Q1 2025 NGL Energy Partners LP Earnings Call

Max: Thank you for standing by. My name is Max, and I will be your conference operator for today. At this time, I would like to welcome everyone to NGL Energy Partners' first quarter 2025 earnings call. All lines have been placed on mute to prevent any background noise.

Max: After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Thank you. I would now like to turn the call over to Brad Cooper, CFO. Please go ahead.

Brad Cooper: Good afternoon, and thank you to everyone for joining us on the call today. Our comments today will include plans, forecasts, and estimates that are forward-looking statements under U.S. securities law. These comments are subject to assumptions, risks, and uncertainties that could cause actual results to differ from those forward-looking statements. Please take note of the cautionary language and risk factors provided in our presentation materials and our other public disclosure materials.

Brad Cooper: Let's get into the quarterly results. Our results for the quarter were strong across all three business units. Water Solutions, Crude Oil Logistics, and Liquids Logistics all met or beat our internal expectations. Consolidated adjusted EBIT for the quarter came in at $144.3 million. I'm happy to report that our performance from the first quarter has carried over to the start of our second quarter.

Brad Cooper: The butane blending season will begin soon, while wholesale propane is dependent on winter weather and heating demand, as you are very well aware. The water solution segment continues to perform quite well, with physical disposal volumes averaging approximately 2.7 million barrels per day in the month of July. When you include deficiency volumes in July, we will be paid for approximately 3 million barrels per day. As mentioned on our year-end call in early June, we also achieved other non-operational milestones during the quarter. First, we announced the sale of two ranches in Eddy and Lee counties for a total of approximately $70 million.

Brad Cooper: Second, on April 25th, we made our last carriage payment on preferred classes B, C, and D. This made us current on all preferred classes. On June 21st, the Board of Directors of our general partner declared a quarterly distribution for preferred Class B, C, and D, which was paid on July 15th. Third, on June 5th, the Board of Directors authorized a Common Unit Repurchase Program that allows us to repurchase up to $50 million of our outstanding units. This program does not have a fixed expiration date.

Brad Cooper: Currently, we have not purchased any common units under this program, as we have been managing the LEX II spend as well as our seasonal liquids inventory bill. Fourth, after the quarter ending June 30th and under the terms of the Term Loan B Agreement, we repriced and amended the SOFR margin from 450 basis points to 375 basis points, which reduces our interest expense by $5.25 million per year. We closed the repricing earlier this week on August 5th.

Brad Cooper: Water solutions adjusted EBITDA was $125.6 million in the first quarter versus $123.2 million in the prior first quarter. Physical water disposal volumes were 2.47 million barrels per day in the first quarter versus 2.46 million barrels per day in the prior first quarter. Total volumes we were paid to dispose of, which includes deficiency volumes, were 2.59 million barrels per day in the first quarter versus 2.49 million barrels per day in the prior first quarter.

Brad Cooper: So total volumes we were paid to dispose of were at 4%, first quarter of fiscal 25 over first quarter of fiscal 24. The team continues to find ways to keep operating expenses low in the face of rising costs.

Brad Cooper: Operating expenses and water solutions can be one or 24 cents compared to 25 cents for the same quarter one year ago. The LEX-2 water pipeline project, with an initial capacity of 200,000 barrels per day that is expandable to 500,000 barrels per day, is on schedule with an in-service date in October. Crudo Logistics' Adjusted EBITDA was $18.6 million in the first quarter of fiscal 25, versus $23.8 million in the prior year's first quarter.

Brad Cooper: Crude oil margins were lower, 1 Q over 1 Q, primarily due to lower volumes from production on acreage dedicated in the DJ basin. However, this was partially offset by higher tariff revenue on the Grand Mesa pipeline from signing up a new shipper during the open season that ended on January 5th, 2024, as well as higher quality differentials realized in the current quarter. Fiscal volumes on the Grand Mesa pipeline averaged approximately 63,000 barrels per day, compared to approximately 72,000 barrels per day for the same quarter in Fiscal 24.

Brad Cooper: Liquids Logistics' adjusted EBITDA was $11.5 million in the first quarter versus $4.7 million in the prior first quarter. Butane lending margins and volumes are stronger than our expectations for the quarter. This will set the butane business up for a nice fiscal 25. Product margins excluding derivatives for refined products were lower as the supply issues seen in certain markets in the prior year, resulting in higher margins, were resolved, and supply and demand were more in balance.

Brad Cooper: The first quarter is typically the low point of the EBITDA stream for the liquid segment, so it's nice to see a strong first quarter from this business. I would just like to summarize what you should think about our first quarter results before I turn it over to Mike. All three segments exceeded our expectations for the meeting. Lexitude Construction is on track and is expected to go into service as planned. We are managing our balance sheet during our butane and propane build season and during the build-out of the LEX II pipeline, which opportunistically reduced interest expense on the term loan B.

Brad Cooper: We are reaffirming our full-year guide of $665 million of EBITDA for the partnership and $550 to $560 million for water solutions. With that, I would now like to turn the call over to our CEO, Mike Krimble. Thanks, Brad. Good afternoon.

Mike Krimble: Thanks, Brad. Good afternoon, everyone.

Mike Krimble: We are pleased with this quarter and off to a good start this new fiscal year. That said, we do not manage NGL on a quarterly short-term basis. As you would expect, we are looking out over multi-year periods of time. For instance, in the water solutions business, we see positive trends for the short, medium, and long term. We have this year's EBITDA guidance above last year's actual, but quarterly it is impacted by customer recycling, drilling programs, and completion schedules.

Mike Krimble: In the medium and long term, we are seeing the Delaware Basin expanding north in Lee County, which will bring additional produced water volumes in the future. We are working on continued expense reductions and new revenue streams, but we do not announce them until proven to generate EBITDA. With respect to crude oil logistics in the DJ basin, we see positive signs for the short and medium term. It appears that volumes produced and flowing into the basin could be increasing.

Mike Krimble: The long term is still influenced by politics, environmental, and regulatory factors. For example, we have not been willing to contract our Grand Mesa capacity at rates below a dollar to a dollar and a quarter per barrel before expenses. We do believe that we are close to or at the bottom of the cycle for this sector. Regarding liquid logistics, this is our most volatile segment, especially with a portion being dependent on normal to cold winter weather, which hasn't shown up for several years.

Mike Krimble: This is not a business we anticipate expanding, nor do we expect significant growth, but we do have some internal growth opportunities. We continue to focus on the balance sheet, debt reduction, and internal growth at attractive multiples. Remember that reduced leverage is a function of both lower debt balances and increased EBITDA. So operator, with that, please open up the line for Q&A.

Max: We will now begin the question and answer session. If you have dialed in and would like to ask a question, please press star 1 on your telephone to raise your hand and join the queue. If you would like to withdraw your question, simply press star 1 again. If you are called upon to ask your question and are listening via the loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. Your first question comes from Sunil Sibal with Seaport Research Partners. Please go ahead.

Sunil Sibal: Yes, hi, good afternoon everybody. So, I just wanted to start off on the water side of the business, you know, your volumes versus fee per barrel handled have been, especially the fee has been moving around a bit. Could you talk a little bit about, you know, some of the moving parts there? And more importantly, I think you talked about next quarter. Your fee-based volumes seem like they will be pretty strong, but how should we think about the per barrel fee number going forward?

Brad Cooper: I had a little hard time hearing the question. I think it was around revenue per barrel for the quarter, which I think we're off about a penny, I think, from the previous year's quarter. You know, I think we've been very clear in how we contract as we contract on the water side of the world. We're obviously looking for MVCs and acreage dedication. Those MVCs, we're willing to give a little bit, I guess, on the rate to get a longer-term contract with an MDC.

Brad Cooper: We did have, you know, recall the Poker Lake step-up on January 1 of 24, another 100,000 barrels. That rate's probably a little bit lighter relative to other contracts in the portfolio. So, it's a little bit hard to truly reconcile to the penny. But, you know, yeah, volumes are starting off really strong for the second quarter. Q1 probably a little bit impacted by recycling, but the start of Q2 July looks really strong

Brad Cooper: Okay, thanks for that. And then, since you mentioned that, you know, your MVCs are probably at a higher percentage of the total volumes, how should we think about the average remaining length on the contract that you have with MVCs?

Brad Cooper: Yeah, I think it's in the presentation materials. I believe it's roughly nine years, I think, on contract life.

David Sullivan: Yes, yes, this is David Sullivan. Yes, we have the MVCs. The percentage of MVC volumes we'll have in the water disposal will go up. We were about, will be about 40 to 45% once the LEGS II project comes on. That's where we'll be as far as the percentage of our volumes that are MVC-related, it'll, it'll be something.

Sunil Sibal: Okay, thanks for that. I'll turn it over.

Patrick Fitzgerald: All right, your next question comes from the line of Patrick Fitzgerald with Baird.

Patrick Fitzgerald: Hi, thank you for taking the question. And congrats on getting...

Brad Cooper: I caught up with the preferred, but those are pretty expensive instruments at this point. Could you talk about your plan to deal with those going forward and, you know, in particular Class D? You know, what it would cost to take those out, and would you consider doing something with that to take those out, potentially? Thanks.

Brad Cooper: You bet. Yeah, the way that, you know, our free cash flow builds through the year, it's really back-end loaded. So, the bulk of our free cash flow comes in in Q3, Q4. Obviously, with the LEX II project this year, you know, heavy capital burden for the first couple quarters. But as we see the free cash flow unwinding or coming to us, I guess, in Q3 and Q4 and the working capital unwinding at the back end of the fiscal year, our plan would be to utilize those dollars to start making redemption payments on the Class Ds.

Brad Cooper: You know, I think our free cash flow over the next couple years can comfortably address the Class Ds. And, you know, if there was a market opportunity, I guess, to take out some debt to look at additionally knocking down the Ds, we would consider it. But I think for us right now, just being very, very pragmatic with how we spend our free cash flow and attack the Ds through free cash flow and asset sales.

Patrick Fitzgerald: Okay, but you have nothing on the horizon in terms of like big asset sales, too. So you're going to be paying for those and all your preferreds for a while, I guess until, you know, free cash flow is generated enough to take them out.

Brad Cooper: That's our current base plan.

Patrick Fitzgerald: Oh, God, um... You, um, could you just talk about, uh... The step up to 2.7 million barrels a day in July from, you know, the average in the fiscal first quarter. And then, you know, you're getting paid for three million barrels a day. What what what did you get paid on in the first quarter, I guess? would be the question. And then why did it step up so significantly?

Brad Cooper: Thanks.

Brad Cooper: Yeah, really, the first quarter, I think, as I mentioned earlier, will be impacted by recycling. So as producers are using water on location to frack wells, at some point, that flush water production is going to come our way. That's what we're seeing at the start of the second quarter. And so, you know, I think Mike hit on his comments: we will see some lumpiness in volumes day-to-day, month-to-month, as a result of producers and their completion cadence.

Brad Cooper: Perguns had this for the quarter.

Brad Cooper: For the quarter, first quarter, yeah, for the quarter, we got paid on about almost 2.6 million barrels. 2.59.

Patrick Fitzgerald: All right, thank you. And then

Brad Cooper: I guess you talked about this last quarter; you talked about this this quarter. But like, why do you think we're at the bottom here for crude logistics in the DJ? Uh, I just think that producers are

Brad Cooper: Uh, I just think that producers are starting to... It's more efficient to add rigs. We are anticipating an increase in volume.

Jason Mandel: Our last question comes from the line of Jason Mandel with RBC Capital Markets. Please go ahead.

Jason Mandel: Hi, good afternoon. Thanks for taking the question. I just wanted to follow up on a comment, I think, from the last conference call about exploring strategic alternatives on a portion of the liquids business. Any updates on that? It sounds like you may be thinking about some asset sales but not the whole business, so just any clarity would be helpful.

Brad Cooper: Thank you.

Jason Mandel: Yeah, no updates at this time. Yeah, I think we'll just continue to look at opportunities that come our way, but no updates on that business at this point in time.

Brad Cooper: Okay, thank you for your help. You bet. Thank you.

Brad Cooper: Questions? I will now turn the conference back over to Brad Cooper for closing remarks.

Brad Cooper: Thank you everyone for your interest in NGL. We look forward to catching up with everyone in a couple months on the fiscal 25 second quarter call. Thanks, and have a nice weekend.

Operator: This concludes today's conference call. You may now disconnect.

Thank you for standing by.

Operator: My name is Max, and I will be your conference operator for today. At this time, I would like to welcome everyone to NGL Energy Partners First Quarter 2025 Earning School. All lines have been placed on mute to prevent any background noise after the speakers remarks. There will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Thank you.

Brad Cooper: I would now like to turn the call over to Brad Cooper, CFO, please go ahead. Good afternoon, and thank you to everyone for joining us on the call today.

Brad Cooper: Our comments today will include plans, forecasts, and estimates that are forward-looking statements and with the US 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 presentation materials and our other public disclosure materials.

Brad Cooper: Let's get into the quarterly results. Our results for the quarter were strong across all three business units. Water solutions, crude oil logistics, and liquids logistics all met or beat our internal expectations. Consolidated adjustity but off of the quarter came in at $144.3 million in the first quarter. I'm happy to report the performance from the first quarter as carried over to the start of our second quarter. The butane blending season will begin soon while wholesale propane is dependent on winter weather and heating demand as you are very well aware.

Brad Cooper: The water solution segment continues to perform quite well with physical dispose of volumes averaging approximately 2.7 million barrels per day in the month of July. When you include deficiency volumes in July, we will be paid on approximately 3 million barrels per day.

Brad Cooper: As mentioned on our year in Colin early June, we also achieved other non-operational milestones during the quarter. First, we announced a sale of two ranches in Eddie and Lee counties for a total of approximately $70 million. Second, on April 25th, we made our last year's payment on the preferred class B, C, and D's. This made us current on all preferred classes. On June 21st, the Board of Directors of our General Partner declared a quarterly distribution for the preferred class B, C, and D's that was paid on July 15th.

Brad Cooper: Third, on June 5th, the Board of Directors authorized a common unit repurchase program which allows us to repurchase up to $50 million of our outstanding units. This program does not have a fixed expiration date. Currently, we have not purchased any common units under this program as we have been managing the Lex II spend as well as our seasonal liquids inventory bills. Fourth, after the quarter ending June 30th, and under the terms of the TermLoneB agreement, we repriced and amended the sale for margin from 450 basis points to 375 basis points, which reduces our interest expense by $5.25 million per year.

Brad Cooper: We closed the repricing earlier this week on August 5th. Water solution suggested EBITDA was $125.6 million in the first quarter, versus $123.2 million in the prior first quarter. Physical water disposal volumes were 2.47 million barrels per day in the first quarter, versus 2.46 million barrels per day in the prior first quarter.

Brad Cooper: Director. Total volumes we were paid to dispose that includes deficiency volumes, or 2.59 million barrels per day in the first quarter, versus 2.49 million barrels per day in the prior first quarter. So total volumes we were paid to dispose of were at 4%, first quarter of fiscal 25 over first quarter of fiscal 24. The team continues to find ways to keep operating expenses low in the face of rising costs. Operating expenses in water solution to be 1, or 24 cents, compared to 25 cents for the same quarter one year ago.

Brad Cooper: The Lex II water pipeline project with initial capacity of 200,000 barrels per day, which is expandable to 500,000 barrels per day, is on schedule with an in service date in October. Crude oligistics adjust EBITDA was 18.6 million in the first quarter of fiscal 25, versus 23.8 million in the prior years first quarter. Crude ol margins were lower, 1Q over 1Q, primarily due to lower volumes from production on acreage dedicated in the DJ Basin.

Brad Cooper: This was partially offset by higher tariff revenue on the Grand Mesa Pipeline from signing up a new shipper during the open season that ended on January 5, 2024, as well as higher quality differentials realized in the current quarter. Fiscal volumes on the Grand Mesa Pipeline average to approximately 63,000 barrels per day compared to approximately 72,000 barrels per day for the same quarter in fiscal 24. Liquid oligistics adjusted EBITDA was 11.5 million in the first quarter, versus 4.7 million in the prior first quarter.

Brad Cooper: Butane lending margins and volumes are stronger than our expectations for the quarter. This is set the butane business up for a nice fiscal 25. Products margins excluding derivatives for refined products were lower as the supply issues seen in certain markets in the prior year, resulting in higher margins were resolved, and supply and demand was more in balance.

Brad Cooper: The first quarter is typically the low point of the EBITDA stream for the liquid segment, so it's nice to see a strong first quarter from this business unit.

Brad Cooper: I would just like to summarize how you should think about our first quarter results before I turn over to Mike. All three segments exceeded our expectations for this. Lex2 construction is on track and is expected to go into service as planned. We are managing our balance sheet during our butane and propane build season and during the build out of the Lex2 pipeline that opportunistically reduced interest expense on the term loan B.

Brad Cooper: We are reaffirming our full year guide of $665 million of EBITDA for the partnership and $550 to $560 million for water solutions.

Mike Cremble: With that, I would now like to turn the call from our CEO Mike Cremble. Mike. Thanks, Brad. Good afternoon, everyone. We are pleased to this quarter and off to a good start this new fiscal year. That said, we did not manage NGL on a quarterly short term basis. As you would expect, we are looking out over multi-year periods of time. For instance, in the water solutions business, we see positive trends for the short medium and long term.

Mike Cremble: We have this year's EBITDA guidance above last year actual, but quarterly it is impacted by customer recycling, drilling programs, and completion schedules. Medium and long term, we are seeing the Delaware Basin expanding north in Lee County, which will bring additional to these water volumes in the future.

Mike Cremble: Foundation. We are working on continued expense reductions in new revenue streams, but do not announce them until proven to generate EBITDA. With respect to crude oil logistics and the DJ basin, we see positive signs for the shortened medium terms. It appears that volumes produced and are flowing into the basin could be increasing. The long term is still influenced by politics, environmental, and regulatory factors. We have not been willing to contract our grandmesa capacity at rates, boil with dollar and dollar in the quarter per barrel before expenses.

Mike Cremble: We do believe that we are close to or at the bottom of the cycle for the second. Regarding liquids logistics, this is our most volatile segment, especially with the portion being dependent on normal to cold winter weather, which hasn't shown up for several years. This is not a business we anticipate expanding nor do we expect significant growth, but we do have some internal growth opportunities. We continue to focus on the balance sheet, debt reduction, and internal growth at attractive multiples. Remember that reduced leverage is a function of both lower debt balances and increased EBITDA.

Operator: So operator with that, please open up the line for Q&A. We will now begin the question and answer session. If you have dialed in and would like to ask a question, please press star one on your telephone to raise your hand and join with you. If you would like to withdraw your question, simply press star one again. If you are called upon to ask your question and are listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question.

Sunil Sibal: Your first question comes from Sunil Sibal with Seaport Research Partners. Please go ahead. Yes, hi. Good afternoon, everybody. So I just wanted to start off on the water side of the business. It seems like your volumes versus fee per barrel handle has been, especially the fee has been moving around a bit. Could you talk a little bit about some of the moving parts there, and more importantly, I think you talked about next quarter, your fee based volumes seems like will be pretty strong, but how should we think about part of that fee number going forward?

Sunil Sibal: I had a little hard time hearing the question. I think it was around revenue per barrel for the quarter, which I think we're all about a penny, I think, from the previous years quarter. I think as we've been very clear how we contract, as we contract on the water side of the world, we're obviously looking for MVCs and acreage dedication. Those MVCs were willing to give a little bit, I guess, on rate to get a longer term contract with an MVC.

Sunil Sibal: We did have recall the poker leg step up January 1 of 24 and other 100,000 barrels. That rate's probably a little bit lighter relative to other contracts in the portfolio. It's a little bit hard to truly reconcile to the penny, but you know, you have volumes that are starting off really strong for the second quarter. Q1 probably a little bit impacted by recycling, but the starting Q2, July looks really strong.

David Sullivan: Okay, thanks for that. And then since you mentioned that, you know, your MVCs are probably a higher percentage of the total volumes, how should we think about the average remaining length on the contract that you have with the MVCs? Yeah, I think it's in the presentation materials, I believe it's what roughly nine years, I think, on the contract life. Yes, yes, this is David Sullivan. Yes, we have the MVCs, the percentage of MVC volumes, we'll have in the water disposal, we'll go up.

David Sullivan: We were about, we'll be about 45, 40 to 45 percent when select to project comes on, that's what will be as far as percentage of our volumes that are MVC related. It'll be something. Okay, thanks for that. I don't know.

Patrick Fitzgerald: All right, your next question comes from the line of Patrick Fitzgerald with bag. Hi, thank you for taking the questions. And congrats on getting caught up with the preferred, but those are pretty expensive instruments at this point. Could you talk about your plan to deal with those going forward and, you know, in particular, the class D. What would it cost to take those out and would you consider doing something with that to take those out potentially?

Patrick Fitzgerald: Thanks. Yeah, the way that our free cash flow builds through the year, it's really back in loaded, so both of our free cash flow comes in in Q3, Q4. Obviously, with the likes to project this year, you know, having capital burden, the first couple quarters, but as we see the free cash flow unwinding or coming to us, I guess, and Q3 and Q4 in the working capital unwinding the back into the fiscal year, our plan would be to utilize those, those dollars to start making redemption payments on, on the class D's.

Patrick Fitzgerald: You know, I think our free cash flow over the next couple of years can comfortably address the class D's. You know, if there was a market opportunity, I guess to take out some debt to look at, additionally knocking down the D's, we would consider it, but I think for us right now, just being very, very pragmatic with how we spend our free cash flow and the type of D's through through free cash flow and assets sales.

Patrick Fitzgerald: Okay, but you have nothing on the horizon in terms of like big assets sales to so you're going to be paying those for, you know, and all your preferred for a while, I guess, is the until, you know, free cash flow is generated enough to take them out. That's correct, yeah. Okay, that's our current base plan. Okay, you could you just talk about the step up to 2.7 million barrels a day in July, from the average in the fiscal first quarter.

Patrick Fitzgerald: And then, you know, you're getting paid on three million barrels a day. What did you get paid on in the first quarter, I guess, would be the question. And then why did it step up so significantly? Thanks. Yeah, really first quarter, I think as I mentioned earlier, impacted by recycling. So as producers are using the water on location to to Brad Wells, at some point that flush water production is going to come our way.

Patrick Fitzgerald: That's what we're seeing at the start of the second quarter. That's what, you know, I think my kid on his comments, we will see some lumpiness in volumes day to day, month to month, as a result of producers in their completion cadence. Start losing for the quarter first quarter, you know, for the quarter we got paid on two, about almost 2.6 million barrels, 2.59. All right, thank you. And then, I guess you talked about this last quarter, you talked about this this quarter, but like, why do you think we're at the bottom here for crude logistics in the DJ? I just think that producers are starting to work. It's more efficient than ad rigs. We are anticipating an increase in the volume. All right, thanks a lot, guys. You're welcome.

Jason Mandel: Our last question comes from the line of Jason Mandel with RBH Capital Markets.

Mike Cremble: Please go ahead. Hi, good afternoon. Thanks for taking the question. Just wanted to follow up from a comment, I think, from the last conference call about exploring strategic alternatives and a portion of the liquids business. Any updates to that sounds like you may be thinking about some asset sales, but not the whole business. So just any clarity, be helpful. Thank you. Yeah, no updates at this time. Yeah, I think we'll just continue to look at opportunities to come our way, but no updates on that on that business at this point in time. Okay, thank you for your help. You bet. Thank you.

Brad Cooper: Questions, I will now turn the conference back over to Brad Cooper for closing remarks. Thanks everyone for your interest in NGL. We look forward to catching up with everyone in a couple of months on the fiscal 25 second quarter call.

Brad Cooper: Thanks