew approximately 94000 barrels per day over the preceding quarter the.

The majority of this growth was the result of continued demand for our services in the Delaware Basin. However, we've also seen growth and volumes in each of the other bases in which we operate as well.

Skim oil sales benefited from higher commodity prices and those higher commodity prices have encouraged additional drilling and completion activity in our core operating areas, resulting in continued demand for water for water, whether that be fresh brackish recycled or Purdue.

For the remainder of the fiscal year, we expect to see water volumes increase ratably by 100 to 125000 barrels per day per quarter and anticipate exiting the fiscal year with approximately two milk million barrels per day of processed water volume.

Are crude oil logistics segment reported adjusted EBITDA 48, 8 million, which includes an estimated $15 million of realized gains associated with deferred profit that were embedded in our inventory and hedge book at June 30th.

Grandmaison volumes came in at 80000 barrels per day or approximately 3000 barrels per day higher than the 77000 barrels per day reported on our first quarter.

And margins in the segment were helped by higher crude oil prices at certain contracted rates with producers increase as Nymex prices increase.

DJ based on production from our core producer customers as well as crude oil prices will drive operating results for the remainder of fiscal 2022.

Our liquids segment reported adjusted EBITDA of $18 5 million, which was primarily driven by results and our butane business as increases in demand for exports and tighter supply market benefited product margin.

Or propane business have a slower start to the year as a result, backwardation in the propane market and decreased demand. However, this segment should see financial gains coming back in the third fiscal quarter as the business as well hedged and we're beginning to see product listings increase.

It's important to remember this is a seasonal business that generates most of its cash flow during the butane blending and propane heating season, which run from the fall through the winter and assuming normal heating degree days this business should be in line with expectations for the year.

Putting it all together total adjusted EBITDA for the quarter totaled 146.3 million and year to date adjusted EBITDA is 237.4 million.

Funded capital expenditures for the quarter totaled $31 million $79 million a year to date as previously mentioned our capital expenditures were weighted towards the first half of the fiscal year and we expect capex for the full fiscal year to be approximately 115 million.

Total debt increased by approximately 45 million as working capital continue to increase through the quarter due to seasonal inventory build an increase in commodity prices.

The increase in working capital was partially offset by free cash flow generated during the period.

We've been consistent in our message that we expect to generate significant excess cash flow during the second half of the fiscal year as we've completed the majority of our capital products project begin to liquidate inventories and continue to perform operationally and that the excess cash flow generated will be used to decrease absolute that and improve leverage this plan.

Has not changed and remains our top priority.

With that I'm going to turn it over to Mike who has some remarks you'd like to share.

Thank you Linda good afternoon, and thanks for joining us today sit back and relax cause we tell you the <unk> story.

Cause you know.

We have our three business segments and our leaders of each singer with us today to comment and answer questions as we go along.

And we're going to provide new information covering fiscal 2022 expectations physical.

Fiscal 2023, and 2024 projections and.

And then our debt and distribution strategy.

Of course, all my comments assume the current energy environment.

So let's begin with fiscal 2022.

The Big stories are water solution segment volumes are increasing about 100000 barrels per day.

Quarter as previously projected.

Two one volumes, obviously 167 million barrels a day Q2 176 million.

We expect Q3 to approximately 1.9 million barrels a day in queue for to approach 2 million barrels per day.

Margins and expenses per barrel are expected to remain flat.

Which is positive and mix modeling this segments simply a function of volumes.

The EBITDA for Q1 was 81 five for Q2 was 87 four.

Q3, and four are expected to average $90 million each.

Thus the entire fiscal year should come in at about 350 million EBITDA.

[noise], we have significant excess injection capacity in our largest she'll play positions. So water volume increases should be more profitable incrementally.

And importantly capital expenditures going forward will be below the current fiscal year $115 million.

We have dug why do weeds or water solutions team I'd like him to discuss recent developments in reason culbertson county's dedications and recycle reuse Doug.

Doug you there.

Yes, Thank you Mike.

Let's start with the update on seismicity.

As many of you may know.

The seismicity induced by injection wells.

In Texas, West, Texas Permian area have been in the news lately.

In the NGL footprint in the southern Delaware.

The Railroad Commission of Texas has proposed a recent reduction in about 2 million barrels a permitted injection capacity.

Our operation area.

There are no ngls assets negatively impacted by this our assets just outside of the risk.

Risk area.

But what this has resulted in is <unk>.

Creased interest in Ngl's available capacity.

It's a very good positive for the organization.

Dedications we've.

We previously mentioned two large dedications in the Delaware.

Really are left on a large scale basis of one of those dedications, we expect to be close by calendar year and this year.

Recycle volumes, we've been really books on recycled volumes Ngls approach to that business.

A large portion of our approach to that business is simply reselling produced water off of our pipeline system.

We have the magnitude of water is taken for the producers to complete that scale with multiple frat cruise, which is different from what has been previously done.

So we take our resell reuse volumes along with our recycled volumes.

Two.

But those together Q1 due to just over 100 900000 barrels per day Q.

Q too we had other projects going on those slipped into this quarter Q3.

We expect that to be evenly spread across Q3 Q4, but those demands are continuing to increase as producers continue to move toward a more sustainable approach to completions.

One other thing to note on our dedicated contracted acreage in the Delaware.

You have 34 rigs running on at 438 Ducks drove uncompleted wells and 16 frat cruise.

So that's.

There's quite a bit of operation going on our contracted acreage. That's what's continue to lead to the increased earn thousand barrels per day.

Volume quarter over quarter.

Great. Thanks, Doug.

Onto crude oil logistics.

Our Grand Mesa volumes of average 77 to 80000 barrels per day, which is only about 50% of capacity through the first six months.

We're expecting these volumes to remain flat for the remainder of the year.

Civitas consolidates, its acquisitions and achieves their synergies.

On a positive note the margin on the Grand Mesa Girls is increasing due to the higher crude oil prices.

Our six month EBITDA is about 62 million.

So if you double that for the full year you $124 million you add the impact of these increased margins and it will result in a full year EBITDA, we believe of about $140 million.

Volumes on Grand Mesa increase then there. This is an area that could have some upside.

Dawn Robinson leaves this segment I'd like him to comment on the recent open season is there has been some discussion we want to make sure everyone is clear on what happened go ahead done.

Dani on mute.

Now my I'm, sorry, my thanks, Yes.

Yes, NGL logistics because of the bankruptcy with extraction in there.

Basically the they no longer have a contract with Grand Mesa Ngls logistics entered into a contract with extraction to provide service for them for volumes and the D J basin.

We needed to right size, our commitment to Grand Mesa. So we approached grandmaison part of the <unk> rules to make sure that we could sign up for volume that basically.

Would would commit us to take care of the producers that we have commitments from in the D. J. This is the reason.

The primary reason for.

The Grand myself what season, you have to go out to all parties at all for them the same.

Type service that you offered to NGL logistics or any other third party. So that was the reason behind it.

And basically a successful open season.

Great. Thanks.

So liquids logistics R.

Q1, EBITDA was five 6 million Q2, $18 five for a total of $24 one.

These are our two lowest EBITDA quarters due to the seasonality of propane use and the butane gasoline blending.

Or butane segments at a plan do to improve margins, while wholesale is off to a slow start due to backwardated price curve.

In the spring higher prices since then in warm weather.

We expect this business to make up the shortfall in the second half of the fiscal year.

Full year 2022, EBITDA is projected to come in around 113 million.

The 220 mile eight inch ambassador pipeline in Michigan.

He is a great example of a smaller highly accretive asset purchase.

That continues to move liquids into more of an asset based business.

The northern half of the pipeline is operational with the new midpoint Wheeler terminal scheduled for completion by early December.

This is the only propane pipeline servicing northern Michigan, it's bi directional so it can move propane south in the summer and north in the winter.

Ambassador is kind of exciting does it could become a critical source of supply to ensure energy security for Michigan citizens, if the federal and state governments shutdown line five.

Jeff Peter runs this group and just I don't know if you are there, but if so do you have anything to add.

Thank you might good afternoon.

Oh, a couple more comments to add the.

We do see the pipeline as a strategic.

Asset for not not just NGL, but customers throughout the state of Michigan. It is one of the highest propane demand states in the country.

And it's it's strategically connected to storage on the southeastern part of the pipeline.

And then does traverse all the way to the northwestern part of the state.

So we're we're hearing a lot of excitement from our customers.

And we look forward to having an services winter.

Great. Thank you.

So for NGL in total were.

Affirming our fiscal 2022, EBITDA range of $570 million to $600 million.

Or trying to be conservative and focus on the low end of that range.

The individual segment numbers.

That we've talked about here less corporate expenses of about 32 $33 million.

Add up to the low end of that range.

So next we want to focus on free cash flow because that's what we're going to use to reduce our debt.

So starting with fiscal 2022.

The calculation using the numbers, we've talked about EBITDA of 570.

Minus interest expense of $250 million less.

Less maintenance and growth Capex combined of 115 million.

Adding back $50 million for some asset sales net of some margin requirements provides.

Provides about $250 million, a free cash flow for fiscal 2022.

So let's jump to the next couple of years. So you get the full picture of how quickly this balance sheet the levers.

For fiscal twenty-three, what we'll start with some EBITDA.

Relationships here. So you can model these things if you'd like.

So for fiscal 2023, we expect water EBITDA to be up 10%.

So on the 350, obviously, that's $35 million.

Crude oil we're assuming flat.

Until we see more drilling and more production of the D. J.

And then liquids up about 5% as a result of the ambassador pipeline.

For fiscal 2004, we expect water to grow another 10%.

Crude we've just been assuming a flat.

EBITDA, there and then we'll assume liquids as flat as well.

Again, just to be tried to be conservative. So both these years will have EBITDA between 600 $650 million.

Interest expense, which obviously, we deduct from EBITDA.

It is $2 50, as we said in 22 and it drops about $25 million a year in 2003.

And 24.

Maintenance and growth Capex are decreasing significantly due to our prior year spend.

An excess capacity in segments.

So the $115 million this year would drop.

2000, $23 million to $75 million and in 2024 $90 million.

So this results in free cash flow to summarize of $250 million in fiscal 2022.

Over $300 million, and 23, and almost $400 million in 2024.

Now all of this is prior to reinstatement of the preferred dividends, which are accruing at the pace of about 100 million annually.

When the preferred dividends are reinstated that year's free cash flow will be reduced accordingly.

So if you are trying to figure the leveraged figure sometime in there there could be a reinstatement of the preferred dividend.

So modeling our business should be fairly simple now with crude and liquids fairly flat water margins and expenses per barrel constant.

So it's it's really a volume increase story with declining interest expense in Capex.

So now let's pull this all together to articulate our debt and distribution strategy.

So what happens if you haven't ever watch someone calls you.

Okay.

So we're going to pull us all together first three important points dimension.

One or new ABL and secured notes do.

Do not have the leverage or interest coverage covenant.

So any speculation about bankruptcy under current market conditions is rubbish.

Two are secured debt do 2026 has a two year noncall provision. So we cannot begin repaying it until after.

After February of 2023.

And thirdly under these dead documents, we must reduce leverage to less than 475 times EBITDA in order to reinstate the preferred dividends and subsequently declare they common unit distribution. This is our number one financial goal.

So we will generate sufficient free cash flow to repay the 2023 unsecured notes prior to their maturity.

Once repaid we will begin reducing the senior secured notes due in 2026 with the additional free cash flow.

Once our leverages below $4 75 times EBITDA, we will address the class B C and the preferred dividend arrearages.

Reinstate the preferred dividend going forward and continue to Delever.

We do not anticipate any M&A activity.

No accessing the public equity markets.

<unk> converting preferred shares in the common units.

We believe we do have strong assets a good business model, but we are focused solely on significantly improving the balance sheet.

So with that thank you and let's open the line for questions.

Ladies and gentlemen, the floor is now open for questions.

If you have any questions or comments you can practice star one on your phone now.

We ask that will posing your question you. Please pick up your handset. It lets me on speakerphone to provide optimum sound quality. Please hold a moment lollipop for questions.

Question is coming from Tara commit from J P. Morgan your.

Your line is live.

Good afternoon, and thank you for the addition color on the business.

So.

Just one question of a water business, you've talked about some of touch dedications as well as you know some of the.

Potential.

Ongoing changes in rules with seismology issues potentially be a beneficiary.

How much of that if you baked into some of the numbers that you've talked to.

Last half hour, both in 22 and beyond.

Doug.

None of the forecast that Mike presented include the.

Benefit of these recent developments regarding seismicity.

So that would all be outside obviously from here.

Yes, that's correct, it's all incremental and.

Give a little more color to it.

We are actually moving toward some dedications.

Related to recent events.

Which are certainly beneficial but are incremental to like I said incremental to the forecast Mike provided.

Thank you.

And then a follow up for me just on on the free cash flow guidance actually working capital as you talked about it has been a bit of a hand here. Some of that makes sense, obviously, just given what's happening to commodity until that seasonal but you just talk about sort of as you think about the use of working capital. So far this year, how much of that you sort of view is sort of more permanent.

Function of what's happened to commodity prices versus how much of that just a seasonal and you expect that to come back in the second half of the year.

Yeah, I'll take I'll take that question. So when you look at working capital most of our working capital is going to be seasonal if you take a look at our balance at 331 at 2021, I think we had a 4 million dollar balance remaining on that ADL facility at that time.

As we move through the year will build and mobile of liquids inventory and we will have some crude inventory, but we would expect that to decrease back down to the same level at March.

March 31, so it truly is kind of a seasonal working capital.

Need that you'll see on the ABL facility.

Got it.

And then the last one for me, just and and I apologize for that and that question, but an adjusted EBITDA.

13 million dollar.

Judgment for CMA role differentials.

Kind of any color and what that actually is it's just confusing.

Yeah. So so there is more disclosure.

And the disclosures around adjusted EBITDA that can give you more detail but.

Essentially we have.

<unk>, we have locked in.

At 28.

CMA role differential so when you look at our could logistics business.

We.

At nine next minus the differential in the basin and we saw at nine.

Plus TMA the August TMA Raul differential.

Which in a backwardated market and is normally.

Sorry, generally speaking historically, we have not hedge that we've.

Just.

Taken the risk within the contract because it generally.

Runs call at 10% to 20% positive or negative at any given time last year at this time we saw.

That CMA role last year first quarter, we saw that TMA rah blow out and saw about we probably needed to hedge that difference in the contracts that we did style what that.

That EBITDA adjusted EBITDA entry is a the position on.

The front end of that head so what we've done and we've hedged 50000 barrels per day through December of 2023, and we've locked in SMA role of about 20 Parker.

Beryl.

Which will result in about 9.2% nine 3 million.

CMA wall that we will generate between.

At this past year at this here sorry in December of 2023.

Hedge is a long dated hedge we have short positions in the near term and a long position out in December of 2023 management view that entire both the short and the long as a.

Part of the same hedge strategy and say awhile, you'll have an unrealized.

Gain and Al and December of 2023, you will have realized losses on the short positions between now and then depending on what some market does.

So what we've done is in order to eliminate that noise, we've adjusted out of EBITDA and again, there's more disclosure around that and EBITDA disclosure.

That you would get sort of an AD back in the next couple of quarters and then as you get into that so that appeared in twenty-three you'll have a loss associated with that sounds were meant everything out of roughly zero all the time.

Correct everything.

Those hedge gains and losses, one that two zero and you should see about $9.2 million flowed through the income statement associated with this TMA roll over that time.

Perfect I'll jump back in the queue, but but again. Thank you guys for the incremental color on the on the on the guidance.

For 22 and beyond.

Your next question is coming from Patrick Fitzgerald with bird.

Your line is lives.

Alright, thanks for taking the question.

So so that's CMA role add back is all in crude logistics this quarter essentially that's right, yes, installing create logistics.

Okay. So.

In terms of like a normalized margin.

Per barrel, how should we think about that the difference between the first quarter and the.

The second quarter.

Dawn do you have.

A thought on that one.

Tommy on mute.

Yes, Mike sorry again.

Yes that would be basically.

Additional as far as the earnings in.

In each quarter as far as can be is Linda spoke to the $9.3 million.

Basically 300000.

Dollars.

Per month over the over the next three years that will be collecting we've taken the loss.

Spoke to about CMA and I'll just add the reason we did that is because of the.

The extraction bankruptcy and NGL logistics, taking that contract. It was just so a risk that we did not feel real comfortable about.

Being there for them.

<unk> and that's the reason, we put the CMA Hey, Joe.

Patrick if you look at the 10-Q, so the margin per barrel that we quote and the 10-Q, that's all excluding the impact that derivative.

Okay.

So the the effect as.

Whether it's inventory hedging or the CMA role should be excluded from the margin analysis.

10-Q.

Could you.

Yeah.

You.

Put this out like 10 minutes before the call what are those numbers because it was gone you know like 245 per barrel to 72 per barrel 164, and then at 650. This quarter I mean, just the yeah I would Patrick I would just pretend like how we should think about that going forward.

Yeah. So if you look at the.

Ed.

Actually a Patrick I'm, just going to direct you to the 10-Q go ahead and take a look at it and then if you have additional questions just let us know you can contact us.

Okay.

[noise] what are your price assumptions.

In terms of your water volley.

Volume growth of 10% next year and the year after.

Is there any price assumption within that are are.

Or it's just going to happen regardless of what prices are just kind of keep increasing.

Increasing production.

Yeah, I think Mike mentioned is that he is assuming consistent commodity price environment, consistent commodity market environment, and he's assuming flat margin.

Per barrel.

So Patrick.

We don't.

No.

What the producers are thinking they're going to they're budgeting cycle right now so with a drill the same amount of the $75 price is 80 565.

So no but no it doesn't assume the same volumes of prices are 30.

Doug you have anything to add.

Yeah, Patrick So one thing to consider.

In these volumetric numbers that we've used to forecast keep in mind, we have the that large dedication from the hillstone acquisition that increases.

Really.

We also have the second this large dedication I mentioned, which is the largest acreage dedication.

We have have or will have in the Delaware basin.

That certainly adds.

Volumes to it as well and then.

Our other existing dedications based on what we know today.

And keep in mind it is central to the Delaware and I think everyone has a good idea of what that crude oil range and the Delaware is where activity stays.

Fairly busy or constant.

I don't think it's going to take $80 oil to achieve our volume forecast.

60 to $80 range.

Is a great price for Delaware Basin.

Thanks for calling thanks, a lot for the color.

Your next question is coming from Phillip afternoon with Rls.

<unk>.

Hi, guys. Thanks for taking my question.

Yeah.

And include logistics, there's obviously a significant hatch loss.

Quarter, and I think you mentioned on the equivalent would you mind repeating how much of that unbound. This quarter, what the game was and what the normalized crude our logistics EBITDA would've been this quarter.

Alright, so we we got back about $15 million related to that and that Ed.

<unk>.

Hedge gain at 630.

Normalized they did 48 eight this quarter you take $15 million off of that you are at about 33 $34 million for this quarter and.

In the first quarter would've been around 28 29 million.

Got it and the $15 million.

The full amount or is there more to be gained back next quarter.

I think we received I think we received back everything we had expected.

Got it. Thank you that's it for me.

Okay. Thank you.

We have no further questions from the lines at this time I would now like to turn the floor back to Linda bridges for closing remarks.

Yes, Sir Thank you guys for joining the conference call and for the interest in NGL I think hopefully you can tell we're excited about the remainder of the year and coming into our fiscal 2023, and we will plan on talking to everybody next quarter.

Thank you. Thank you.

Thank you ladies and gentlemen. This concludes today's event you may disconnect at this time and have a wonderful day. Thank you for your participation.