NGL - NYSE

Greetings. Welcome to the NGL Energy Partners 4Q '23 Earnings Call. . Please note, this conference is being recorded. I will now turn the conference over to your host, Brad Cooper, CFO. You may begin.

Thank you. Good afternoon, and thank you, everyone, for joining us on the call today, where we will discuss our fiscal '23 results, our deleveraging update and our outlook for fiscal '24. 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 filings 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 fourth quarter. 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 12-month adjusted EBITDA associated with these assets was approximately $10.7 million, which implies over a 13x multiple on these asset sales. Selling these noncore and underutilized assets at these attractive multiples has allowed us to accelerate our strategy to reduce absolute debt and leverage. We started fiscal '23 with a $476 million balance remaining on the '23 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 '23 unsecured notes wouldn't occur until later this calendar year. But due to the strong operational performance, the noncore 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 $138 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 minus 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 are off to a strong start for fiscal '24 on the debt retirement front, and Mike will get into how we see the year playing out. But through the first 2 months of this fiscal year, we have purchased approximately $100 million of our 2025 unsecured notes. The current balance on the '25 notes, $281 million, which we expect to have fully retired no later than March 31, 2024. The debt reduction in fiscal '23 and jump start on debt reduction on fiscal '24 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 fourth quarter adjusted EBITDA of $131.6 million. Also, Water Solutions achieved record disposal volumes in the fourth quarter. 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 fourth quarter, Water processed approximately 2.46 million barrels of water per day. This is a 28% increase over the prior year's fourth quarter. During the fourth quarter, 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 fourth quarter's operating expense per barrel to $0.24. This is a $0.04 per barrel improvement versus the prior fourth quarter and $0.01 lower than the third quarter of this fiscal year. This decrease was driven by higher disposal volumes and the locking in at 3 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 fourth quarter versus $54.5 million in the prior fourth quarter. This variance was primarily driven by the sale of higher-priced inventory into a declining crude price market during the quarter. In the prior fourth quarter, Crude Logistics benefited by selling lower price 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 '24 playing out, I did want to mention we do not currently have this potential additional activity and positive developments in our fiscal '24 budget. Liquids Logistics adjusted EBITDA was $28.5 million in the fourth quarter versus $24.5 million in the prior fourth quarter. 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 fourth quarter 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 Liquids segment, and 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 third and fourth quarters of the fiscal year, so as Mike outlined 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.

Thanks, Brad. So let's discuss how we expect fiscal '24 to play out. So with respect to our adjusted EBITDA guidance, first, we are guiding fiscal 2024 Water Solutions to a range of $485 million to $500 million. Reconciling to fiscal '23 actual results, we begin with a $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 '24 for all of NGL, $645 million plus. Reconciling to the fiscal '23 results of $633 million, we deduct the onetime gain of $29 million and then deduct the trailing 12 months adjusted EBITDA on asset sales of approximately $11 million, so that's $40 million, then add back the net change in Water Solutions we just discussed, which is $22 million, which is that $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 '24 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 2 months of this fiscal year with $530 million of debt reduction in fiscal '23 and more in '24, and our interest expense should decrease by approximately $50 million, another source of free cash flow that cost 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. So 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, 2023. Our priority remains lowering absolute debt and reducing leverage. We expect to be under 4.0x total leverage by March 31, 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 and again, 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. And our weighted average contract life is currently more than 10 years. We're the only water disposal company to reduce operating expense per barrel in the face of inflation. We are not focused on recycling or freshwater sales, but do provide volumes for reuse by producers. NGL is comparable to a crude oil transportation pipeline, which typically trades at an 8 to 10x EBITDA multiple. Finally, a few comments about equity analyst approach to our company valuation. The endless focus has evolved 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 4, 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 a 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, so analysts need to take a deeper dive and understand the current and near-term value being created at NGL. We believe NGL's equity trades were -- 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, and 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 '24. I understand the improvement can never happen fast enough for investors, but 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. Steve Cropper, for his knowledge, experience and advice over his many years as a Board member of NGL. We will miss him, but are thankful for his guidance over the last few difficult years. And thank you. With that, let's open it up for Q&A.

. The first question comes from Patrick Fitzgerald with Baird.

I appreciate the comments on how to value the company and the guidance in terms of how you're thinking about everything. So just on that, is it safe to say that you would wait to -- wait until you refi the '26 maturities before you turn on the distributions again? Is that the correct way of thinking about it?

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

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

Right. But your covenants would allow it, just to clarify?

That's correct.

That's correct. Once we get under the 4.75 leverage, yes, which is where we are.

Okay. Could you provide -- working capital was a huge -- 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?

Yes, I think for fiscal '24, 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. One of the other items that historically has pinched our working capital and capacity is the CMA hedge, that's a nonevent or inside the fiscal year. Crude price with respect to the forward curve is fairly flat. So 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 million to $140 million. I think we see it in the same

Great. And then what is the volume guidance or if you have any update on current volumes that you're seeing in the disposal business. What's the guidance -- what's the volume guidance underpinning the Water EBITDA guidance in the update?

Yes, in the investor presentation we published, it's showing fiscal year '24 to average about 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 2 months of this fiscal year were just under about 2.5 million barrels a day.

The next question is from Tarek Hamid with JPMorgan.

I'd love to take in a little bit more on the cost performance on the Water business. Obviously, very, very impressive. But you talked about some of the contract pricing being fixed. If you say about things like chemicals, have you ever sort of disclosed how long that contract prices sticks for? And then maybe just help us think through kind of how that evolves.

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

Sure. This is Doug. We expect that to be a long-term 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 3/4 cents by using a different strategy on our chemical program and reduce the volumetric usage of chemicals. But that contract is a longer-term contract.

Nothing we should think of as a sort of reset coming in '25 or anything like that?

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

That's very helpful. And then I just want to follow on just the working capital question. Obviously, sort of the seasonality of the business, and you guys 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 tie that to the sort of the or whatever of bonds that you've repurchased in the last couple of months. So should we sort of read anything into kind of how working capital is shaping up over this couple of quarters?

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. With Water's growth, our free cash flow is obviously more driven by Water's performance. So maybe it's not as seasonal as we've seen around the organization historically. And again, recall at the end of, what was it, early Feb, I guess, we amended the ABL to have that permanent $100 million accordion feature within the ABL. So lower commodity prices in some of these asset sales that we pulled off here the first 2 months gave us comfort to lean into the bond repurchases in the first 2 months of the year.

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

Yes, I think you're correct. It's both. And if there were some opportunity to repurchase some of the preferreds, we would definitely consider that. So both.

The next question is from Jason Mandel with RBC Capital.

For all the reasonably detailed guidance, very helpful. Just specifically on the Water business, and you touched on this with Tarek for a minute, but 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?

Yes, 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 '24 at $0.25 compared to $0.25 for this fiscal year. So you can impute it's all volume-driven.

Okay. Perfect. And then on the buybacks in the quarter, there was a -- it's a small piece of the puzzle, but there were some buybacks on the unsecured '26-es. Was that just opportunistic and shouldn't be a big use of cash going forward?

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

The next question is from with Stifel.

Congrats on a good quarter and congrats on being below the 4.75x leverage. 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. Would the -- is the thinking that you would like to push out the 2026 maturities before attacking those arrearages on the press? Or are you ready to say at this point?

No, it's very transparent. Yes, that's exactly what we're looking at. We have the '26-es and the timing is coincidental perhaps, but the call premium on 6 secured drops in half in February of this coming -- this next February. So I think getting -- we'll have -- if we can get rid of all the '25 by December 31, and then our cost on the call premium drops by 50% and that -- the timing would work out well.

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

Doug, can you address that?

I can take that. Our operational capacity at the end of this -- if I can clarify the question, is this fiscal '24? Or are you asking the end -- what was at the end of fiscal '23?

At the end of '24.

At the end of '24, we're going to 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 going to be north of 4 million of permitted capacity by the end of fiscal '24.

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

Congrats on the execution. Just you gave us a sense of the first 2 quarters -- the first two months of this fiscal year, 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, takeaway capacity, et cetera?

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

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. And then after 12 months, we really have to rely on permit activity, remaining inventories, et cetera. But as we look at the general growth throughout the Delaware Basin, we see that growth approximately 10% per year, year-over-year. And 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%.

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

That's an interesting word to use, risk. And we would love if we could get additional contracts and MVCs to spend 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, but we can see some new projects next year.

Great. And then just to finish up, you mentioned the $15 million of asset sales already seems to be in the books this year over the $50 million you've identified. Of the $15 million, the -- I think you said we should assume that's high or that's low double digits. And 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.

Yes, this is an area where we kind of surprised the market because they're not big enough other than our Marine sale to issue a press release. So they're anywhere from $200,000, $500,000 up to $10 million, $15 million, $16 million, but we'd rather not disclose it because we have employees at those assets that may not be aware they're for sale.

The next question is from Ned Baramov with Wells Fargo.

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 2 producers? And going forward, do you anticipate competition for incremental transportation volumes to intensify given ample capacity on pipelines going to Cushing?

Yes, 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 a transaction like this, you would assume there would be some increase in activity to support the underlying economics kind of our overall view.

Yes, I'll add to it. And Don, maybe you jump in. But if these majors have ownership in the other pipelines in the basin, that's where they're going to put their volume, but then we would hope we get volume pushed -- they would push volume off those lines in -- over in our direction.

Got it. And then following up on the question of your CapEx guidance. Could you maybe talk about the split between maintenance and growth CapEx? And then on the growth CapEx side, are these projects primarily in the Water Solutions segment?

Yes, a majority of it is in the Water Solutions segment. I think in the earnings deck, we're guiding the $75 million of growth and then $50 million of maintenance. You could assume a chunk of the $75 million is Water, $70 million-plus.

Yes, at least $70 million of it.

The next question is from Sunil Sibal with Seaport Global Securities.

So 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 if you could talk about any MVCs that you have with the current volumes.

I can take that, Brad.

Yes, go ahead. Go ahead, Doug.

Okay. Since our last call, we have 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, so it was a big positive. We added 2 sizable MVC contracts in the quarter as well as executed the 2 term contracts we've mentioned on the prior call. So our MVC barrels per day grew this past fiscal year, and we've already grown it by another 20% in this new year. So those terms are -- MVC terms are a 10-year average term with the addition of those new contracts.

Okay. And then the -- volume-wise, you're saying it grew -- for fiscal year '24, your MVC volumes will be 20% higher than where you were in '23?

Yes. We were, I think, somewhere around 580,000 barrels per day in fiscal '23. And we've already grown that by approximately 20% with MVCs in the new fiscal year.

Okay. Got it. And then on the CapEx front, I think you guided to -- as a guide post, deliverable volumes growing by 10% year-over-year for the next few years. So 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?

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

Okay. Go ahead, Doug.

Okay. We have -- prior fiscal year to this new fiscal year, our CapEx outlook is pretty close to the same on growth capital. As Mike mentioned and Brad mentioned, that -- 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 going to add 300,000 barrels per day of capacity on pipeline from the system to an area that was underutilized, has been underutilized. So 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. And as Mike said, if we are able to enter into new MVC-type deals with fully underwritten additional projects, then we would be looking to do that. But we would do those as they were able to be executed.

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

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

Okay. We have reached the end of the question-and-answer session. I would now like to turn the floor back to Mike Krimbill for closing remarks.

Oh, go ahead, Brad.

Yes. 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 '24. Thank you all.

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

Thanks, everyone.

Thank you.