Q3 2024 NGL Energy Partners LP Earnings Call
Participants
Bradley Cooper; Chief Financial Officer, Executive Vice President; NGL Energy Partners LP
Mike Krimbill; Chief Executive Officer; NGL Energy Partners LP
Doug White; Executive Vice President – Water Solutions; NGL Energy Partners LP
Paul Chambers; Analyst; Barclays Capital, Inc.
Patrick Fitzgerald; Analyst; Robert W. Baird & Co., Inc.
Gregg Brody; Analyst; BofA Securities, Inc.
Ward Blum; Analyst; UBS Financial Services Inc.
Ned Baramov; Analyst; Wells Fargo Securities, LLC
Ben Niedermeyer; Analyst; NBW Capital LLC
Presentation
Operator
Greetings, and welcome to the NGL Energy Partners 3Q 2024 Earnings Call. (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.
Bradley Cooper
Good afternoon, and thank you to everyone for joining us on the call today. Our comments today will include plans, forecasts and estimates that are forward-looking statements under the U.S. securities law, and 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 presentation materials and our other public disclosure materials.
Before we get into the third quarter's financial results, I wanted to take some time and discuss what we've accomplished this quarter. I first wanted to thank all the NGO employees for their dedication and extra efforts over the last few months. What we have accomplished over the last few months is astonishing, and we should be proud of what we have achieved.
We have been able to execute on our long-term plan faster than we anticipated. Operationally, we recently held an open season on the Grand Mesa pipeline on January fifth, we closed the open season on the Grand Mesa Pipeline and have a new five year MBC with the same counterparty whose prior contract expired on December 31st, outside of entering into a new 5-year NBC agreement this counterparty will also be the shipper on the pipeline freeing up $18 million to $20 million of working capital.
This is a permanent release of working capital as we continue to negotiate new contracts, signed three contracts on the pipeline. We should continue to see further reductions in working capital. These reductions in working capital will require us to hedge fewer barrels, thus reduce reducing earnings volatility and turns crude logistics into a more ratable long-term fee-based type of business with more MPCs.
A few weeks ago, we issued a press release on the expansion of the Lex produced water pipeline system into Andrews County. This expansion of the Lea County Express Pipeline system takes the existing capacity of 140,000 barrels of water per day, up to 340,000 barrels per day. In 2024.
The addition of a second large diameter pipeline, new disposal wells and new facilities will greatly expand the capabilities of NGL's existing produced water super system and create a significantly larger outlet for Delaware Basin produced water.
The construction of the 27 mile 30 inch produced water pipeline will transport water to areas outside the core of the basin there, but thereby further diversifying NGL's geographic location on its disposal operations.
Elects to expansion is fully underwritten by a recently executed minimum volume commitment contract that includes an acreage dedication, extension with an investment grade oil and gas producer. This is a strong example of the types of transactions we are able to execute upon with our continued demonstration of being the most reliable and dependable water disposal company in the Lower 48 financially on February second, we closed on the refinancing of our debt maturities.
With this $2.9 billion refinancing we extended the weighted average maturity of our debt by approximately three years, while rebalancing the corporate mature maturity stack towards pre-payable debt, providing us the optionality to further accelerate our deleveraging plans the new term loan also provides additional exposure to floating interest rates.
With projected rate cuts on the horizon, we should be able to capture lower interest expense in the future. The combined three tranches were the largest midstream sector financing efforts in 2022 and the most significant capital raise effort in NGL's history.
We have been very clear with our strategy over the last few quarters, our plan was to address the debt maturities in the first half of calendar 2024, and we've been able to execute this refinancing months earlier than anticipated with high yield energy spreads trading the tightest they have been over the last two years.
We decided to accelerate this refinancing while simultaneously amending and extending the ABL in connection with this transaction, all three rating agencies issued new ratings with S&P and Moody's both raising the corporate credit rating one notch to single B.
Fitch initiated coverage on the company as well as issued a corporate credit rating of single-B and double-B minus on the secured notes and permanent.
ABL has been extended five years to 2029 the commitment level stayed the same with $600 million of commitments from the bank group, while at the same time getting relief within the documents across a few key covenants that provide us more flexibility.
The new debt consists of $2.2 billion of senior secured notes with $900 million of year non-call two notes at eight and one eight interest due 2029 and $1.3 billion of 8 year non-call three notes at eight and three-eighths to 2032.
In addition of the secured notes, we entered into a seven year, $700 million term loan facility, the term loan facility floating rate debt as a and as I mentioned earlier, we went into the refinancing wanting and mixing a mix of fixed and floating rate debt.
The term loan also gives us the ability to reprice the facility as we continue to execute on our operational plan. And as we strengthen the balance sheet along the way, the net proceeds from the transactions are being used to fund the redemption of the 25 unsecured notes, the 26 unsecured notes and the 26 senior secured notes, including any applicable premiums and accrued and unpaid interest funds will also be used to pay fees and expenses in connection with the transaction and to repay borrowings under the ABL.
This refinancing allows us to take the next step in addressing our capital structure. On Tuesday of this week, we announced the payment for 50% of the outstanding arrearages on the three classes of the preferred securities.
Over the last few months, we have been using free cash flow to pay down our ABL and position ourselves to quickly address the arrearages after the refinancing, we believe we are catching up on these arrearages quicker than anyone anticipated.
The first 50% payment will be made to holders of record as of February 16th, with payments being made on February 27th, for the holders of the Class B preferred securities, they will receive $4.44 per week per unit and each holder of the Class C's will receive approximately $4.7 per unit. In addition to the payments of the Class B and C holders, we are also making a $115 million payment to the holders of the Class D preferreds.
The first question we expect to receive in the Q&A session is when do we plan to make the second half payment and declare we are current on the preferred distributions. In the press release we issued after market today. We are raising the full year guide on asset sales from $100 million to $150 million.
The remaining asset sales should close by 331 with free cash flow, asset sales and the release of working capital in the liquids segment, we will make the remaining 50% payment in the very near future. We will be thoughtful on the timing of this payment as we assess what the fiscal 2025 cash flow and capital budget could be.
As we kick off the budget process in late February over the last several quarters, we have positioned the partnership to take advantage of a market window to address the debt maturities. Our ability to execute quickly allows us the flexibility to take the next step of our long-term strategy addressing the preferred arrearages. As we achieve these milestones, our long term strategy will continue to evolve. We have additional steps to complete, but all of our stakeholders should feel comfortable with the progress we have made and our consistent messaging along the way.
With that, let's get into the third quarter financial results. Water Solutions. Adjusted EBITDA was $121.3 million in the third quarter versus $121.7 million in the prior third quarter. Water disposal volumes were $2.38 million barrels per day in the third quarter versus $2.43 million barrels per day in the prior third quarter.
As Mike mentioned on the previous earnings call, we expected water disposal volumes would be down versus the fiscal second quarter. There are two main drivers that impacted our third quarter disposal volumes. First, producers are keeping produced water on location for completion activity.
This activity will create lumpiness in our disposal volumes going forward. The good news is NGL will receive these disposal volumes once all completion activity is completed at that location. NGL isn't losing any volumes. It's just a timing issue on when those volumes will be received.
Second, we have a large NBC with an investment grade integrated energy, major producer pressured up its own water gathering system, and it was limited to the amount of water volumes they can get on our system. This producer is currently working on reducing pressures on our water gathering system the volume impact for the third quarter was approximately 178,000 barrels per day for the quarter.
It's important to remember that we get paid for these volumes and these deficiency volumes are not included in the physical disposal volumes. We report also this in BC as approximately nine years. Remaining Water Solutions continues to maintain operating expenses at $0.25 per barrel best in the industry.
This is primarily due to lower chemical expenses, lower generator rental expenses and utilities expenses. These decreases were partially offset by higher repairs and maintenance expense due to the timing of repairs that preventative maintenance and tank cleaning Crude Oil Logistics adjusted EBITDA was seven, was $17 million in the third quarter versus $33.3 million in the prior third quarter.
The adjusted EBITDA, the decrease was primarily due to lower crude sales margins as we received lower contracted rates with certain producers as WTI pricing went below $75 and lower contract differentials negatively, it negatively impacted certain other sales contracts. Volumes decreased due to lower production on acreage dedicated to the Grand Mesa pipeline and also our adjusted EBITDA when compared to the same quarter.
The previous quarter is slightly impacted by the sale of our marine assets in March on March 30th of 2023. We remain constructive on the DJ Basin and believe the results of the most recent open season on Grand Mesa demonstrate the important to producers of having long-term capacity contracted on the pipeline. We will continue to work with the producers in the DJ and look forward to having additional contracting updates in the near future.
Liquids Logistics EBITDA adjusted EBITDA was $22.4 million in the third quarter versus $20.5 million in the prior third quarter. This increase was due to higher margins and higher demand for butane blending This was partially offset by lower propane margins and volumes due to warmer weather in the third quarter.
Also lower margins on refined products supply issues seen in certain markets in the prior year have been alleviated and have tightened margins. Corporate and adjusted and other adjusted EBITDA was a loss of $11.9 million in the third quarter versus income of $19.5 million in the prior third quarter.
I want to remind everyone that in the prior year third quarter, it included other income of $29.5 million to settle a dispute associated with commercial activities.
I would like now like to turn the call over to Mike Krimbill, our CEO. Mike?
Mike Krimbill
Thanks, Brad. As you have heard in the last year, we have achieved significant milestones as we position NGL for success at the same time continue exceeding expectations. First, as Brad described, we have reduced leverage on the balance sheet faster than expected due to free cash flow and asset sales attractive multiples. Second, this deleveraging allowed us to complete the refi of all of our indebtedness earlier than expected, reducing our refinancing risk providing financial flexibility.
And third, we announced the payment of 50% of the preferred dividend arrearages sooner than expected. We are trying not to disappoint, but rather establish a reputation for beating expectations. Looking forward, we are focused on the following payment of the remaining preferred distribution arrearages as soon as possible, then reinstatement of the Class B C and D distribution as soon as possible.
Third, continued deleveraging through debt reduction and increased EBITDA balanced with addressing the Class D preferred debt reduction can be begin six months after the recent refi as the new high-yield debt has non-call provisions of two to three years.
And the term loan incurs breakage fees if repaid within the next six months for improve our credit rating with the agencies, debt reduction, payment of the distribution arrearages and increased EBITDA from accelerations process.
I emphasize internal growth opportunities at attractive rates of return underwritten supported by MVCs rather than limiting growth capital. As we have up until now, we will look for investments to expand our footprint, strengthen our competitive position that will also increase the quality consistency and amount of our adjusted EBITDA.
For example, this is the recently announced expansion of the county Express Pipeline system growth. Capex and adjusted EBITDA for this project will be included in our fiscal 2025 guidance. Another example of the outcome of the open season Brad spoke about.
We are currently working on multiple new growth projects and contracts, which we will announce if successful. Finally we expect to grow adjusted EBITDA each year for the foreseeable future, led by our Delaware Water Solutions business.
With respect to our adjusted EBITDA, we are affirming the previous guidance of $500 million plus for water and $645 million for the partnership. So our guidance for adjusted EBITDA and growth CapEx in fiscal year 25 will obviously be higher than the current fiscal year that we will announce that at our year-end call and closing over the last few years, we have made tremendous progress in many areas, increased efficiencies, cost reduction, asset sales, reduce leverage and increase in EBITDA.
Going forward we will have fewer opportunities to capitalize on most of these areas. So our renewed focus will be on internal growth with MVCs and hitting our numbers. Ngl was one of the best performing equities in the energy space in calendar '23. We will do our utmost to repeat that performance. Thank you. Couple of questions.
Question and Answer Session
Operator
Thank you. At this time we will be conducting a question and answer session. (Operator Instructions)
Paul Chamber, Barclays.
Paul Chambers
Yes, great. Thanks. And I'll surprise you here and not ask about the pref on Brad, you brought up a working capital release in crude logistics and obviously your March quarter historically has not had the largest swings towards the positive working capital change of I know there are a lot of factors involved, including seasonal inventories, but any color or range you can kind of point us to for what the fourth quarter could look like or what you're targeting for the full year?
Bradley Cooper
Q4 ABL balance?
Paul Chambers
Working cap sorry, working capital change?
Working capital lending motors, it was like $120 million and I think the previous year was like $60 million. I know it's a big swing for you every year?
Bradley Cooper
Yes, that's probably a decent ZIP code. It's a little bit challenging to think that I'm looking thinking through the ABL balance because we've been using free cash flow to pay down the ABL to address the pref on, I would think we'd probably be a $40 million to $50 million working capital number at 331, Paul.
Okay, great.
Mike Krimbill
Or not out of the 55 sorry.
Paul Chambers
But yes, so far, Q4 working capital would be somewhere around keeping in the 50-ish, plus or minus range. Just put it.
Bradley Cooper
Well, that's a good estimate.
Operator
Apologies, can you hear me?
Patrick Fitzgerald, Baird. Please proceed.
Patrick Fitzgerald
Hey, congrats on the refi on what is if you wouldn't mind, could you provide an update on the ABL balance, you know, as of today or recently
Bradley Cooper
It's zero today.
Patrick Fitzgerald
Okay. Sell your May-Kin preferred payments and I guess you all with a free cash flow and asset sales.
Bradley Cooper
Yes. We're using we'll be using a little bit of the ABL balance just because we've been using free cash flow in the third quarter to get the ABL down to zero. So back to the kind of the opening question about the ABL balance at three 31 will represent a little bit of usage for the preferred. Otherwise, it's free cash flow.
Is the moderator there?
Operator
Apologies having technical difficulties here.
Gregg Brody, Bank of America.
Gregg Brody
Hey, guys, and congrats. Congrats on all the work you did on refine and getting the first slug of preferred addressed. I know it's been a long road. So congrats on that. Just maybe my question is more just on the asset sales. Can maybe give us a sense of what some of those might be on and if that will lead to some of any revision to your guidance once it's done?
Bradley Cooper
Yes, good question about the what's the what's really laps? And I spoke to the working capital release that's coming our way as a result of the new for the shipper on the Grand Mesa Pipeline that just occurred through the open season, we've accounted for that $18 million to $20 million of working capital release in our asset sale number because of a permanent release of working capital.
When there's a second transaction that it is a land position that generates a mid to high single digit EBITDA that we're close to wrapping up. It would be a similar type. Our multiple from what we've been executing this year.
Gregg Brody
And then just as you talk about shifting to organic growth opportunities, you've highlighted the one that you announced in the last month. How significant do you think that could be and is there you sounded like you were trying to pay off the rest of the preferred near term. Is it possible that gets delayed as a result of organic growth opportunities or where do you think you can do you think you can do it all at the same time? You think you can do it?
Bradley Cooper
Yes, we can. I mean that work we're committed to getting caught up on the preferred arrearages. We've been very clear. I think with the press release that went out Tuesday and the first payment, we wouldn't have committed to making a first payment. We didn't see line of sight to adding the second payment being May. We do want to see the release of working capital come our way in the third quarter.
The free cash flow we typically generate come our way in the fiscal fourth quarter and then be in a position to make that payment. But the growth projects that Mike spoke to does not impede our ability to address those arrearages.
Gregg Brody
Great, that's it for me, guys. Thanks for your time, and congrats again.
Bradley Cooper
Thank you.
Operator
Paul Chambers, Barclays.
Paul Chambers
Hey, guys, thanks for letting me back in. I think you got bumped there from follow-up question on kind of oil skimming and as we look at fiscal '25 and the ramp of the new contract commencing in the second half, will the oil skimming daily volumes grow commensurate with that or maybe put another way, is it fair to assume that oil scan volumes will be higher in fiscal '25?
Bradley Cooper
Yes, that the relationship between skim and disposal volumes that we've had the last couple of years should hold for fiscal '25.
Paul Chambers
Okay. And then I guess, Brad, once the clarity on the income statement, the water solutions cost of sales was a benefit. And I know it's a small number, but can you get any clarity on why that is product? Is that cost of sales that might be?
Bradley Cooper
We've got hedges. We've hedged the skim oil with costless collars that would be rolling through that line item. Let us look at that real quick and then we can circle back with you, Paul, if that's not. Okay. Not the does those composition? We had about 80% to 90% of our skim oil hedge with collars through the end of the fiscal year.
Paul Chambers
Okay. Fair enough. Great. Thanks for that.
Operator
Ward Blum, UBS.
Ward Blum
Going to have no great accomplishment on the refi sort of looking forward, perhaps a quarter or so when you have the free cash flow and the asset sale proceeds to bring your preferreds current? How do you view the sort of the priorities between getting rid of the B Preferred with a 12% coupon or starting to pay distributions to that unit holders.
Bradley Cooper
I think we got a bad connection. I know we the issue on the deal is there is a maturity of those at June 30th of 27. So it's not perpetual. We just can't let it hang out there. So we need we do we're not fans of the cost of those funds either. So that would say we have to do something in the next 3.5 years.
Ward Blum
I was referring to the B as in boy?
Bradley Cooper
Yes, these being perpetual that they've bought our first now not the first securing that prepared that we would we would go after getting caught up on the BC. and D. arrearages allows us now to make to start making redemption payments on the class fees to Mike's comment that those have the obligation to put right in the summer of 27 and we will go activities before we address the B's and C's.
Ward Blum
Would that preclude you from making common distributions at that point when you were going after the pay down of the D.
Bradley Cooper
No, once we have paid the arrearages, we have as we refer to the financial flexibility, we can reduce debt further, we can buy out these over time and we could then do something with the comment.
Ward Blum
Thank you very much.
Bradley Cooper
Yes, thank you.
Operator
Ned Baramov, Wells Fargo.
Ned Baramov
Talk about how big the contract is with the one shipper which signed up for capacity. And then when are the remaining contracts on Grand Mesa rolling off?
Bradley Cooper
Yes, we've got some maybe a smaller contract that's rolling off towards the latter part of this calendar year. And the second contract of size equivalent to one that just rolled off as it had a couple of years on it.
Ned Baramov
Okay, got it. And then maybe on the on the water system expansion project, can you give us a sense for CapEx dollars associated with the expansion? I know that you mentioned next year's growth CapEx is going to be higher than the current year, but just looking for additional color there.
Bradley Cooper
Yes, at this time we can it will be part of our fiscal '25 budget. And I think as Mike spoke to, and we'll roll that all that out on the June year end call.
Ned Baramov
Understood. Thanks for the time.
Bradley Cooper
Thank you.
Operator
Ben Niedermeyer, NBW Capital.
Ben Niedermeyer
Yes, I'm just wondering with the desire to get a higher debt rating you what you're thinking isn't a debt to EBITDA, aspirationally, where do you want to see it? And I know you've got to counterbalance that with the fact that some of the debt, you can pay down right away and it's more of an EBITDA grossing. But nonetheless, where do you see EBITDA two, three years out?
Bradley Cooper
So Bill, I think the agencies consider the arrearages as indebtedness, and they also consider the class DDi's indebtedness. So by we're not we're not looking at are just kind of pure plain vanilla leverages really all three of those. So we will be paying down the arrearages and going after the D's that will be reducing leverage from the agency's point of view.
Ben Niedermeyer
And where what are you looking at in terms of goals, are you looking for leverage to be 3.5 debt to EBITDA?
Bradley Cooper
Yes, just plain vanilla without the arrearages or the trap. And we'd like to be frankly, any while we continue to address the graphite Class D specifically, they were in those three and three quarters of up to four times range. And then once the deals are taking care of something, something sub that level.
I think we're probably 3.5 is a nice long-term goal for us to they have post class these.
Ben Niedermeyer
Now can I do a follow on question on another topic of the former question on not being able to disclose the cost of the new type fit. I'm interested in knowing if you can disclose at the length of those MVCs. And I'm assuming the return on invested capital is going to be much higher than the Company norm because you've got it on an existing right-of-way, that's you're building another pipe right next to another one. And so an existing one, how can you give us some sense of what type of returns, the length of those MBCs just beyond without disclosing the costs?
Bradley Cooper
Is Doug on. Doug, are you there?
Doug White
From here and we say the likes of the MBC. Yes, as the press release, I believe stated Mike, the NBC, the five year NBC was public.
Ben Niedermeyer
And returns on existing. Are you putting this up at a very low multiple of EBITDA? Can you give us some sense of the returns on the project we do envision.
Doug White
So your comment on right away is correct. We've all we previously purchased that right away. We had to and we built the X1, this has legs to. So there is not significant right away costs, which we can't disclose see the return. But I think the important thing here is the whole story is we got an extension of the acreage dedication. There's value that there is EBITDA from obviously what gets shipped over these five years. But what we're very excited about is the total capacity is 500,000 barrels per day.
So we have a couple of hundred thousand barrels of capacity to sell to other producers. So ultimately, the return or the there, the GAAP rate of return is going to be very attractive through. I can't give you a number.
Ben Niedermeyer
Okay. Thank you.
Bradley Cooper
Yes, thank you.
Operator
I would now like to turn the call back to Brad Cooper for closing remarks.
Bradley Cooper
Well, thanks, everyone, for your interest in the call today. We've accomplished a lot this last quarter and look forward to talking to you all in June with our year-end results and fiscal '25 budget. Thank you.
Operator
This concludes today's conference and you may disconnect your lines at this time. Thank you for your participation.
