NGL Energy Partners - Earnings Call - Q1 2021

Transcript

Speaker 0

Ladies and gentlemen, thank you for standing by, and welcome to the Q1 FY twenty twenty one NGL Energy Partnership LP Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Mr.

Trey Karlovich, CFO. Please go ahead, sir.

Speaker 1

Great. Thank you, and welcome, everybody. First, I hope everyone is staying safe and healthy. 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 effective 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 ks, 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 ks and Form 10 Q on our website at www.nginergypartners.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. We believe it is important to cover our first quarter financial results before Mike gives his thoughts on the business and the rest of fiscal twenty twenty one. I will discuss our operating results for the quarter for each segment and then turn the call over to Mike before opening up the line for questions. We also have our EVPs, Doug White for Water Don Robinson for Crude and Jeff Tenner and Don Jensen for Liquids and Refined, along with other members of management on the call to assist with Q and A.

Starting with Crude. The Crude segment reported approximately $31,000,000 of adjusted EBITDA this quarter. There are several items impacting the Crude segment this quarter, including a benefit of contango with our storage assets, offset by costs related to the CMA plus roll component and the pricing of barrels purchased and shipped on Grand Mesa, the timing of recognition of hedge gains and losses, as well as profit embedded in our inventory for July sales. We have estimated approximately $16,000,000 of profit embedded in our inventory, which is valued at weighted average cost that we expect to recognize during our second quarter. We have already realized the majority of the hedge losses associated with these barrels when we roll those hedges forward from June, so this is just a matter of timing.

Grand Mesa volumes averaged 119,000 barrels per day this quarter. However, our profitability on a portion of those barrels was negatively impacted by the unprecedented calendar month average roll differentials during the quarter, which cost us an estimated $11,000,000 compared to historical average differentials. Most of this cost was realized in May and June settlements, and the differential has come in significantly in July. This is a standard pricing mechanism for the industry, and while this loss was not expected to be made up this year, it is also not expected to continue. Finally, for crude, we benefited from contango storage for a portion of the quarter.

However, the forward curve has flattened considerably, and we do not expect to see any significant contango for the remainder of this fiscal year. So from an earnings perspective, crude generated $31,000,000 of adjusted EBITDA. We have deferred earnings estimated at $16,000,000 to be recognized later this year, most likely second quarter, and we lost approximately $11,000,000 compared to historical results from the CMA role. Moving to Water. Water adjusted EBITDA was $57,000,000 for the quarter.

Total disposal barrels averaged 1,400,000 barrels per day during the quarter as volumes declined significantly in May. Delaware Basin volumes totaled 1,100,000 barrels per day, approximately 80% of total volumes. Eagle Ford volumes averaged 95,000 barrels per day, down 64% compared to last year and have been the most impacted by the decline in prices, rigs and production shut ins. We are expecting a slower recovery of volumes in this basin. DJ volumes were down as well to about 132,000 barrels per day compared to about 170,000 barrels per day in the comparable quarter last year.

We received an average disposal fee of $0.63 per barrel for the quarter, very consistent with pricing in prior quarters. Of note, we did not sell all of our skim oil recovered during the quarter. Instead, we utilized our storage at each facility to hold barrels, and we have been selling those barrels at higher pricing during the current quarter. This should be a nice benefit to the second quarter when we are expecting about $4,000,000 of incremental revenues. Our steam oil volumes remain hedged for calendar twenty twenty with approximately 3,000 barrels per day hedged at an average price just over $56 per barrel through December.

Operating expenses came down significantly and averaged $0.32 per barrel for the quarter, a 25% reduction on a per barrel basis from last year. We completed a significant reduction in headcount as well as reductions in chemicals and other supplies and utilities costs. We only benefited from these reductions in the last month or so of the quarter and expect our operating cost per barrel to continue to decrease in the second quarter and beyond as we target OpEx per barrel of less than $0.30 Moving to liquids. Adjusted EBITDA for our Liquids and Refined Products segment totaled $12,000,000 this quarter. Volumes for propane were strong during the quarter and compared to last year as we saw little to no impact in propane demand as a result of the pandemic at this time of the year.

Butane, refined fuels and other liquids were down compared to last year, primarily as these products are utilized in transportation. We've seen a pickup in volumes heading into the second quarter. However, we continue to be cautious on our volume expectations for these products this year. Product margins were generally in line with our expectations during the quarter as this is the period that we are building inventory and preparing for the blending and heating seasons. Overall, our quarterly results were impacted by the pandemic like many others.

However, we took the opportunities to capitalize on our asset positions and maximize value, most of which will be recognized in future periods. Had those items been fully reflected in the first quarter, our financial results would have been more in line with market expectations. Based on these results and expectations for the rest of fiscal twenty twenty one, we are adding a range to our adjusted EBITDA guidance of $560,000,000 to 600,000,000 Turning to capital expenditures and cash flows. Our growth CapEx totaled approximately $21,000,000 for the quarter as we are completing the water infrastructure projects we started last year, including the Poker Lake tie in for Exxon, which we expect to bring online this fall. We have entered into incremental acreage dedications recently that will require minimal, if any, growth CapEx to meet the producers' disposal needs.

We have made no changes to our target growth CapEx for fiscal twenty twenty one. Note, we did fund a significant amount of our growth capital expenditures that were incurred prior to and accrued on 03/31/2020, coming into this fiscal year as well as approximately $66,000,000 of the $100,000,000 remaining for the deferred purchase price of Mesquite. The remaining $34,000,000 from Mesquite will be funded ratably through December 2020 and has been accrued on our balance sheet. We also focused on reducing our maintenance CapEx, which came down again in the first quarter to $9,000,000 Our combined capital expenditures forecast remains approximately $100,000,000 for both growth and maintenance CapEx for the entire year. Our common unit distribution of $0.20 per unit for the quarter, $0.08 0 per unit on an annualized basis was declared a couple of weeks ago, along with our preferred unit distributions and will be paid on August 14.

We continue to expect FY 2021 coverage to exceed 2.5 times based on our adjusted EBITDA guidance and also continue to expect fiscal twenty twenty one to be free cash flow positive with excess cash flow used to reduce indebtedness and improve leverage. Our leverage remains around 5.3x at June 30, and we expect to stay at this level for the next couple of quarters under current operating conditions. We are also evaluating other opportunities to reduce leverage, including joint ventures and non core assets. Finally, as a general matter, we do not generally comment on pending litigation. However, as many of you are aware, one of our customers is taking steps within its Chapter 11 bankruptcy to attempt to reject our transportation contracts relating to the Grand Mesa pipeline.

Unfortunately, those contracts are currently subject to litigation. Last week, we filed an objection to their motions to reject the two contracts, and we separately filed a motion to lift the automatic stay so that we can seek the proper input from FERC, which we believe has jurisdiction over the contracts. The hearing related to these matters was set with the court for September 3. Obviously, our filings are public record, and you are welcome to review them. Basically, at this time, I cannot add anything additional here that isn't contained in those filings.

As in any disputed matter, NGL is always amicable to resolving matters in a commercially reasonable way, but there are times where we owe it to our unitholders to seek validation of our contractual rights and use the courts to do so, and we believe this circumstance is one of those matters. So we will be considering all legal possibilities with respect to defending the value in these contracts for our stakeholders. That concludes my prepared remarks.

Speaker 2

I'll now turn it over to Mike. Thanks, Trey. The past quarter presented us with many challenges and opportunities which we have been managing like all of our peers and most companies in general. We have seen unprecedented volatility in crude prices, other commodities, significant reductions in demand for crude, refined fuels and certain liquid products and an increase in upstream producers facing significant financial difficulties. We have taken numerous steps to reduce operating costs and capital expenditures while optimizing our assets.

We have been working closely with our producer customers to make sure we are meeting their operational needs and helping them to manage in this environment as well. We took advantage of an extremely steep contango crude environment April and May only to see the forward curve flatten considerably in June and through July. As Trey said, a significant portion of our profits are embedded in our inventory at June 30, and we expect to recognize these margins when the product is sold in our second quarter. We held skim oil barrels in tank and expect to monetize those in the upcoming quarter as well at higher average prices than we saw throughout the first quarter. We have also taken this opportunity to add acreage dedications, expand our market share and further solidify our core operating areas in the Weller Solutions business.

In the Delaware Basin, we have all of our large diameter pipe online and flowing water. The 24 inches WEX pipeline east to Andrews County, Texas is in service. The 24 inches WEX pipeline from Eddy County to Mentone, Texas is operational, as is the 24 inches Orla Express from Lea County to Mentone. Our new 30 inches pipeline in Southern Eddy County South Of Texas is in service and flowing water as well. This is a major milestone for NGL as these capital expenditures are now behind us.

Water volumes are currently increasing with additional substantial contracted volumes coming on the remainder of the year. As Trane mentioned, we have reduced operating expenses in our Water segment by approximately $2,000,000 per month beginning in June, which we will continue to fully realize in our future quarters. In closing, we took this quarter to focus on items that we can control as we continue to position NGL for long term success, focusing on the future while managing the short term obstacles and opportunities. With that, should we open

Speaker 1

it up for questions?

Speaker 0

And I have a question from Terence Hammond from Simmons Energy. Congrats

Speaker 3

on some of the recent success with some of the acreage dedications in the Delaware Basin. I was just curious, what are leading edge disposal fees right now within the Delaware Basin?

Speaker 2

Doug, I'll call on you for that one, but I think they're different in Texas versus Mexico. Doug, what are you what are your thoughts?

Speaker 4

The range in Texas is anywhere from 45 to 55¢, generally. And some areas such as our Hillstone, Loving County assets, they're somewhere from that range, but maybe a little bit higher due to unique area, lack of electricity, station power such as that. So we do have higher rates in that area. New Mexico, with the Devonian wells, they're much more expensive to develop. Lack of, reliable, offtake and takeaway, we see those prices ranging anywhere from the lows of $0.55 to $0.80 You would imagine prices may have decreased during this downturn, but we have not seen that.

We've seen some very temporary rate reductions to help the producers. But those rates, subsequent to the increase in commodity price,

Speaker 1

have gone back up

Speaker 4

to pre COVID levels.

Speaker 3

Okay. And then Mike and Trey, I just wanted to expound a little bit upon your prepared remarks comments on asset divestitures and potentially joint ventures to help reduce leverage. What are your thoughts there? What's the sense of timing? What's the market like for that right now?

Speaker 1

So thanks, Pierce. So as we've done historically, we're always looking at opportunities. It is a more challenged market. However, we are seeing it improve. We've got some significant opportunity ahead of us as well with in particular with our water business, but really across all of our lines of business.

So those are things that we continually evaluate and would expect to do so in these circumstances as well. Now generally speaking, the multiples that we will look at for those types of transactions, they have to be deleveraging in order to make an impact. So that's what we would be targeting. So I would say nothing is on sale. Okay,

Speaker 3

great. And then if I could squeeze one more in. Just what's the latest update on Poker Lake?

Speaker 1

Doug?

Speaker 4

As Mike stated previously, our 30 inches pipeline is in the ground and taking water. Our timing of that development is unchanged from previous discussions. That's all we can say about it currently publicly.

Speaker 1

Thank you.

Speaker 0

And we have a question from James Spicer from TD Securities. Please

Speaker 5

go ahead. Yeah. Hi, guys. Hi, guys. Good afternoon.

The the reduction guidance or the the the addition of the range to the guidance, $5.60 to 600, I assume that reflects the 11,000,000 onetime hit that, it doesn't look like you can get that one back. Is there anything else, built into that range that we should be thinking about?

Speaker 1

Thanks, James. So yes, it does include the onetime item accrued. The other commentary I would add to that is that when we put the guidance out initially in April and then reiterated at the May, there was an extremely steep contango, which continued through May. That obviously disappeared in June. We do not expect contango to come back during the second half of this year and into next year.

So we've removed the expectation of any significant contango barrels being held, which will help from a working capital perspective to reduce working capital needs, but obviously has the impact of not generating that incremental EBITDA either. So we captured contango during the first quarter. When we gave our original guidance, we expected to capture some contango throughout the year. And at this point in time, we're not expecting that. Otherwise, no other real changes.

Speaker 2

Yes. I would just add, it's we're really in this transition period. I mean if you're going to have significant contango, you're going to have low crude prices, which is certainly not good for future crude and water production. So we're in this period here. I think some of our peers talked about over $40 is a good thing.

You're not going to have contango. I think fiscal 'twenty or calendar 'twenty one is close to $45 So this should lead to some rigs being put back into service, we think, no later than the '1. And then maybe when we get some DUCs completed in the last half of this year. So rather have a higher crude price than the contango.

Speaker 5

Yes, I understand. Okay. That's helpful. Thank you.

Speaker 0

And your next question comes from the line of Patrick Fitzgerald from Baird. Please go ahead.

Speaker 6

Yes. Thanks for taking the question. Is there any way you could help us with kind of it seems like the obvious question about the capital structure, the maturities in 'twenty one. What's your plan to refinance that?

Speaker 1

Yes. I'll start. This is Trey. So our twenty twenty one maturity is our credit facility. So it's October 2021.

Our expectation is to have that extended prior to it going current. So that's something that we've been working on. We've been in communications with our bank group. And we expect the bank group to be constructive. There are a couple unknowns that we've been working through, including we did the refi of a term loan.

We completed that with Apollo back in June. So that we needed to complete that. And then, you know, the the recent bankruptcy filing, we've been working through that as well. So this is something that is the number one priority of the of the finance team expected to be extended. That's something that we're working through.

Okay. And you bought back some bonds in the quarter, it looks like.

Speaker 6

I mean, do you plan to use capital for that purpose throughout the remainder of the year, given where these prices are?

Speaker 1

So we've always evaluated our bonds in the open market for opportunity. We bought those bonds at less than $0.50 on the dollar. We've done that in the past as well. We did that in 2016. So that's something that we continue to evaluate.

A lot of factors go into that decision on what is the best use of capital, what do liquidity needs look like, How does it impact leverage? What are our maturities? So all of those things are weighed. I wouldn't take anything off the table, but I wouldn't say that that's a core strategy either.

Speaker 6

Okay. And then the five sixty to 600 guidance, that I mean, how much of that factors in the what's going on with the bankruptcy proceedings and the and the litigation?

Speaker 1

So that that's our latest expectation. Know, at this point in time, both parties are operating under the existing contracts. So, at this point in time, that's what's factored into our guidance. And again, we have a range. Are, you know, going on the fifth month of the year.

So, you know, if this continues, it continues to operate under the existing contract structure.

Speaker 6

Okay. Is there say things go well, obviously, that probably doesn't impact it. If things go against you, would you is there any, range you could provide on how much of an impact that could be?

Speaker 1

So when we provided our expectations for the year, we expected so expected a 5% to 10% reduction in volumes on Grand Mesa from last year's results. So last year was about 130,000 barrels a day. So assuming about a 10% reduction would be about 117,000 barrels a day. We're running just above that. So we attempted to factor that in.

Most of the volumes on Grand Mesa are under MVCs. We attempted to factor this situation into our overall guidance as well. I think that's what I can say publicly and what's been stated previously as well.

Speaker 2

Let me add to that, because this is an area where we've seen some misconceptions to be nice in some of these people who volunteer their opinions on the Internet. It's not only an EBITDA issue. You're going to either have a contract or you're gonna have a very large unsecured claim, which results in ownership or both. And if some of what you have is ownership, then that is positive, you might say, your leverage because you're going to sell it and pay down debt. So it's it's hard for us at this point to decide to determine where where this thing is going.

Is there gonna be are they gonna accept the contract? Are we gonna own a bunch of the company? Are we gonna reduce that? And is EBITDA gonna be the same or a little less? Just we just can't say.

I mean, we have no idea. But you you don't end up with nothing, which is what some of the some of the folks on the Internet have said.

Speaker 6

Got you. Well, I appreciate you answering the question. Thanks. Yep.

Speaker 0

And your next question comes from TJ Schultz from RBC Capital Markets. Please go ahead.

Speaker 7

Great. Thanks. Hey, guys. Good afternoon. Just on that last one, was like on the Grand Mesa contract, has there been any discussion to negotiate a lower MVC to provide more flexibility, or is it at this point just a full accept or reject decision to the court and then going through with the unsecured claim?

Speaker 2

Probably the easiest thing to say is, we have not spoken to anyone representing or the bondholders themselves. So it's hard to negotiate with a ghost.

Speaker 7

Okay. Understood. Just a question on on their exposure for your water segment. If if they're able to reject their water disposal contract, how material is that to you all, if at all?

Speaker 1

TJ, I would call it minimal unit. The DJ Basin, we have a very large area of dedication with lots of producers. I would not call it significant to the company working with DJ on a stand alone basis.

Speaker 7

Okay. Understood. Just last one moving on. So the water segment, the OpEx per barrel, I think you mentioned a partial benefit in this last quarter. And then as we think into the September, maybe with a full quarter benefit, would you expect to get to that sub $0.30 this quarter?

Or is there still more to do throughout the year before we realize that? Yes.

Speaker 1

We would expect to be at that $0.30 for this upcoming quarter and to stay at or below that level on a go forward basis.

Speaker 2

T. J, Mike, just to I'll add to that for your first question on the water contract. Again, you don't end up with zero value, so that just increases continues to increase our unsecured claim.

Speaker 7

No. I understand. I appreciate it, man.

Speaker 1

Thanks, TJ.

Speaker 0

And I'm showing no further questions in the queue at this time.

Speaker 1

Again, thank you everybody for your interest, and we look forward to talking to you on the next earnings call. Have a good evening. Thank you.

Speaker 0

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.