Q1 2020 Earnings Call
Ladies and gentlemen, please standby your first quarter fiscal year 2020, NGL Energy Partners LP earnings Conference call will begin in two minutes.
Again, please standby your conference call will begin in two minutes. Thank you.
Good morning, ladies and gentlemen, and welcome to the first quarter fiscal year 2020, NGL Energy Partners LP earnings Conference call.
At this time all participants are in a lease them only mode. Later, we will conduct a question and answer session and instructions will follow at that time, if anyone should require assistance. During the conference. Please press Star then zero on your Touchtone telephone as a reminder, this conference call is being recorded I would now like to turn the conference over to your host Craig Karlawish CFO you may begin.
Thank you and welcome everybody.
Minder. This conference call will be forward looking statements and information words shut such as anticipate project expect clan goal forecast intend could believe may and similar expressions of statements are intended to identify forward looking statements.
While NGL energy partners believes that its expectations are based on reasonable assumptions there can be no assurance that such expectations will prove to be correct.
A number of factors could cause actual results to differ materially from the projections anticipated results or other expectations included in the forward looking statements.
These factors include prices and market demand for natural gas natural gas liquids refined products and crude oil.
The level of production of crude oil and natural gas liquids and natural gas.
The effect of weather conditions on demand for oil natural gas and natural gas liquids and the ability to successfully identify and consummate growth opportunities and strategic acquisitions at costs that are accretive to financial results and to successfully integrate and operate assets and businesses that are built or acquired.
Other factors that could impact. These forward looking statements are described in risk factors in the partnerships annual report on Form 10-K quarterly reports on Form 10-Q , and other public filings and press releases.
NGL energy partners undertakes no obligation to publicly update or revise any forward looking statements as a result of new information future events or otherwise.
This conference call also includes certain non-GAAP measures, namely EBITDA, adjusted EBITDA and distributable cash flow, which management believes are useful in evaluating our financial results.
Please see the partnership's earnings releases Investor presentations, and annual and quarterly reports on Form 10-K , and Form 10-Q on our website at Www Dot NGL energy partners Dot com under the Investor Relations tab for more information on our use of non-GAAP measures as well as reconciliations of differences between any non-GAAP measures discussed on this conference call.
To the most directly comparable GAAP financial measures.
I will now turn the call over to our CEO Mr. Mike Krimbill.
Thanks Trey.
Thanks for joining us.
I would like to set the stage and we start off in a constructive positive manner.
We have as you know.
Signed an agreement to sell refined.
We thought that would trade in the stock price going down at least a dollar or two.
We're only down 38 cents. So we have a lot to celebrate.
So.
As you know we are continuing our trend of significant events today.
As we announced the signing of an agreement to sell Transmontaigne refined products unit.
The proceeds based on June 30 values will approximate 300 million.
And be used to reduce debt there will also be a reduction in our letters of credit.
Both the cash and LC reductions will increase availability on our bank line of credit for growth opportunities that may arise.
This transaction in our opinion should increase the value of NGL common units and reward our unit holders or status yet to be seen.
Onto the mosquito transaction, the mesquite assets are being connected to the NGL.
Infrastructure, namely our 24 inch pipelines, the Lea County Express.
To the East is now in service taking water.
And the Western Express is in construction with an expected in service date in late September .
There are numerous opportunities that we're working on to fill these pipelines as well as the mosquito.
System.
The liquids assets, which we had purchased earlier this year are performing very well, particularly at the Chesapeake butane export facility, we are expanding the railcar capacity there to bring in more butane.
Going forward, we expect more stability and predictability to cash flows we continue to focus on long term contracts in all three businesses.
So repeatability of our cash flows increases.
Finally, we are positioned for organic growth in our business at attractive multiples.
That to turn it back to trade for specifics.
All right. Thanks, Mike.
So first off here's how I think about the typical sale.
This business has been significantly volatile over the past five years. However, the EBITDA over the 12 past 12 months is essentially zero.
The volatility is now been removed.
The pro proceeds we received will be used to pay off all of the working capital associated with this business plus about 10%. So assume our total debt is reduced from $2.6 billion.
2.3 billion with no reduction in LTM EBITDA.
This reduces leverage by about half a turn.
Additionally, the value assigned to this business based on guidance was generally $100 million, assuming a four to five times EBITDA multiple by the market, but the debt level was $300 million to $350 million, depending on working capital values, resulting in a negative sum of the parts valuation of $200 million to $250 million.
We didnt sell the business for just $100 million, we eliminated all the debt associated with it which should increase our overall valuation by almost $2 per unit using a sum of the parts.
We also reduced our interest cost savings from the sale by $15 million per year, which is not factored in to the EBITDA valuation.
Looking at some some multiples if you look at last year's multiples. This is over a 35 times multiple on fiscal 19 results.
It was an infinite multiple based on the last 12 months.
And based on our current year guidance as originally published it would be about a 16 to 17 times multiple.
This was a great transaction for NGL in this market.
Mike hit on some of the other benefits.
This transaction and also talked about Misty.
One of the questions that weve been getting quite frequently is around our financing of mosquito so I'll dive into that first.
Our stated objective with the mesquite transaction was to fund it in a leverage neutral manner.
The total purchase price was $892 million and our forecasted EBITDA for the acquisition was between $110 million to $120 million per year one.
Which allowed us to use approximately 400 million in debt to remain at our 3.25 times compliance leverage target.
We funded the initial purchase with $400 million of newly issued class D preferred units.
$100 million of existing class B preferred units and $250 million of debt through a senior secured loan.
The remaining purchase price is expected to be funded through borrowings under our revolving credit facility once certain volume thresholds are met.
We received several questions about the use of preferred equity and our belief is that this preferred issuance was at a lower cost than our common equity over the long run, especially considering the size and provided much more surety of execution.
Following the closing of the refined products transaction, we will continue to have a portion of our credit facility allocated to working capital.
However, with the elimination of this inventory and the expected reduction in letters of credit the balance would be reduced by an estimated $300 million to $350 million going forward, which as I stated, we'll we'll reduce all in leverage by over half a turn and interest cost by approximately $15 million per year.
We will continue to target a 3.25 compliance leverage as well as an all in leverage under five times.
We will also continue to look at ways to reduce working capital borrowings and appropriately manage our balance sheet and cost of capital.
We are slightly above those thresholds at 630, however, pro forma for the type of refined product sale are all in leverage would be approximately 4.6 times.
I will now go through the results for each of the segments.
And overall for fiscal <unk> for the first quarter of fiscal 19.
Fiscal 2000 I'm sorry.
Adjusted EBITDA totaled 87 million for the quarter, which included an $11 million loss and refine products, which included the typical business that is being sold.
Removing the typical business would have resulted in pro forma adjusted EBITDA of $97 million for the quarter.
Which would be right in line with our expectations for our core businesses and with street consensus.
Our full year fiscal 2020, adjusted EBITDA guidance target remains $600 million. Despite the seller refine products as we remain in the forecast ranges for our core segments.
I will now go through each segment the crude segment generated approximately $52 million of adjusted EBITDA This quarter consistent with the prior several quarters and right in line with our guidance.
Grand Mesa volumes averaged 133000 barrels per day. This quarter, we continue to see strong demand out of the DJ basin on Grand Mesa and other areas of our crude business our operating on forecast.
We've seen some commodity price fluctuation in crude oil over the past quarter.
But this has had minimal impact on our crude logistics segment.
We are not expecting any changes to our business at this time and maintain our adjusted EBITDA guidance range for fiscal 2020 of $190 million to $210 million.
Moving to water water adjusted EBITDA was $41 million for the quarter with approximately 849000 barrels per day of disposal volumes and 2900 barrels per day of skim oil.
This is the first full quarter subsequent to the sale of our south take those assets in the Permian and we did not close the musky transaction until July 2nd after the end of the quarter.
We are expecting musky to contribute significantly to both disposal and skim volumes for the remainder of this fiscal year.
Disposal and skim oil revenues were better than budget for the quarter fresh water sales were slightly lower than expected as we worked on completing the joint marketing arrangement with intrepid potash that it was as announced last week.
We expect freshwater sales to catch up to budget through the remainder of the year as we have a limited volume that we can sell.
Skim oil production was approximately 2900 barrels per day during the quarter with an average crude cut of about 34 basis points, which is inline with our expected recovery during the spring and summer.
We have recently increased our forecasted skim oil production with the addition of the mesquite of mesquite and added to our hedge position.
We are hedging approximately 3500 barrels per day for the remainder of fiscal 2020 at a weighted average price of just over $60 per barrel.
We are expecting significant growth in our water business for me through for the remainder of this year within our legacy legacy assets as well as in the seats.
Our adjusted EBITDA expectation for water solutions for fiscal 2020 remains a range of $290 million to $320 million.
Adjusted EBITDA for our liquids segment totaled 12 million this quarter as we benefited from our recently acquired terminals, including our Chesapeake export facility.
Volumes and margins were stronger than prior year, especially for butane, where we had strong performance due to favorable market conditions.
This is typically a slow period for propane as we prepare for upcoming supply season.
We are capitalizing on opportunities to use our storage positions quality asset base and favorable market conditions to better supply our customers and generate strong profits on forward sales.
We have also grown our customer base through both acquisition and organic Ganic business development efforts.
Our fiscal 2020, adjusted EBITDA guidance range for liquids remains $75 million to $90 million.
Finally refined products adjusted EBITDA on refined and renewables was a loss of $11 million for the quarter with a typical division that has been sold generating a 10 million dollar loss.
We are expecting to close the sale by the end of September .
We would have oney to the Transmontaigne business for approximately five years. Once this transaction closes remember we purchased the business for about $200 million plus the working capital in 2014.
Since that time, we have sold the equity in that business for almost $500 million not to mentioned realizing over 300 million in EBITDA over the period and recovery in the working capital.
It may have been a roller coaster ride for earnings, but you cannot argue with the overall returns generated by this business.
We will continue to operate the business through closing. Additionally, we will continue to own our rack marketing gas blending and renewable businesses. These businesses are much smaller than typical and we look for and we will look at ways to optimize them going forward.
We will also retain our biofuel tax credits earned through the closing of the sale should they be passed by Congress.
Which could total over $25 million benefit to NGL.
Assuming the September 30 closing of the transaction, we are updating our f. why 2020 guidance range for the refined products segment to 15 million to $30 million.
Finally, we declared a 39 cents per unit of $1.56 annualized distribution for the quarter. We continue to target 1.3 times coverage or better on a trailing 12 month basis at which point, we will evaluate the best use of funds to benefit of our unitholders, including reinvesting in the business repurchasing equity or increasing our distribution rate.
That decision will be made based on numerous factors, but keeping our balance sheet healthy we will continue to be a priority.
That concludes our prepared remarks, we will now open the line for questions.
[laughter].
[noise] brands do we have any questions.
Ladies and gentlemen, if you have a question at this time. Please press star and then the number one key on your Touchtone telephone. If your question has been answered or do you wish to remove yourself from the queue. Please press the pound key.
Our first question comes from TJ Schultz RBC capital. Your line is now open.
[laughter].
Great. Thanks.
First on the Capex spend in the first quarter or 215 million can you break out what was acquisition related versus organic.
How much was spent on some of the pipe projects you have in any change to expectation for the or Gannett growth Capex range that you gave earlier this year.
Sure. So so about $250 million TJ, almost $200 million wasn't water about $82 million of that was on acquisitions. The rest was on growth capex, including the pipelines, we did make a pretty significant payment on a pipe order.
For both the Western Express and Lea County Express projects.
So we've we've purchased that I that will all be installed over the next quarter or so.
Okay and no change to your expectation for organic growth for the rest of the year.
No no no changes to grow to the growth Capex guidance.
Okay, and then just stick sticking with water.
And as we think about trajectory of volumes going forward.
Just any commentary on what you're seeing from producer activity.
Plans for the year now versus when you gave.
Guidance earlier, and then maybe you get mesquite tied in just expectations on where you think you can exit this year on lower volumes.
And you're going to want to exit but.
TJ, there's a we see I'll call it a wall of water coming starting at the end of September . So the second half of the year is going to be I think much much greater volumes I don't know if we have a.
End of year, where do we come out on our.
Our budget, we didn't guide to a waterfall and okay.
So I don't see a change the.
The timing, maybe a month or two behind where we thought it was going to be but.
And as the next quarter, we should see.
The exit at September Thirtyth.
We'll see I think much higher volumes.
TJ, what I'll add is disposal volumes were really right on.
Through the first quarter.
We had we did our budget in April and May were not seeing any significant change we knew it was a little bit slower ramp. The first part of this year, but we are expecting a very significant ramp through the back half of the year.
As as we guided.
We'll obviously see the big jump in the ski volumes in the second quarter, but we are expecting legacy volumes to growth in second quarter as well.
Okay got it.
But the biggest jump, but we will be will be through third quarter.
Got it okay understood on the Intrepid joint marketing deal across the three regions.
And can you just expand on on the benefit to you or is there any cost sharing arrangements on development.
Freshwater or disposals services.
Yes intrepid.
I believe they have more water rights in new Mexico than any other entity. They bought the Dinwiddie ranch, which is sandwiched in between Mccoy and Bakken.
And so they have water on their ranch from the same aquifer as us. So they clearly are I think should be the ones that market. Both our water. So there'll be marketing dinwiddie as well as back of water. Then we'll also work together on disposal water off the three ranches.
So we're very excited there just a great group of.
Of people and.
We.
We're not out there.
Trying to buy freshwater really thats.
The intrepid folks have their own freshwater.
So it made sense and team to team up there and then team up.
The produced water of all three branches.
Okay understood.
Just last on trade just to clarify the revised.
Guidance on refined products I think you said 15 to 30 does that include the negative.
Contribution of 11 in the first quarter as their pro forma just trying to understand what to expect but.
That does conclude that does include the negative 11 from the first quarter.
We are expecting to make up some of that in second quarter prior to the sale on.
Typical and then or the remaining businesses.
We'll make up the difference.
Got it thanks guys.
Next question is from Dennis Coleman from Bank of America. Your line is now open.
Yes. Thanks.
I guess, maybe just to pick up on that last.
Question to start with trade please.
Can you just.
Can you say again.
The businesses, what's left in refining and.
Of the picture 30 can you give us a little bit better sense of what the run rate is on those.
Sure. So what will be retained is our.
What we call our rack marketing business, which is our flash title business very little working capital, we market across the United States at terminals.
That business has has been.
The most profitable refined products business over the past couple of years as it does not carry inventory risk.
So we are we are we are maintaining that business.
We are maintaining our gas blending business.
We started that business about a year and a half ago that business has been profitable, but it does carry some inventory risk that business did have a loss during the first quarter.
However, we are expecting to make that up as we go into blending season.
In the fall so we'll maintain that business.
And then finally, our renewables business, which is a very small component, where we market to ethanol and biodiesel.
So.
When you look at Historicals, obviously, it's a little bit challenging because of some of the volatility but generally speaking the typical business has made up about 60% of our overall portfolio. There have been years that it's been much higher than that and there have been years that it's been lower because of the challenge performance, but approximately 60% of the of the working capital in the entire business is associated with with typical.
Additionally, we will we are looking to minimize inventory is.
And the businesses that we're retaining so that we can continue to reduce working capital lower.
The cost of operating that business.
At this point in time.
It becomes 5% of the overall portfolio so.
Much smaller component.
And again, we've got.
We've got some opportunities to that we think we can continue to either improve that business or reduce the costs associated with it.
Okay. That's helpful. And then if you can just remind me that the tax credits the $25 million that was not in the original guidance right.
That is that is not in that as we have not included that in guidance so that.
The way that we think about that is if the tax credit is realized we we ought to be above the higher end of the guidance range.
Okay, and and it goes with the assets that are being sold that the buyer gets that tax credit if it if it trips beyond the closing date.
No not not for what has been earned to date. So if it is past subsequent to the sale. We retained the rights of those credits as we incurred the cost to build those credits anything generated.
Subsequent to the sale would go to the to the buyer.
I got it okay. Okay. That's helpful and then.
I guess switching gears.
Mike you've you obviously have.
We continue to expand in the water business and I think the M&A market in that sector remains pretty active.
Can you maybe talk about what you're what you're seeing there or how you're thinking about M&A.
Additional opportunities, particularly now that you've sort of improve the balance sheet.
Yes, I think first of all we're not going to screw the balance sheet, but up now that we fixed it. So we're not going to go into buying spree, but I think there are.
One or two attractive assets remaining in the Permian from our perspective.
So we will participate.
In any processes that are initiated.
As you know when we.
Have the.
Folks come in and invest there is a 200 million dollar per preferred basket, there and thats there on purpose.
So that will have an equity ability to fund an additional acquisition with properly with equity and debt.
So.
We are.
Actively looking to really.
Enhance our position in the Delaware, if there's an opportunity.
But not at the expense of the balance sheet.
Okay. Okay.
And any updated thoughts on the share repo.
Well, it's much more attractive today than it was Friday.
So.
We.
That's something that.
We are.
Looking at seriously when you start.
Trading up here 11, 12% that's cuckoo after everything we've done over the last 18 to 24 months and continue doing.
So it's certainly something we're going to seriously consider.
Okay. That's it for me thank you.
Thanks.
Next question is from New York Gershuni from you'd be up your line is now open.
Hi, This is Michelle on for Sharon just a quick one for me on.
I might have missed it earlier, but is there a working capital release or how much less is needed going forward as a result of the sale.
So so they can show it.
It depends obviously on market prices working capital was lower as of June 30.
Values were lower and our inventory balances were a little bit lower.
But generally speaking, it's about $300 million to $350 million of.
Working capital plus Lcs that could make up another $25 million to $50 million.
Okay perfect that's it for me.
Thank you.
Again, ladies and gentlemen, if you have a question at this time. Please press the star and then the number one key on your Touchtone telephone. If your question has been answered or you wish to remove yourself from the queue. Please press the county, we have appears Hammond from Simmons Energy. Your line is now open.
Good morning, and thank you for taking my questions. My first question is what drove the strong results during the quarter in the crude oil logistics business.
It appears so that's the biggest drivers obviously grand Mesa.
Our forecast for Grand Mesa as we gave guidance was 129000 barrels a day, we ran slightly above that 133000 barrels a day. So we did get a benefit there.
Our.
Are the rest of our logistics assets performed right in line with plan.
So that includes our.
Our marine business.
Our rail and trucking business.
As well as our business out of.
Out of Cushing, our our terminals at Cushing.
And point comfort along the Gulf Coast.
Commodity crude price absolute crude price does not have a significant impact on our crude business.
It's really a differential for or basin differential is what pack would have the most significant impact and we did not see a lot of swing there.
So generally speaking.
The base business operated at budget.
The Grand Mesa asset performed slightly ahead of budget with drug which drove the beat our.
Mid point of our guidance is $200 million for the year, which has 50 million a quarter, which should be.
Consistent throughout the fiscal year.
Great. Thanks for the color tray and then my follow up is I know, it's really early days, but how's the integration of mosquito proceeding.
Yes, I mean, it's very very well.
The.
We only have one month of an indication what's going on there but.
We're connecting them to our infrastructure, we're actually expanding their pipe system to some new customers.
And we're seeing the the skim oil hitting our budgeted.
Quantities.
But that trend may have spoken to the hedging that weve hedged.
What percentage of our for this fiscal year I think for the next three or four months were about a 100% hedged. So first for the current quarter, we're about 90% hedged for the entire fiscal year were 75% to 80% hedged on skim oil volumes.
That includes the mesquite volumes.
And we hedge when we had the run up to $60.
Great well, thank you for the color.
I'm showing no further questions at this time I would now like to turn the conference back to Mike Campbell.
Well I have many more thoughts, but you probably don't want to hear them. So thank you and we'll end the call.
Ladies and gentlemen. This concludes today's conference. Thank you for your participation you may all disconnect.
Oh.