Q1 2024 NGL Energy Partners LP Earnings Call
Participants
Bradley P. Cooper; Executive VP & CFO of NGL Energy Holdings LLC; NGL Energy Partners LP
Douglas W. White; EVP of NGL Water Solutions - NGL Energy Holdings LLC; NGL Energy Partners LP
H. Michael Krimbill; President, CEO, & Director of NGL Energy Holdings LLC; NGL Energy Partners LP
Nevin Tuli
Sunil K. Sibal; MD; Seaport Research Partners
Presentation
Operator
Greetings, and welcome to the NGL Energy Partners 1Q 2024 Earnings Call. At this time, all participants are in a listen-only mode and a question-and-answer session will follow the formal presentation. (Operator Instructions) Please note, this conference is being recorded. I will now turn the conference over to your host, Brad Cooper, CFO of NGL Energy Partners. Brad, you may begin.
Bradley P. Cooper
Good afternoon, and thank you to everyone for joining us on the call today. After the market closed today, we issued an earnings release, investor presentation and filed our 10-Q. Comments today will include plans, forecasts and estimates that are forward-looking statements under the U.S. securities law. These comments are subject to assumptions, risks and uncertainties that could cause actual results to differ from the forward-looking statements. Please take note of the cautionary language and risk factors provided in our SEC filings and earnings materials. With that, let's get into the quarterly results. We have continued our momentum from fiscal 2023 into the first quarter of fiscal 2024.
Our Water Solutions business is on pace for another record year of adjusted EBITDA and disposal volumes with $123.2 million in adjusted EBITDA for the quarter. We are reaffirming our full-year consolidated adjusted EBITDA guidance of $645 million plus. We are getting more capital efficient by spending less growth capital this year, and we are increasing our monetization guidance by 50% from $50 million to $75 million, thus increasing our free cash flow for the year. Our strategy to reduce absolute debt and leverage continues as we purchased $99.3 million of the 2025 unsecured notes early in the quarter and reduced total leverage to 4.4x at the end of the first quarter. As discussed on our last earnings call, all the free cash flow this fiscal year will go straight to the balance sheet and will allow us to pay off the 2025 unsecured notes no later than March 31, 2024. Our liquidity remains strong for this time of year. Recall, earlier this year, we permanently extended our ABL commitment to $600 million through the life of the ABL. As of 6/30, we had approximately $286 million of liquidity and $180 million of borrowings on the ABL.
With our continued strong operational performance and the hard work of the entire company over the last 2 years, we have line of sight to leverage under 4x at the end of fiscal '24. This leverage level will have us positioned for a global refinancing in the first half of calendar 2024. As we have discussed before, there is significant seasonality to our Liquids Logistics segment, especially in our butane and propane businesses. We built butane and propane inventories in the first and second fiscal quarters, which draws on working capital of the company during these quarters. Butane blending season starts in our fiscal second quarter and as those inventories are drawn down, the working capital and margin associated with those sales come back to us in the third and fourth quarters. The propane season is similar to the butane season with inventory draws typically starting in November as cooler weather starts in the upper Midwest and Northeast regions of the United States. Propane and butane have benefited this year from lower prices during their inventory builds with attractive spreads.
With the current container in the market, both are positioned for a strong back half of the fiscal year. Sizable moves in propane and butane prices can shift earnings across our fiscal year. When prices decline over the course of the quarter, earnings are shifted into future quarters due to how we hedge and lock in margins with fixed-price contracts. As mentioned on the last earnings call, Mike and I both spoke to the seasonality of our EBITDA strain. It's not as simple as taking the full-year guide and dividing by 4. Internally, we always saw the first quarter of the year as the softest quarter of the year on a consolidated EBITDA basis. Crude Logistics adjusted EBITDA was $23.8 million in the first quarter. Grand Mesa volumes averaged 72,000 barrels per day in the first quarter as well. Margins for the quarter were impacted by lower crude prices that resulted in lower contracted rates with certain producers. We also saw lower demand for heavier crude oil grades that resulted in lower volumes on the Grand Mesa pipeline.
As I mentioned earlier, Water Solutions is on pace for another record year for adjusted EBITDA and disposal volumes. Water achieved strong adjusted EBITDA of $123.2 million, which equates to approximately 17% growth compared to the same quarter in fiscal 2023. Also, the water team handled approximately 2.46 million barrels per day of produced water volume in the quarter, a 14% increase from the prior year. The average disposal fee in the quarter was $0.64, a 10% increase versus the prior year. This increase is driven by new contracts we have signed over the past 12 months, interruptible volumes we have contracted as well as spot volumes that hit our system in the quarter. The Water team continues doing a great job holding operating expenses down, averaging $0.25 per barrel in the quarter. For the quarter, skim oil recoveries were in line with our historical averages across the basin we operate in. We did have approximately 53,000 barrels of skim oil from the Eagle Ford in storage at the end of the quarter due to tighter pipeline specifications, which reduced the amount of skim oil we sold during the quarter. Early in the second quarter, we solved the skim oil specification issue and sold half of the stored oil so far. We expect to sell the remaining volumes in storage by the end of the second quarter and be back on track selling skim oil production going forward in the Eagle Ford, with the increasing disposal volumes and higher crude oil prices since June 30, we are expecting a strong quarter from our Water Solutions segment.
Now I will turn the call over to Mike.
H. Michael Krimbill
Great. Thanks, Brad. Good afternoon, and welcome. As you know, we do not provide quarterly adjusted EBITDA guidance, and these summer months are typically the slower ones for NGL. This is a typical first quarter with adjusted EBITDA approximately $11 million above the prior year's first quarter. As we are only 3 months into the current fiscal year, it is too early to change guidance. So we are reaffirming our previous full-year estimated EBITDA guidance of $645 million plus, as you've heard. Note that our Water Solutions adjusted EBITDA this quarter was $123, which times 4 quarters is $492 million. This exceeds our current Water Solutions guidance of $475 million for the full year. If the second quarter is similar or better, we will need to increase our Water Solutions full-year adjusted EBITDA guidance. I think we have done light on. Doug, if you're there, do you have any color on water?
Douglas W. White
Yeah, Mike. I think the important thing to point out is we hit a new record peak day in the quarter in June, just shy of 2.8 million barrels. So that shows our abilities, number one, to take the water and have the ready capacity, but also that we are showing the forecasted growth that we believe in. Back half of the quarter showed some pretty heavy recycling, which is also not necessarily negative. The positive thing is when the producers are heavily recycling that just means new completions and new robust volumes to come.
H. Michael Krimbill
Okay. As I discussed in the last earnings call, our accelerated debt reduction was made possible by the non core asset sales and reduced working capital requirements. During this first quarter, we sold $22 million of such non-core assets. Another $25 million have been sold since the end of the quarter up to this timing of this call for a total of $47 million. So as Brad said, we're increasing our non core asset sales from $50 million this year to $75 million. And of course, these additional sale proceeds will be deployed for further balance sheet improvement. With respect to growth capital expenditures, we're reducing our guidance from $75 million to $65 million, a savings of $10 million. This takes our total CapEx, both growth and maintenance for the full year from $125 million down to $115 million. This reduction in growth capital will not impact any of our water disposal volumes. So finally, to sum it up, we are on track to achieve our adjusted EBITDA guidance, and we are generating an additional $35 million of free cash flow for further debt reduction. We continue to be focused on increasing adjusted EBITDA, reducing indebtedness and deleveraging further. Our goal remains repaying the 25 unsecured notes and refinancing the 26 secured bonds. As such, we do not anticipate paying any preferred dividend arrearages in the current fiscal year. That said, I think we're approaching the time when we will regain a measure of financial flexibility.
I think for that, we open up for questions.
Question and Answer Session
Operator
Thank you. The floor is now open for questions. (Operator Instructions) And our first question today is coming from Sunil Sibal from Seaport Global.
Sunil K. Sibal
So I just wanted to understand a little bit the trend in the water business, especially the sequential trends. So I believe the water volumes were essentially flat versus the previous quarter, but your margins was a little bit impacted. Could you talk a little bit about what was going on in that regard? I think we have heard commentaries from some other midstream players about challenges in Permian. Could you address that, too?
H. Michael Krimbill
Doug, do you want to take that?
Douglas W. White
Yes. Sunil, the difference between the Q4 and Q1, you are correct, we were very close to almost exact volumes in those 2 different quarters. As you could see, the adjusted EBITDA was very different. The main driver is that we had $12 million of MVC deficiency payments coming in, in Q4, of which we did not have those in Q1 with a smaller amount in Q1. That's typical for us for fiscal year-end. But if you see the other metrics within the business, we felt that the Q1 was an improvement over Q4, but the difference with the MVC volumes making the EBITDA look different.
Sunil K. Sibal
Doug, what about the volumes? What do you seeing -- I mean we all read, I think there's been rig reductions in the U.S. I'm not sure much in the Permian. But what are you seeing activity-wise? What do you expect to your back half of this quarter and the next couple of quarters?
Douglas W. White
Yes. We are forecasted for the second quarter to be our highest volumetric quarter for the fiscal year. There's a lot of recycling going on currently with produced water. We've seen swings of 300,000 to 400,000 barrels a day in the Delaware, the back half of Q1 and early Q2 here. We're starting to see those volumes swing back with completions coming online, and we expect September actually to be our biggest month of the entire fiscal year. So the recycling and the lower volumes are the investment in the upcoming completions, but we are still very much on track with our forecast for the year. That has not changed.
Sunil K. Sibal
Okay. And then in the Liquids Logistics segment, I think you mentioned about your hedges with regard to the propane and butanes. And I was wondering if you could quantify that a little bit in terms of where the Contango stands right now or what Contangos you have logged in versus previous years?
H. Michael Krimbill
Why don't we start with the Contango? So we have the main storage at Conway, and we have blocked in, I think, our margins around $0.11 a gallon, which we're very pleased with its more than the storage cost for that same storage. So it's going to be a net positive. Did you have anything, Brad, on the... If that's...
Bradley P. Cooper
We don't see the market right now.
H. Michael Krimbill
Yes. It's very frustrating because if you're in a market where you purchase at X price and the price falls for the next several months, we are actually selling at a loss, and then we end up gaining that back in the second half of the year. We've referred to it as [Wake] HOG, which I hate that word, but it's just a timing difference on when we get the profits.
Operator
(Operator Instructions) Our next question today is coming from Tarek Hamid from JPMorgan.
Nevin Tuli
This is Nevin on for Tarek. I wanted to ask a little bit more about the timing to begin paying the press and whether the focus is on redeeming the profit we're just paying the dividend to start.
H. Michael Krimbill
Yes. I think we -- we're looking at each other... I think we're hyper-focused on the refi, obviously, and I think that's where we're laser-focused, executing operationally over the next 2 to 3 quarters and position the partnership for the I think post refi, that will be probably a decision and something we will continue to contemplate and kick around. My guess is it's probably averages first and try to get caught up on those. But I think refi first, and that's where we're hyper-focused.
Bradley P. Cooper
So I just want to clarify, we are not allowed to go into the open market and buy the pref. And we know we have the Bs and Cs at trade, but these are with some private equity investors. So it's difficult to go out and buy those. You would have to make an offer to all the Bs, Cs and Ds. So it would be difficult to buy back the pref.
Nevin Tuli
Got you. And second want to get your thoughts around potential consolidation in the water industry in the Delaware Basin.
H. Michael Krimbill
We have a lot of silence around here. I guess that means these are good questions. I think it makes some sense. We're not in a position where we can do that with a unit price at $4. So I think that's, again, to make it -- there's a lot of logic to it, but I don't know that it happens right away.
Operator
And there are no further questions in queue at this time. I would now like to turn the floor back to Brad Cooper for closing comments.
Bradley P. Cooper
Thank you, guys, for joining us today. It's the first quarter. We're happy with the progress we've made. Again, continue to be laser-focused on the refinance. And we'll talk to you guys here in a few more months. Thank you.
Operator
Thank you. This does conclude today's conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.
