Q3 2023 NGL Energy Partners LP Earnings Call
Greetings and welcome to the NGL Energy Partners L. P. <unk> 23 earnings call at this time, all participants are in a listen only mode.
And answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad. Please note. This conference is being recorded I will now turn the conference over to your host Brad Cooper you may begin.
Thank you good afternoon, and thank you to everyone for joining us on the call. This afternoon. After the market closed today, we issued an earnings release Investor presentation and filed our Q.
Comments today will include plans forecasts and estimates that are forward looking statements under the U S Securities law.
These comments are subject to assumptions risks and uncertainties that could cause actual results to differ from the forward looking statements.
Please take note of the cautionary language and risk factors provided in our SEC filings and earnings materials.
Let's get into the quarterly results with three quarters in the books fiscal 'twenty three is coming to fruition and we're extremely happy with what we are seeing the plan that Mike outlined to employees in the spring of 'twenty, two and communicated externally on the fourth quarter call. The fiscal 'twenty two is becoming reality as we enter the home stretch of this fiscal year I want to thank all of our employees for their hard.
Work and tenacity to get us to this very exciting spot for the company. We are increasing our water solutions adjusted EBITDA guidance from over $430 million to over 440 million for fiscal 'twenty three.
This strong performance out of water and the return of working capital has allowed us to lean into the repurchasing of our 23 unsecured notes over the last few quarters.
We started this fiscal year with an outstanding balance of $476 million and the 23 notes at the end of the third quarter. The balance of the 23 notes was $302 million and during the first few weeks of January we retired an additional $100 million of the 23 notes, leaving a current balance of $203 million.
This is significant progress in reducing the balance on these notes and our plan is to fully retire the remaining balance no later than June 30th while maintaining our strong liquidity position throughout all of our businesses.
From a balance sheet perspective, we have reported total liquidity at the end of the third fiscal quarter of approximately $280 million and borrowings on the ABL facility of $156 million. As a reminder, we are entering the liquidation phase of the propane season, and we would expect to see the ABL ABL balance decrease over the fourth fiscal quarter.
At the beginning of February we started the process with process with our bank group to extend the $100 million accordion feature within our ABL that will allow us to have an ABL commitment of $600 million.
This process should be completed by mid February .
With our strong trailing 12 month, adjusted EBITDA and a reduction of 20 of the 23 notes our total leverage should be below 475 times at the end of this fiscal year.
This is a very important milestone, but we will not rest as we continue our laser focus on strengthening the balance sheet over the next fiscal year.
As I mentioned earlier, our water solutions business continues to see strong growth water solutions is benefiting from owning and operating the largest integrated network of large diameter produced water pipelines and disposal wells in the Delaware Basin.
Our water disposal volumes have grown approximately 32% this quarter over the same quarter, a year ago, and 7% versus last quarter.
Delaware system experienced three days of sub 2 million barrels of oncoming water due to cold weather in December but with our fully integrated system, we were able to quickly recover and take advantage of unexpected volumes from non contracted customers to achieve record volumes of over $2 7 million barrels for several days.
Our third quarter EBITDA for water was not impacted by weather, thanks to our excellent field staffs efforts.
The water team has continued to focus on reducing operating costs in the face of inflationary pressures, while maintaining rapid growth operating.
Operating costs were 25.
Her barrel in the quarter versus <unk> 27 per barrel in the second quarter as volumes continue to grow there is an opportunity to further lower our per barrel operating costs. All of this positions our water segment for continued EBITDA growth.
It is important to note that water strong financial performance has not been driven by $100 plus crude oil on our skim oil barrels we hedged our skim oil in the first half of the year and our average realized price for fiscal 'twenty three is approximately $80, which is about where the market is today.
The Grand Mesa pipeline continues to be negatively impacted by producer permitting delays in the DJ Basin Grand Mesa averaged averaged approximately 77000 barrels per day compared to approximately 83000 barrels per day in the third quarter last year. We are closely monitoring the pace of activity and as the permitting issues get resolved. We are encouraged that we could see more.
Out of the basin in the future and if so Grand Mesa is well positioned to capture its fair share of those volumes.
Our rack marketing of biodiesel businesses have benefited from the tight gasoline and diesel market to capture higher margins in the case of biodiesel has benefited from cheaper additional supply driving their strong financial performance.
Our butane margins, excluding the impact of derivatives were lower as product purchased earlier in the blending season continues to compete with product purchased in a currently discounted market.
Recall that a majority of the EBITDA from our wholesale wholesale propane business occurs in the months of December through March propane results for the quarter were below expectations, partially due to an overall warmer than normal winter so far.
With that I'd like to turn the call over to Mike.
Thanks, Brad.
I would like to summarize the significant growth in our water disposal volumes a little bit here.
If you remember a year ago, we thought we would have 10% a year growth and we were way off this.
This first year, our water volumes grew 30%.
In the first quarter, we saw disposal volumes grow 12% in one quarter versus the fourth quarter last year.
In the second quarter versus first we grew another five and then this quarter.
Versus second we saw a 7% growth rate that we will see some additional growth.
In the fourth quarter.
So.
30% growth rate in water in just one year as you know is really incredible and kudos to our guys.
Four.
Being able to accomplish that but.
A lot of it is worth dependable and the producers know that.
Give us the water, we will get rid of it.
This impressive growth is the driver for why we increased adjusted EBITDA.
<unk> from $4 30 to $4 44.
For this year.
Ah recently, a couple of our largest customers indicated publicly they are increasing their activity in the Delaware.
This gives us confidence that water solutions volumes and EBITDA will continue growing in 'twenty 'twenty four and again our costs at 25, a barrel is pretty incredible.
Inflation, we hear about every day.
Maybe a little perspective, we're at.
I think 331 million EBITDA for the nine months third quarter was $121 seven.
So if we were to duplicate that in the fourth quarter, we'd be at 453.
Above the 440 plus guidance.
We're trying to.
Be a little conservative and make sure that we beat our numbers.
Now I'd like to focus.
Discuss our strategic focus in the short term and intermediate goals strategy. So first our key focus has been addressing the 23 unsecured notes as Brad mentioned, we thought it made a lot of progress current balance of $203 million and we will pay the rest off by June 30.
I think this is well before most folks.
Anticipated and we'll see if we can do better than that.
So we get the immediate debt.
Hurdle out of the way get us some breathing room.
Second.
Regardless of when we pay off the 20 threes.
We think by the end of this fiscal year March 31, our leverage will be at or below $4. Seven five times again, I think thats well in advance.
Any any of the estimates I've I've read on the street.
And contrast that with our leverage in the third quarter fiscal 'twenty to seven two times.
So just within four quarters, we've reduced total leverage by approximately two full term.
Possibly two five turns by March 31.
This is remarkable progress.
Third our 26% secured notes.
Mature in February of 2006, so they will become a current liability February of 'twenty five that is only two years away.
Do not want to get into the same situation with these that we did with the 'twenty threes.
Therefore, we will continue to drive down leverage and our absolute debt to position the partnership to roll and extend all remaining maturities with the best possible terms.
And then fourth we will also address the preferred dividend Arrearages and thereafter, the preferred dividend at the appropriate times.
There is certainly on our radar.
Now that we've talked about increased water solutions guidance and debt reductions.
I'd like to point out that these debt reductions achieved in these first nine months year to date.
Were accomplished without any significant asset sales, we continue to make progress on several noncore asset sales, which we hope to sign and close in the fourth quarter.
If these are completed the proceeds will go directly to the balance sheet and drive leverage even lower by the end of the year, giving us even more financial flexibility.
So with that let's open up for Q&A.
Absolutely.
Thank you.
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One moment, please while we poll for questions.
Once again Thats Star one if you have a question or comment.
Okay.
First question comes from Patrick Fitzgerald with Baird. Patrick. Please proceed.
Hey, thanks for taking the questions.
So could.
Could you provide any.
Help on.
The $29 5 million charge that was I guess reversed in the quarter.
Hey, This is Brad I think what would you do is point you to the Q on that when there's language in the queue with respect to that.
That's about all I can really say cursed Mcmurray, our general counsel us on the call as well of course I don't know if you want to elaborate on that.
Yes, sure sure Brad.
Yes, what we can say is whats in the queue and.
Is this a legal matter so I appreciate your respect.
Our.
Need to be confidential. Thank you.
Okay that wasn't a cash benefit in the quarter, though is it.
Cash benefit yes, it was.
Okay.
Alright.
In terms of the <unk>.
Water segment obviously.
Very strong.
Results there.
One of your competitors actually.
Came out and said that they have the lower there.
<unk> because of the winter storms.
Obviously.
Your volumes look, great, but where they actually tamped down a little bit by the winter weather that impacted.
The region in December .
I'm going to let Doug answer, but it in my prepared comments, we talked about three days or so that were sub $2 million and then we had a handful of days that were over $2. Seven. So I think if you average across those handful of days, it's probably right in line with where.
<unk> average was for the for the quarter, Doug anything to add there.
No I would confirm that Brad.
Okay. Thanks.
In terms of your.
Fourth quarter, usually you see working capital release.
<unk> paid down $100 million.
Is that.
Do you expect a significant working capital release.
In the fourth quarter or did you use the revolver balance to take out the $100 million of additional bonds since.
Since the quarter end.
Now the bond reduction was done with working capital release, and we would expect further working capital release as we move through the rest of our propane season.
Okay.
Could you give us a sense of the magnitude.
From where we are at the end of the third quarter.
It's fair to say that the ABL balance could be there might be $40 million to $50 million on it at the end of the fiscal year.
Assuming no more again retirement from this point forward.
So nothing on our $40 50 on the on.
The ABL and $100 million left on the 20 threes.
Correct.
Okay, that's great.
In terms of the NGL segment.
Any.
I think at the start of the year, you guys said that.
<unk>.
You would.
Kind of be flat this year.
Liquids logistics.
And youre trending.
Not not not so close to flat.
Implying a big fourth quarter is that still your expectation or are is kind of this year been a little bit worse than you expected because of the.
Unseasonably warm weather.
Yes, I think the weather the lack of weather I would say up at our key areas has been a driver we do expect a nice fourth quarter from the team, but I think for the year.
Down relative to expectations across the full liquids logistics business the biodiesel in our rack marketing group.
Butane blending have done have done well, but wholesale propane a little bit lighter than we would like.
What I'd like to see at this point in the year I think we'll still see a strong fourth quarter from them, but probably under what our expectations were for the full year.
Jeff you have anything by that point out here is here who runs that division.
I think your comments captured it well.
Alright, great. Thanks, a lot guys.
Thank you.
Okay up next we have Tariq Hamid with Jpmorgan. Please proceed.
Good afternoon gentlemen.
On the flow of our business.
Yes.
The performance was particularly impressive.
And I just wanted to sort of get a sense of some of the drivers there of how you were able to continue to reduce costs in that business.
Doug I'm going to take that.
Yes, Sir.
One of the important factors in our per barrel metric on an opex certainly as the fixed fixed cost.
Every barrel that we add as we grow.
And as we grew the volume so.
Ratably this year.
It's really reduced our fixed costs per barrel were <unk>.
Always working to reduce any expense that we can.
But on a total basis, our variable costs are higher on accumulative basis.
But we've held them very steady on a per barrel basis.
The.
A large amount of volumes that we see today and going forward.
It really really washes out and reduces the fixed cost.
We're doing as much.
And more water as we did in the past, but our employee head count has not increased.
That's an example.
We look at what's it cost to run the.
And we really focus on those fixed costs and keeping those down those are ones that we can certainly control.
And then on the variable cost side like we've mentioned many times, we were fortunate to hedge our power costs in Texas.
That would be extremely low natural gas prices.
I will go through 2028.
So that's a big big help so every barrel, we bring on and we're able to apply these low cost too.
Our per barrel metric continues to get better.
Got it so really a huge fixed cost absorption benefit overtime.
That's correct.
And I know you can't say much about it.
But on the $29 5 million onetime gain is it fair to say that the matter is closed at this point.
Yes.
Yes.
And then you touched on potential for further asset sales.
Yes.
On a non core basis.
Serge you can give us of kind of the size or nature of the assets, we should be thinking about would be helpful.
Mike do you want to take that one.
Not really.
[laughter].
Uh huh.
I guess, we can give a range a range of $20 million to $100 million.
Fair enough Mike.
Paid to ask the question you get paid not tax rate.
And I guess, just just last one for me.
Get back in the queue.
As you think about sort of.
<unk> 24 and beyond.
Just love to get your sense of kind of how much additional capital it will take to keep the water system growing.
So repeat the incredible rate drag right now, but sort of at the rate you are targeting over time.
Doug.
Okay.
I'll just I'll take.
Yes.
I think the guidance we'd get in the past is that we had fully really built out our system after.
This year, where we had a couple of big new pipelines.
I would have Doug comment after me, but.
We were thinking more in the.
I'll say $40 million to $50 million range going forward, I think thats going to increase because of the new opportunities.
But we haven't we haven't budgeted yet so we don't have.
Number.
Do you have anything.
Doug Yes.
Yes, yes, it's important to note we took this quarter as well.
Third quarter.
And we amended and extended.
Some of our term contracts acreage dedications, we picked up.
View.
New contracts are there long term.
<unk> added to our acreage dedications and then we're working on a couple of.
Another couple of 10 year dedications currently they are very close to being signed those all include additional acreage.
<unk>.
The other than the other important thing to note is the Supermajors you can see it in their public comments.
They're really planning to ramp up in the Delaware.
Certainly within our footprint.
So we're going to do everything we can to take every barrel of water.
Do it for me.
Some are very smart and contracted basis, not overbuild, our system, but be there to capture these great margins.
Got it I appreciate it I'll jump back in the queue. Thank you guys.
Once again, if you have a question or a comment. Please press star one up next we have Gregg Brody with Bank of America. Please proceed.
Good afternoon guys.
Okay.
Hello.
Just.
You had very strong volume growth this quarter.
I'm just curious.
Was there any benefit from the seismic activity leading to some of your competitors not being able to inject in.
Deepwater wells.
Is that something you quantify and talk about how that how you may benefit from that going forward.
That's a that's.
That's a question where are we going to knock on wood.
To answer that one we have been very fortunate that our footprint has not been materially affected by the seismic review areas.
It maintains as a risk to our business, but we feel like both.
In New Mexico, The Railroad Commission in Texas.
Taken.
Really large steps towards <unk>.
<unk> that risk of reducing that risk.
Which is good.
That is very positive we have certainly benefited.
From this system that we have that all.
All these years.
Stone mesquite.
We've spent the money to.
Fully integrate we have benefited greatly from that due to seismicity.
But we certainly aren't out of the woods, yet as an industry, but I believe everyone's working together.
Along with the regulatory agencies to reduce the future risk.
Got it and there is no water.
Moved from other regions over to you.
That was material.
No it does.
I would say its material.
From volumetric basis approximately.
150000 barrels a day to 200000 barrels a day.
That would be an estimate I would give that comes our direction due to reductions or limitations on others.
Got it.
Fair to say that that's going to stay excellence.
You can see that volume.
When you would expect it to this time.
Great.
And then just one more for you you highlighted.
Two of your producers and Youre operating area have highlighted increased rig activity.
I think indicated to timing.
When you would see those volumes or are you just looking at at the rig announcements and tripling from there.
Activity color.
I would say their needs are very immediate.
Okay.
Thank you for the time guys.
Okay. The next question is coming from mid <unk> with Wells Fargo. Please proceed.
Hey, good evening, thanks for taking the questions Mike you touched a little on capital allocation. After you get to the 475 leverage target.
Next quarter, but could you elaborate a little bit more on how you think about allocating between further debt reductions as you noted maybe the 2026.
And the payment of preferred distribution center of yours.
Yes, we really haven't.
Discuss that with our board yet.
We are.
We're mindful of the Arrearage.
So its really balancing.
Your balance sheet needs to be in a certain.
Condition to be able to roll out your debt.
So its $4 75 is too high leverage to be able to do that.
So we will be talking with our bankers figure out is it.
Is it 4.04 to five.
Is it debt.
Laos us to launch.
And then we push out the debt. So we don't have to worry about that anymore.
And then we would address the price.
Got it and then on your on your corporate initiatives.
Curious why we havent seen an announcement yet is it is it a function of lower demand and.
Lower bids in the current environment is it complexity of the transactions youre trying to finalize or maybe something else whatever color you could provide would be it would be helpful.
Yes.
They're all a little different.
One is.
Requiring consent from.
Let's see.
Yes.
Let's say third parties and those are.
They take longer to receive.
Others just took.
I would say.
Wanted to sell into the strength of the market. So we wait until the market.
It was much stronger.
And then we launched in.
Yes.
I think we'll end up with them a more attractive.
Price.
So it wasn't that.
Fire sale, we were very thoughtful about timing.
One of I think one was pushed back some from third quarter to the fourth quarter.
One we've.
We have signed and now we have to go get consents.
Another one the buyer was having difficulty getting financing and it appears that they've been able to secure financing so different reasons.
But we didn't want to push because you are right. If you do that then you're going to get a lower price.
Got it I appreciate that and then maybe can you just remind remind me what's the remaining contract average term on Grand Mesa.
Geez I don't know for sure.
I know two of the contracts as Don Robinson on.
Dan you there.
Yes, two of those contracts.
Our about have about four years left on them today.
Three to four years.
Got it.
Thank you that's all I had.
Thank you.
Yes.
Okay. The next question comes from Jason Mandel with RBC. Please proceed.
Hi, guys. Thanks, very much most of my questions have been answered, but just a quick follow up on the asset sale if applicable.
Can you confirm if those asset sales are outside of the water business or maybe include some.
Yes.
<unk>.
Well I can't confirm that there is a small one.
Water side Thats, a no growth asset.
And.
The other two are outside of the other two are larger.
But.
I call it kind of pruning if there's no growth asset then you basically just have an annuity.
And then if it's.
That's a good one because you're.
You are not really giving up any future growth the other ones are.
In areas, where we can get multiples over 10 times.
Alright, that's great you guys answered all my other questions. Thank you for your help.
We've reached the end of the question and answer session I would now like to turn the call back to management for any closing remarks.
Yes, thanks, everyone for your participation today as you've heard we're excited about our progress. This fiscal year. We look forward to speaking with you. This summer when we discuss our fourth quarter and full year results have a good day.
This concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.