NGL Energy Partners - Q2 2023

Transcript

Operator (participant)

Good day, ladies and gentlemen, and welcome to the NGL Energy Partners LP 2Q 2023 earnings call. At this time, all participants have been placed on listen-only mode. The floor will be open for questions and comments following the presentation. Please press star one on your phone at any time to enter the Q&A queue for today's call. It is now my pleasure to turn the floor over to your host, Linda Bridges, CFO at NGL Energy Partners. Ma'am, the floor is yours.

Linda Bridges (CFO)

Hi, welcome to NGL's second quarter fiscal 2023 earnings call. As usual, I'd like to call your attention to our safe harbor language, which can be found toward the end of the partnership's earnings release, which was filed after market closed this afternoon. Today's remarks may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In accordance with the act, I would also like to direct your attention to the Management's Discussion and Analysis section and the Risk Factors discussed in the partnership's annual report on Form 10-K for the year ended March 31, 2022, and in other SEC filings made by the partnership, which are available on our website and on the SEC's website.

These, together with the safe harbor statement and the earnings release, set forth important factors that could cause actual results to differ materially from those contained in any such forward-looking statements. Jumping into the financials, our Water Solutions segment showed very strong performance and growth in volumes during our second fiscal quarter. Adjusted EBITDA for the quarter totaled $104.8 million, with year-to-date adjusted EBITDA totaling $209.9 million, representing a 24% increase compared to the first half of fiscal 2022. We continue to see increases in water disposal volumes, particularly in the Delaware Basin, as producers actively complete new wells and the base volume on our system grows.

Produced water volume processed totaled approximately 2.3 million barrels per day, growing nearly 29% from the comparable quarter last year and over 5% from the previous fiscal quarter. Total margin per barrel, which includes disposal and skim oil revenue offset by OpEx per barrel, remained strong at $0.47. We remain confident in our full year guidance of over $410 million for this segment. The Liquids Logistics segment reported adjusted EBITDA of $16.5 million for the second quarter of fiscal 2023, and $29.4 million year to date, compared to $18.5 million and $24 million for the respective periods last year. Results in this segment were again driven by strong margins on refined products and biodiesel volumes due to tighter supply in certain markets.

Our propane and butane product margins declined compared to last year due to decreasing market prices through the period as the cost of sales applied to market price spot volumes were based on inventory purchased earlier in the fiscal year at a higher price. We expect our margins to increase as we replace our current inventory with inventory purchased in a lower price environment and realize the higher margin associated with our forward fixed-price sales contracts. As we enter into peak blending and heating seasons, we should begin to see increased cash flow from this segment. Crude Oil Logistics reported adjusted EBITDA for the quarter of $32.9 million and $47.9 million year-to-date. A quick reminder that our first quarter results were negatively impacted by net financial losses on derivatives that related to inventory gains realized in the fourth quarter of fiscal 2022.

While physical volumes on Grand Mesa decreased during the quarter as a result of declining volumes in the DJ Basin, in part due to producer permitting issues, these volume decreases were offset by strong physical margins related to higher contracted rates with certain producers as we realized the full price adder on certain contracts whose rates increased with crude oil prices, as well as increased differentials on certain other sales contracts. Additionally, as we move into our third fiscal quarter, we are seeing some increase in volume as producers are working through their permitting delays, and we're eager to see how the recent increase in DJ Basin rig counts impact the second half of our fiscal year.

We continue to expect the Liquids Logistics and Crude Oil Logistics segments to contribute adjusted EBITDA net of all corporate expenses that will bring us to our $600 million+ of total adjusted EBITDA guidance for fiscal 2023. From a balance sheet perspective, we reported total liquidity of $175 million on September 30, with total borrowings on our ABL facility of $287 million. A reminder, we are deep into the inventory build season for our butane and propane businesses and we did expect borrowings on our ABL facility to increase during our second fiscal quarter as a result of this inventory build. As inventory is liquidated over the next six months, we expect to see corresponding decreases in borrowings on the ABL facility with the low point of borrowings being near the end of our fiscal year.

With that, I'll turn it to Mike for additional comments.

Mike Krimbill (CEO)

Thanks, Linda. As you have heard, we are confirming our fiscal 2023 guidance of over $600 million EBITDA for all of NGL and in excess of $410 million for Water Solutions. We haven't changed this guidance as we would like to be in a position where we can beat these numbers. That said, I would like to provide some color to evaluate where EBITDA is trending. With respect to Water Solutions, we have achieved EBITDA of approximately $210 million in the first six months.

Of this fiscal year. Obviously, repeating this performance in the second half of the fiscal year results in $420 million of EBITDA. In the first 40 days of this current third quarter, which is October and November month to date, we are averaging water volumes of processed about 5% above the second quarter. Crude Oil Logistics is going sideways, you might say, waiting for an uptick in DJ production and increased volumes on Grand Mesa. Liquids Logistics is experiencing strong results from refined products and biodiesel, albeit they are a small part of this segment. Butane blending should perform as U.S. refineries are currently operating at near capacity. The recent change in weather expectations is a boost for our wholesale propane business.

Colder than normal weather in the back half of November and much of December will benefit this segment if it occurs, and is a welcome change compared to the much above temperatures we had last year for this same time period. As we have mentioned in previous calls, we continue to focus on the balance sheet and have repurchased approximately $76 million of our 2023 unsecured notes year to date, bringing the balance to $399 million as of September 30, 2022. We expect to repay the balance of the 2023 notes prior to maturity using free cash flow, and if needed, borrowings on our ABL facility. Additionally, as previously discussed, we are still working on certain corporate initiatives that, if successful, would allow us to repay the 2023 notes by our fiscal year-end.

These corporate initiatives are being pursued both to retire the 2023 notes early and to delever to the 4.75x. Reducing debt through free cash flow and corporate initiatives combined with increased EBITDA will accelerate our deleveraging process. I think with that, we open up for questions.

Operator (participant)

Thank you. Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, please press star one on your phone at this time. We ask that while posing your question, you please pick up your handset if listening on speaker phone to provide optimum sound quality. Please hold while we poll for questions. The first question is coming from Will Levy from Merrill Lynch. Will, your line is live.

Will Leven (Managing Director and Private Wealth Advisor)

Thank you. Hi, guys. I'm just looking at the total liquidity drop of $111-

Linda Bridges (CFO)

Will?

Operator (participant)

Apologies. It looks like we had just lost Will. One moment please. See if we can get him back. Okay. We'll try to get Will back. In the meantime.

Linda Bridges (CFO)

Yeah. I think I can address what I think the question was, which really was. I think he Will had referenced the liquidity drop of $111 million. Again, you know, liquidity as we define it is cash plus available borrowings, available capacity, I'm sorry, on our ABL facility. Our ABL facility will naturally increase in borrowings, meaning capacity or excess capacity will decrease on the ABL facility as we build inventory into the fall period, during the fall period. We build that inventory to support our propane and butane businesses. They'll begin liquidating that inventory in the second half of our fiscal year. That liquidity would be expected to build back up as we use proceeds from the liquidation of inventory to repay those borrowings on our ABL facility.

This is a very consistent trend that you'll see in our borrowings where you have increases in late summer or early fall, and then you'll start seeing decreases as we exit the blending and heating seasons into the spring. I think that was the question. I don't know that we have Will back on the line, but hopefully that answered the question.

Operator (participant)

Thank you. Unfortunately, Will has not come back on. Once again, ladies and gentlemen, if you do have any questions, please press star one on your phone at this time. There were no other questions. I would now like to hand the call back to Mike Krimbill for some closing remarks.

Mike Krimbill (CEO)

Okay. Well, we felt like we had a good quarter and are on track for the numbers that we provided last earnings call on this one. Thank you very much.

Operator (participant)

Thank you, ladies and gentlemen. This does conclude today's conference. You may disconnect your lines at this time and have a wonderful day. Thank you for your participation.