NGL Energy Partners - Earnings Call - Q4 2025

Transcript

Operator (participant)

Greetings. Welcome to the NGL Energy Partners 4Q25 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 (EVP and CFO)

Good afternoon, and thank you to everyone for joining us on the call today. Our comments today will include plans, forecasts, and estimates, but our forward-looking statements are 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 presentation materials and our other public disclosure materials. Before I start discussing our fourth quarter and full-year results, I would like to thank the NGL employees for executing on our strategic initiatives and executing on the non-core asset sales that have positioned the partnership quite well heading into fiscal 2026. As we announced in the May 5th press release, we closed on the sale of the 18 natural gas liquids terminals, including Green Bay.

In addition to closing these previously announced asset sales, we monetized our rack marketing refined products business, our Limestone Ranch ownership, and most of our crude oil railcar fleet. The total asset sale proceeds, inclusive of working capital, were monetized for a double-digit multiple. Also, we completed the full wind-down of the biodiesel business, completing our final deliveries in the fiscal fourth quarter. These non-core asset sales will allow us to focus on our core assets. Additionally, these asset sales reduce our volatility and seasonality of our Adjusted EBITDA. The wind-down and divesting of these businesses eliminates, on average, $75 million of working capital, and at the peak, over $100 million of working capital based on the prior 12 months of activity.

The elimination of this working capital and earnings volatility will allow us to be less leveraged as we continue to further address our capital structure and specifically the Class D preferred units. The proceeds from these sales have allowed us to pay off the entirety of the outstanding indebtedness on our ABL. Also, we purchased 20,000 units of the Class D preferreds in the open market at a discount. As discussed on previous earnings calls, we will continue to right-size the portfolio and organization and will look for opportunities to further reduce the asset footprint within the liquids logistics segment. Let's get into the quarterly results. Consolidated Adjusted EBITDA from continuing operations for the quarter came in at $176.8 million in the fourth quarter versus $147.9 million the prior year fourth quarter, or approximately 20% higher than the prior fourth quarter.

The increase was primarily driven by the performance of our Water Solutions business segment. Our full-year Adjusted EBITDA from continuing operations was $622.9 million, which exceeds our previous guidance of $620 million. Water Solutions Adjusted EBITDA was $154.9 million in the fourth quarter versus $123.4 million in the prior fourth quarter. Physical water disposal volumes were 2.73 million barrels per day in the fourth quarter versus 2.39 million barrels per day in the prior year fourth quarter. Total volumes we were paid to dispose that includes deficiency volumes were 2.89 million barrels per day in the fourth quarter versus 2.6 million barrels per day in the prior year fourth quarter. Total volumes we were paid to dispose of were up 11% fourth quarter of fiscal 2025 over fourth quarter of fiscal 2024.

The increased EBITDA in water solutions is due to overall higher disposal revenues from higher disposal volumes as well as higher fees charged for interruptible spot volumes. We also received a full quarter of the Lex 2 pipeline contribution that was put in service during our third fiscal quarter. The water solutions team continues to drive operating expense per barrel lower. Operating cost per barrel was $0.22 for fiscal 2025 versus $0.24 per barrel for fiscal 2024. For the quarter ended March 31, 2025, operating cost per barrel was $0.23. The water solutions segment is off to a good start for fiscal 2026 as volumes continue to exceed internal expectations. With the current market sentiment and oil price uncertainty, we have not seen any drop-off in activity from our customers in the core of the basin.

We will continue to monitor activity levels and the impacts that commodity prices and tariffs could have on our Water Solutions segment. We are well positioned with 90% of our volumes committed through acreage dedications and MVCs. Recall, 80% of our total volumes are with investment-grade counterparties. Crude Oil Logistics Adjusted EBITDA was $13.1 million in the fourth quarter of fiscal 2025 versus $15.3 million in the prior year's fourth quarter. During the quarter, volumes on the Grand Mesa pipeline averaged approximately 56,000 barrels per day compared to 67,000 barrels per day for the fourth quarter of 2024. The reduction in EBITDA for the quarter compared to the same quarter from the previous year is predominantly driven by lower volumes on Grand Mesa. As previously discussed, we signed a contract with Prairie Operating where NGL Crude Marketing will ship their production.

We anticipate our first tranche of new volumes on Grand Mesa in early July from this new contract. Liquids logistics Adjusted EBITDA was $17.7 million in the fourth quarter versus $22.2 million in the prior fourth quarter. Margins for product sales decreased by about $7.1 million as butane margins declined due to a weak gasoline blending season. Propane margins were essentially flat quarter over quarter. Expenses decreased in the fourth quarter of fiscal 2025 due to reduced compensation. For fiscal 2026, we are guiding EBITDA of $615 to $625 million with total capital expenditures of $105 million. Of the $105 million in total capital expenditures, $60 million will be spent on growth projects in the water solution segment. As I mentioned earlier, water disposal volumes are ahead of our internal expectations, and we are off to a nice start for fiscal 2026.

With that, I would now like to turn the call over to our CEO, Michael Krimbill

Michael Krimbill (CEO)

Thanks, Brad. Good afternoon, everyone. I think many analysts and investors seem to be focused on quarterly results and may overlook the progress that NGL is making. I'd like to look back over the last 14 months to review our accomplishments. In February 2024, we began paying off the dividend arrearages on all three classes of our outstanding preferred units. It required three months and $475 million to complete this effort, such that we are now and have been current on our preferred equity financial obligations. At the same time, we continued to grow our water solutions business. We entered into a five-year $200,000 per day MVC contract that allowed us to construct the Lex 2 water pipeline. This pipeline was placed into service in November of 2024, contributing five months' activity to fiscal 2025.

We now have two large diameter pipelines with total capacity expandable to 500,000 barrels per day, taking water east into Andrews County. Meanwhile, we continue to grow our water solutions business. In the fiscal year of 2025 just ended, we achieved both record water disposal volumes and Adjusted EBITDA. Through the first two months of this quarter, we are exceeding, as Brad said, the total water disposal volumes projected in our 2026 guidance. We are off to a good start. Strategically, we have been streamlining our business over the last couple of years. During that time, we have experienced significant volatility and somewhat disappointing results in several of our liquids logistics businesses. Very recently, we sold those businesses as well as other non-core assets to raise $270 million. We are becoming more of a water solutions business with approximately 85% of our Adjusted EBITDA to be generated by this segment.

Now, for the first time, we have purchased and retired Class D preferred equity. This is a significant milestone as it is necessary to achieve our goal of a simplified capital structure and increasing our Free cash flow. Previously, we had purchased and retired over 23 million long-term warrants representing common units, significantly reducing potential dilution of our common equity in the future. Earlier, Brad provided our Adjusted EBITDA guidance for fiscal year 2026. At first glance, the $620 million midpoint approximates our actual results for fiscal year 2025 and appears to suggest no growth. In reality, our guidance makes up for a $20 million decline in skim oil revenues due to a lower crude price compared to the prior year actual, and the reduction of another $20 million in Adjusted EBITDA associated with asset sales included in the prior year actual. Going forward is now quite simple.

We will continue lowering leverage, continue to improve the capital structure by reducing the highest cost of capital, the Class D preferreds, and increase Adjusted EBITDA through growth in our water solution segment. With that, operator, please open up the line for Q&A.

Operator (participant)

Certainly. 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 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. Once again, please press star one if you have a question or a comment. Our first question comes from Derrick Whitfield with Texas Capital. Please proceed.

Derrick Whitfield (Managing Director)

Good afternoon, all, and congrats on a strong year-end and your progress with the asset sales. Mike, perhaps starting where you ended in your commentary, your guidance is quite strong when you think about the headwinds that you guys are overcoming, both with asset sales and crude prices. With respect to your 2026 guidance, could you offer some more color on your expectations by business or maybe speak to some of the operating assumptions for the water and crude logistics segments?

Michael Krimbill (CEO)

Yeah. Brad, why don't you address the guidance on water?

Brad Cooper (EVP and CFO)

Yeah. Derek, the water guide in that 620 midpoint, the water guide is an implied number of about $560 million. Recall in Mike's comments, we do have a little bit of a pullback in oil prices for FY2026 relative to what we realized in FY2025. It accounts for about $20 million of EBITDA, and then we had a little bit less than $10 million in asset sales that we will not have in the EBITDA stream going forward that were in FY2025.

Derrick Whitfield (Managing Director)

Terrific. For my follow-up, maybe shifting over to water macro, it appears three larger pipeline projects are moving forward based on the Waterbridge, Western, and Aris announcements. While fundamentals remain tight in the Delaware, to your point, I mean, we are seeing lower prices and would expect lower activity at some point. I guess, could you guys offer some color around the conversations you're having with customers and if you see opportunities for growth beyond the current announced projects?

Michael Krimbill (CEO)

Yeah. I think we'll have Doug answer that question. He's on the line. What are the three projects? The Waterbridge, the Western.

Derrick Whitfield (Managing Director)

Western and Aris.

Michael Krimbill (CEO)

Aris is the last.

Doug White (EVP, Water Solutions)

Hey, Derrick. This is Doug.

Derrick Whitfield (Managing Director)

Yes, sir.

Doug White (EVP, Water Solutions)

Yes, sir. So we've been busy recontracting our closest expiration long-term contracts, and there are only a couple. We have one of those fully executed with a new long extension, and then we're in the process of extending another. Our focus has been on our base wedge of business. When we look at growth, we've seen growth through our existing agreements, and obviously, the new Lex 2 agreement comes with the growth as well. When we look forward to these other options, we were the first mover on the out-of-basin with Lex 2. In this past year, we have firmed up our further out-of-basin acreage to be able to develop for growth. Right now, in this fiscal year, while we see no slowdown in volumes, we are on forecast, and as Mike said, we're a little ahead of forecast in this first quarter.

We're really focused on preparing for future growth opportunities with our core customers, of which we have had interest. Now, that interest may be somewhat delayed until everyone gets a good firm feel on where oil prices land this year. When you bring up these three pipelines, I know we've seen what is public on those. I will be curious to see if those get off the ground and if those actually develop and are constructed this year based on maybe a little bit of trepidation by the producers to really grow. We have seen movement back to the core acreage. That's where really our large contracts are focused, are the really good core acreage there in Central Lea County and somewhat into Eddy County.

When we look at growth, we're looking at the opportunities of growth under our current long-term contracts, which average almost 10 years on our current long-term contracts and the growth within those. I guess to answer your question on, "Hey, there's three pipelines specced," the Western pipeline is down in Loving County. That's focused on long-term, obviously, with Legacy, Anadarko, Oxy Water, which that piece of the pie has been with Western for a long time. That really does not impact anything around our business. If you go to the other two mentioned in Northern Lea County, I guess it's TBD to see how much growth is there to support those projects actually getting off the ground in 2025.

Derrick Whitfield (Managing Director)

Great color. One last, if I can, only because we've received several inbounds on it. Regarding the May 16th Railroad Commission announcement on enhanced guidelines for Permian water disposal, what level of impact will this have with your business as you guys see it today?

Doug White (EVP, Water Solutions)

Fortunately for us, we're always planning out three to five years ahead. These new guidelines are focused on new permits and new permit applications. We have almost 30 legacy permits in the Reeves and Loving area. We still have opportunities there to go drill those permits. As you know, we've been focused on really out-of-basin, Andrews County growth. That's really where our future growth will be. We have procured almost 25 pre-guidelines valid permits, legacy permits of the 30,000-35,000 barrels per day, half PSI per foot. We beat that timeline on any additional obligations within that new notice to operators that came out recently. We really are in a great position for our future growth for the next several years. To answer your question, that really does not impact NGL from a new permit or permit opportunity perspective.

Derrick Whitfield (Managing Director)

Great update. I'll turn it back to the operator.

Operator (participant)

Once again, if you have a question or a comment, please indicate so by pressing star one. The next question comes from Tarek Hamid with J.P. Morgan. Please proceed.

Hi. This is Nevanon for Tarek. You had mentioned that there was some delay in terms of growth opportunities for people to get a feel where oil prices land. In the context where projects are pushed out of fiscal year 2026, how much lower could you flex capital spending down? I know it's already low, just a little above $100 million. Is there room to go lower, or if oil prices firm up, is there room for CapEx to go higher?

Michael Krimbill (CEO)

I mean, on the growth, we're down to 60, so I'm not sure. Can you squeeze some more out? Maybe, but it's not going to make a difference. I think on the maintenance capital, it's predominantly water. I think that's probably a pretty low number already. I really don't see us being able to take it down much.

Yeah. Definitely understand. I just was looking to see if there is room to go lower, but it's already a very low point, so understandable. Thank you.

Operator (participant)

The next question comes from Gregg Brody with Bank of America. Please proceed.

Gregg Brody (High Yield Research Analyst)

Good morning, guys. I'm sorry. Good afternoon. As you give the guidance that you put out there, can you help us think about how you think about your low and your high range there on volumes and what drives that variability? Specifically in the water business.

Michael Krimbill (CEO)

Just having some feedback. Gregg, could you maybe speak a little louder and repeat the question?

Gregg Brody (High Yield Research Analyst)

Yeah. Hold on one second. Can you hear me now?

Michael Krimbill (CEO)

Yes. Thank you.

Gregg Brody (High Yield Research Analyst)

Yeah. That's better. Just trying to understand when you think about the water business, sort of the low to the high side for this year, how are you thinking about volumes and help us think about how you're coming up with that?

Michael Krimbill (CEO)

Doug, you want to take that?

Doug White (EVP, Water Solutions)

Sure. As I think everyone has learned over the last few years with the recycling coming to be such a large part of the business, which is a real positive, the midstream water business is really the backstop to those peaks. The producers really benefit on the valleys when they get to recycle their own water. Meanwhile, we're maintaining capacity as a backstop when the flowbacks happen. That has continued. As I talked about earlier, we have such a good wedge of base water within the portfolio. Our swings, we might swing 500,000 barrels day to day based on whether the recycling is hitting or the peaks are hitting us. That will continue. That's a normal part of the business at this point. Where we see variation maybe from a budget perspective is that sometimes we will have forecasted directly from our customers.

If several of the customers, for some reason, push their completions into one quarter to the next, we'll see those quarterly fluctuations. An example is this first physical quarter started in April. What do we look like through, I guess, we're almost through May? We're looking quite above budget for this first quarter on volumes. Why is that? Volumes have been very strong and actually they're outpacing forecasts because there really has been a little bit less recycling based on timing. We might come into July and be a little bit under budget. We have a pretty good band and pretty good understanding of how to forecast that and when those are going to hit. It's a base part of the business. We have a very strong wedge. You look at our wedge, and we're 2.5 million barrels a day very consistently in the portfolio.

We have peaked and hit records in this fiscal quarter, over 3 million, 3.1, 3.2 million some days. It is just, like I said, it is part of the business. As our base wedge grows and grows, really that 500,000 barrel per day swing is pretty normal for us.

Gregg Brody (High Yield Research Analyst)

Just based on what you've heard from your customers and maybe what you've heard on the calls, if they haven't communicated with you clearly, what do you think that means for volumes next year, just based in this market today? Is it flat? Is it up slightly, up slightly? How should we think about it? Obviously, I know things can change. I'm just trying to get a sense of how to think about what happens next.

Doug White (EVP, Water Solutions)

Yes. Sure. Sure. So everyone's been asking what's happening. Are we seeing changes? We're seeing some of the rigs being laid down. We have not seen or been informed by our customers that the volumes are changing on the water side. I think everyone has been hearing that production will be at least held flat. There may not be a lot of growth. One of the positive things about recycling is when completions slow down from the growth side, that water doesn't go to recycle. It goes to disposal. A certain percentage of that does. So we expect we have some growth in this year in our forecast, and we expect that to be on. We've not heard anything different. That's the alternate aspect to the recycling is that in any one day, there's 20-30 million barrels of water sitting on the surface.

If there are any completions that are pushed or delayed into the next, be it quarter or next year, that water comes off the table, and our core business is disposal, and we get the benefit of that in our volumes. To answer the question, we have not been apprised of any volumetric changes from our customers. With their endeavor to hold production at least flat, we are still on pace. We are glad to have this be quite a bit ahead in this first fiscal quarter. That obviously helps us throughout the full fiscal year.

Gregg Brody (High Yield Research Analyst)

Great. Just one more question for you unrelated to your volumes. I noticed in the 10K you had as part of your business strategy, you pointed out continuing to reduce the nines of the Class D preferred units. You also mentioned something about reinstating the common unit distribution. I think in the past, you've said that's also financing growth projects. In the past, you've said that's a possibility, but you may look at other things like instead just focusing on share repurchases. Is that still the case, or am I reading this too literally to say that now the goal is to come reinstate the distributions?

Michael Krimbill (CEO)

I mean, near term, we do not see common unit distribution. We are happy to start attacking these Class D, so that will be our focus. At the same time, trying to reduce leverage. We would like to get that under four times. I would not be looking for a distribution increase in the next few quarters, no, or reinstatement.

Gregg Brody (High Yield Research Analyst)

Gotcha. In terms of buying back shares, is that a possibility, or is that it's now focused on the preferreds? I know you focused on the warrants before.

Michael Krimbill (CEO)

Yeah. I think, Greg, I think it's Class Ds, and then we'll be opportunistic with the capital structure. There could be some comments sprinkled in there, but Class Ds are our priority. I think you've heard it in my comments, you heard it in Mike's comments, and here in Q&A. That's the next piece of the capital structure we need to tackle, and we'll get after it this fiscal year.

Gregg Brody (High Yield Research Analyst)

All right. Thanks for your time, guys.

Operator (participant)

We have reached the end of the question and answer session, and I will now turn the call over to Brad Cooper for closing remarks.

Michael Krimbill (CEO)

Thanks, everyone, for your interest in NGL. We are well-positioned heading into fiscal 2026. Look forward to catching up with everyone in August during our First Quarter Call for 2026. Thank you.

Operator (participant)

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