NGL Energy Partners - Earnings Call - Q2 2020

Executive Summary

• Q2 FY2020 Adjusted EBITDA from continuing operations was $118.98M (+30% YoY) driven by stronger Water Solutions and steady Crude Oil Logistics; total revenues were $4.29B; GAAP net loss was $(201.37)M due largely to discontinued operations related to the refined products sale.
• Segment guidance updated: Crude raised to $200–$220M, Liquids raised to $85–$95M; Water lowered to $270–$300M reflecting timing/volume ramp and Hillstone integration; Refined Products cut to $15–$30M as TPSL exited—net effect is mix shift to fee-based, contracted cash flows.
• Balance sheet and liquidity actions: sale of TPSL reduced working capital borrowings ~$300M; amended revolver to $1.79B capacity and eliminated leverage covenant per amendments; total debt at 9/30/19 was $2.774B; liquidity ~$503.5M.
• Strategic pivot accelerates: closed Mesquite (July 2) and Hillstone (Oct 31), creating the largest U.S. produced-water network with long-term acreage dedications/MVCs; management targeting >70% piped water and 1.8–2.0MM bpd disposal exit run-rate for FY2020.
• Consensus estimates from S&P Global were not available at the time of analysis; estimate comparisons are omitted.

What Went Well and What Went Wrong

What Went Well

• Water Solutions EBITDA rose to $56.9M (+47% YoY), with 1.258MM bpd processed (+24.9% YoY) as Mesquite volumes ramped; average disposal fee was ~$0.64/bbl; skim oil realized ~$58/bbl after hedges.
• Crude Oil Logistics remained steady: Adjusted EBITDA $54.6M (vs. $48.5M YoY); Grand Mesa averaged ~128 kbpd with volumes trending higher into October/November per management.
• Liquids execution: Adjusted EBITDA $19.3M, supported by strong butane and Chesapeake export facility utilization; segment guidance raised to $85–$95M for FY2020.

Management quote: “We have established the largest water system in the U.S. with nearly 3 million barrels a day of disposable capacity… long-term contracts… Mesquite 95% piped, Hillstone 100% piped” — CEO Mike Krimbill.

What Went Wrong

• Headline GAAP net loss of $(201.37)M, driven by a $(202.02)M loss from discontinued operations as TPSL was sold and wound down; net loss per common unit was $(1.72).
• Water Solutions full-year guidance lowered to $270–$300M (from $290–$320M) reflecting integration timing and updated volume ramp, despite strong Q2 segment EBITDA.
• Operating costs in Water remained above target ($0.38/bbl in Q2 vs. $0.30/bbl target), with ongoing automation and grid power transitions needed to reach cost goals.

Transcript

Speaker 0

Ladies and gentlemen, thank you for standing by, and welcome to the Second Quarter Fiscal Year twenty twenty NGL Energy Partners 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. As a reminder, today's program is being recorded. I would now like to introduce your host for today's program, Trey Karlovich, Chief Financial Officer.

Please go ahead, sir.

Speaker 1

Great. Thank you, and welcome, everybody. As a reminder, this conference call includes forward looking statements and information. Words such as anticipate, project, expect, plan, goal, forecast, intend, could, believe, may and similar expressions and statements are intended to identify forward looking statements. LNG Energy Partners believes that its expectations are based on reasonable assumptions.

There can be no assurance that such expectations will prove to be correct. A number of factors could cause actual results to differ materially from the projections, anticipated results or other expectations included in the forward looking statements. These factors include prices and market demand for natural gas, natural gas liquids, refined products and crude oil level of production of crude oil, natural gas liquids and natural gas the effect of weather conditions on demand for oil, natural gas and natural gas liquids and the ability to successfully identify and consummate growth opportunities and strategic acquisitions at costs that are accretive to financial results and to successfully integrate and operate assets and businesses that are built or acquired. Other factors that could impact these forward looking statements are described in Risk Factors in the partnership's annual report on Form 10 ks, quarterly reports on Form 10 Q and in the 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.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. We have on the call with us today our CEO, Mr. Mike Kremble as well as our Executive Vice President of Water Solutions, Doug White. I will now turn the call over to Mike for his prepared remarks.

Speaker 2

Great. Thank you, Trey. And Doug, jump in whenever you think appropriate. This has been an incredible quarter of significant achievements for NGL. We closed the Mesquite acquisition, the largest water solutions company in the Delaware with capacity of 1,000,000 barrels per day disposal, 95% hike and long term contracts with large producers.

Then we signed the Hillstone PSA, which has one of the best producer contract profiles, MVCs, ten- to twenty year acreage dedications with large creditworthy producers. Then next, we closed on the sale of our refined products business, reducing indebtedness by $300,000,000 For those of you who look in the rearview mirror to make investment decisions, in the last twenty, twenty four months, we have sold assets for approximately $2,100,000,000 while retaining Grand Mesa, of course, and purchased assets for approximately $1,500,000,000 math that would lead one to believe that EBITDA would have declined. But no, EBITDA has actually increased over 50% from about $380,000,000 to nearly $600,000,000 So what have we accomplished? The business has become more simplified and focused with three segments versus five. The three businesses are much less volatile with the sale of refined products and less seasonal with the sale of retail propane.

Crude and NGL Logistics are repeatable, predictable cash flow streams water solutions less so currently as a result of significant growth going forward. We have reduced total leverage by nearly two turns already and have a couple of $100,000,000 of working capital debt to eliminate by twelvethirty one. We have established the largest water system in The U. S. With nearly 3,000,000 barrels a day of disposal capacity and many hundreds of miles of pipelines.

More importantly, we invested in the Delaware Basin with the highest rates of return for producers, meaning less commodity risk. It is also the basin with the highest water to oil ratio. We exited other basins that we felt had greater commodity price or seismic risk. We have focused on creating a profile for the water business similar to the G and P business. Long term contracts, five to twenty years, significant acreage dedications, minimum volume commitments, a focus on piped water, not truck.

Mesquite, as I said, is 95% piped. Hillstone is 100% piped. We have created massive redundancy for our producers by building many 24 inches pipelines and two thirty inches pipelines all connected to our SWDs. We are not a water disposal company, but Roundup Water Solutions' partner. We offer many services to our customers.

Disposal, of course. Second, recycle. This is extremely important in New Mexico where we need to protect and conserve fresh water and utilize recycled water for fracking instead. Recycle is not a small volume mobile unit, but rather an extensive produced water pipe system that provides produced water to recycle ponds throughout Leonetti County. NGL can provide frac quality water, taking out undissolved solids and corrosive metals like iron so producers don't need to add chemicals.

We own ranches in Lea County, approximately 200,000 acres. On our fee land, we are building recycled ponds, landfills that are important to dispose of the unresolved solids removed from produced water, Cowiche mines for building roads and drilling pads, And we're even currently evaluating construction of solar fields on our fee land to produce electricity. So what's in store for the next eighteen months? A significant increase in water volumes. We have built the infrastructure to handle large increases we produced and flow back water.

Two, we continued reduction in working capital debt. Limited, if any, acquisition opportunities on a much smaller scale and reduced CapEx for internal growth. No more than 10 to 20 SWDs may be required annually in addition to pipeline construction. Before closing, I would like to address our substantial and exciting ESG efforts for the first time. For over a decade, we have operated our large scale 60,000 barrel a day and decline recycle and discharge facility in Wyoming.

We believe we have the most experience and expertise in treating produced water to a recycle standard for reuse and a discharge standard, which is better than drinking water quality for discharge into the New Fork River. We have treated and discharged over 60,000,000 barrels in this uppermost tributary of the Green River, which eventually flows into the Colorado. Our water meets the highest quality specifications of Wyoming and is both swimmable and supportive of fish. This expertise and our 14 step patented treatment process is ideal for use in New Mexico, where there is a shortage of fresh water and a massive amount of produced water. To that end, we have entered into two research collaborations, first with the Colorado School of Mines, where we donated a research facility and equipment by the $800,000 This effort will support research and analysis of produced water.

Second, we recently committed $1,000,000 to the New Mexico State University for a produced water research consortium with the objective of filling scientific data gaps and identifying compounds in produced water and associated testing methods. We have two specific goals in mind presently. One is to work with the state of New Mexico to create a net zero carbon footprint in the state. And two is to treat produced water to various standards that can be useful for agricultural purposes, recycle, river discharge and even municipal potable purposes. With our partners, we are analyzing our ranch soil to determine what can grow and the water treatment cost to support such purpose.

This is called fit for purpose. Can we grow non consumable agricultural products such as cotton and alfalfa? Can we grow agricultural products for human consumption? What does it cost to treat to a standard that allows water to be discharged into the rivers? A substantial amount of carbon can be sequestered in the soil if we grow prairie grasses and other plants.

NGL can produce the water qualities needed. The question is at what cost and how do we get a return on our investment. In closing, our future is very bright. Our infrastructure is built. Our business is simplified and predictable.

In spite of fake news, analysts stepping to the sidelines and short sellers, we have executed the right transactions to create value for our unitholders. One day, we believe it will be reflected in the unit price. In the meantime, smile and continue collecting the $1.56

Speaker 1

annual distribution. Back to you, Gerry. Okay. Great. Thanks, Mike.

After that, there are quite a few things to cover from a financial perspective for the quarter as well as updates on the recent closing of Hillstone. First, for the transactions included in the quarter. Mike mentioned we closed Mesquite on July 2, and we closed the Refined Products TPSL sale on September 30. So both transactions are reflected in our quarterly results. Sales dips was included in discontinued operations in our September 30 financial statements, and prior periods have been adjusted accordingly.

This should allow investors to understand the impact this business has had on our historical results. These results are no longer included in our covenant calculations, which is consistent with the treatment of the retail propane segment we sold last year. The proceeds from the Tissel sale were used to repay borrowings on the revolving credit facility and delever the business by approximately half a turn in total. Pro form a for the Mesquite acquisition and the Tipsaw sale as well as growth CapEx invested year to date, our LTM pro form a adjusted EBITDA at ninethirtytwenty nineteen is approximately $575,000,000 as calculated for our debt covenant compliance purposes, compared to a total debt balance of approximately $2,800,000,000 which results in total leverage of approximately 4.8 times, which is a reduction of about 0.4 turns from the June 3039 period. With the recent change in our business strategy and the reduction in working capital needs with the Tiftoll sale and the expected further wind down of certain remaining refined products businesses, we have reallocated our revolving credit facility and adjusted our covenants to be more in line with market.

We are now governed by a total leverage covenant, which will include working capital borrowings going forward and is currently subject to a 5.75x limit with a step down to 5.5x beginning 06/30/2020. We expect our leverage to remain at its current level and then reduce once Hillstone volumes ramp with the Poker Lite dedication coming online next year. Our target leverage is below 4x total leverage. The current total leverage metrics are in line with where they have been over the past year and significantly improved from prior periods. However, we believe the cash flow profile and predictability of earnings, as Mike mentioned, has significantly improved with our transition from retail propane and refined products marketing to water solutions infrastructure.

Looking at the changes in our debt balances for the quarter, the TPSL sale resulted in approximately $300,000,000 reduction in working capital at September 30. You should note that our total working capital reduction since June 30 was $252,000,000 with the offset being primarily a seasonal increase in our liquids working capital. We funded $250,000,000 of the Mesquite acquisition with a new term loan in July. Our growth CapEx for the quarter was almost 100,000,000 almost all of which was incurred in our Water segment as we built out pipelines and completed our infrastructure. Additionally, we funded $50,000,000 of the Hillstone acquisition with a deposit in September that was funded on our expansion facility and which is also reflected on our balance sheet as an increase in borrowings.

Following the end of the quarter, we closed on Hillstone, which was funded with $200,000,000 of incremental preferred equity, and the remaining balance was funded with proceeds from our credit facility. A portion of this transaction funding will be offset with the remaining wind down of a portion of our refined products business, which is expected to be completed during the current quarter and should reduce working capital needs by approximately 200,000,000 to $250,000,000 That translates to a net debt increase of approximately 150,000,000 to $200,000,000 for Hillstone, well under our 4x leverage target. Now we'll cover the operating results for the quarter as well as our updated guidance for fiscal twenty twenty. Adjusted EBITDA, excluding discontinued operations, totaled approximately $119,000,000 for the quarter and over $212,000,000 year to date. We are adjusting our forecast ranges for fiscal twenty twenty for each of our business units to the following: Crude increases to 200,000,000 to $220,000,000 of adjusted EBITDA for the year Water will be $270,000,000 to $300,000,000 which includes Mesquite for nine months and Hillstone for five months.

Liquids increases to 85,000,000 to $95,000,000 And Refined Products, excluding discontinued operations, remains the same at 15,000,000 to $30,000,000 for the year. Our G and A forecast also remains unchanged at $30,000,000 We are not adjusting our forecasted organic growth capital or maintenance capital expenditures for the fiscal year. And as Mike mentioned, we expect to maintain our $1.56 per unit annualized distribution. Jumping to the Crude segment. The Crude segment continues to show steady performance and generated approximately $54,000,000 of adjusted EBITDA this quarter and $106,000,000 year to date.

Grand Mesa volumes averaged 128,000 barrels per day this quarter, very slight decrease the last quarter, but remaining in line with our expectations. We're currently seeing volumes trend higher through October and November on Grand Mesa as producers have ramped production in the DJ Basin, which has been facilitated by increased natural gas and NGL takeaway recently coming online. We believe most the current crude takeaway is being fully utilized at this time, which benefits our marketing efforts in the basin as well. We have not seen any significant changes in the remaining crude segment as we continue to see high utilization of our Cushing storage as well as our logistics assets. The results to date, along with our expectation for the remainder of the year, have allowed us to increase our earnings target for this segment.

Moving to Water. Water adjusted EBITDA was $57,000,000 for the quarter and $98,000,000 year to date, which includes one quarter of Mesquite results. Total disposal barrels were 1,260,000 barrels per day and our skim oil volumes totaled 3,100 barrels per day during the quarter. We received an average disposal fee of $0.64 per barrel and realized skim oil after hedges totaled approximately $58 per barrel with an average skim oil cut of 24 basis points. Approximately 60% of those diesel volumes were delivered via pipeline during the quarter.

We're expecting pipe volumes to continue to increase on our existing systems, and all of the Hillstone Delaware Basin volumes are delivered via pipeline as well, which should result in over 70% of our volumes delivered via pipe once Hillstone is integrated. Mike discussed some of the Mesquite transition and integration. We continue to see an increase in their volumes, which were just under 400,000 barrels per day in October compared to approximately 350,000 barrels per day averaged during the quarter. Hillstone volumes were over 300,000 barrels per day in October as well. Freshwater sales continue to be lower than expected during the quarter.

However, we are negotiating agreements that would commit all of our freshwater for next calendar year to certain producers under agreements that cover acreage dedications for multiple years. Additionally, as Mike mentioned, we are developing wastewater recycling projects on our ranches with long term acreage dedications on those as well. Our current city solids facility in the Eagle Ford was down during the last two quarters for unplanned maintenance, but is back operational at this time. The work performed on this facility, as well as certain well workovers, pump replacements and upgrades, drove our maintenance capital expenditures during the quarter. We are expecting an increase in our solids for the back half of the year going forward.

Operating expenses were $0.38 per barrel for the quarter compared to $0.40 per barrel year to date. OpEx remains higher than budget as we work to automate facilities, increase utilization, integrate acquisitions and streamline operations. We are also moving additional facilities off of diesel generators as we connect them to the power grid. We continue to focus on reducing operating expenses across the system with a target of $0.30 per barrel by the end of the year. We continue to see growth in volumes across the system, particularly in our core Northern Delaware Basin operating area, where most of our producer customers are large independents or major integrated companies.

Mesquite volumes are increasing, and we will start recognizing the Hillstone volumes in November. We are expecting to exit the year with disposal volumes between 1,800,000 to 2,000,000 barrels per day, which is reflected in our updated guidance range. Jumping to Liquids. Adjusted EBITDA for our Liquids segment totaled $19,000,000 this quarter and totaled almost $32,000,000 year to date. We continue to benefit from our recently acquired terminals, including our Chesapeake export facility, and our butane business has shown strong volumes and margins so far this year.

We have loaded 19 ships at the Chesapeake, Virginia export facility this fiscal year completed certain optimization projects contemplated with that acquisition from DCP. This has been a nice addition to our liquids asset mix. Butane sales remained strong as we progressed through the season, and we are just entering the heating season for propane, where we believe we are well positioned from an inventory and average cost perspective. We are forecasting based on a normal heating degree winter. We increased our guidance range for this segment based on our results to date and expectations for the remainder of this year.

Finally, Refined Products. Our remaining Refined Products business will primarily consist of our Rack Marketing business, which carries minimal inventory and markets barrels through third party terminals across The United States and our Renewables business, which is centered around biofuel marketing. We are in the process of winding down our other marketing operations, which required significant amount of inventory storage and has contributed minimal earnings over the past year. We have maintained our distribution this quarter and do not expect any changes to the distribution at this time. Our coverage has continued to increase.

We are just over 1x on an LTM basis, and we expect to hit or exceed our 1.3x LTM coverage target at the end of this fiscal year.

Speaker 2

It seems like we always get caught

Speaker 1

up in the moment or the quarter, but if you look at what we have proactively accomplished to redirect the strategy of this business, reduce leverage, improve cash flow predictability, strengthen contract terms, grow fee based revenues, extend debt maturities, among other efforts, many of which address the always growing list of market concerns, it's pretty remarkable what has been accomplished at NGL in the past two years. Mike said we have sold over $2,100,000,000 of assets, acquired $1,100,000,000 in high quality water assets and increased our EBITDA cash flow and still reduced leverage by about 2x over this period. We believe we are doing the right things for all of our business stakeholders. That concludes our prepared remarks. Jonathan, please open the line for questions.

Speaker 0

Our first question comes from the line of T. J. Schultz from RBC Capital Markets. Your question please.

Speaker 3

Great, thanks. Maybe for Doug, what percent of the expected Delaware volumes by the end of next year will be on contract or part of an acreage dedication? And what percent is supported by MVCs?

Speaker 4

Hey, TJ, thank you. Right now, I believe we're somewhere close to 70% of all either Acreage Dedicated or MVCs in the Delaware. That really is pretty in line with the percentage of our piped water also. Really, our trucked water is the undedicated portion of our portfolio in the Delaware. As we continue to bring on more facilities and then also we see the Poker Lake contract ramp next year.

We'll see that 70% pushing more towards the 80%, 85%. On an MVC basis, I would say on MVC basis in the Delaware, of that 70% have committed, 30% of that's MVC.

Speaker 3

Okay. And then maybe a question on recycling, more high level. You've indicated building these ponds. So what recycling now is done via some of these mobile units? And how does that evolve?

Or is that evolving to something different more quickly that would utilize these ponds and pipes? Just trying to understand the opportunity that sits there for you all as you look to contract that recycling business.

Speaker 0

Sure.

Speaker 4

The mobile units are more focused on on the fly or, lower volume production. With our long history of recycling and treating, we've been down that road and considered them. We didn't see it as an answer for anything we could scale. That's why we do not focus on those. Because we have such a large pipeline system in place now, we're able to strategically place very low CapEx pits and recycle equipment that is really centralized, but not on a big plant basis, more of a central facility with equipment and pits that store the water.

Our interconnect to our produced water system is where we receive the produced water to treat. Our average facility can treat 50,000 barrels per day, scalable for up to 100,000 barrels per day for not a lot more CapEx. And our goal is to and what we've already entered into, we have a ten year acreage dedication on our first facility on our McCoy Ranch. We're delivering that water to the anchor dedication, but then that has opened up opportunities for us there into other dedications or other contracts within eight- to 10 mile radius of that facility, all delivered by pipe as well.

Speaker 5

Okay, great. That's helpful.

Speaker 3

Just lastly, Mike or Trey, the implied valuation on the GP and some recent transactions that were disclosed, implied plans, I would think, grow the distribution over the next few years. But how do you view distribution growth versus buybacks just given where the stock is trading right now?

Speaker 2

We think, number one, we probably end up in the midstream space where everyone eliminates their IDRs. So when do you do it? How do

Speaker 1

you make it,

Speaker 2

say, fair to a GP owner, but very attractive to the partnership? So when we look at our next few years projections and we look at more of what the DCF per unit, it's clearly we're not going to raise the distribution for trading at 12% or 13% where we currently are. We think it's very attractive to buy GP interest back today. It would ultimately become a multiple below, say, the current market, where we're seeing, whatever, nine to 15x. I don't if that answers the question.

Trey, do you have

Speaker 1

a Just to add, T. J, obviously, we're not making decisions in a box. We're obviously looking at the market, looking at what our expectations are for where the units will trade to determine whether we're buying back units or increasing distributions in the future. Obviously, the way that we look at running our business and generating excess cash flow supports distribution growth, but obviously, that decision is not going to be made if you're trading at 13%, 14% yield. At that point in time, you would devote those funds to buying back units, which, again, may not support a higher GP valuation because you don't have the increase in distributions.

But that's what is implied in our overall valuation and how we look at the business on a longer term basis. So hopefully that helps. Again, think that at the current unit price level, raising the distribution, we would most likely be buying back units rather than doing that. We don't expect the units to stay at this level. Again, as it's proven out that our distribution is predictable, steady, our coverage increases and leverage continues to decrease and hits our target levels, we wouldn't expect to trade at this level.

But again, the market hits the market, and we'll have to make that decision at the time.

Speaker 0

Our next question comes from the line of Justin Jenkins from Raymond James. I

Speaker 5

guess first on the exit rate for the year for water volumes, that's fiscal year and not calendar year. Is that right?

Speaker 1

That's correct, Justin.

Speaker 5

Okay. And then you mentioned, Trey, the five months of contribution from Hillstone in the updated guidance. Can you give us a better sense of potential financial contribution in the early stages here? And I guess secondarily, has the outlook changed at all for those assets given what we've seen with operator activity levels heading into calendar 2020?

Speaker 1

There's been no change to our expectations on the Hillstone assets. Again, we closed that business a week ago. The largest dedication is a twenty year Poker Lake dedication. That development comes online a year from now. Between now and then, our expectation is that the Hillstone EBITDA contribution essentially offsets the it's not accretive or dilutive.

It offsets the financing cost of the business. And that business is financed with $200,000,000 of 9% preferred. The remainder is financed with debt. Doing the simple math, that's around $50,000,000 of contribution for the first year. That's how there's a ramp in those volumes over time, but that's the contribution that we're assuming in our fiscal guidance.

Speaker 5

Got it. That's helpful. And last one for me, if I could. Just how we should think about maintenance CapEx now that the water business is a meaningfully larger portion on a go forward basis?

Speaker 1

Sure. So our maintenance CapEx obviously has increased as we have grown the water business. There's more infrastructure, more assets. You have regular maintenance on your pumps and your facilities. We'll continue to have a regular maintenance plan.

The maintenance capital will be more tied to volumes as well. So as volumes increase, we would expect maintenance capital to also increase. We've moved our maintenance capital numbers We're still in line with that expectation. It was a range from 50,000,000 to $60,000,000 I would expect next year's maintenance capital numbers to be slightly higher.

But again, I don't think it's going to be significant.

Speaker 5

Got it. Thanks, Rick.

Speaker 0

Thank you. Our next question comes from the line of Shneur Gershuni from UBS. Your question please.

Speaker 2

Hi, good morning guys. Mike, thank you for the title reference in the prepared remarks. Just to start off, you guys have made a lot of progress on leverage over the last couple of years. And then you sort of turned around and did this acquisition this most recent quarter. When

Speaker 6

I

Speaker 2

think about the backdrop of where the rig count is, producer expectations and so forth, at what point do you take a pause and sort of produce where you're at and sort of focus on letting the earnings catch up to where your leverage actually is at this stage?

Speaker 1

I'll start, Shneur, and then Mike can chime in. As Mike mentioned, we've reduced leverage by two turns over the past two years. We've completed these acquisitions with a significant amount of preferred equity. So we've raised $600,000,000 of preferred Class Bs. We also issued another $100,000,000 of preferred Class B.

So approximately half of these transactions was financed with preferred. I think what's lost in some of the translation is the amount of debt that's coming off related to the Pistol sale as well as the wind down of remaining remaining products, that's going to be $500,000,000 So from our perspective, we have continued to reduce leverage. Our overall target is lower than where our current leverage is because we do we will grow into these two acquisitions. The volumes are expected to ramp. But these are two significant transactions that we have actually been discussing for about a year These assets that we identified in our evaluation of the basin that we thought were core to the further development of the basin.

They're underpinned by long term contracts with the best producers in the basin as well. So we do feel confident in the assets that have been acquired.

Speaker 2

The question to what's next,

Speaker 1

Mike mentioned our continuing growth capital will be focused on tying these assets together via pipeline, expanding pipeline capacity where necessary. We have 2,800,000 barrels a day of disposal capacity in the basin. So over the next twelve to eighteen months, we should see higher utilization of that capacity and a reduction in growth capital. And there's not any significant M and A that we're evaluating at this point in time. Mike, if you want to add anything more to that.

Speaker 2

Yeah. It's it's it's wonderful to think you can just say, oh, I'm gonna put a business on pause, and I'm not gonna lose any competitive advantage, but that's not the way it works. You have in this basin, there was a shortage of disposal capacity in New Mexico. So producers were, you know, signing contracts to make sure they could get rid of their water. Those producers are larger independents and majors, but there's a limited number.

So we have to get as many contracts as we can for the future growth and health of the business. So in the basin, we had ourselves, Mesquite, Hillstone, Owl and Solaris. That was it, really. It's the large systems. That we felt the two best were Mesquite and well, their physical assets,

Speaker 1

but also their contract profiles.

Speaker 2

As you know, Owl went to Instar, and Solaris is doing whatever they're doing today. So if we just had to purchase these two businesses and leverage will increase somewhat by the insurers, our business really of being the, you know, the franchise in the Delaware. So now what's what's left? Well, there's really nothing left. So the there may be a few producer systems out there that may come up for sale, But otherwise, there's you know, all the systems are divvied up, the producers are pretty much divvied up.

So by getting Hillstone and Mesquite done, I think we're at the point now where we we're just waiting for the water to flow to us and there's nothing any kind of large or medium scale acquisition to be done. Okay. So to paraphrase, you're mostly done with acquisitions and we can sort of expect the operating leverage of everything you put into place where you just have the connection capital going forward, we should see a faster clip or faster growth rate from an EBITDA perspective on a go forward basis. Is that encapsulate what you're basically saying? Yes.

And that we've tried to say that as well with this SWDs next year and year after being in this 10,000,000 to $20,000,000 As you know, the ones in on the Texas side are 1,500,000.0 to $2,000,000 each. So there's we spent the capital, but it's because we expect the water here. We're seeing it already in November ramp up. But yes, so I think now it's just that we're going to see the growth in the water EBITDA and leverage should decline or will decline over time. Okay.

One of your peers reported this week and had some really strong auto results. Should we expect similar performance in terms of what Rattler posted earlier this week? Do you have, like, some similar metrics to them and so forth? Or, you know, are there differences based on where you are and where they are and so forth? Can you respond to that?

Speaker 1

Actually, Shneur, you know, Rattler's tied specifically to their parent one primary producer. They are not in the exact same area that we are in the basin. I don't think it should be lost, but we have seen growth in our volumes over the past quarter. It may not be as significant as we had originally thought in the first part of the year or as the market had anticipated. But it has continued to grow, and we're seeing that growth through October and November as well.

So I think if you look at our system and you understand the producers that are behind that system, you can see that their rig counts are not really falling, either staying steady or even increasing, and their volume expectations are are increasing through the remainder of not just this calendar year, but next calendar year as well. So I think that's the the read through and where you should be focused, from an NGL perspective.

Speaker 0

Our next question comes from the line of James Spicer from TD Securities.

Speaker 7

Trey, you mentioned an additional 200,000,000 to $250,000,000 reduction in working capital borrowings. Given that the digital sale is closed, can you just clarify exactly what's driving that? And then how much in total is going be drawn on the credit facility pro form a for all these transactions?

Speaker 1

Sure, Jay. So total when you look at our total borrowings at the June, it was about $900,000,000 That was about $600,000,000 of refined products and about $300,000,000 of crude and liquids. At September 30, we sold TPSL. Working capital came down about $250,000,000 in total. Again, the TPSL sale was 300,000,000 offset by a slight increase in our liquids at seasonal.

But the $600,000,000 of refined products working capital was only reduced in half. The remaining businesses, we're utilizing that 300 approximately $300,000,000 of working capital and generating a very small amount of EBITDA. So we are in the process of winding those businesses down or looking for other opportunities associated with those business, And we expect that to be completed by the end of this quarter, which would be December 31. Our estimate right now is that's another 200,000,000 to $250,000,000 reduction in borrowings under the working capital facility. The way we've reallocated our credit facilities, we have about $1,200,000,000 available on the expansion facility, dollars 600,000,000 available on the working capital facility.

We would expect that working capital facility to be in the $400,000,000 range from an outstandings perspective. And that would cover crude logistics, NGLs, which at December 31, would still have a fairly significant inventory position for propane as we move through the heating season and then what is remaining in our refined products business, which is primarily the rack marketing and a small piece of renewables business.

Speaker 7

Okay. Great. That's helpful. And then just on CapEx for next year. I understand this is primarily connection capital and tying things together, but can you just directionally provide a little guidance relative to the $230,000,000 to $330,000,000 this year?

Speaker 1

So right now, we're looking at growth CapEx in total across all of our businesses of probably 200,000,000 to $250,000,000 range. At this point in time, that would include no M and A activity. And I think that's a a a reasonable number at this point. That would primarily be the water infrastructure. And then as Mike mentioned, you've got a few disposal wells that you would add as needed through the year.

Speaker 0

Our next question comes from the line of Pearce Hammond from Simmons Energy.

Speaker 2

I know this has already been kind of addressed in the Q and A, but I was just curious, what attracted you to the Hillstone assets? Is there like one or two attributes that you want to point out about those assets that attracted you, especially relative to the other water related businesses that have been up for sale? I you you know, that was an easy one. Their contract profile, the contract they have on Poker Lake in particular, very attractive. We we're not able to tell you who the customers are because of the CAs in the contracts.

So it's hard for you to necessarily confirm. But the contract profile, they had 19 wells drilled. We can drill wells and get permits easily too, so that's not a big deal. But certainly the contracts. And it's difficult, I think, for analysts, and you know this better than most, you can look at the rig count in The US.

You can look at the oil rig count in The US. That doesn't matter. You can look at the oil rig count in the Permian. K? That really doesn't matter.

You've got some of the companies, you know, going bankrupt, others dropping rigs that enters into that count. The only way you can really evaluate us is to look at the rig count for our producers, and we're not allowed to tell you all the producers. So we it's very frustrating when these analysts come out and say, Oh, the rig count is, this, this. That's nonsense. They don't no one knows except us what that rig count is, and we can't say anything.

But the contracts are key. Oakland Lake was one of the most attractive contracts in the company. Great. And then as a follow-up to that, as you look at other water companies, not your own, but other ones, do you think that there's the chance that they might be facing some pricing related issues from a competitive standpoint, maybe an oversupply of systems that are getting built out there? Just any thoughts on that.

I think generally, it would be true that contracts that were signed, let's say, five years ago are probably at a higher rate than the contracts being signed today. You know, as any business, as you get more competitors, the the fees come down. So I think anyone who has contracts, you know, from some period of time in history as they come up for renewal, there will probably be some pressure on price.

Speaker 0

Our next question comes from the line of Sunil Sibal from Seaport Global Securities. A

Speaker 6

couple of questions for me. So starting out with the customers, I realize that you can't talk about specific customers, etcetera. But I was wondering if you could categorize your customers, especially in the water business, as large integrated energy companies versus independent E and Ps or or by even customer credit quality?

Speaker 1

Yes. Sunil, our largest customers are going to be large integrated or very, very large independents, all investment grade or higher rated. That that would I think that would cover the majority of of our customers and the volumes that we're receiving. Obviously, we we have a very large system, so we do have customers of all credit qualities. But the contracts that are anchoring the system, the MVCs that we have, the large acreage dedications, those are all from extremely high credit quality customers.

Speaker 2

Had to clearly we want all the producers to be successful. So if we have a line running by a smaller producer, we're very excited to have them connect to our system. I think we all are looking at the smaller guys. What are they more likely to have financial issues, drop rigs? So you really wanna base your business on the larger producers that are going to drill through any downturn.

But that said, the smaller guys will eventually, I think, be purchased by the larger guys. So we don't want to ignore the smaller guys. We want to help them as much as we can. And then if they end up becoming part of a larger group that we do business with, we'll already have their water, and it'll be additive to instead of having a portion of our larger customers' water going somewhere else.

Speaker 6

Okay. Just to put a little bit of quantification around that. So when you say in large majority, would it be fair to say it's more than 85%?

Speaker 2

Yes. I'm sorry. Have to go by by shale play. So if you're talking about the Permian,

Speaker 1

if you're looking at the Delaware Basin, yes. When you look at the DJ, the Eagle Ford, the Midland Basin, no, it would be a smaller number. The core basin and particularly the assets that we acquired, I think that's around 80% is probably a reasonable number.

Speaker 6

Got it. And then just on the leverage question, I think you had set a 3.25 x kind of a leverage metrics for the business sometime back, and I realized, you know, there have been some changes around the working capital, how that working capital is broken down, etcetera. So I was just kind of curious, you know, is 3.25 still the kind of the number that you're targeting? And if so, seems like you indicated, you know, you will hit four x or so sometime in the next year. When do we when can we expect to get to that 3.25 x?

Speaker 1

Right. So so the 3.25 times, that metric excluded working capital. And if you look at where our working capital was three months ago, it was $900,000,000 That's 1.5 turns. So if you took the 3.25 and you add a turn and a half, you're at 4.75 times, would have been the target at that point in time. We've actually for a total leverage comparison.

We've actually lowered that target. We're right at that target today. We're at 4.8 times. But we've reduced our working capital. We're continuing to reduce working capital, continuing to eliminate the business the primary use of that working capital.

However, we will still have a little bit under a turn of working capital. As I indicated earlier, about $400,000,000 so call that 0.6, 0.7 turns. So we've really the 3.25 hasn't changed. It's just been adjusted for how the business is now structured and how we how the working capital will be impacted for the business. So we've really taken the 3.25 from a compliance basis, which excluded working capital, to 4x, including the remaining working capital.

So we really have not changed that target, and we're expecting to be there in about a year once we see the ramp up of volumes on Hillstone and Mesquite and again, the elimination of the remaining working capital intensive businesses associated with refined products.

Speaker 0

Our next question comes from the line of Spiro Dounis Your question please.

Speaker 2

Hey, good morning guys. Thanks for squeezing me in here. Two quick ones. Just on drilling SWDs next year, seems like there's actually considerable headroom just with your current injection capacity and relative to

Speaker 1

where your run rate is.

Speaker 2

So just curious why you think there's a need to drill that many overall? And then just on that 20 or so figure that you are drilling, should we expect that's something that probably declines at least the following year?

Speaker 4

I can take that, Mike.

Speaker 2

Yes.

Speaker 4

This is Doug. We are running a lot of pipe, large diameter, to move the water from New Mexico to our existing capacities in Texas. Our New Mexico capacities, we only drilled seven Devonians inherited 17 Devonians from Mesquite. Those are in field. Those are staying very full.

When we engaged our three new customers in the Hillstone acquisition, all three of them told us they are outpacing their forecast, and they have come and asked us for additional firm capacity above and beyond what was contracted. That basis is where we are coming up with the additional wells to be drilled. That's particularly in Loving County, where the demand on the Hillstone system is. And to answer your second part of your question, our expectation would then be to only be drilling additional wells in the future based on additional forecasts or contract new contracts. But we are continuing to see the forecast of the magnitude of water under our contracts continue to increase.

That's what would drive, obviously, additional investment in new wells.

Speaker 2

Got it. Appreciate that color, Doug. Second one, Mike, this one might fall into the fake news category, but there's been some expanded discussions around risk to drilling on federal lands depending on the results of the next election. So it sounds like maybe there could be some impact in New Mexico. Just wondering what your thoughts are around risk there and how you'd expect New Mexico to react just given how vital energy is now?

Yes, that is fake news. Thank you. And we've already been through this once in Colorado with a setback. So we, you know, we have opinions, but those really don't matter. So we engaged, a law firm in the Southwest that was an expert in this area.

They have provided us an opinion, which, you know, took ten days or so. So it wasn't it was well thought out. What really can an executive can someone really shut us down or shut down the producers in next executive order assuming it doesn't it's not something that can get through the senate and the house? Their opinion was that the the the Democratic president cannot shut down fracking on the deal on land. So then we said, okay, what happened in Colorado?

There was a rush to the advisor producers to get as many additional drilling permits approved as possible. So they would have a large inventory, obviously, case that that passed. That is not happening in New Mexico. There's not a rush on the drilling permit folks to grant thousands and thousands of new permits. So that's an indication, I think, of what the producers are thinking.

So we don't believe a change in administration could shut down fracking on the BLM lands. Currently, we have some production in predominantly New Mexico that we're on our producers are on BOM. We tried to figure out how much water is coming off of those lands, but there's no way for us to know. The advantage, obviously, of what we do is all the water is on pipe. But when water is on pipe, you don't know what mixes it came from.

So there's no way for us to determine how much of our New Mexico water is coming off of the inland. But we do think that's fake news. Unfortunately, investors who don't know any better may react to their detriment. But we saw the same thing happen in the DJ. At the end of the day, in the DJ, we had our biggest water customer come to us and ask for a fifteen year contract.

So quite a bit different than the fake news that came out about the setback proposal. Understood. Yes, I do appreciate that. It's tough one to answer, so I appreciate taking a stab at it. Thanks, guys.

Thanks, Spiro.

Speaker 0

Our next question comes from the line of Mike Murray, Private Investor. Your question, please. This does conclude the question and answer session then. I'd now like to hand the program back to Mike Grumble for any further remarks.

Speaker 2

Again, I have many thoughts, but I think I'll keep them to myself. So thank you, and we'll see you next quarter.

Speaker 0

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect.

Speaker 1

Good day.