Good day, ladies and gentlemen, and welcome to the Q3 2019 NGL Energy Partners LP Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions to further participate will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your hosts for today's conference, Mr. Trey Karlovich, Chief Financial Officer. Sir, you may begin.

Thank you and welcome everybody. As a reminder, this conference call includes forward-looking statements and information. Words such as anticipate, project, expect, plan, goal, forecast, intend, could, believe, may and similar expressions and 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; level of production of crude oil, natural gas liquids and natural gas; the effect of market 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 the Risk Factors in the partnership's 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.nglenergypartners.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 measure discussed on this conference call to the most directly comparable GAAP financial measures. Now, I’ll now turn the call over to our CEO, Mr. Mike Krimbill for his opening remarks.

Thanks Trey. Good morning and thanks everyone for calling in. Another record quarter compared to the prior year. We expect the fourth quarter to continue this trend. Trey will review the results for each business unit, as well as the financial highlights in a minute. I would like to address our strategic initiatives beginning with the Water business. First, asset sales, we closed on the sale of our Bakken SWDs. We were a small player there with only three facilities and five wells. So it made sense to exit and focus on the Permian, which has a much higher water-to-crude oil ratio. We then signed an agreement to sell our Pecos area water assets, which we expect to close prior to our fiscal year end. NGL was first focused on central Reeves County, and north to the Texas, New Mexico state line. And then up into Eddy and Lea counties. Much like the Retail Propane sales, we are selling certain non-core assets at attractive multiples and reinvesting the proceeds in higher rate of return opportunities while delevering. Second, why the Delaware? Five main reasons why we're focused there. The basin has the lowest commodity price risk as it has the highest rates [ph] of return for producers, thus the last basin to see rigs laid down. Second, it has one of the highest water-to-crude oil ratios. We expect over the next 5 years the produced water volumes to exceed 10 million barrels a day. Third, it has the lowest ratio of flow back to produce water. To my [ph] lateral requires a similar volume of freshwater to frac in all basins. That freshwater returns to the surface as flow back quarter. But in a 3 to 1 water-to-crude ratio basin is a much lower percentage of the disposed water. Thus,…

Great. Thanks, Mike. I'll be covering our financial results of the quarter and our accomplishments so far this year. However, I believe the most significant development is our improvement in leverage. When I joined NGL 3 years ago, we set a compliance leverage target of 3.25 times for the company. We knew it takes some time to achieve and we encountered some unexpected obstacles along the way. But we have achieved that goal, actually beat it by more than a quarter turn with compliance leverage for this quarter at 2.96 times. We accomplished this while also growing our business and focusing our strategy. Our leverage has been reduced by over 2 turns in the past year alone. But we have also increased our adjusted EBITDA by 22% compared to prior year-to-date results. We are proud of this accomplishment, which has the partnership on very solid grounds from an operational, balance sheet and liquidity standpoint. And we intend to stay at this leverage level while continuing to grow our businesses. We have sold assets over the past year at significantly better multiples and we received credit for in the market. We have strategically redeployed these proceeds into new growth opportunities and debt reduction. We redeemed our 2021 notes in October, and expect to redeem our 2019 notes in March with the proceeds from the South Pecos sale. Our balance sheet is expected to continue to improve for our fiscal year end at March 31, with compliance leverage expected to remain under 3 times. All these efforts have put us in the financial position to be able to repurchase units should the market continue to discount our unit price. As Mike mentioned, we will continue, however, to put our balance sheet and credit first in any buyback decision. I do appreciate the…

Thank you. [Operator Instructions] Our first question comes from Shneur Gershuni with UBS. Your line is now open.

Morning, guys.

Good morning.

Just a first question for you guys. Just to confirm the comments you made around guidance today. The Water segment, you're expecting to be at the higher end of your original guidance that you originally put out. I was just wondering if you could clarify that.

No. Water segment is lower end. So we're expecting to be at the higher end of Crude and Liquids, lower end on to Refined and Water.

Okay, perfect. Just a second question more at a 10,000-foot level. I was wondering if you can sort of share your thoughts on the Refined Products segment, you know, longer term, any thoughts on a strategic review? It seems that - if it were to be sold, you actually benefited from the proceeds and high grading your portfolio. And at the same time, you'd be putting out [ph] capital. Or alternatively, do you look to buying capacity from competitors who are struggling and to help tighten the market? Just kind of wondering where your thoughts are on this business longer term?

Sure. Shneur, the way we're looking at it, this business, we bought in '14. And we had 2 years, I believe the EBITDA was around $130 million. And now we've had 2 years in that $50 million to $60 million. So what we're doing right now is evaluating really, I'll call it, the sector to see have there been fundamental changes that’s line [ph] spacing are going to be negative forever, which doesn't help margins at the rack. Or is this kind of a part of the cycle. So we're in the middle of that analysis. So I don't have an answer for you. But I think we all can see that the working capital borrowings are very significant compared to the EBITDA we're currently getting. So there'll be more to come I think in our future quarters on that subject.

Okay, fair enough. And may be one final question. You got approval from your revolver commitments to be able to repurchase units which you talked about in your prepared remarks. Any thoughts about how regular it's going to be? Are we talking about something like $50 million a quarter? Or is it going to be just kind of time-to-time? Just trying to gauge the commitment to deploying the capital that you've gotten available to repurchase units?

Sure, Shneur. So we do have a limit of up to $50 million per quarter, and the approval is for $150 million repurchase program. Acquiring $50 million per unit based on our flow and average daily volume would be a challenge to get to that much without a block trade or something of that nature. I think at this point, we are - we do not have board approval for - to execute today. But it's something that we are watching very closely. As Mike mentioned, our focus was going to be on growth capital, as well as our balance sheet, and making sure that we are funding our capital needs, keeping the balance sheet where it needs to be. But at this leverage level, it does not make sense to further reduce indebtedness, so any excess proceeds would be devoted towards that repurchase program. I think is the - as we look at what that price would be, I think that’s to be determined. But at this point in time, we're still trading at a mid double-digit 14% yield. Mike mentioned a 6.5 times acquisition as a comparison. That's how we're thinking about it. I think once we did put it, if we were to put and – the actual program in place, it would be pretty ratable. But it also have some opportunistic components to it.

Okay, perfect…

Appreciate the color.

Shneur, let me add to that. I think, when you look at - when I’ll say the empirical data, which is a lot of C-Corps and major corporations that have had buybacks, stock buybacks. Often times, there are 10% to 20% of the all time highs, not the lows. So we always look at others and say, are we missing something or have they been effective. I think the MLP space having at this point some pretty high yields. It's a different scenario. And we can see these buybacks being extremely accretive. And in effect, increasing our coverage ratio by a full tenth of a point without having to buy anything and take any operating risk. So we don't know what the exact price is. But at 15% yield, it's pretty juicy. So if investors want to give us their stock at $10, we're all - we're here to take it.

All right. That makes perfect sense. Thank you very much for the color.

Thanks, Shneur.

Thank you. And our next question comes from Justin Jenkins with Raymond James. Your line is now open.

Great, thanks. Good morning, everyone. I guess, I just had to follow up on the last couple of points there on the buyback program. Mike, did you mention that 2.5 times leverage was kind of the target there in terms of getting towards the buyback program getting utilized or is that maybe a goal?

3.25 times has been our goal to get below. We've actually gotten there faster I think and further below than we anticipated. So I don't know if we [indiscernible] to, I don't know that we have a minimum. It just seems like - at this at 2.5 times, if you're reducing debt, which has a 4%, 5% or 6% coupon versus buying equity at 15%, it's a pretty easy decision.

Right. I think Justin - Mike used the 2.5 as an example of - there's no reason to go below that. We really like where we are right at three times. I think it's very manageable. If it comes down to 2.5 times, that's great. If it goes back up to 3.25 times, that's okay as well. But we want to stay in kind of this target range.

Understood, appreciate that clarification. I guess, maybe transitioning the wholesale propane business. Any more details you can share in terms of purchase amount? Or maybe EBITDA expectations for that acquired business going forward?

We can't at this point just because we haven't - the story is not finished. We’re working right now on some contracts around the butane export in Terminal, and I think once we have that, and we can give you some color on what the ultimate multiple is. I think we've said it was in the - we said high single digits. But that's - it's less than a 9% or 8%, I think where we end up.

Perfect…

And…

Go ahead…

We will most likely give those metrics by the time we close the transaction, which should be late February, early March timeframe.

Got it. Thanks. Last one for me, if I could. Appreciate all the color on the Water business. But maybe any updates you can share in terms of what the strategy is going forward? Or any updates on the water recycling plans going forward?

Yes, water recycling. There is certainly a freshwater supply difference between Texas and Mexico. So Mexico seems to be short water, Texas, long freshwater. So we're focusing, and in fact, our two pilots are in Lee County up on the ranches in New Mexico. We think we've figured out a way to do high volume, very inexpensive recycling. Well, there'll be more to follow on, it's a very exciting update or news for us. We're working with a one producer already on a recycle program. So you'll hear a lot about recycle, some really - to some its blending fresh with produced. But we're looking as a true recycling where we're taking solids out of the water, cleaning it up and sending it back for fracking. But more to follow on that. We think there's a big market here for us.

Perfect. I’ll leave it there. Thanks, guys.

Thank you. And our next question comes from TJ Schultz with RBC Capital Markets. Your line is now open.

Great, thanks. Good morning. First, just Delaware water volumes. What percent of produced water volumes are under contract? Or just maybe more generally, how has contracting progressed from the Ranch [ph] acquisition?

Well, I don't have a percentage. But we are getting more committed volumes. We’re not building these projects without committed volumes. So Lea County expressed to the east [ph] has commitments. We have others – other projects we haven't talked about yet that have commitment. So yes, we are - and those commitments are now 10 plus years. They are not a 3 to 5 year. I don't know that we were very interested in a 5 year commitment. So it's - it's increasing and the term is increasing as well.

And to give a little more color on that, TJ, about 65% of our volume is on pipe. You would assume most of that is contracted for some period of term. We are also getting some truck volumes from contracted parties as well. We don't have a percentage that we've published that what percent is contracted volume at this point in time. But I think that's a good - the pipe volume is a good rule of thumb to use for this point.

Okay, great. And then on Western Express, I think you said the third phase is dependent on some permits. Can you just give some more detail on permits that you need and timeline that you expect to receive?

Yes, the New Mexico portion is the portion that we're waiting on some VLM approval for right away. So not - I don’t know, I wouldn't call it permits, but just a more right away. That just takes a longer period of time, 6 to 9 months.

And right now, I believe, our target for that is September timeframe of 2019.

Okay, great. Just last on crude marketing. Clearly, Permian spreads narrowing, and I understand the offset from skim oil. Is that the way to think about this business? And that it just a breakeven business between crude marketing and skim on the water? Or can you just provide any color for crude marketing relative to not just the Permian, but maybe other basins and your expectations for marketing into 4Q and over the next year?

Sure. So crude marketing is remained generally it's a breakeven basis. It benefits from basin differentials, which in our second quarter, the July through September period, differentials were pretty strong. Those all narrowed, Permian significantly but other differentials narrowed as pricing fell during the third quarter. So that did have some – we were not getting the same benefit. From a breakeven perspective, it is supporting all of it's overhead cost and everything associated with the Crude Logistics business. As well as we give the Grand Mesa number on a gross and net basis. So Grand Mesa on a net basis, Crude Logistics was slightly positive. That business is still carrying burden. We have alleviated one NBC, it still has one remaining for approximately 1 year, a little bit more than 1 year. Once that NBC rolls off in the Crude Logistics business on a stand-alone or crude marketing business on a stand-alone basis, would be highly profitable. But we believe it's well positioned right now. Obviously, Grand Mesa is the crown jewel of the segment. But the rest of that business, we are committed to. We feel good about it. The things we're doing it along the Gulf coast, at Point Comfort and Houma give us some opportunity, as well as what we're doing around Cushing and looking for some growth opportunities around those assets as well.

Okay, great. Thanks.

Thank you.

Thank you. And our next question comes from Dennis Coleman with Bank of America. Your line is now open.

Good morning, guys. This is Ujjwal Pradhan stepping in for Dennis. Congrats, on a great quarter. Just had a quick question on the skim oil ratio in the Water segment. You mentioned that 4Q ratio is likely higher sequentially. And at the Analyst Day, you had talked about this ratio going down to 0.30% as you get more piped water. Are we still in that framework? And also can you tell us what the operational changes in DJ Basin were that you mentioned in the release?

Sure, Ujjwal. So the skim oil percentage, we do expect to increase from the 0.36, slightly in the fourth quarter. And a lot of that is based off of what we seen in January year-to-date. One of the things that we have - addressed this previously, but skim oil does have some seasonal component to it. When it's colder, you do get a slightly better skim oil percentage. So we are expecting that to increase for the fourth quarter. But our point remains the same going forward a 0.3% - a 0.3% is how we're looking at it based off of pipe volumes, what we're seeing particularly in the Delaware and the growth that we're expecting in the Delaware. So I think that's still a valid assumption. We will be doing - continue to do some more work on that and we'll provide any update on our next call on what we have included in our forecast for fiscal 2020. And then your second question, Ujjwal?

The operational changes in DJ Basin that was in the release?

All right. Sure. Sure, so we have seen a decline in the skim oil in the DJ. Most of that is also due to pipeline connections. We've added a significant amount of volume via pipe in the DJ. And so our thesis in, we get lower skim oil out of pipe barrels than we do out of truck barrels and has proven. And that's another basin where we're seeing that as well. As we connect more and more the basins, via pipeline, that's again, we're expecting that percentage to come down slightly. But we're also expecting a large increase in volume, as well as contracts and dedications coming on those pipelines.

Thanks for that…

And we believe the volume should be an offset - a very positive offset of loss in skim oil percentage.

Got it. Thank you. Another quick one, the Liquid segment results were pretty strong this quarter. Can you comment on durability of those results going forward?

Yes, I'll take it. So the quarter we did come in very strong. Obviously, as I mentioned one the call, we are trending towards the higher end of our guidance for the year. We were able to benefit in the Northeast, some of the infrastructure hasn't - did not come online as quickly as producers had anticipated. And so we were able to get a higher utilization rate of railcars. In fact, we are using some sub-leased railcars, some leased railcars that we did not expect during quarter. So we did see that benefit. I don't want to say that, that's not repeatable because its the business that we're in. As we do provide a need, but some of the infrastructure is up today. So next year, we may not see that same type of volume. However, we feel good about what we're doing in that business. We are growing our footprint, both on the rail side and on - for the butane, as well as on the propane side. And then the integration of the new assets should continue to benefit that business as well.

Got it. Thank you. And a final one, could you please share your views on what your ideal asset portfolio is? And any motivations for future M&A, maybe outside of the Refined Products segment? Thank you.

You want to take that, Mike?

So we still believe in a diversified asset portfolio. Obviously, water is growing significantly. crude, very stable business. You look at those two businesses combined and that's 75% to 80% of our portfolio. We have moved further away from marketing assets - our marketing business and growing assets in the Refined Products and the Liquids business. I think that would be the trend is continuing to add assets to support those businesses. The diversification, we feel like is important. We feel like we get a benefit from that diversification when commodity prices swing. Obviously, we're not getting that - the valuation we would like to see in the marketplace. And that's something that we are working on to figure out what the ideal structure is from a market perspective. But from a business portfolio, I think we're comfortable with what we have. But we're always looking to - for opportunity. And I see us continue to grow the Water business. I think that's obviously our core strategy and where we're devoting most of our capital. But we have been spending capital in other businesses as well. There is some potentially very nice opportunities in crude. We just added a nice acquisition to the Liquid segment. And we've done a few things in the Refined Products as well.

Thank you. That’s all from me.

Thank you. And our next question comes from Michael Blum with Wells Fargo. Your line is now open.

Thanks. Good morning, guys. I'm wondering, Mike, if you could just elaborate on the - one of the things you said earlier on in your prepared remarks about the NGL wholesale acquisition from DCP, just the strategic rationale? And how it kind of fits in your system? Can you just elaborate a little on that?

Yeah, sure. We had – and Trey can correct me, about 19 to 20 terminals that were propane and some also provided butane. We only had one terminal in Northeast which was in West Springfield. If you recall, east [ph] had a portal terminal but that one was - had to move out for the CDs [ph] construction. So we were actually marketing or are marketing off TET [ph] and some other terminals. These terminals on the propane side fit in perfectly in that new Mexico - in the New England area. So it really allowed us to fill in this void in our footprint. One of the DCP terminals was literally, I want to say 10 miles away from our terminal at West Springfield. So we'll have a bigger market share in the Northeast. The one terminal in Chesapeake, which is an export terminal and connects for [ph] butane, we see over the next number of years, butane supply is going to jump significantly and there is going to be a lot more butane available than actually supply than demand. So we think that's the jewel maybe in all the terminals in terms of upside. But it was a well-run business. You don't expect to go and double volumes or do anything like that. We just - we're keeping people, and - really having an even better team going forward. So if we had to get out or we had to grow like this and much rather grow a good business.

Great. And then just a follow up to that. In terms of up there in the Northeast, how do you see matter [ph] is to coming into full service? How do you see that changing dynamics up there if at all for you?

In general, the more that goes on pipe and export, the less there is for rail. So you would say that would be perhaps a negative. On the flip side, the production is growing dramatically. So we still think we keep our railcars folded [ph] butane beauty and as a big opportunity up there. So net-net, I don't think it's bad. It could be good in the summertime to pulling propane out of the market is going to be dramatically oversupplied.

Okay, great. And then just one more question on Grand Mesa. So you’re obviously seeing really strong volumes. Can you just talk about what you're seeing in terms of activity levels in the DJ around your producers? And then your outlook going forward there?

Yes, I mean, in the prior quarter we talked about the lack of sufficient gas gathering and processing or processing and infraction [ph]. Since then and I think DCP had another nice plant coming on. I think there's another one plant trading [indiscernible] later this year maybe...

Yeah.

So that will allow physically our produces to increase their production and drilling activity. So that was a bit of a hurdle. I think we're seeing with the white cliffs [ph] line we getting converted, that there is now -- the producers are maybe a little uneasy about having enough take away capacity. So that's good in terms of - I'll say, what we can charge as a shipper. So we see volumes continuing to increase. We don't have a lot of space left. I think we're 129 average. So that means we only have 21 left. But we do see rates increasing somewhat. I don't - we don't see them going back to the tariffs. And we're also seeing some interest in taking some more of our space under longer term contracts. So it helps.

No, I think…

So its all good news.

Producer activity has maintained. We saw an uplift in volumes with processing capacity coming online. We are expecting another uplift with the next plans coming online. The basin differentials has stayed about the same. Although, as Mike mentioned, producers are starting to get concerned about take away. So we like our position. We’ve always felt like Grand Mesa would be one of the first pipelines to fill up, and we’re seeing that. And we like what the activity is. So it's been absolute positive, and it's continuing into this quarter as well.

Great. Thank you.

Thank you. Our next question comes from Sunil Sibal with Seaport Global Securities. Your line is now open.

Hi. Good morning, guys. And congrats on a good quarter. Most of my questions have been hit. But I was just trying to get a little bit clarity on how should we be thinking about maintenance capital on your Water business, especially when we think about saltwater wells, et cetera? What's the kind of life on those? And what kind of maintenance needs there?

Sure. So right now, Sunil, we're running about $10 million a quarter of maintenance capital with almost all of that - is in the Water business. As that - as those volumes continue to increase, that maintenance capital will probably increase slightly. But right now, the $10 million per quarter, $40 million annual run rate seems to be where we are. We've seen that over the past couple of quarters. We did have some one-offs during this fiscal year. But we are expecting to have a continued growth in that business. So that's the run rate we're expecting. As far as life of a well, most of our fleet, so to speak, is still relatively young. But we do believe that these wells have 20 to 30 year lives. Now the volume capacity in those wells could decline somewhat over the life, but we have yet to see that. Obviously, there are saltwater disposal wells that have been in existence for decades, well beyond a 20 to 30 year life. However, that the capacity that we are utilizing, we think that's the right time frame. It does require some regular maintenance. It does require certain amount of chemicals, which to treat the well, as well as the formation, which we follow a nice program on that. Most of the maintenance is on the pumps. That's where we’ve seen most of our cost, and we have those now on our regular maintenance programs as well.

Okay. Got it. Thanks. That’s all I had.

No problem.

Thank you. And our next question comes from Lin Shen with HITE. Your line is now open.

Good morning. Thanks for taking the call. A very quick clarification question. For Grand Mesa, you report a financial volume averaged 129,000 [ph] barrels per day. Is there any difference between financial volume and physical volumes you are moving now?

Sure. For this quarter, the physical volume was about 127,000 to 128,000 barrels per day. Very, very close to our financial volumes were. Our producers were very much in line or exceeding what their minimum volume commitments are on the pipeline.

Okay, great. And then also the capacity, the 150,000, so you have like 21 left?

That is correct. We can only contract up to 135,000 barrels per day. The remaining 15,000 barrels per day would have be - would be required to take on a spot basis. But we could still fill up the pipeline.

Great. Thank you very much.

No problem.

Thank you. And I'm – pardon, thank you. And I'm showing no for further questions at this time. I'd like to turn the call back over to Mike Krimbill, Chief Executive Officer for any closing remarks.

Thank you guys very much. We continue to improve and hopefully we'll have a really good fourth quarter. So talk to you soon. Thanks.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude your program. And you may all disconnect. Everyone have a good day.