NGL Energy Partners LP (NGL) Q2 2021 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to the Q2 Fiscal Year 2021 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 will follow at that time. [Operator Instructions] This call is being recorded. I would now like to turn the conference over to your host, Mr. Trey Karlovich, CFO. Please go ahead, sir.

Great. Thank you, and good evening, 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 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 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 measures discussed on this conference call to the most directly comparable GAAP financial measures. I'll now turn the call over to our CEO, Mr. Mike Krimbill. Mike?

Thanks, Trey. Good afternoon and thanks for joining us. Our second fiscal quarter EBITDA is $138 million, as you know, as compared to $123.5 million last year. With respect to our Water Solutions business, it appears that volumes have bottomed out this quarter. The rigs working on acreage dedicated to NGL customers and the Delaware is increasing. With October volumes averaging about 1.5 million barrels a day, volumes under the Poker Lake contract began on October 1 and will increase January 1, 2021, so less than 60 days and each year thereafter through January 1, 2024. We have added additional dedications with the focus on increasing our market share in the Delaware during this downturn. We've issued numerous press leases announcing those. Reducing operating costs has been a significant priority this year, even though water volumes have declined, our cost per barrel fell from $0.38 last year to $0.27 per barrel this quarter. As volumes increased, we expect this per barrel cost to fall even further. We have done this to reducing headcount in excess of 25%, consolidating SWDs and eliminating most diesel power generation. With respect to crude oil logistics, they performed well, led by Grand Mesa with financial volumes at 123,000 barrels per. The liquids logistics is performing well in the face of uncertainty. In the first six months or so with COVID, there was a question about how much butane blending would be happening with gasoline demand down so much, but logistics is performing on budget. Regarding the balance sheet, NGL has already built out its Delaware water's super system such that CapEx this fiscal year and going forward is reduced and allow us to be free cash flow positive. Even so, we have reduced CapEx below the guidance provided earlier in the year for this fiscal year. This will significantly reduce leverage over time. We did evaluate again, our common unit distribution situation and determine that we are better served in the short-term to reduce that then pay a yield exceeding 20%. This is not because we are not earning the distribution, our common unit coverage is about four times, I think it was five times for the quarter, but rather to retain our cash to delever and reduce bank commitments. We are pursuing numerous asset sales and joint venture opportunities to raise capital sooner. And again, use this to reduce leverage and bank commitments. Trey will address that credit facility extension, but I will comment that we have a good bank group that is under pressure to reduce their energy commitments. We understand that are working to accelerate the reduction that is naturally occurring from our free cash flow position. So where do we go from here? And very simply, we have transitioned to a simplified business model, the three top tier segments, reduce volatility, lessen seasonality, and significantly cut working capital needs. Our contract profile is greatly improved through long-term dedications with strong counterparties. Majority of our CapEx is behind us. As we have built our Delaware system, a large diameter pipe system. We are long water disposal capacity, so we can take all the produced water producers have to send us. We are set to growth the business without acquisitions or significant CapEx. Second, we are focused on reducing indebtedness, leverage and bank amendments. Third, we are focused on reducing indebtedness, leverage and bank amendments. Fourth, we read two and three. And with that, Trey, I'll turn it back to you.

Okay. Thank you. So as Mike mentioned, I would like to spend a little time discussing the credit facility extension, we have in process before going through the results for the quarter. First, I'd like to express my appreciation for the banks and their teams that have been working on this important extension, especially with everything going on in our industry. We launched our extension last month and I've been working with our bank group to finalize terms. Generally speaking, we are looking to extend our credit facility by at least a year. We are working with the group on ways to reduce the commitments under the facility, as well as trying to address certain financial covenants based on the impacts we have had from the pandemic, as well as extraction with bankruptcy filing. We understand our borrowing costs may be going up and there’ll be limits on cash flows leaving the company other than to reduce the debt. These conversations have been constructive and we are working diligently to complete this extension as soon as possible. Our current leverage ratio is about 5.3 times calculated in accordance with our credit facility in line with prior quarter and we are working on opportunities like the ones Mike mentioned to reduce our secure debt and lower leverage. That will be our core focus through the remainder of this year and into fiscal 2022. Since July 1, we have repurchased and retired an additional $75 million notional face value of unsecured notes, bringing our total repurchases for this year to around $125 million space value at about $0.60 cents on the dollar, resulted in a net $50 million debt reduction. Moving to our financial results for the quarter. Mike mentioned how well our operating segments performed during the period, despite some of the continued macro challenges. Our adjusted EBITDA for the quarter came in at $138 million, which includes a full quarter of operating cost savings in water. The sales of skim oil, we held an inventory through our first quarter, the benefit of a large portion of our contango crude sales and it was offset by continued weak demand for refined fuels natural gas liquids, lower rate counts across the areas we operate and serve one-time corporate legal costs. Well, I’ll cover some of the specifics of each segment, a reminder that we’re referring to adjusted EBITDA and other non-GAAP which we reconciled our earnings release, investor presentations and quarterly reports to operating income or other GAAP measures. Starting with crude oil, the Crude segment reported approximately $65 million of adjusted EBITDA this quarter and $96 million year-to-date, this includes the sale of majority of our crude barrels held in tank to capture the contango market that were deferred from the June quarter. Mike mentioned Grand Mesa’s financial volumes averaged 123,000 barrels this quarter, and our physical barrels were approximately 109,000. The difference between financial and physical barrels relates to minimum volume commitments that were invoiced in charge, but not physically delivered during the period. This difference has been minimal over the prior several quarters. Grand Mesa is expected to be the primary contributor to this segment's earnings for the remainder of the year, as our transportation, storage and logistics assets continue to operate just above breakeven levels when including all of our overhead costs in the current market and not having a contango in place. Moving to Water. Water adjusted EBITDA was $61 million for the quarter and has totaled $118 million year-to-date. Total produced water volumes averaged about 1.3 million barrels per day during the quarter, roughly in line with our average volumes in the prior quarter. We have seen these volumes continue to increase, particularly in the Delaware Basin. Delaware Basin volumes averaged about 1.1 million barrels per day, which currently represents about 82% of total volumes and are growing with the start-up of the poker Lake deliveries in October. The Eagle Ford and DJ Basin volumes remain challenged by the lower crude oil prices, rig counts and completions, coupled with production declines. We are expecting a slow recovery of volumes in these basins pending increased rig activity in crude production. We received an average disposal fee of $0.63 per barrel for the quarter, consistent with pricing in prior quarters. Our skim oil sales included volume Southern inventory from the prior quarter, as we mentioned. Additionally, flowback water volumes have declined and we are receiving incremental water volumes via pipelines, which has resulted in lower skim oil recoveries per barrel. Our recoveries have averaged about 12.5 basis points this year, about half of the recoveries we saw last fiscal year. Our skin oil volumes remain hedge for the remainder of calendar 2020 with approximately 3,000 barrels per day, hedged at an average price just over $56 per barrel through December. We have also started to layer in some 2021 positions as well and we'll continue to look at opportunities to add to our hedge position into the future periods. Operating expense reductions exceeded our targets, as we were able to bring average operating expenses down to $0.27 per barrel for the quarter, we'll be looking to maintain this level or even continue to reduce on a per barrel basis as we bring on larger pipeline connections like Poker Lake. The Poker Lake pipeline was completed during the quarter and accounted for most of our growth CapEx for the period, initial volumes flowed on October 1 and have been right in line with our expectations. We're expecting growth in this pipeline as production ramps from the Poker Lake unit over the next several quarters. We're also seeing other producers increase their activities in the basin, which should benefit our volumes during the second half of the year as well. Going now to Liquids and Refined Products. Adjusted EBITDA in this segment totaled $21 million this quarter and $33.5 million year-to-date. Product margins were generally in line with our expectations during the quarter, as we are moving into our peak periods of butane blending and propane demand. Volumes continue to be impacted by weaker demand, the segment performance is consistent with our expectations coming into the period and we are well positioned to manage our customer's needs through the upcoming winter season. I wanted to also point out that our corporate costs have been reduced from prior levels as well, excluding approximately $2 million of legal expenses that we've considered to be one-time, excluding those costs, our corporate costs would have been less than $7.5 million this quarter, almost $4 million less than the same quarter last year. Finally, I want to briefly discuss our capital expenditures. Our growth CapEx totaled approximately $18 million for the quarter and $38 million year-to-date, as we completed our water infrastructure projects, including the Poker Lake tie-in. We have minimal growth capital expenditure requirements going forward and believe we can service our producer customers utilizing our existing pipeline system interconnected disposal assets. We also focused on reducing our maintenance CapEx, which came down again in the second quarter to $7 million and has total $16 million year-to-date. Our combined capital expenditures forecast is now expected to come in below the $100 million guidance for the full year. In summary, our business performed well during the quarter and generated significant cash flow. We are very focused on growing our customer relationships, improving our cost structure and reducing leverage going forward. We appreciate the support of all of our stakeholders. That concludes our prepared remarks, and we'll now open the line for questions

[Operator Instructions] Your first question comes from the line of T.J. Schultz from RBC Capital Markets. Your line is open.

Hey, good afternoon. So you've given the extension proposal on the credit facility to the lenders. Are there any specific terms of that extension proposal that they've come back with at this point, that is moving the process along? Or do you expect to need more resolution on Grand Mesa and maybe some of these JVs first and would that include the JV of your water business?

So TJ, I'll start, Mike, you can chime in. We have gone back and forth on a few items, again, everything's been constructive conversations. Some of these things are going to take longer than a week or two necessarily, but we are moving pretty quickly, particularly on some of these other transactions. Our objective is to have the credit facility extension completed prior to that, again, I think that's something that we're endeavoring towards and we've had positive feedback from the group as well.

Yes. TJ, as the last part of your question there about, there was an article I think about – I don't know three or four weeks ago that discussed, I guess perhaps a rumor that we were looking for JV partner on our water business. So that is correct, we've been through a process, so we are – but when we've referred to JV opportunities that's what we're talking about.

Okay. So – what's the timing on that process for the water business?

Definitely prior to 12/31.

Okay. Understood. And then just on, is extraction currently shipping on Grand Mesa or does it have another viable option to move product as you consider potentially discussing new commercial terms?

So TJ, we can't talk about specific shippers on Grand Mesa, unless they’ve disclosed it publicly. So I can't specifically address that. But what we can say is that physical volumes on the pipe have not significantly changed recently. So, I think that's how we can answer that question right now.

Okay. Fair enough. Thanks guys.

Thanks, TJ.

[Operator Instructions] Your next question comes from Pearce Hammond from Simmons Energy. Your line is open.

Yes. Good afternoon and thanks for taking my questions. Just following up on TJ's question with Mike's comments and Trey's comments. So on the J – perspective JV for the water business, are you referring to part of the water business or the whole water business?

A portion.

A portion. Okay, thank you. And then, congratulations on bringing the operating cost down in the water business to $0.27 a barrel. Just curious if that OpEx number included any royalties and if so, what sort of royalty rates are you in the Delaware basin, both the Texas and New Mexico?

Any royalties we pay are – they are in that number, we have a mix of – we have quite a few as, you know properties, we'd like to own our own land, so there are no royalties and a lot of that land is up and down 285. But we also, take a lot of water over to, one of the ranchers, they're in block 74, so 476, 54. So it's combination of both, but yes, they're all in the numbers.

Okay, great. And then one last one for me, just from a high level, you've mentioned evaluating assets sales and joint venture opportunities. And we just talked about joint venture opportunities, but what are you thinking from a high level, from an asset sales standpoint because you did a good job pairing down the company and simplifying it over the course of the last year to 18 months?

Yes. Trey will jump in too, we looked at our assets to see where are – there are some assets that are perhaps off by themselves. I wouldn't call them stranded, but they're not really connected to the rest of the assets by pipe or, naturally in a certain geographic areas. So there are a few of those that we've looked at this, we are talking to some potential buyers.

Here's just to add. I mean, we talked about any non-core assets. Again, this is a tougher time just from a macro environment perspective, but we have seen some interests. I wouldn't say there's anything significant. We focused on where our competencies are, where our strengths are, within each one of our business segments. So, there are a few things on the fringes, but most of those are relatively small right now.

Okay. Thanks guys. Appreciate it.

Your next question comes from the line of Jason Mandel from RBC Capital Markets. Your line is open.

Hi guys. Good afternoon. Thanks for taking the question. It's two separate questions, first off, the crude oil margin benefit in the quarter, the portion that comes from sort of cheaper purchase inventory barrels. Maybe I just haven't seen it yet, but can you give any kind of quantification for how much of that was, as part of the quarter? And then I have a separate question on Grand Mesa.

Yes. Jason, thanks. We didn't disclose the specific amount, but it's kind of in the low to mid-teens that we captured from first quarter and the second quarter so that has been rolled, that was deferred from first quarter and captured into the second quarter. And then, your second question again.

Sorry, that's low to mid-teens, what…

EBITDA calculation.

Great. Thank you. And then the second question is on the extraction issue, I realized there's limits around where you can talk about but specifically for, any potential for commercial negotiations or renegotiations of the contract, any impacts we should be considering for other shippers that have deals on the pipe that could potentially cause those pricing to come down, or you have able to kind of structure around that?

Well, much like last quarter, we've never heard a peep out of the bondholders. So we are – we sit here continuing to perform. So, we don't have really anything to say in terms of, of that. But we filed a lot of appeals. So for our other, press release, things are active.

And Jason, with regards – just regards to other contracts again. So we can't disclose any specifics on other contracts unless they've been disclosed publicly by the shipper or producer. We do have our tariff, it's public. But within the tariff, there is no most favored nation’s type language within that tariff. Again, it's all based off of volume and term of commitment.

Very good. Thanks for help.

Yes.

I'm showing no further question at this time. I would now like to turn the conference back to Mr. Mike Krimbill, CEO.

Well, thank you very much and we'll see you next quarter.

And ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day. You may all disconnect.