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Edited Transcript of NGL earnings conference call or presentation 8-Aug-19 3:00pm GMT

Q1 2020 NGL Energy Partners LP Earnings Call

TULSA Aug 16, 2019 (Thomson StreetEvents) -- Edited Transcript of NGL Energy Partners LP earnings conference call or presentation Thursday, August 8, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* H. Michael Krimbill

NGL Energy Partners LP - CEO & Director of NGL Energy Holdings LLC

* Robert W. Karlovich

NGL Energy Partners LP - CFO, Executive VP & Treasurer of NGL Energy Holdings LLC

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Conference Call Participants

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* Dennis Paul Coleman

BofA Merrill Lynch, Research Division - Global Head of High Grade Debt Research and MD

* Michelle Kenel

UBS Investment Bank, Research Division - Equity Research Associate, MLP

* Pearce Wheless Hammond

Simmons & Company International, Research Division - MD & Senior Research Analyst

* Torrey Joseph Schultz

RBC Capital Markets, LLC, Research Division - Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to the First Quarter Fiscal Year 2020 NGL Energy Partners LP Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Trey Karlovich, CFO. You may begin.

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Robert W. Karlovich, NGL Energy Partners LP - CFO, Executive VP & Treasurer of NGL Energy Holdings LLC [2]

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Thank you, and welcome, everybody. As a reminder, this conference call -- 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 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 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. Mike?

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H. Michael Krimbill, NGL Energy Partners LP - CEO & Director of NGL Energy Holdings LLC [3]

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Thanks, Trey. Thanks for joining us. I'd like to set the stage and really start off in a constructive, positive manner. We have, as you know, signed an agreement to sell Refined. We thought that would crater the stock price, going down at least $1 or $2. We're only down $0.38. 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 Fund products units. 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 unitholders or as that is yet to be seen.

Under the Mesquite transaction, 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 in Western Express is in construction, with an expected in-service date in late September. There are numerous opportunities that we are working on to fill these pipelines as well as the Mesquite system.

The Liquid 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 in cash flows. We continue to focus on long-term contracts in all 3 businesses, so repeatability of our cash flows increases. Finally, we are positioned for organic growth in our business at attractive multiples.

With that, I'll turn it back to Trey for specifics.

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Robert W. Karlovich, NGL Energy Partners LP - CFO, Executive VP & Treasurer of NGL Energy Holdings LLC [4]

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All right. Thanks, Mike. So first off, here's how I think about the TPSL sale. This business has been significantly volatile over the past 5 years. However, the EBITDA over the past 12 months is essentially 0. The volatility has not been removed. The proceeds we receive will be used to pay off all the working capital associated with this business, plus about 10%. So assume our total debt is reduced from $2.6 billion to $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 4 to 5x 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 and $250 million.

We didn't 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, leaving 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 multiples. If you look at last year's multiples, this is over a 35x 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 17x multiple. This was a great transaction for NGL in this market.

My share on some of the other benefits of this transaction and also talk about Mesquite. One of the questions that we've been getting quite frequently is around our financing of Mesquite. 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 for year 1, which allowed us to use approximately $400 million in debt to remain at our 3.25x compliance leverage target.

We funded the initial purchase with $400 million of newly issued Class B 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 will be reduced by an estimated $300 million to $350 million going forward which, as I stated, will reduce all-in leverage by over half a turn and interest costs by approximately $15 million per year.

We will continue to target a 3.25 compliance leverage as well as an all-in leverage under 5x. 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 6.30, however, pro forma for the Refined Products sale, our all-in leverage would be approximately 4.6x.

I'll now go through the results for each of the segments, and overall, for fiscal -- for the first quarter of fiscal '19 -- fiscal '20, I'm sorry.

Adjusted EBITDA totaled $87 million for the quarter, which included an $11 million loss on Refined Products, which included the TPSL business that is being sold. Removing the TPSL 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 sale of Refined Products as we remain in the forecast ranges for our core segments.

I'll 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 133,000 barrels per day this quarter. We continue to see strong demand on the DJ Basin on Grand Mesa, and other areas in our crude business are 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 this quarter with approximately 849,000 barrels per day of disposal volumes and 2,900 barrels per day of skim oil. This is the first full quarter subsequent to the sale of our South Pecos assets in the Permian, and we did not close the Mesquite transaction until July 2, after the end of the quarter. We are expecting Mesquite to contribute significantly to both disposal and skim volume 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 was announced last week. We expect fresh water 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 2,900 barrels per day during the quarter, with an average crude cut of about 34 basis points, which is in line with our expected recovery during the spring and summer. We have recently increased our forecasted skim oil production with the addition of Mesquite and added to our hedge position. We are hedging approximately 3,500 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 the remainder of this year within our legacy assets as well as Mesquite. 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 our upcoming supply season. We're 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 business development efforts. Our fiscal 2020 adjusted EBITDA guidance range for liquids remains $75 million to $90 million.

Finally, Refined Products. Adjusted EBITDA in refined and renewables was a loss of $11 million for the quarter, with the TPSL division as being sold, generating a $10 million loss. We're expecting to close the sale by the end of September.

We would have owned the TransMontaigne business for approximately 5 years once this transaction closes. Remember, we purchased that 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 mention realizing over $300 million in EBITDA over the period and recovering the working capital. It may have been a rollercoaster ride for earnings, but you cannot argue with the overall return generated by this business.

We will continue to operate the business through closing. Additionally, we will continue to own our right marketing, gas blending and renewable businesses. These businesses are much smaller than TPSL, 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 a September 30 closing of the transaction, we are updating our FY 2020 guidance range for the Refined Products segment to $15 million to $30 million.

Finally, we declared a $0.39 per unit, $1.56 annualized distribution for the quarter. We continue to target 1.3x coverage or better on a trailing 12-month basis, at which point, we will evaluate the best use of funds for the benefit of our unitholders, including reinvesting in the business, repurchasing equity or increasing our distribution rates. That decision will be made based on numerous factors but keeping our balance sheet healthy will continue to be a priority.

That concludes our prepared remarks. We will now open the line for questions. Prince, do we have any questions?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from TJ Schultz, RBC Capital.

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Torrey Joseph Schultz, RBC Capital Markets, LLC, Research Division - Analyst [2]

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Great. First, on the CapEx spend in the first quarter of $215 million. Can you break out what was acquisition-related versus organic? How much has been on some of the prior projects you have and any change to expectation for the organic growth CapEx range that you gave earlier this year?

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Robert W. Karlovich, NGL Energy Partners LP - CFO, Executive VP & Treasurer of NGL Energy Holdings LLC [3]

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Sure. So about $215 million, TJ, almost $200 million was in 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 pipe water for both the Western Express and Lea County Express projects. So we've purchased that pipe and that will all be installed over the next quarter or so.

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Torrey Joseph Schultz, RBC Capital Markets, LLC, Research Division - Analyst [4]

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Okay. No change to your expectation for organic growth for the rest of the year?

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Robert W. Karlovich, NGL Energy Partners LP - CFO, Executive VP & Treasurer of NGL Energy Holdings LLC [5]

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No. No. No changes to the growth CapEx guidance.

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Torrey Joseph Schultz, RBC Capital Markets, LLC, Research Division - Analyst [6]

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Okay. And then just sticking with Water. As we're thinking about trajectory 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 when you get Mesquite tied in, just expectations on where you think you can exit this year on Water volumes?

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H. Michael Krimbill, NGL Energy Partners LP - CEO & Director of NGL Energy Holdings LLC [7]

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Can you get the Water?

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Robert W. Karlovich, NGL Energy Partners LP - CFO, Executive VP & Treasurer of NGL Energy Holdings LLC [8]

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Absolutely, one minute.

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H. Michael Krimbill, NGL Energy Partners LP - CEO & Director of NGL Energy Holdings LLC [9]

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TJ, there's -- we'd 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 greater volumes. I don't know if we have a -- end-of-year where do we come out on our budget.

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Robert W. Karlovich, NGL Energy Partners LP - CFO, Executive VP & Treasurer of NGL Energy Holdings LLC [10]

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We didn't guide to a water volume, remember?

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H. Michael Krimbill, NGL Energy Partners LP - CEO & Director of NGL Energy Holdings LLC [11]

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Okay. So I don't see a change. The timing may be a month or 2 behind where we thought it was going to be, but -- and this next quarter, we should see the exit at September 30, we'll see, I think, much higher volumes.

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Robert W. Karlovich, NGL Energy Partners LP - CFO, Executive VP & Treasurer of NGL Energy Holdings LLC [12]

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So TJ, what I'll add is disposal volumes were really right on through the first quarter. We did our budget in April and May. We're 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 we guided, we'll obviously see the big jump in Mesquite volumes in the second quarter, but we are expecting legacy volumes to grow in second quarter as well.

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Torrey Joseph Schultz, RBC Capital Markets, LLC, Research Division - Analyst [13]

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Okay. Got it.

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Robert W. Karlovich, NGL Energy Partners LP - CFO, Executive VP & Treasurer of NGL Energy Holdings LLC [14]

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But the biggest jump will be through third quarter.

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Torrey Joseph Schultz, RBC Capital Markets, LLC, Research Division - Analyst [15]

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Got it. Okay. Understood. On the Intrepid joint marketing deal (inaudible) can you just expand on the benefits to you all? Is there any cost-sharing arrangements on development of freshwater or disposals services?

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H. Michael Krimbill, NGL Energy Partners LP - CEO & Director of NGL Energy Holdings LLC [16]

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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 McCloy and Beckham, 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 they'll be marketing Dinwiddie as well as Beckham water.

Then we'll also work together on disposal water off the 3 ranches. So we're very excited that they're just a great group of people. And we're not out there trying to buy freshwater, really, that's -- the Intrepid folks have their own freshwater. So they tend to team up there and then team up on the produced water off all 3 ranches.

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Torrey Joseph Schultz, RBC Capital Markets, LLC, Research Division - Analyst [17]

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Okay. Understood. Just last one, Trey, just to clarify the revised guidance on Refined Products. I think you said $15 million to $30 million. Does that include the negative contribution of $11 million in the first quarter or is there a pro forma? I'm just trying to understand what to expect.

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Robert W. Karlovich, NGL Energy Partners LP - CFO, Executive VP & Treasurer of NGL Energy Holdings LLC [18]

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That does include the negative $11 million from the first quarter. And we're expecting to make up some of that in second quarter prior to the sale on TPSL and then our -- the remaining businesses will make up the difference.

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Operator [19]

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Next question is from Dennis Coleman from Bank of America.

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Dennis Paul Coleman, BofA Merrill Lynch, Research Division - Global Head of High Grade Debt Research and MD [20]

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Yes. I guess, maybe just to pick up on that last question to start with, Trey, please. Can you just -- can you say again the businesses, what's next in refining? And of the picture, the 30 can you give us a little bit better sense of what the run rate is on those?

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Robert W. Karlovich, NGL Energy Partners LP - CFO, Executive VP & Treasurer of NGL Energy Holdings LLC [21]

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Sure. So what will be retained is our -- what we call our rack marketing business, which is our flash tile business, very little working capital. We market across the United States at terminals. That business has been the most profitable Refined Products business over the past couple of years as it does not carry inventory risk. So we are maintaining that business. We are maintaining our GAAP lending business. We started that business about 1.5 years 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're expecting to make that up as we go in the 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 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 TPSL business has made up about 60% of our overall portfolio, where there's been years that has been much higher than that, and there have been years that's been lower because of the challenged performance. But approximately 60% of the working capital and the entire business is associated with TPSL.

Additionally, we will -- we are looking to minimize inventory 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 some opportunities that we think we can continue to either improve our business or reduce the cost associated with it.

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Dennis Paul Coleman, BofA Merrill Lynch, Research Division - Global Head of High Grade Debt Research and MD [22]

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Okay. That's helpful. And then if you can just remind me the tax credits, the $25 million, that was not in the original guidance, right?

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Robert W. Karlovich, NGL Energy Partners LP - CFO, Executive VP & Treasurer of NGL Energy Holdings LLC [23]

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That is not -- we have not included that in guidance. So that -- the way that we think about that is if the tax credit is realized, we ought to be above the higher end of the guidance range.

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Dennis Paul Coleman, BofA Merrill Lynch, Research Division - Global Head of High Grade Debt Research and MD [24]

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Okay. And with the assets that are being sold, the buyer gets that tax credit if it trips beyond the closing date?

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Robert W. Karlovich, NGL Energy Partners LP - CFO, Executive VP & Treasurer of NGL Energy Holdings LLC [25]

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Not for what has been earned to date. So if it is passed subsequent to the sale, we retain the rights of those credits as we incur the costs to build those credits. Anything generated subsequent to the sale would go to the buyer.

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Dennis Paul Coleman, BofA Merrill Lynch, Research Division - Global Head of High Grade Debt Research and MD [26]

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I got it. Okay. Okay. That's helpful. And then I guess, switching gears. Mike, you obviously have continued 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 seeing there? Or how you're thinking about M&A, additional opportunities, particularly now that you've sort of improved the balance sheet?

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H. Michael Krimbill, NGL Energy Partners LP - CEO & Director of NGL Energy Holdings LLC [27]

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Yes. I think, first of all, we're not going to screw the balance sheet up now that we fixed it. And so we're not going to go on a buying spree. But I think there are 1 or 2 attractive assets remaining in the Permian from our perspective. So we will participate in any processes that are initiated.

As you know, we've had the EIG folks come in and invest. There's a $200 million per basket there, and that's there on purpose so that we'll have an equity, ability to fund an additional acquisition 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.

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Dennis Paul Coleman, BofA Merrill Lynch, Research Division - Global Head of High Grade Debt Research and MD [28]

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Okay. Okay. And any updated thoughts on the share repo?

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H. Michael Krimbill, NGL Energy Partners LP - CEO & Director of NGL Energy Holdings LLC [29]

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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%, it's cuckoo after what 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.

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Operator [30]

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Next question is from Shneur Gershuni from UBS.

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Michelle Kenel, UBS Investment Bank, Research Division - Equity Research Associate, MLP [31]

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This is Michelle on for Shneur. Just a quick one for me, and I may have missed it earlier, but is there a working capital release or how much it -- less is needed going forward as a result of the sale?

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Robert W. Karlovich, NGL Energy Partners LP - CFO, Executive VP & Treasurer of NGL Energy Holdings LLC [32]

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So thanks, Michelle. 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.

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Operator [33]

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(Operator Instructions) We have Pearce Hammond from Simmons Energy.

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Pearce Wheless Hammond, Simmons & Company International, Research Division - MD & Senior Research Analyst [34]

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My first question is what drove the strong results during the quarter in the crude oil logistics business?

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H. Michael Krimbill, NGL Energy Partners LP - CEO & Director of NGL Energy Holdings LLC [35]

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Pearce, so the biggest drivers, obviously, Grand Mesa. Our forecast for Grand Mesa, as we gave guidance, was 129,000 barrels a day. We ran slightly above that, 133,000 barrels a day. So we did get a benefit there.

The rest of our logistics assets performed right in line with the plan, so that includes our marine business, our rail and trucking business as well as our business out of Cushing, our terminal 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 or basin differential is what had 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, which drove the beat. Our midpoint of our guidance is $200 million for the year, which is $50 million a quarter, which should be consistent throughout the fiscal year.

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Pearce Wheless Hammond, Simmons & Company International, Research Division - MD & Senior Research Analyst [36]

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Great. And then my follow-up is, I know it's really early days, but how is the integration of Mesquite proceeding?

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H. Michael Krimbill, NGL Energy Partners LP - CEO & Director of NGL Energy Holdings LLC [37]

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I mean, it's very, very well. We only have 1 month of an indication of what's going on there, but we're connected into our infrastructure. We're actually expanding their pipe system to some new customers. And we're seeing the skim oil hitting our budgeted quantities. But Trey may have spoken to the hedging that we've hedged, what percentage of our -- for this fiscal year, I think for the next 3 or 4 months, we're about 100% hedged.

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Robert W. Karlovich, NGL Energy Partners LP - CFO, Executive VP & Treasurer of NGL Energy Holdings LLC [38]

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So for the current quarter, we're about 90% hedged. For the entire fiscal year, we're 75% to 80% hedged on skim oil volumes. That includes the Mesquite volumes.

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H. Michael Krimbill, NGL Energy Partners LP - CEO & Director of NGL Energy Holdings LLC [39]

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And we hedge when we had the run-up to $60.

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Operator [40]

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I am showing no further questions at this time. I would now like to turn the conference back to Mike Krimbill.

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H. Michael Krimbill, NGL Energy Partners LP - CEO & Director of NGL Energy Holdings LLC [41]

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Well, I have many more thoughts, but you probably don't want to hear them. So thank you, and we'll end the call.

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Operator [42]

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Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may all disconnect.