NGL Energy Partners - Q4 2023

Transcript

Operator (participant)

Greetings! Welcome to the NGL Energy Partners 4Q '23 earnings call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note, this conference is being recorded. I will now turn the conference over to your host, Brad Cooper, CFO. You may begin.

Brad Cooper (CFO)

Thank you. Good afternoon. Thank you everyone for joining us on the call today, where we will discuss our fiscal 2023 results, our deleveraging update, and our outlook for fiscal 2024. After the market closed today, we issued an earnings release, investor presentation, and filed our 10-K. Comments today will include plans, forecasts, and estimates that are forward-looking statements under the U.S. securities law. These comments are subject to assumptions, risks, and uncertainties that could cause actual results to differ from the forward-looking statements. Please take note of the cautionary language and risk factors provided in our SEC filing and earnings materials. fiscal 2023 was truly a transformational year for NGL across all aspects of the partnership, with record EBITDA, significant reductions in our absolute debt, and leverage well below our initial goal of 4.75x.

We achieved record adjusted EBITDA of $632.7 million for the year, and $173.3 million for the Q4. This record adjusted EBITDA was driven by the strong growth in our water business, which I will discuss shortly. We completed the sale of our marine assets and other miscellaneous assets, totaling approximately $141 million. The trailing twelve-month adjusted EBITDA associated with these assets was approximately $10.7 million, which implies over a 13x multiple on these asset sales. Selling these non-core and underutilized assets at these attractive multiples has allowed us to accelerate our strategy to reduce absolute debt and leverage.

We started fiscal 2023 with a $476 million balance remaining on the 2023 unsecured notes, and $42 million remaining on the equipment notes supported by the marine assets. Most folks outside the walls of the NGL offices thought the redemption of the 2023 unsecured notes wouldn't occur until later this calendar year. Due to the strong operational performance, the non-core asset sales, and our ability to project the release of working capital as commodity prices moderated, we were able to redeem all of the 2023 unsecured notes and pay off the equipment note, both totaling about $518 million by year-end. With this debt retired, our leverage at the end of the fiscal year was approximately 4.56x.

Our ABL balance at the end of the fiscal year was $130 million, roughly the same level that it was at the beginning of the fiscal year. You recently saw our progress on the debt and leverage front, acknowledged with the upgrade from S&P to B- Stable. While this is a nice move in our overall credit rating, it is not the final stop. As we continue to reduce overall debt and drive leverage lower, we would expect to see additional upgrades along the way. We're off to a strong start for fiscal 2024 on the debt retirement front. Mike will get into how we see the year playing out. Through the first two months of this fiscal year, we have purchased approximately $100 million of our 2025 unsecured notes.

The current balance on the 25 notes is $281 million, which we expect to have fully retired no later than March 31st of 2024. The debt reduction in fiscal 2023 and jumpstart on debt reduction in fiscal 2024 significantly reduces our interest expense, thus bolstering our free cash flow on a go-forward basis. Our Water Solutions business achieved several new records in fiscal 2023. Our consolidated record adjusted EBITDA was driven by Water Solutions' record adjusted EBITDA of $463.1 million, and Q4 adjusted EBITDA of $131.6 million. Water Solutions achieved record disposal volumes in the Q4. As the Delaware Basin saw significant drilling and completion activity last year, our Water Solutions business grew volumes approximately 29% year-over-year.

This growth demonstrates how producers value our integrated pipeline system with large-diameter pipe and our track record of service and reliability in the Delaware. In the Q4, Water processed approximately 2.46 million barrels of water per day. This is a 28% increase over the prior year's Q4. During the Q4, we also benefited from higher fees on spot volumes that hit our system. The water team continues to find ways to optimize the cost side of the house and reduce the Q4's OpEx per barrel to $0.24. This is a $0.04 per barrel improvement versus the prior Q4, and $0.01 lower than the third quarter of this fiscal year. This decrease was driven by higher disposal volumes and the locking in of three of our largest variable costs: utilities, royalty, and chemical expense.

We won't be materially impacted by inflation in fiscal 2024 due to negotiated long-term utility contracts with fixed rates, royalty contracts with no escalation clauses, and a fixed expense per barrel with our chemical provider. Crude logistics adjusted EBITDA was $29.7 million in the Q4 versus $54.5 million in the prior Q4. This variance was primarily driven by the sale of higher-priced inventory into a declining crude price market during the quarter. In the prior Q4, crude logistics benefited by selling lower-priced crude inventory into a rising crude price environment. Since our last call, there have been a few noteworthy items in the DJ Basin that could positively impact the basin in the near future and our Grand Mesa volumes.

First, one of the largest operators in the basin announced strong well results at the end of 2022, and additional drilling and completion activity in the back half of this calendar year. Second, Chevron announced the acquisition of PDC Energy. We view both of these as positives for the DJ Basin and potentially Grand Mesa. As I said on the last earnings call, we continue to be cautiously optimistic on production increasing in the DJ, and ideally, additional volumes hitting Grand Mesa. As Mike details how we see fiscal 2024 playing out, I did want to mention we do not currently have this potential additional activity and positive developments in our fiscal 2024 budget. Liquids logistics adjusted EBITDA was $28.5 million in the Q4 versus $24.5 million in the prior Q4.

This increase was primarily due to higher propane margins during the quarter as customers pulled on their fixed-price contracts. The full-year results in the propane segment were weaker than we had hoped for, due to a warmer than normal winter, reducing the demand for spot volumes. EIA recently reported that propane demand in the U.S. fell to the lowest level since 2010. Margins on our refined products for the Q4 and full year increased due to refinery and infrastructure disruptions in certain markets, while the team was able to continue to execute on a successful supply program for its customers. This increase was partially offset by lower butane margins, as our product purchased earlier in the season continued to compete with product purchased in a discounted market, reducing our margin on each gallon sold.

fiscal 2024 is off to a good start in the liquid segment. Our expectations are we see a rebound in performance from this segment for the year. Recall that a majority of the EBITDA from our liquid segment occurs in the 3rd and 4th quarters of the fiscal year. As Mike outlines the guidance for fiscal 2024, our consolidated EBITDA should not assume to be a ratable amount every quarter. With that, I will turn it over to Mike.

Mike Krimbill (CEO)

Thanks, Brad. Let's discuss how we expect fiscal 2024 to play out. With respect to our adjusted EBITDA guidance, first, we are guiding fiscal 2024 Water Solutions to a range of $485-$500 million. Reconciling to fiscal 2023 actual results, we begin with $463 million, less $15 million for approximately a $10 per barrel lower realized crude price on SKIM, plus $37 million for 10% growth in disposal volumes and SKIM oil barrels. This reconciles to the low end of that range. At the high end of the range, an extra $15 million would put our growth at $52 million instead of $37 million. Second, we're guiding the full year fiscal 2024 for all of NGL at $645+ million.

Reconciling to the fiscal 2023 actual results of $633 million, we deduct a one-time gain of $29 million, then deduct the trailing 12 months adjusted EBITDA on asset sales of approximately $11 million, so that's $40 million. Add back the net change in Water Solutions we just discussed, which is $22 million, which is at $37 million minus the $15 million of skim, and then add $30 million for the recovery in liquids crude oil logistics and reduced corporate overhead. We are being conservative, so we have an opportunity to raise guidance during the fiscal year. Our guidance for fiscal 2024 includes positive growth, but it is only one factor in the performance and value equation. Significant cash is raised from the following that are not included in adjusted EBITDA. We continue to identify underutilized assets and monetize them at double-digit multiples.

Again, in this fiscal year, we have identified at least $50 million in such assets, and we have already harvested $15 million of those in the first two months of this fiscal year. With $530 million of debt reduction in fiscal 2023 and more in 2024, our interest expense should decrease by approximately $50 million, another source of free cash flow that costs us no capital. We are focused on reducing working capital to provide additional free cash flow. For example, we are idling or selling certain terminals, no longer shipping on certain pipelines and eliminating line fill. Finally, we are reducing capital expenditures wherever possible. All of these sources of cash will help accelerate the deleveraging of the balance sheet and add value to our equity. It also allows NGL to address the preferred dividend arrearage sooner. What does this mean?

It means we are very comfortable that we will be able to redeem all the 2025 unsecured notes this fiscal year, possibly by December 31 of 2023. Our priority remains lowering absolute debt and reducing leverage. We expect to be under 4.0 times total leverage by March 31 of 2024. This should put us in a strong position to refinance the outstanding balance of the 2026 secured and unsecured bonds, extending those maturities. We do not expect to pay any dividend arrearage on the preferred equity in calendar 2023. Now I'd like to address how Water Solutions is structurally different from other water disposal companies. We are a long-haul pipeline business with large-diameter pipes spanning hundreds and hundreds of miles. Producers spend their own capital to tie into our pipeline system. We do not connect to the wellhead.

We have long-term contracts with either acreage dedications or MVCs. Our weighted average contract life is currently more than 10 years. We're the only water disposal company to reduce OpEx per barrel in the face of inflation. We are not focused on recycling or freshwater sales. We do provide volumes for reuse by producers. NGL is comparable to a crude oil transportation pipeline, which typically trades at an 8x-10x EBITDA multiple. A few comments about equity analysts' approach to our company valuation. The analyst focus has devolved into a simplified miss or beat consensus EBITDA story, often prior to even listening to the earnings call. There is so much more to a quarterly performance that should be considered, as we have outlined: debt reduction, improving leverage, asset sales, working capital changes, to name a few.

None of these are addressed with a miss or beat label. We provide annual adjusted EBITDA guidance, while analysts decide what the quarterly estimates will be. On occasion, some simply have divided the annual guidance by four, ignoring our seasonal business, guaranteeing a miss in the first and second quarters. A few have taken our water business and valued it at a 5.5x EBITDA multiple, similar to a marketing business with few hard assets, while valuing other smaller, lower growth competitors with higher capital requirements at 7.5x. We believe there is no true peer comp for NGL. Analysts need to take a deeper direct dive and understand the current and near-term value being created at NGL. We believe NGL's equity trade where it is due to our capital structure.

Our previous elevated leverage levels, preferred equity, suspension of dividends, and near-term maturities created a significant headwind. The good news is that we are growing into our capital structure. This fiscal year, our free cash flow will provide for debt reduction to a level where we can push out the 26 maturities and begin attacking the dividend arrearages in calendar 2024. I understand improvement can never happen fast enough for investors. We are accelerating our balance sheet recovery and ultimately regaining our financial flexibility. On a closing note, I would like to thank our director, Mr. Stephen Cropper, for his knowledge, experience and advice over his many years as a board member of NGL. We will miss him. We are thankful for his guidance over the last few difficult years. Thank you. With that, let's open it up for Q&A.

Operator (participant)

Thank you. At this time, we will be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. The first question comes from Patrick Fitzgerald with Baird. Please proceed.

Patrick Fitzgerald (Managing Director)

Hey, thanks for taking the questions. Yeah, appreciate the comments on, you know, how to value the company and, you know, the guidance in terms of how you're thinking about everything. Just on that, is it safe to say that you would wait till you refi the 2026 maturities before you turn on the distributions again? Is that the correct way of thinking about it?

Mike Krimbill (CEO)

Yeah, I think that's how we're thinking about the next 12 months.

Patrick Fitzgerald (Managing Director)

Okay.

Mike Krimbill (CEO)

It makes sense. It makes sense because we want leverage to be as low as possible.

Patrick Fitzgerald (Managing Director)

Right. Your covenants would allow it, just to clarify?

Brad Cooper (CFO)

That's correct.

Mike Krimbill (CEO)

That's correct.

Patrick Fitzgerald (Managing Director)

Okay.

Mike Krimbill (CEO)

Once we get under the 4.75 leverage. Yep. Which is where we are.

Patrick Fitzgerald (Managing Director)

Okay. Working capital was a huge, you know, it, had been kind of a headwind for, it seemed like, quite a while, and, in the back half of this year, it was certainly a positive. How do you see that, going forward in fiscal 2024?

Brad Cooper (CFO)

Yeah, I think for fiscal 2024, I mean, where propane and crude oil prices are today, we won't have near the constraints on our ABL capacity like we did in prior years. You know, one of the other items that historically has pinched our working capital and capacity is the CMA hedge. That's a non-event. We're inside the fiscal year. Crude price with respect to the forward curve is fairly flat. I don't think you can look at the previous years as really a representation of how we see working capital this year. ABL balance at the end of the fiscal year is around $135-$140 million. I think we see it in the same zip code at the end of fiscal year 2024.

Patrick Fitzgerald (Managing Director)

Great, thanks. What is the volume guidance or if you have any update on, you know, current volumes that you're seeing in the disposal business? Or what's the volume guidance underpinning the Water Solutions EBITDA guidance?

Mike Krimbill (CEO)

Yeah, in the earnings-

Patrick Fitzgerald (Managing Director)

Any update?

Brad Cooper (CFO)

In the investor presentation we published, it's showing fiscal year 2024 to average about 256, and that equates to the $485 million of EBITDA that Mike guided to. Again, that's the average for the year.

I think the first two months of this fiscal year were just under about 2.5 million barrels a day.

Patrick Fitzgerald (Managing Director)

Okay. All right, thanks. I'll hop back in queue.

Brad Cooper (CFO)

Thank you.

Operator (participant)

The next question is from Tarek Hamid with JPMorgan. Tarek, your line is live.

Tarek Hamid (Managing Director)

Good afternoon. I'd love to dig in a little bit more on the cost performance on the water business. Obviously, very, very impressive, but you talked about some of the, you know, contract pricing being fixed. You know, when you think about things like chemicals, have you ever sort of disclosed how long that contract price is fixed for? Maybe just to help us think through kind of how that evolves.

Brad Cooper (CFO)

I don't know if we've historically disclosed that in terms of the contract. I think we've got five-plus years on it. Doug, are you there? You want to.

Dough White (EVP of Water Solutions)

Sure. This is Doug. We expect that to be a long-term, you know, administration of those prices. I do want to mention we are working on a new initiative on chemicals to actually reduce our chemical-related OpEx by half to three quarter cents, by using a different strategy on our chemical program, and reduce the volumetric usage of chemicals. That contract is a longer-term contract.

Tarek Hamid (Managing Director)

Nothing we should think of as a sort of reset coming in 2025 or anything like that?

Dough White (EVP of Water Solutions)

That's correct. Like I said, anything coming this new fiscal year will be lower, not higher, on a per barrel basis regarding chemicals.

Tarek Hamid (Managing Director)

That's very helpful. Thank you. You know, I want to follow up on just the working capital question. Obviously, the sort of the seasonality of the business, and you guys, you spoke about in your prepared remarks, tends to be a little bit punitive in the first couple of fiscal quarters and then a little bit beneficial in the second half. I just want to sort of, you know, tie that to the sort of, you know, the $112 million or whatever, of bonds that you've repurchased in the last couple of months. You know, should we sort of read anything into kind of how working capital is shaping up over this couple quarters?

Brad Cooper (CFO)

I don't know if there's anything to read into other than, I mean, Mike alluded to some asset sales that have come through the first 2 months. You know, with Water's growth, our free cash flow is obviously more driven by Water's performance, so maybe it's not as seasonal as what you've seen around the organization historically. Again, to recall, at the end of, what was it? Early February, I guess, we amended the ABL to have that permanent $100 million accordion feature within the ABL. Lower commodity prices and some of these asset sales that we've pulled off here the first two months, gave us comfort to lean into the bond repurchases the first two months of the year.

Tarek Hamid (Managing Director)

I appreciate that. Just last one for me. As you talk about addressing the preferred securities, you know, is your focus there mostly just sort of solving for the arrearage? Do you think about, you know, the size of that preferred layer as maybe being a little bit oversized, and maybe you should, you know, think about redemptions of preferred over time? I'd just love to get your general thoughts on it at this point.

Brad Cooper (CFO)

Yeah, I think you're correct. It's both. If there was some opportunity to repurchase some of the preferreds, we would definitely consider that. Both.

Tarek Hamid (Managing Director)

Okay, that's helpful. I'll jump back in the queue. Thank you guys very much.

Brad Cooper (CFO)

Thank you.

Operator (participant)

The next question is from Jason Mandel with RBC Capital. Please proceed.

Jason Mandel (Managing Director)

Hi, guys. Thanks for taking the question for all the reasonably detailed guidance. Very helpful. Specifically on the water business, I know you touched on this with Tarek for a minute, the EBITDA growth guidance, can you give us a sense if any more of that is coming from additional cost saves and thus margin expansion, or if that's all volume improvement?

Brad Cooper (CFO)

Yeah, I think it's predominantly driven by volume improvement. Our OpEx, and again, if you'll in the earnings presentation we released, I think we're showing OpEx fiscal year 2024, $0.25, compared to $0.25 for this fiscal year. You could compute it's all volume driven.

Jason Mandel (Managing Director)

Okay, perfect. Thank you. Then on the buybacks in the quarter, there was I know it's a small piece of the puzzle, but there were some buybacks on the unsecured 26s. Was that just opportunistic and shouldn't be a big use of cash going forward?

Brad Cooper (CFO)

Yeah, that's fair. They were trading at a pretty decent discount to the $25, so we went and grabbed them.

Jason Mandel (Managing Director)

Got it. Very good. That's all for me. Thanks, guys. Appreciate it.

Brad Cooper (CFO)

Thank you.

Operator (participant)

The next question is from Jay Spencer with Stifel. Jay, please proceed.

Jay Spencer (Managing Director)

Thank you. Congrats on a good quarter and, you know, congrats on being below the 4.75x leverage. You know, I just wanted to be clear on kind of your thinking in terms of the order of operations, like as it relates to the arrearages on the preferred. Is the thinking that you would like to push out the 2026 maturities before attacking those arrearages on the pref, or are you ready to say at this point?

Brad Cooper (CFO)

No, it's very transparent. Yes, that's exactly what we're looking at. We have the 2026s, and the timing is coincidental perhaps, but the call premium on the 2026 secures drops in half in this next February. I think if we can get rid of all the 2025s by just December 31, and then our cost on the call premium drops by 50%, and that the timing would work out well.

Jay Spencer (Managing Director)

Gotcha. Okay, thanks. You know, as it relates to the water processing, capacity, I mean, you've got your produced water processing, you know, expectations for fiscal year 2024. It looks like it's 2.5-2.6 million barrels per day. What would the capacity be, you know, at the end of this after at the end of this year?

Mike Krimbill (CEO)

Doug, can you address that?

Dough White (EVP of Water Solutions)

I can take that. In operational capacity, at the end of this, if I can clarify the question, is it the fiscal 2024, or you asking what was at the end of fiscal 2023?

Jay Spencer (Managing Director)

At the end of 2024.

Dough White (EVP of Water Solutions)

At the end of 2024, we're gonna be somewhere between 3.3 million and 3.5 million barrels per day. Permitted capacity, we have been working on additional permitted capacity for new development in the future, and that's gonna be north of 4 million permitted capacity by the end of fiscal 2024.

Jay Spencer (Managing Director)

Okay, great. Thank you. I appreciate it.

Operator (participant)

Up next, we have Gregg Brody with Bank of America. Greg, please proceed.

Gregg Brody (High Yield Research Analyst)

Good morning, guys. Congrats on the execution. Just, you gave us a sense of the first two quarters, the first two months of this fiscal year, in showing your confidence in your volumes, expectations. Just curious how you think about your visibility today on volumes? How far out do you think you can see, based on what producers are doing, you know, takeaway capacity, et cetera?

Brad Cooper (CFO)

Well, I'll say next Tuesday, but I'll let Doug take that question.

Dough White (EVP of Water Solutions)

It's a great question. We are consistently working and planning our future growth. It's a big driver. We have an excellent view 12 months out, then after 12 months, we really have to rely on per-permit activity, remaining inventories, et cetera. As we look at the general growth throughout the Delaware Basin, we see that growth approximately 10% per year-over-year. I think that's a pretty well-published number out there. We would say our growth with our large dedications, dedicated areas, et cetera, 10-year contracts, we see our growth very comparable to that 10%.

Gregg Brody (High Yield Research Analyst)

Got it. Then just on the CapEx spend, what's the potential risks up or down when you think about the guidance you gave today?

Brad Cooper (CFO)

That's an interesting word to use, risk. I mean, you know, we would love if we could get additional contracts and MVCs to spend, you know, the money, especially at some attractive rates of return. I think, I don't know if we have any risk of having to spend more money this year, you know, we can see some new projects next year.

Gregg Brody (High Yield Research Analyst)

Great. Just to finish up, you mentioned the $15 million of asset sales already seems to be on the books this year, over the $50 you've identified. Of the $15, I think you said we should assume that's high, or that's low double digits. Maybe give us a sense of what you did sell and kind of what else you think you are selling, if to the extent you can tell us?

Brad Cooper (CFO)

This is an area where we kind of surprised the market because they're not big enough, you know, other than our marine sale, to issue a press release. They're anywhere from, you know, $200,000-$500,000, up to $10-$16 million. You know, we'd rather not disclose it because we have employees at those assets that are, may not be aware they're for sale.

Gregg Brody (High Yield Research Analyst)

I appreciate that sensitivity. I'll leave it there, and thanks again for the time.

Operator (participant)

The next question is from Ned Baramov with Wells Fargo. Please proceed, Ned.

Ned Baramov (Senior Research Analyst)

Hey, good afternoon. Thanks for taking the question. Brad, in your prepared remarks, you mentioned potential benefits from the Chevron PDC deal. Could you maybe review if you currently handle volumes from any of the two producers? Going forward, do you anticipate competition for incremental transportation volumes to intensify, given ample capacity on pipelines going to Cushing?

Brad Cooper (CFO)

Yeah, I don't think we can fully disclose volumes going across by customer, but I think our stance is, and I think others feel the same, that transaction like this, you would assume there'd be some increase in activity to support the underlying economics kind of our overall view.

Mike Krimbill (CEO)

Yeah, I'll add to it, and Don, maybe you jump in. You know, if these majors have ownership in the other pipelines in the basin, that's where they're gonna put their volume. We would hope we get volume they would push volume off those lines, in, over in our direction.

Ned Baramov (Senior Research Analyst)

Got it. Thanks for that. Following up on the question of your CapEx guidance, could you maybe talk about the split between maintenance and growth CapEx? On the growth CapEx side, are these projects primarily in the Water Solutions segment?

Brad Cooper (CFO)

Majority of it's in the Water Solutions segment. I think in the earnings deck, we're guiding to $75 million of growth and then $50 million of maintenance. You could assume a chunk of the $75 million is water, $70+ million.

Mike Krimbill (CEO)

Yeah, at least $70 million of it.

Ned Baramov (Senior Research Analyst)

That's helpful. Thank you.

Operator (participant)

The next question is from Sunil Sibal with Seaport Research Partners. Please proceed.

Sunil Sibal (Managing Firector and Senior Energy Insfrastructure and Utilities Analyst)

Yeah, hi, good afternoon, everybody, and thanks for taking my question. My first question was related to the contractual commitments on your water systems. In Permian, I think you mentioned the contract life of around 10 years. I was curious, you know, if you could talk about any MVCs that you have with the current volumes?

Dough White (EVP of Water Solutions)

I can take that, Brad.

Mike Krimbill (CEO)

Yeah, go ahead.

Brad Cooper (CFO)

Go ahead, Doug.

Dough White (EVP of Water Solutions)

Okay. Since our last call, we've amended and extended one of our large dedicated contracts that we inherited from the Mesquite acquisition, with a new 10-year term, and we actually were able to execute that at the current market rate, which was a big positive. We added 2 sizable MVC contracts in the quarter, as well as executed the two-term contracts we mentioned on the prior call. Our MVC barrels per day, you know, grew this past physical year, and we've already grown it by another 20% in this new year. The MVC terms are a 10-year average term, with the addition of those new contracts.

Sunil Sibal (Managing Firector and Senior Energy Insfrastructure and Utilities Analyst)

Okay. Volume-wise, you're saying it grew for fiscal year 2024, your MVC volumes will be 20% higher than where you were in 2023?

Dough White (EVP of Water Solutions)

Yeah. We were, I think, somewhere around 580,000 barrels per day in fiscal 2023, and we've already grown that by approximately 20% with MVCs in the new fiscal year.

Sunil Sibal (Managing Firector and Senior Energy Insfrastructure and Utilities Analyst)

Okay, got it. On the CapEx front, I think you guided to, as a guidepost, you know, deliver volumes growing by 10% year over year for the next few years. With the CapEx that you're guiding for fiscal 24, is that kind of a good way to think about run rate in terms of meeting that 10% growth number in the basin? I'm just trying to get whether there's any lumpiness in your CapEx, or is that kind of a good run rate?

Dough White (EVP of Water Solutions)

Brad, if I may, I'll go ahead and take that.

Brad Cooper (CFO)

Yeah, go ahead, Doug.

Dough White (EVP of Water Solutions)

Okay. you know, we have prior physical year to this new physical year, our CapEx outlook is pretty close to the same on growth capital, as Michael Krimbill mentioned and Brad Cooper mentioned. those new projects are there for a portion of the 10% growth. One big project that we actually bring online this week, we've already executed in this first quarter, is to connect our Block 76 Hillstone assets to the integrated system more fully. that's gonna add 300,000 barrels per day of capacity on pipeline from the system to an area that was underutilized has been underutilized. We have a nice growth trajectory there on just that project. Of course, we have some others adding additional capacity.

We would expect next year's CapEx and most likely years after that, based on current contracts, that demand to go down for growth cap, as we maximize the integrated system. As Mike said, you know, if we are able to enter into new MVC-type deals with, you know, fully underwritten, additional projects, then we would be looking to do that. We would do those as they were able to be executed.

Sunil Sibal (Managing Firector and Senior Energy Insfrastructure and Utilities Analyst)

Got it. thanks for that. My last question was related to your leverage. Obviously, you know, you have nice tailwinds going into 2024 in terms of leverage. I was curious, you know, and you talked about, you know, how you want to reduce your absolute debt. I was curious, you know, with the, with the business composition that you have now, where do you think is the right leverage level for this kind of, you know, business composition?

Mike Krimbill (CEO)

I think in the short term, there has to be a trade-off between the dividend arrearages and leverage. We definitely wanna be under 4x to refinance. I think we need to maybe, you know, continue decreasing leverage somewhat, but it will be difficult to decrease it significantly, while we're catching up on the arrearages.

Sunil Sibal (Managing Firector and Senior Energy Insfrastructure and Utilities Analyst)

Got it. Thanks for all the color.

Operator (participant)

Okay, we have reached the end of the question and answer session. I would now like to turn the floor back to Michael Krimbill for closing remarks.

Mike Krimbill (CEO)

Go ahead, Brad.

Brad Cooper (CFO)

Yeah, thank you guys for joining today. We appreciate your interest in the company, and we look forward to connecting with you all in August when we report fiscal Q1 of 2024. Thank you all.

Mike Krimbill (CEO)

I would just add, it is now very exciting to work at NGL.

Brad Cooper (CFO)

Thanks, everyone.

Operator (participant)

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.