NGL Energy Partners - Earnings Call - Q3 2020

Executive Summary

• Record quarter: Adjusted EBITDA from continuing operations of $200.5M, up 53% YoY, driven by strong Liquids (+156% YoY) and solid Crude performance; management said results were “at least 20% higher than any retail analyst projection,” catalyzing positive sentiment on execution and guidance raises in multiple segments.
• Mixed headline P&L: Income from continuing operations was $49.1M vs $97.2M YoY; total revenues were $2.23B vs $2.30B YoY, reflecting portfolio simplification and exit of volatile refined products businesses.
• Guidance shifts: FY2020 Adjusted EBITDA guidance was lowered for Water ($240–$250M) due to a ~3-month ramp delay, but raised for Liquids ($115–$120M), Refined ($35–$40M) and tightened higher for Crude ($215–$220M); total FY2020 guidance now $565–$595M.
• Strategic catalysts: Hillstone acquisition (closed Oct 31) adds long-term acreage dedications and MVCs; Grand Mesa volumes steady at ~134kbpd; pipeline share of water volumes rising toward >70%, with OpEx targeted to fall materially as diesel generators are replaced by grid power.

What Went Well and What Went Wrong

• What Went Well

  • Liquids posted a record $69.1M Adjusted EBITDA on strong butane/propane margins and Chesapeake export terminal performance; product margin per gallon rose to $0.098 vs $0.049 YoY.
  • Strategic simplification: sale/wind-down of refined products reduced working capital and volatility; continuing Refined segment benefited from reinstated biodiesel tax credit (recognized $13.8M in continuing ops) and guidance raised to $35–$40M.
  • Management tone confident: “historic quarter with record adjusted EBITDA in excess of $200 million” and LTM coverage improved to ~1.25x; targeting self-funding and deleveraging toward investment-grade metrics.

• What Went Wrong

  • Water volumes ~3 months behind plan; FY2020 Water guidance reduced to $240–$250M from $270–$300M, with Poker Lake contribution now mid-2020; Q3 Water Adjusted EBITDA was $62.2M.
  • Elevated OpEx: Disposal OpEx was $0.42/bbl (vs target $0.30) as systems are integrated and generators replaced by grid power; margin improvement depends on operating cost reduction.
  • Headline income down YoY: Income from continuing operations fell to $49.1M from $97.2M; reported diluted EPS was $0.18 vs $0.64 YoY, reflecting portfolio changes and discontinued operations dynamics.

Transcript

Speaker 0

Ladies and gentlemen, thank you for standing by, and welcome to the Third 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 speaker presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. It is now my pleasure to hand the conference over to CFO, Trey Karlovich.

Speaker 1

All right. 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. 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 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 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.mglenergypartners.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. I will now turn the call over to our CEO, Mr. Mike Krimbold.

Speaker 2

Thanks, Trey. This was a historic quarter with record adjusted EBITDA in excess of $200,000,000 at least 20% higher than any retail analyst projection. In addition, our 12 trailing common year coverage ratio skyrocketed from 1x to 1.5x. During the quarter, we closed the Gilson acquisition, which we previously discussed, and exited additional smaller refined products businesses, further reducing volatility and working capital indebtedness. The quarter benefited from the diversity of our business units with crude oil and NGL logistics, achieving record adjusted EBITDA results, while waiting for water volumes to ramp up significantly.

Our water volume projections are provided by our producers. We do not make these up. You can read earnings transcripts and presentations from our customers to determine the exciting future rather than looking in the rearview mirror. For instance, a super major customer has only developed 3% of its position in the Delaware. Our water future is bright.

First, I'd like to address some of these research reports that have recently been published that provide advice, promote a scorecard approach and ask questions which are correct in many cases but misguided in others. First, is NGL focused on ratable, predictable cash flows? Obviously, yes. We have exited the two business units that were most volatile. Our Crude segment remains highly contracted with long term MVCs.

And our liquids business is asset heavy with 27 terminals and 5,000 railcars. We have substantially grown long term contracted water revenues with acreage dedications and MVCs. We have significantly increased these long term contracts with investment grade customers. Second, is NGL increasing its financial discipline? Again, yes.

We have been decreasing indebtedness through asset sales, preferred equity issuances and working capital reductions. We are dramatically reducing CapEx in fiscal twenty twenty one beginning this April. We are approaching free cash flow positive status net of internal growth CapEx during fiscal twenty twenty one as a result of lower CapEx and increasing distribution coverage. Is NGL management aligned with common unitholders? The answer clearly is yes, more so than most.

First, NGL executives and directors own millions of common units. I personally own nearly 3,000,000 common units. We cut our distribution several years ago by 39%, which effectively eliminated 100% of the entire GP distribution owners, but only 39% of the LP distribution. We have not nor are we currently paying any distribution to the GP owners. We have defended our $1.56 unit distribution and refused to reduce it, even though our yield has increased to as high as 15% at times.

We now have a covenant coverage ratio of 1.5x and increasing, so we are comfortably earning our $1.56.04, should NGL eliminate IDRs? The answer is yes, but how best to accomplish it without impacting the common unitholder? Most eliminations involve a significant dilution to the common unitholder and a unit price decline. We are taking our time in purchasing IDRs for cash in small increments so we limit any future dilution. There is no difference between an MLP with no IDRs and an MLP with the IDRs that is distributing nothing to the GP owners while it purchases the IDRs.

Research makes no sense when analysts place NGL in the penalty box because we have IDRs, but pay nothing, and they have no distribution increases projected. Fifth, should NGL convert to a C Corp? Historically, C Corp conversions or simplifications were disguised common unit distribution cuts. These conversions often resulted in large tax gains to the common unitholder. These C Corps will eventually become taxable and have the added risk of rising future corporate income tax rates.

NGL is aligned with the common unitholder. We will not convert. We will not stick our common unitholders with a large tax gain. One reason given to convert is that C Corps returned 25% in 2019 and MLPs lost 2%. These returns are correct, but we must scratch the surface to determine why.

The MLP returns were down due to significant decline in the G and P sector. During 2019, NGL actually provided a 35% total return, better than the C corp average. Looking ahead, we asked ourselves where the NGL common unit price would have to be in five years in order to provide a 25% annual total return for each of those five years? The answer is approximately $21 or only a $2 per year increase in the common unit price. NGL should not be penalized and is not C Corp.

It should not be penalized because it has IDRs that pay nothing to the owners. NGL should be embraced for successfully completing its transformation, looking out for the common unitholder and creating the attractive value proposition going forward. So finally, our focus for the future, what is it? One, self funding two, continued deleveraging. These two are now possible with a 1.5 time year coverage and decreasing growth CapEx requirements three, we're increasing acreage dedications, MVCs and extending tenor of existing contracts.

And fourth, targeting investment grade financial metrics and credit rating. So with that, Trey, turn it back to you.

Speaker 1

Great. Thanks, Mike.

Speaker 3

A lot to be excited about

Speaker 1

with NGL right now and in the future. Let's talk about the quarter. We had a very strong quarter financially, and we have made significant progress in simplifying our business. The highlights of the quarter from a financial perspective includes the sustained strong performance of our Crude Logistics business, driven by volumes on Grand Mesa pipeline a record quarter from our Liquids segment, which benefited from lower commodity prices for propane and butane, contributing to very strong demand for products continued growth of our Water Solutions volumes along with the full integration of Mesquite and now Fieldstone assets into our Delaware Basin system and a further reduction in our Refined Products segment where we completed the wind down of our Mid Continent business and streamlining of our remaining businesses. All of these items contributed to adjusted EBITDA of over $200,000,000 for the quarter, well above industry analyst expectations and a raise of our annual guidance.

We have met our financial target for distribution coverage, as Mike mentioned, with a current quarter coverage of 2.5x and an LTM coverage ratio of about 1.5x. We expect to remain above our target coverage for the foreseeable future. Our LTM pro form a adjusted EBITDA at twelvethirty onenineteen is approximately $660,000,000 as calculated for our debt covenant compliance purposes. This includes our historical adjusted EBITDA from continuing operations and pro form a additions for a full year of the acquisitions, primarily Mesquite and Hillstone, along with credit for organic capital expenditures subject to certain limitations. We funded the Hillstone acquisition during the quarter through the issuance of an additional $200,000,000 of Class B preferred units and the remaining purchase price borrowed under our revolving credit facility.

We also closed a small joint venture for the Limestone Ranch in Lea County, New Mexico during the quarter and utilized approximately $55,000,000 to complete that transaction. The continued wind down of our refined products business along with earnings in excess of distributions for the period contributed to a significant reduction in borrowings under the credit facility. Total debt outstanding at twelvethirty onenineteen totaled just under $3,100,000,000 resulting in our total leverage at 5x as calculated under our credit facility, which is expected to stay around this level for the next couple of quarters while we continue to eliminate working capital, integrate Hillstone and grow produced water volumes. Our targeted leverage metric, including working capital borrowings, is 4x or lower, and we are focused on achieving that goal. We have proven that we will take the steps necessary to meet our financial targets, and we expect nothing different in this case.

We have already reduced total leverage by approximately two times over the past two years, including reducing future working capital needs by at least $400,000,000 We have improved our distribution coverage by over 40% over the same period and also grown our business by over 40% on an EBITDA basis during that same period. We did all of this while also improving the cash flow profile and predictability of earnings and simplifying our business while focusing on our core strengths. Now we will cover some of the details driving our operating results for the third quarter and year to date fiscal twenty twenty. Adjusted EBITDA, excluding discontinued operations, totaled approximately $200,000,000 for the quarter and almost $428,000,000 year to date. Discontinued operations included the historical results of the TPSL and Mid Continent businesses, which have been liquidated, along with results of our glass blending business, which we are in the process of liquidating as well.

We would like to note that the current quarter discontinued operations also includes TPSL's $17,000,000 share of the biofuel tax credits, which NGL retained in the sale of that business and will receive the benefit. The remaining $14,000,000 benefit from these credits is recognized in the continuing operations of the Refined Products segment. As a reminder, while I cover each segment, adjusted EBITDA is a non GAAP measure that we reconcile to our earnings in our earnings release, investor presentations and quarterly reports to operating income, which is a GAAP measure for each segment. Looking at the Crude Oil division. The Crude segment continues to show steady performance and generated approximately $56,000,000 of adjusted EBITDA this quarter and 162,000,000 year to date.

This is in line with the upper half of our original 2020 adjusted EBITDA guidance range, so we are raising and tightening our range to $215,000,000 to $220,000,000 for this segment for the full year. Grand Mesa volumes averaged 134,000 barrels per day this quarter and has averaged about 130,000 barrels per day this year, remaining in line with our expectations. We expect volumes to remain at these levels through the upcoming quarter as well. Our other Crude Logistics assets have also performed in line with expectations with our marine fleet operating at full utilization, continued strong demand for our Cushing storage and no significant variances in basin differentials driving minimal volatility. This business continues to see very little earnings volatility despite the changes in crude prices as there remains very little direct commodity exposure in this segment.

Jumping to Water. Water adjusted EBITDA was $62,000,000 for the quarter and has totaled $160,000,000 year to date. The current quarter includes two months of Hillstone, which closed on October 31. Total disposal barrels were almost 1,600,000 barrels per day during the quarter. This is adjusted to account for only sixty one days of the Hillstone assets.

The increase in volumes over the prior quarter was primarily driven by strong growth behind the Mesquite assets, which averaged almost 475,000 barrels per day during the quarter and Hillstone, which contributed approximately 270,000 barrels per day for the quarter, again adjusted for sixty one days. The growth in volumes in the Delaware Basin were partially offset by declines, mostly in the Eagle Ford as rig counts have declined, but also in the DJ Basin, which we believe was mostly weather and timing related during the quarter. Approximately 67% of the disposal volumes were delivered via pipeline during the quarter, and we exited the quarter with over 70 of volumes on pipe. We are expecting pipe volumes to continue to increase on our existing systems as our volume growth is focused on the Delaware Basin gathering system. That system continues to show strong growth as the producers behind our system execute on the drilling and development programs.

We are expecting water disposal volumes to continue to increase in the basin and expect a significant increase in the middle of next year when Exxon brings the Poker Lake project online as well as other dedicated producers expected volume increases. As a reminder, the Poker Lake dedication includes approximately 70,000 acres in Southern New Mexico under a twenty year fee based contract with Exxon. The infrastructure for this dedication is almost complete, requiring minimal incremental capital to support the disposal volumes. Exxon is in the very early innings of their Delaware Basin development plan, and we are not expecting significant contributions from this dedication until mid-twenty twenty. We received an average disposal fee of $0.62 per barrel for the quarter, which is consistent with our disposal fee year to date.

Our skim oil volumes totaled approximately 3,400 barrels per day during the quarter, and realized skim oil revenues after hedges totaled approximately $56.9 per barrel with an average skim oil cut of 21 basis points. We are well hedged for calendar 2020 with approximately 3,700 barrels per day hedged at an average price just over $56 per barrel. We also have hedges in place through calendar twenty twenty one at approximately $55 per barrel. Freshwater sales increased this quarter as well. As a reminder, we have freshwater agreements in place supporting a significant amount of our New Mexico permitted volumes for calendar twenty twenty.

Our Karnes City Solids facility in the Eagle Ford came back online during the quarter and drove the slight increase in solids volumes. The work performed on this facility as well as certain well workovers, pump replacements and upgrades drove our maintenance capital expenditures so far this year. Operating expenses were $0.42 per barrel for the quarter, adjusted for the partial quarter for Hillstone compared to $0.40 per barrel year to date. The increase is mostly related to the integration of systems acquired and not yet realizing certain synergies. OpEx remains higher than budget as we work to automate facilities, increase utilization, integrate acquisitions and streamline operations.

We are also continuing to move facilities from high cost diesel generators as we connect them to electric power grid. We continue to focus on reducing disposal operating expense across the system with a target of $0.30 per barrel. Based on results to date, along with the updated timing from producers on expected volume increases, we currently expect to be below the low end of our previous adjusted EBITDA guidance range for fiscal 'twenty. Per our most recent conversations with our producer customers and the activity we see in the field, the water volumes are coming. We estimate that water volumes are approximately three months behind our original expectations.

Based on this delay, we are adjusting our FY 'twenty adjusted EBITDA guidance range to $240,000,000 to $250,000,000 Moving to Liquids. Adjusted EBITDA for Liquids segment totaled a record $69,000,000 this quarter and has totaled $100,000,000 year to date, already exceeding the high end of our annual guidance, which we also raised last quarter. We are raising our adjusted EBITDA guidance again for this segment to $115,000,000 to 120,000,000 for fiscal 'twenty. The quarterly results are not just timing related. We continue to benefit from our recently acquired terminals, including our Chesapeake export facility, which has loaded 29 ships since April as demand has exceeded our initial expectations.

The Chesapeake team has done a great job managing this increase in volumes while also upgrading the facility to support future opportunities. Butane sales remained strong through the quarter, and we benefited from low commodity prices in building our inventory position coming into the period. Butane demand diminishes in our fiscal fourth quarter, but the overall year has been very robust. Wholesale propane started the winter season with strong demand from late season crop drying and a cold November, and margins benefited early in the quarter. We have seen the forecast warm up for the remainder of the winter in certain operating areas.

We are well positioned from an inventory standpoint to manage a potentially warmer season from a margin perspective. However, volumes could be impacted. Potentially lower propane volume was factored into our updated guidance for this segment. 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 biofuels marketing.

Those divisions are reflected in our continuing operations, while the remaining divisions have been removed and are now carried in our discontinued operations. The segment adjusted EBITDA for continuing operations was $24,000,000 for the quarter and has been $34,000,000 year to date, above the high end of our adjusted EBITDA guidance range as a result of the biofuel tax credits. We realized the benefit for the 2018 and 2019 biofuel tax credits during the quarter, with a portion associated with our continuing business totaling approximately $14,000,000 which is reflected in this segment. We do not expect the biofuel market to generate the type of volatility we have seen in recent years as the credit is now in place through 2022. Our continuing businesses have been more stable, predictable and carry much less inventory and therefore working capital requirements compared to the businesses we have exited.

Based on our restructuring of this business and the results year to date, including the benefit from the tax credits, we are also increasing our adjusted EBITDA guidance range for this segment to $35,000,000 to $40,000,000 Our growth capital spending is decreasing as we complete our largest infrastructure projects, including the Western Express and Lea County Express pipelines and the interconnections of the Mesquite and Hillstone systems into our legacy system. Maintenance capital expenditures have been relatively consistent the past few quarters and are expected to remain at this level. We expect to be able to fund our growth capital expenditures in fiscal twenty twenty one with our excess cash flow from operations. In summary, this was a record quarter for NGL, and we are proud of our accomplishments. We have simplified our business strategy yet maintained a prudent diversity of cash flows.

We have focused on our core areas of expertise and grown our business significantly. We are focused on reducing our leverage while continuing to execute for our stakeholders. That concludes our prepared remarks. We will now open the line for questions.

Speaker 0

Thank you. And our first question comes from the line of TJ Schultz with RBC Capital Markets.

Speaker 4

Hey guys, good morning.

Speaker 3

Hi TJ. First on the water volumes, I think

Speaker 4

you said about kind of three months behind schedule. Does that kind of push that exit rate that you had indicated before of, I think, 1.8 to 2,000,000 barrels a day into June? Or did that range that you gave for March not include Poker Lake? So maybe if you can just give some expectation on what exit rate would be for the end of this calendar year after Procreate Lake?

Speaker 1

So I'll start, T. So we are at about 1,600,000 barrels for the quarter. That includes the two months of Hillstone. We are seeing volumes grow this quarter. I think we'll be at the low end of that range heading into the exit for 4Q.

But again, what we're seeing is a delay in volumes. Poker Lake is not expected to come on until mid-twenty twenty. So we are not factoring Poker Lake into our exit rate for the fourth quarter.

Speaker 4

Okay. That makes sense. And then I think ICO has some pretty sizable units to the north of of Poker Lake. If I look at maps that it's published, that includes, like, James Ranch and and Big Eddy. Have those water rights been dedicated yet?

Speaker 2

They have not.

Speaker 4

They've not. Okay. No. No. Go ahead.

Alright. That that's fine. Is that something that you would expect they'd look at at dedications this year?

Speaker 1

I don't Doug, do you have

Speaker 2

any thoughts on that, what time it might be other than we don't I

Speaker 5

would say we cannot speak to that publicly at this time.

Speaker 4

Good enough. Okay. That's fine. I'll just leave it there.

Speaker 2

Thanks, guys.

Speaker 1

Thanks, TJ.

Speaker 0

Thank you. And our next question comes from the line of Shneur Gershuni with UBS.

Speaker 1

Hi. Good morning, everyone.

Speaker 6

I was wondering if we could start off talking about the water business. I recognize the delay with one of your producers and so forth, but I kind of wanted to focus actually on the margin side of it. You've

Speaker 3

done

Speaker 6

a lot of acquisitions, expansions over the last couple of years and so forth. When we think about the margin that you're achieving in the water business, is this quarter representative of what it's going to be on a go forward basis? And I was wondering if you can sort of also talk to, and maybe it's a second question, but if you can talk to the skim impacts. When you first started this years ago, the skim was a big deal. I thought with all of the investments, was supposed to come down.

If you can sort of give us some color with respect to how much of the percentage of the business it is or of the margin impact and how we should be thinking about it on a normalized basis?

Speaker 1

Sure. Thanks, Shneur. So to start on the margin, so I'm going say no. This is not what the expected margins would be. We do expect our net margin to be larger on a go forward basis.

If you look year to date, our disposal fee has been very consistent at about $0.62 a barrel. That rate may come down slightly as we bring more barrels on type, but I think that's a pretty consistent number to use. Skim oil has generated about $0.14 a barrel. Also, think that's pretty consistent as we are hedged for the next two years. So we're well positioned from a revenue perspective.

So that gets you to, call it, at $0.75 $0.76 a barrel on the revenue side. Operating expenses is where we have not realized the synergies from the acquisitions. We have not been able to bring all of our disposal facilities on to Electrical Power. We're still working to tie everything in on pipe. So our OpEx is running higher per barrel.

Additionally, I'll point out that our operating expenses right now also include ancillary expenses related to freshwater, solids, the management of the ranches in Southern New Mexico. That's something that we will look to break out to help from a modeling perspective. But overall, we are expecting that operating expenses will come down significantly. For disposal alone, our target is $0.30 a barrel, and we believe that is absolutely achievable. So that's where you get a large benefit from an overall margin perspective, It's in that the reduction of operating costs.

Speaker 6

Okay. And just a quick follow on specifically on the topic. So with Poker Lake, will it have the same margin as everything that you've got on a go forward basis, or is it a higher margin or lower margin, you know, relative to what you have right now?

Speaker 1

Yeah. I we can't talk about the the specific rates, but what I would indicate is Poker Lake is all delivered at one point, so very little operating expenses expected on from the Poker Lake volumes.

Speaker 6

Okay. Cool. And and maybe in the

Speaker 3

sorry. Yeah?

Speaker 1

Well, your your your follow-up your other question was around skim oil. As we put more volumes on pipe, the skim oil percentage compared to disposal volume does come down. And we have been guiding that way. For this quarter, we were down 21 basis points. Again, as we continue to add volumes on pipe, that number will most likely be lower than what we have seen historically when we were primarily truck volumes.

So we will continue to update our expectations as we give our annual guidance on what to expect from a skim oil perspective.

Speaker 6

Okay. Definitely helpful. Maybe a question for Mike. In your prepared remarks, you talked about lower CapEx going forward and being able to pay down leverage and so forth. Can you give us a sense of the rate of decline that you're expecting in terms of CapEx?

And then does a pause on acquisitions factor into that as well too? Do you feel that you've acquired enough, specifically in the water business, to achieve the scale that you're originally looking for when you embarked on this, and it would only be opportunistic and infrequent acquisitions on a go forward basis?

Speaker 2

Yeah. We I think the the two big systems that we wanted to purchase were the Hillstone and Mesquite, so that's done. I think the focus now is on acreage dedications and MVCs. Right? So we have what do we have now?

Three, four million barrels in of capacity. Total capacity. Permit capacity. So there's plenty of room there. And we've completed our Lex Lex and the pipe, you know, 24 inch.

Our Poker Lake 30 inch will be complete, I think, around June 30. And then we just have the Orla 24 inch remaining. So CapEx we we haven't come up with a number yet, but we we if I could say we've got it around a $100,000,000 for water, which is gonna be mostly just remaining pipe.

Speaker 6

Alright. Yeah. I guess that makes sense. Perfect. Thank you very much, guys.

Appreciate the color.

Speaker 0

And our next question comes from the line of Pearce Hammond with Simmons Energy.

Speaker 7

First question pertains to the Water business and just following up on the color that you just provided on some questions related to that. But if you were to think about the adjustment in the EBITDA for the Water business in three buckets, the buckets being volumes. And like you said, the volumes are coming in. They're coming, but they're just coming at a slower pace than what you're expecting. Revenues and then operating expenses.

Where do you think the majority of that adjustment is coming from within those three buckets?

Speaker 1

Pierce, volumes and OpEx are going to be the two drivers, right? One, as we get more volumes, you are going to naturally bring down your operating expense per barrel as we get higher utilization of facilities. But this is a volume game. I think the dedications that we've been able to acquire, the long term dedication, and the MVCs, allow us to capture a significant amount of the volumes in, you know, our core focus area, which we think is the best place to be in in the country. So I believe this is still a a volume game, but operating expenses should not be discounted.

From a rate per barrel perspective, again, as I mentioned before, I don't that that's not we're not gonna I don't think we'll be driving rates higher. I also don't see them coming down significantly either.

Speaker 7

Okay. Great. And then my follow-up just pertains to the competitive dynamics on the ground. If you are trying to sign up, say, new water deals with producers, what's the environment like right now? How competitive is it?

Just some color around that would be great.

Speaker 2

Doug, could you cover that one?

Speaker 5

Sure. Focus being the Delaware Basin, there really are not a lot of large acreage dedications or MVCs available through Hillstone, Mesquite, Legacy NGL. We have a very large share of the commitments in the Delaware. And then obviously, some of our competitors, they have their dedications as well. So from a competitive basis, much of the opportunity for others to come in and greenfield or start competing with us, it's very tough for that environment due to the fact there a lot of the long term dedications have already been inked.

And

Speaker 2

that's why it's a

Speaker 5

perfect opportunity for us to now focus on fold ins as far as folding in our contracts into our subregions within the Delaware, into our growth pipes and existing online capacity. So to answer your question, the competitiveness, it remains, but a large amount of the contracts and dedications have already been wrapped up in the basin.

Speaker 7

Okay. Thank you very much.

Speaker 1

Thanks, Greg.

Speaker 3

Thank you. And our

Speaker 0

next question comes from the line of Spiro Dounis with Credit Suisse.

Speaker 8

Hey, good morning, gentlemen. Mike, appreciate your comments around some of the qualitative attributes being cited as an overhang. But I guess I'd still argue that strong enough fundamentals should be able to overcome maybe all or most of that. And you mentioned being forward looking here on water. It sounds like it's got a really strong outlook.

I don't want to dwell in the past, but I guess there's been some iterations here of Mistwater results that, to some degree have been outside your control, it sounds like customer related, but I mean it's driving investors to maybe discount some of the outlook from here. And so just maybe walk through some of the specifics on what exactly is driving some of that underperformance? And then what's going to basically abate going forward?

Speaker 2

Sure, Doug.

Speaker 5

Sure. As Trey went to what we call underperformance here in this quarter, a material amount, about onethree of our missed budget was related to generators and diesel, unbudgeted. The driver in the Delaware, especially the New Mexico portion, the local the provider there is there's plenty of generation in the area. There is a dearth of distribution. So their execution on their end to actually get the power distributed to the certain areas has been a very big struggle for them, which creates, obviously, a hangover for us that was unpredictable.

So that we come out of the woods. We took about a third of our generators offline in January, which is great news. We finally got on station power. And then by mid- late summer, our expectation is to have most of the remaining generators offline and on online power. So that is coming.

That's going to be a material, gain for us on the EBITDA side. As far as volumes go, like Mike said, we receive a forecast directly from our customers, and that's what we forecast off of. Interestingly enough, those were lower than what they forecasted. But now we'd bring a corner into February, and it has gone completely the other direction. And we're scrambling to say, Oh my gosh, look at all this water.

Good problem to have, right? Makes up there's a lot to make up. But we're seeing that turn and the strength of those forecasts coming back. And actually, those forecasts are outpacing where they were previously forecasted. So if you take volumes and OpEx, obviously, the integration side of things, with Mesquite and Hillstone, we're very busy reducing OpEx and meeting those synergies that we had modeled.

Those are in play. A lot of the Hillstone assets contained rental injection pumps, other rental equipment that NGL purchases on capital purchase. Those are being changed over, and they were some of them in January, certainly in Feb to March this last quarter. We'll be seeing those expenses come off of the books. Mesquite is going very well on the integration side.

We're enhancing how that business is being run and working on OpEx on that side. So hopefully, that answers your question. It's a transition. It's a new basin. Like Mike said, one of our largest customers is only 3% developed in their area.

There's a lot of midstream development to happen on our end, but there's also a lot of support development around infrastructure such as power that's happening as well. And frankly, we're going to come out of the woods on a lot of that this fiscal Q4 and then '1.

Speaker 8

Got it. Very helpful. Second question maybe for you, Trace, on Grand Mesa. Performing really well this year. It looks like that should continue based on the outlook.

Just curious how you're thinking about maybe some of the credit risk right now. I think some of your major customers are seeing some of their bonds trade a little bit lower here. So

Speaker 7

how do think about

Speaker 8

the credit risk against Grand Mesa being of pretty strategic importance in the basin?

Speaker 1

Sure. So we do have diversified customer base on Grand Mesa. Obviously, some of the larger customers you know, do have some credit risk associated with them. We monitor that very closely. We feel very comfortable with what all of our producers are saying publicly as well as to us directly.

We do have foresight. They are nominating volumes ahead of when they're reporting publicly. So we do get to see what is coming down the pipeline. So that gives us some foresight into what's happening. And as you can see from from the volumes, the volumes have remained strong.

So we feel good about where things stand. You know, something that we will obviously pay very close attention to. But Grand Mesa was built for these particular producers. We're a strong partner with these producers, and we we will continue to partner with these producers on a on a on a future basis. Even under long term contracts, there's still a lot of of work between the producer customers and the pipeline to make sure that we're meeting each other's needs.

Speaker 8

Very helpful. Thank you, gentlemen.

Speaker 1

Thanks, Spiro.

Speaker 0

Our next question comes from the line of Michael Blome with Wells Fargo.

Speaker 3

Maybe just to stay on Grand Mesa for a second. So I noticed in the quarter, you talked about purchase of third party volumes. I just want to understand, is that your marketing company buying those barrels? And if so, how do we think about the margin on that barrel versus a barrel that's just shipped by a third party? And should we just expect that that's going to be sort of a normal course of operations going forward?

Speaker 1

Michael, yes, that's consistent with how the pipeline is operated from day one. NGL Crude Logistics is a shipper on the pipeline. They pay the tariff rate to the pipeline. We report Grand Mesa on a net basis, so we do factor in any loss that Crude Logistics may take into our net, into what we report. So that has been consistent since the start of the pipeline.

That the margin that, Crude Logistics can generate is generally in line with the differential out of the basin. So I think I've seen some some reports recently that, in the $2 to $3 range, I think that's consistent with what we would expect right now as well.

Speaker 3

Great. And then my second question was just you recently hired an executive VP of strategic initiatives, and I just wondered maybe if you could just talk a little bit to that and, you know, what what the what's that role going to entail? And especially, I guess, in light of

Speaker 2

the fact that it sounds

Speaker 3

like you're you've kind of done the heavy lifting on M and A in terms of the acquisitions you want to do. Just want to get a sense of that.

Speaker 9

I think that this is John Ciulliuk, Executive Vice President of Strategic Initiatives. I think that the role here is really to make sure that we, number one, don't miss any opportunities from a strategic acquisition or divestiture standpoint. And then I think that there's also a number of other important initiatives that the company is focused on, including ESG, importantly, but also to looking forward, we want to make sure that we are presenting our story, presenting the way that we communicate with investors on an ongoing basis. I think that you'll see increased transparency around a number of different things over the course of this fiscal year and on a go forward basis.

Speaker 3

Great. That's all I had. Thank you.

Speaker 1

Thanks, Michael.

Speaker 0

Thank you. And I'm showing no further questions at this time. I will now turn the call back over to CEO, Mike Kremble, for closing remarks.

Speaker 2

Well, thank you for joining, and we'll talk to you in a few months.

Speaker 0

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