Q4 2023 NGL Energy Partners LP Earnings Call
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Greetings and welcome to the NGL Energy partners for <unk> 23 earnings call. At this time all participants are in a listen only mode. A question 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.
Note. This conference is being recorded I will now turn the conference over to your host Brad Cooper CFO you may begin thank you.
Good afternoon, and thank you everyone for joining us on the call today, we will discuss our fiscal 'twenty three results are deleveraging update and our outlook for fiscal 'twenty four.
After the market closed today, we issued an earnings release Investor presentation and filed our 10-K.
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.
Fiscal 2023 was truly a transformational year for NGL across all aspects of the partnership with record EBITDA significant reductions in our absolute debt and leverage well below our initial goal of 475 times.
We achieved record adjusted EBITDA of $632 $7 million for the year at $173 3 million for the fourth quarter. This record adjusted EBITA was driven by the strong growth in our water business, which I will discuss shortly.
We completed the sale of our marine assets and other miscellaneous assets totaling approximately $141 million.
The trailing 12 month adjusted EBITDA associated with these assets was approximately $10 $7 million, which implies over a 13 times multiple on these asset sales.
Selling these noncore and underutilized assets at these attractive multiples has allowed us to accelerate our strategy to reduce absolute debt and leverage.
Started fiscal 'twenty, three with a $476 million balance remaining on the 23 unsecured notes and $42 million remaining on the equipment that was supported by the marine assets most folks outside the walls of the NGL offices thought the redemption of the 23 unsecured notes wouldn't occur until later this calendar year.
But due to the strong operational performance the noncore asset sales and our ability to project the release of working capital as commodity prices moderated we were able to redeem all of the 2023 unsecured notes and pay off the equipment, but note both totaling about $518 million by year end.
With this debt retired our leverage at the end of the fiscal year was approximately 456 times.
Our ABL balance at the end of the fiscal year was $138 million roughly the same level that it was at the beginning of the fiscal year.
You recently saw a progress on the debt and leverage from the acknowledged with the upgrade from S&P to be minus stable. While this is a nice move in our overall credit rating. It is not the final stop.
As we continued to reduce overall debt and drive leverage lower we would expect to see additional upgrades along the way.
We're off to a strong start for fiscal 'twenty four on the debt retirement front and Mike will get into how we see the year playing out but through the first two months of this fiscal year, we have purchased approximately $100 million of our 2025 unsecured notes. The current balance on the 25 notes is $281 million, which we expect to fully retire no later than March 31.
A 2024.
The debt reduction in fiscal 'twenty, three and jumpstart on debt reduction in fiscal 'twenty four significantly reduces our interest expense, thus bolstering our free cash flow on a go forward basis.
Our water solutions business achieved several new records in fiscal 2023, our consolidated record adjusted EBITDA was driven by water solutions record adjusted EBITDA of $463 $1 million in fourth quarter, adjusted EBITDA of $131 $6 million.
Also water solutions achieved record disposal volumes in the fourth quarter.
As the Delaware Basin saw significant drilling and completion activity last year, our water solutions business grew volumes approximately 29% year over year.
This growth demonstrates our producers value our integrated pipeline system with large diameter pipe and our track record of service and reliability in the Delaware.
In the fourth quarter water processed approximately 2.46 million barrels of water per day. This is a 28% increase over the prior year's fourth quarter. During the fourth quarter. We also benefited from higher fees on spot volumes that hit our system.
The water team continues to find ways to optimize the cost side of the house and reduce the fourth quarter's operating expense per barrel to 24.
This is a four center per barrel improvement versus the prior fourth quarter and one <unk> lower than the third quarter of this fiscal year.
This decrease was driven by higher disposal volumes in the locking in of three of our largest variable costs utilities royalty and chemical expense, we won't be materially impacted by inflation in fiscal 2024 due to negotiated long term utility contracts with fixed rates royalty contracts with no escalation clauses in a fixed.
<unk> per barrel with our chemical provider.
Crude logistics adjusted EBITDA was $29 $7 million in the fourth quarter versus $54 5 million in the prior fourth quarter. This variance was primarily driven by the sale of higher priced inventory into a declining crude price market during the quarter.
And the prior fourth quarter crude logistics benefited by selling lower price crude inventory into a rising crude price environment.
Since our last call there had been a few noteworthy items in the D. J basin that could positively impact the basin in the near future and our Grand Mesa volumes first one of the largest operators in the basin and a strong well results at the end of 2022 and additional drilling and completion activity in the back half of this calendar year.
Chevron announced the acquisition of PDC energy, we view both of these as positives for the DJ basin and potentially Grand Mesa.
As I said on the last earnings call. We continue to be cautiously optimistic on production increasing in the D J and ideally even additional volumes hitting Grand Mesa.
As Mike detailed how we see fiscal 'twenty four playing out I did want to mention and we do not currently have this potential additional activity and positive developments in our fiscal 'twenty for budget.
Liquids logistics adjusted EBITDA was $28 5 million in the fourth quarter versus $24 5 million in the prior fourth quarter.
This increase was prior primarily due to higher propane margins margins during the quarter as customers pulled on their fixed price contracts. The full year results in the propane segment were weaker than we had hoped for due to a warmer than normal winter, reducing the demand the demand for spot volumes.
<unk> recently reported that propane demand in the U S fell to the lowest level since 2010.
Margins on our refined products for the fourth quarter and full year increased due to refinery and infrastructure disruptions in certain markets. While the team was able to continue to execute on a successful supply program for its customers.
This increase was partially offset by lower butane margins as our product purchased earlier in the season continued to compete with product purchased at a discount discounted market.
<unk> our margin on each gallon sold.
Fiscal 2024 is off to a good start in the liquids segment and our expectations are we see a rebound in performance for this segment for the year.
Recall that the majority of the EBITDA from our liquids segment occurs in the third and fourth quarters of the fiscal year. So as Mike outlined the guidance for fiscal 2024, our consolidated EBITDA should not assumed to be a ratable amount every quarter.
With that I will turn it over to Mike.
Thanks, Brad.
So let's discuss how we expect our fiscal 'twenty four to play out so with respect to our adjusted EBITDA guidance.
First we are guiding fiscal 2020 for water solutions to a range of $485 million to $500 million.
Reconciling to fiscal 'twenty three actual results.
We begin with the $463 million.
Less 15 million for approximately a $10 per barrel lower realized crude price on skin.
Plus $37 million for 10% growth in disposal volumes and skim oil barrels this reconciles to the low end of that range.
The high end of the range, an extra $15 million, which put our growth at 52 million instead of 37.
Second we're guiding the full year fiscal 'twenty four for all of NGL $645 million plus.
Reconciling to the fiscal 'twenty three actual results of 633 million, we deduct the one time gain of $29 million then deduct the trailing 12 months adjusted EBITDA on asset sales of approximately 11, So that's 40.
Then add back the net change in water solutions, we just discussed which is $22 million.
Which is F 37, minus the 15 of skin.
And then they had $30 million for the recovery in liquids crude oil logistics and reduced corporate overhead.
We are being conservative so we have an opportunity to raise guidance during the fiscal year.
Our guidance for fiscal 'twenty four includes positive growth, but it is only one factor in the performance and value equation.
Significant cash raised from the following they are not included in adjusted EBITDA.
We continue to identify underutilized assets and monetize them at double digit multiples.
Again in this fiscal year, we've identified at least $50 million in such assets and we have already harvested $15 million of those in the first two months of this fiscal year.
With $530 million of debt reduction in fiscal 'twenty, three and more in 'twenty four or interest expense should decrease by approximately $50 million. Another source of free cash flow that costs us no cap.
We are focused on reducing working capital to provide additional free cash flow. For example, we are idling or selling certain terminals no longer shipping on certain pipelines and limiting eliminating landfill.
Finally, we are reducing capital expenditures wherever possible.
All of these sources of cash will help accelerate the deleveraging of the balance sheet and.
And add value to our equity.
It also allows NGL to address the preferred dividend arrearage sooner.
So what does this mean it means we're very comfortable.
That we will be able to redeem.
All of the 2025 unsecured notes this fiscal year, possibly by December 31 of 2023.
Our priority remains lowering absolute debt and reducing leverage.
We expect to be under 4.0 times total leverage by March 31 of 2024.
This should put us in a strong position to refinance the outstanding balance of the 2026 secured and unsecured bonds extending those maturities.
We do not expect to pay any dividend to rearrange on the preferred equity and calendar again calendar 2023.
Now I'd like to address how water solutions is structurally different from other water disposal companies.
We are a long haul pipeline business with large diameter pipe spanning hundreds and hundreds of miles.
Producers spend their own capital to tie into our pipeline system, we do not connect to the wellhead.
We have long term contracts with either acreage dedications or M D CS and our weighted average contract life is currently more than 10 years.
We're the only water disposal company to reduce operating expense per barrel in the face of inflation.
We are not focused on recycling, our freshwater sales, but do provide volumes for reuse by producers.
NGL is comparable to a crude oil transportation pipeline, which typically trades at an eight to 10 times EBITDA multiple.
Finally, a few comments about equity analysts approach to our company valuation.
The and the analysts focus has evolved into a simplified Miss a beat consensus EBITDA story.
Often prior to even listening to the earnings call.
There is so much more to our quarterly performance that should be considered as we have outlined debt reduction improving leverage asset sales working capital changes to name a few.
None of these are addressed with a miss or beat label.
We provide annual adjusted EBITDA guidance, while analysts decide what the quarterly estimates will be on occasion, some simply a divided the annual guidance by four ignoring our seasonal business guaranteeing a miss in the first and second quarters.
A few have taken our water business and valued at a five five times EBITDA.
Also similar to a marketing business with few hard assets, while valeant other smaller lower growth competitors with higher capital requirements at seven five times.
We believe there is no true peer comp for NGL, so analysts need to take a deeper direct dive and understand the current and near term value being created at NGL.
We believe Ngls equity trades, where it is due to our capital structure.
Our previous elevated leverage levels preferred equity suspension of dividends and near term maturities created a significant headwind.
The good news is that we are growing into our capital structure in this fiscal year free cash flow will provide for debt reduction to a level, where we can push out the 26 maturities and began attacking the dividend arrearages in calendar 'twenty four.
I understand improvement can never happen fast enough for investors, but we are accelerating our balance sheet recovery and ultimately regaining our financial flexibility.
On a closing note I would like to thank our director Mr. Steve Cropper for his knowledge experience and advice over his many years as a board member of NGL, We will miss him, but are thankful for his guidance over the last few difficult years.
And thank you and with that let's open it up for Q&A.
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One moment, please while we poll for questions.
The first question comes from Patrick Fitzgerald with Baird. Please proceed.
Hey, thanks for taking the questions and.
And.
Yeah.
Yeah I appreciate the comment comments on.
How to value the company and you know the guidance in terms of how you're thinking about everything.
So just on that is it safe to say that you would wait to read you now wait until your refi. The 26 maturities before you turn on the distributions again is that the correct way of thinking about it.
Yeah, I think that's how we're thinking about the next 12 months.
If it makes sense. It makes it makes sense, because we want leverage to be as low as possible.
Right.
Your covenants.
Would allow it just to just clarifier.
That's correct that's correct.
Okay. Once we got under the $4 75.
Leverage.
Which is where we are.
Okay.
Could you provide working capital was a huge.
Yeah.
Been kind of a headwind for it seemed like.
Quite a while and are in the back half of this year. It was certainly a positive how do you see that going forward in fiscal 2024.
Yeah, I think for fiscal 'twenty, forming where propane and crude oil prices are today, we won't have near the constraints on our ABL capacity like we did in prior years.
One of the other items that historically has pinched, our working capital and capacities of the CMA hedge that's a non event or inside the fiscal year crude price with respect to the forward curve is fairly flat so.
I don't think you can look at the previous years is really a representation of how we see working capital. This year ABL balance at the end of the fiscal year was around $135 million to $140 million I think we see it in the same ZIP code at the end of fiscal year 'twenty four.
Great. Thanks.
And then.
What is the volume guidance or if you have any update on.
Yeah, Carton current volumes that you're seeing in the disposal business.
What is the guidance and what's the volume guidance underpinning the water's water EBITDA guidance and the earn any update.
Yeah and in the Investor presentation, we published its showing fiscal year 'twenty four to average about 256 and that equates to the $485 million of EBITDA that might guided too.
Again, that's the average for the year.
I think the first two months of this fiscal year were just under about $2 5 million barrels a day.
Okay, Alright, thanks, I'll hop back in queue.
Thank you.
The next question is from Terry Hammett with J P. Morgan Derrick Your line is live.
Good afternoon.
I'd love to dig in a little bit more on the cost performance on the water business something very very impressive, but you talked about some of the contract pricing being fixed.
But things like chemicals have you ever disclosed how long that contract prices six four and then maybe just help us think through kind of how that evolves.
I don't know if we've historically disclosed that in terms of the contract and I think we'd rather.
Plus years on it Doug are you there you want to.
Sure This is Doug.
We expect that to be the long term.
Administration of those prices.
Do want to mention we are working on new initiatives on chemicals.
We reduce our chemical related opex by half to three quarters cents.
By using a different strategy on our chemical program and reduce the volumetric usage of chemicals, but that contract is a longer term contract.
Yeah.
So no nothing we should think of as a sort of reset coming in 'twenty five or anything like that.
That's correct.
Like I said anything coming this new physical year will be lower not higher on a per barrel basis regarding chemicals.
That's very helpful. Thank you.
And then he actually I want to follow up on just the working capital question, obviously in sort of the seasonality of the business that you guys spoke about in your prepared remarks.
Tends to be a little bit punitive in the first couple of fiscal quarters, and then a little bit beneficial in the second half, but I just wanted to sort of tie that to the sort of the 100.
$12 million or whatever of bonds that you've repurchased in the last couple of months. So should we sort of read anything into your kind of how working capital is shaping up over this couple of quarters.
Got it all if there's anything to read into other than I mean, Mike alluded to some asset sales that have come through the first two months with waters growth. Our free cash flow is obviously more driven by Waters' performance. So maybe it's not as seasonal as we <unk> seen around the organization historically and again Rick.
Call at the end of <unk>.
What was it early fab I guess, we amended the ABL to have that permanent $100 million accordion feature in the ABL, so lower commodity prices and some of these asset sales that we pulled off here. The first two months gave us comfort to to lean into the bond repurchases. The first two months of the year.
I appreciate that.
And then just last one for me, maybe just talk about addressing the preferred securities.
Or is your focus there, mostly just sort of solving.
Solving for the Arrearage.
Or do you think about the size of that preferred layer as maybe being a little bit oversized maybe you should think about redemptions are preferred over time I'd just love to get your general thoughts on that at this point.
I think Youre correct is it's both and if there were some offer some opportunity to.
Repurchase of some of the preferreds, we would definitely consider that.
So both.
Okay. That's helpful I'll jump back in queue. Thank you guys very much. Thank.
Thank you.
The next question is from Jason Mandel with RBC capital. Please proceed.
Hi, guys. Thanks for taking the question for Oh, a reasonably detailed guidance very helpful. Just specifically on the water business I know you touched on this with <unk> for a minute but.
EBITDA growth guidance can you give us a sense of any more of that is coming from additional cost saves and the margin expansion or if that's all volume improvement.
Yeah, I think it's predominately driven by volume improvement our Opex again, if youll recall in the earnings presentation. We released I think we're showing opex fiscal.
Fiscal year 'twenty, four 'twenty five <unk> compared to 25 cents for this fiscal year.
So you can impute, it's all volume driven.
Okay perfect. Thank you and then on on the buybacks in the quarter. There was a small piece of the puzzle, but there was some buybacks on the unsecured 26. This was that just opportunistic and shouldn't be a big use of cash going forward. Yeah. That's fair they were trading at a pretty decent discount or the 25, So we went and grabbed him.
Got it very good okay. That's all for me Thanks, guys I appreciate it thank you.
The next question is from Jay Spencer with Stifel. Jay. Please proceed.
Thank you congrats on a good quarter and congrats on big below the 4.75 times leverage.
You know I just wanted to be clear on kind of your you're cranking.
In terms of the order of operations like as it relates to the Arrearages on the preferred.
What is the thinking that you would like to push out the 2026 maturities before attacking those are really just on the prefs.
Or are you really just say at this point.
No. It's a very transparent yes, that's exactly what we're looking at.
We have the 26 and the timing is coincidental, perhaps but the call premium on those points.
<unk> secured drops in half.
In February of this coming this next February .
So I think getting we'll have if we can get rid of all the 25 by December .
December 31, and then our cost on the call premium drops by 50% and that the timing would work out well.
Gotcha, Okay. Thanks.
You know and as it relates to the water processing capacity I mean, you've got.
Your produced water processing.
<unk> expectations for fiscal year, 2024, and it looks like it's 252 6 million barrels per day, what would the capacity be.
You know at the end of this.
After that at the end of this year.
Doug can you address that now.
Can take that.
Our operational capacity.
The end of this.
If I can clarify the question is is this physical twenty-four Ashland and what was at the end of fiscal 'twenty three.
At the end of 'twenty four.
At the end of 'twenty, four we're gonna be somewhere between $3.3 million and $3 5 million barrels per day permitted capacity, where we have been working on additional permitted capacity.
New development in the future and that's going to be north of 4 million are permitted capacity by the end of fiscal 'twenty four.
Okay, great. Thank you I appreciate it.
Up next we have Gregg Brody with Bank of America, Greg. Please proceed.
Good morning, guys.
That's an execution.
I'm just.
You gave us a sense of of the first two quarters are the first two months of this fiscal year.
I'm showing your conference in your and your volumes.
Expectations I'm just curious how you think about your visibility today on volumes how far out do you think you can see.
Based on what producers are doing takeaway capacity et cetera.
Well I'll say next Tuesday, but I'll, let Doug take that question.
It's great question, we weird.
Consistently working and planning.
Our future growth.
The big driver, we have an excellent view 12 months out and then after 12 months, we really have to rely on.
For permit activity.
Remaining inventories etcetera.
But as we look at the general growth throughout the Delaware Basin.
We see that growth.
Approximately 10% per year on.
On a year over year.
And I think that's a pretty well published number out there.
We would say our growth with our large dedications dedicated areas et cetera, 10 year contracts.
We see our growth I'm very comparable to that 10%.
Got it and then just on the Capex spend what's <unk>.
What's the potential risks up or down when you think about the guidance you gave today.
That's an interesting word to use risk and we know we would love if we could get.
Additional con.
Contracts and M D C to spend.
You know the money.
Especially at some attractive rates of return.
I think.
I don't I don't know if we have any.
Risk of having to spend more money this year, but we can see some new projects next year.
Great and then just to support finish up you mentioned the $50 million of asset sales already.
Already it seems to be on the books this year over the 50 you've identified.
So <unk> I think you said, we should assume that that's high.
Double digits.
And.
Maybe you can give us a sense of of what you did sell and kind of what else. You think you are selling or if to the extent you can tell us.
Yeah. This is an area, where it kind of surprised the market because they're not big enough.
In our marine sale to issue a press release, so they're anywhere from 200 500000 up to 10 $15 million to $16 million.
But we'd rather not disclose it because we have employees at those at those assets.
May not be aware they are for sale.
I appreciate that censorship typically I'll leave it there and thanks again for the time.
Thank you.
The next question is from Ned <unk> with Wells Fargo. Please proceed Matt.
Hey, good afternoon. Thanks for taking the question Brad in your prepared remarks, you mentioned potential benefits from the Chevron PTC deal.
Could you maybe review issue currently handle volumes from any of the two producers and.
Going forward do you anticipate competition for incremental transportation volumes too.
Densify give them ample capacity on pipelines going to Cushing.
Yeah, I don't think we can fully disclose volumes going across by customer, but I think our stances.
I think others feel the same that transaction like this you would assume there'd be some.
Some increase in activity to support the underlying economics.
Kind of our overall view.
Yeah, I'll add to it and Don maybe you jump in but you know if these majors have ownership in the.
The other the other pipelines in the basin, that's that's where they're going to put their volume, but then we would hope we get volume pushed they would push volume off those lines.
And over in our direction.
Got it thanks for that and then.
Following up on the question of your Capex guidance could you maybe talk about the split between.
Maintenance and growth Capex and then on the growth Capex side are these projects primarily in the water solutions segment.
Yeah majority of it is in the water solutions segment.
I think in the earnings deck, we're guiding to 75 of growth and then 50 of maintenance you could assume.
A chunk of the 75 is water 70, plus.
At least $70 million of it.
That's helpful. Thank you.
Yeah.
The next question is from Sunil Sibal with Seaport Global Securities. Please proceed.
Yeah, Hi, good afternoon, everybody and thanks for taking my question. So my first question was related to the contractual commitments on your water systems and Permian I think you mentioned the contract life of around 10 years. I was curious you know if you could talk about any M. A C is that you have with the current Oh.
Yes.
I can take that Brett.
Yeah go ahead go ahead.
Okay.
Since our last call, we have amended and extended one of our large dedicated contracts that we inherited from the mesquite acquisition.
With a new 10 year term and we actually were able to execute that at the current market rate.
It's a big positive Ah, we havent two sizable M D C contracts in the quarter as well as executed the two term contracts, we mentioned on the prior call.
So our our M D C barrels per day. It grew this past fiscal year and we've already grown it by another 20% in this new year.
So both of those terms or the N. B C turns are at 10 10 year average term.
With that addition of those new contracts.
Okay, and then the volume wise you are saying.
For fiscal year 'twenty for you as well.
M. A C volumes it would be 20% higher than we have you wouldn't quality.
Yeah, we were I think somewhere around 580000 barrels per day in fiscal 'twenty three and.
We've already grown that by approximately 20% with M D. CS in the new fiscal year.
Okay got it.
And then.
On the Capex run I think <unk> guided to is the guidepost you know delegate volumes growing by 10%.
Year over year for the next few years.
No.
The capex that you're guiding for fiscal 'twenty four is that kind of a good way to think about.
In terms of meeting that 10% growth number.
The basin.
I'm just trying to get it doesn't get any lumpiness in your capex or is that kind of a good run rate.
Yeah, Brad if I may I'll go ahead and take that.
Go ahead Doug.
Okay.
We have.
Prior physical year to this new physical year, our Capex outlook is is pretty close.
To the same on growth capital as Mike mentioned and Brad mentioned.
That those new projects.
Or are there for a portion of the 10% growth.
One big project that we actually bring online. This week, we've already executed its first quarter mm is to connect our box 76 Hill stone assets do the integrated system more fully.
That's gonna add 300000 barrels per day of capacity on pipeline from our system to an area that was underutilized has been underutilized. So we have a nice growth trajectory. There I'm just that project of course, we have some others, adding additional capacity we would.
Next year's Capex, and most likely years after that based on current contracts that demand to go down.
Cat.
As we maximize the integrated system.
And then as Mike said.
If we are able to enter into new M. D C type deals with.
Fully underwritten additional projects.
We'd be looking to do that but we don't we would do those as they were able to be executed.
Got it.
Thanks for that and then my last question was related to loan.
Downgrades, obviously nice tailwind going into 2024 in terms of leverage.
I was curious you know and you talked about you know how you want to do just that.
So I was curious you know with.
The business composition that you have now.
Where do you think is the right leverage level for this kind of business competition.
I think in the short term.
There there has to be a trade off between the.
A dividend of ridges and leverage so we definitely want to be under four times to refinance.
But then I think we need to.
Maybe.
You know keep continue decreasing leverage somewhat but it will be difficult to decreases significantly.
While we are.
Catching up on the Arrearages.
Got it.
Thanks for all the color.
Hmm.
Okay, we have reached.
Reached the end of the question and answer session I would now like to turn the floor back to Mike <unk> for closing remarks.
So go ahead, Brad yes. Thank you guys for joining today. We appreciate your interest in the company and we look forward to connecting with you all in August when we report fiscal Q1 of 'twenty four thank you all.
I would just add it is now very exciting to work at NGL.
Yeah.
Thanks, everyone.
Yeah.
This concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.