NGL Energy Partners (NGL) 8 Aug 242025 Q1 Earnings call transcript

Thank you for standing by. My name is Max and I will be your conference operator for today. At this time I would like to welcome everyone to NGL Energy Partners First Quarter 2025 Earnings Call. [Operator Instructions]

I would now like to turn the call over to Brad Cooper, CFO. Please go ahead.

Good afternoon, and thank you to everyone for joining us on the call today.

Our 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 presentation materials and our other public disclosure materials.

Let's get into the quarterly results.

Our results for the quarter were strong across all 3 business units. Water Solutions, Crude Oil Logistics and Liquids Logistics all met or beat our internal expectations. Consolidated adjusted EBITDA for the quarter came in at $144.3 million in the first quarter. I'm happy to report the performance from the first quarter has carried over to the start of our second quarter. The butane blending season will begin soon while wholesale propane is dependent on winter weather and heating demand, as you are very well aware. The Water Solutions segment continues to perform quite well with physical disposal volumes averaging approximately 2.7 million barrels per day in the month of July. When you include deficiency volumes in July, we will be paid on approximately 3 million barrels per day.

As mentioned on our year-end call in early June, we also achieved other nonoperational milestones during the quarter.

First, we announced the sale of 2 ranches in Eddy and Lea Counties for a total of approximately $70 million.

Second, on April 25, we made our last [ arrears ] payment on the preferred Class B, C and D. This made us current on all preferred classes. On June 21, the Board of Directors of our general partner declared a quarterly distribution for the preferred Class B, C and Ds that was paid on July 15.

Third, on June 5, the Board of Directors authorized a common unit repurchase program, which allows us to repurchase up to $50 million of our outstanding units. This program does not have a fixed expiration date. Currently, we have not purchased any common units under this program as we have been managing the LEX 2 spend as well as our seasonal liquids inventory builds.

Fourth, after the quarter ending June 30 and under the terms of the Term Loan B agreement, we repriced and amended the SOFR margin from 450 basis points to 375 basis points which reduces our interest expense by $5.25 million per year. We closed the repricing earlier this week on August 5.

Water Solutions' adjusted EBITDA was $125.6 million in the first quarter versus $123.2 million in the prior first quarter. Physical water disposal volumes were 2.47 million barrels per day in the first quarter versus 2.4 million barrels per day in the prior first quarter. Total volumes we were paid to dispose that includes deficiency volumes were 2.59 million barrels per day in the first quarter versus 2.49 million barrels per day in the prior first quarter.

So total volumes we were paid to dispose of were up 4%, first quarter of fiscal '25 over first quarter of fiscal '24.

The team continues to find ways to keep operating expenses low in the face of rising costs. Operating expenses in Water Solutions in Q1 were $0.24 compared to $0.25 for the same quarter of 1 year ago. The LEX 2 water pipeline project with initial capacity of 200,000 barrels per day that is expandable to 500,000 barrels per day is on schedule with an in-service date in October.

Crude Oil Logistics adjusted EBITDA was $18.6 million in the first quarter of fiscal '25 versus $23.8 million in the prior year's first quarter. Crude oil margins were lower 1Q over 1Q primarily due to lower volumes from production on acreage dedicated in the DJ Basin. This was partially offset by higher tariff revenue on the Grand Mesa pipeline from signing up a new shipper during the open season that ended on January 5, 2024, as well as higher quality differentials realized in the current quarter. Physical volumes on the Grand Mesa pipeline averaged approximately 63,000 barrels per day compared to approx 72,000 barrels per day for the same quarter in fiscal '24.

Liquids Logistics adjusted EBITDA was $11.5 million in the first quarter versus $4.7 million in the prior first quarter. Butane lending margins and volumes were stronger than our expectations for the quarter. This has set the butane business up for a nice fiscal '25. Product margins, excluding derivatives for refined products were lower as the supply issues seen in certain markets in the prior year, resulting in higher margins were resolved and supply and demand was more in balance.

The first quarter is typically the low point of the EBITDA stream for the Liquids segment.

So it's nice to see a strong first quarter from this business unit.

I would just like to summarize how you should think about our first quarter results before I turn it over to Mike. All 3 segments exceeded our expectations for this quarter. LEX 2 construction is on track and is expected to go in service as planned.

We are managing our balance sheet during our butane and propane build season and during the buildout of the LEX 2 pipeline have opportunistically reduced interest expense on the term loan B.

We are reaffirming our full year guide of $665 million of EBITDA for the partnership and $550 million to $560 million for Water Solutions.

With that, I would now like to turn the call from our CEO, Mike Krimbill. Mike?

Thanks, Brad. Good afternoon, everyone.

We are pleased this quarter and off to a good start this new fiscal year. That said, we do not manage NGL on a quarterly short-term basis, as you would expect, we are looking out over multiyear periods of time.

For instance, in the Water Solutions business, we see positive trends for the short, medium and long term.

We have this year's EBITDA guidance above last year actual. But quarterly, it is impacted by customer recycling, drilling programs and completion schedules. Medium and long term, we are seeing the Delaware Basin expanding north in Lee County, which will bring additional to these water volumes in the future.

We are working on continued expense reductions and new revenue streams, but do not announce them until proven to generate EBITDA.

With respect to Crude Oil Logistics in the DJ Basin, we see positive signs for the short and medium terms. It appears that volumes produced and are flowing into the basin could be increasing. The long term is still influenced by politics, environmental and regulatory factors.

We have not been willing to contract our Grand Mesa capacity at rates below $1 to $1.25 per barrel before expenses. We do believe that we are close to or at the bottom of the cycle with the segment.

Regarding Liquids Logistics, this is our most volatile segment, especially with a portion being dependent on normal to cold winter weather, which hasn't shown up for several years. This is not a business we anticipate expanding nor do we expect significant growth, but we do have some internal growth opportunities.

We continue to focus on the balance sheet, debt reduction and internal growth at attractive multiples. Remember that reduced leverage is a function of both lower debt balances and increased EBITDA.

So operator, with that, please open the line for Q&A.

[Operator Instructions] Your first question comes from Sunil Sibal with Seaport Research Partners.

So I just wanted to start off on the water side of the business. It seems like your volumes versus fee per barrel handle has been -- especially the fee has been moving around a bit. Could you talk a little bit about some of the moving parts there? And more importantly, I think you talked about next quarter your fee-based volumes seems like it will be pretty strong. But how should we think about per barrel fee number going forward?

I had a little hard time hearing the question.

I think it was around revenue per barrel for the quarter, which I think if we're up about $0.01, I think, from the previous year's quarter.

I think as we -- we've been very clear in how we contract.

As we contract on the water side of the world, we're obviously looking for MVCs and acreage dedication. Those MVCs were willing to give a little bit, I guess, on rate to get a longer-term contract within MVC. We did have recall the Poker Lake step-up January 1 of '24, another 100,000 barrels. That rate is probably a little bit lighter relative to other contracts in the portfolio.

So it's a little bit hard to truly reconcile to the penny. But yes, volumes are starting off really strong for the second quarter. Q1 probably a little bit impacted by recycling, but the start of Q2, July looks really strong.

Okay. And then since you mentioned that your MVCs are probably higher percentage of the total volumes, how should we think about the average remaining length on the contracts that you have with the MVCs?

Yes.

I think it's in the presentation materials, I believe, it's what, roughly 9 years, I think, on the contract life?

Yes. Yes. This is David Sullivan. Yes, we have the MVCs, the percentage of MVC volumes will happen the water disposal will go up. We were about -- will be about 40% to 45% once the LEX 2 project comes on. That's where we'll be as long as percentage of our volumes that are MVC-related. It will be some -- yes.

Your next question comes from the line of Patrick Fitzgerald with Baird.

Congrats on getting caught up with the preferred, but those are pretty expensive instruments at this point. Could you talk about your plan to deal with those going forward? And in particular, the Class D, what it costs to take those out? And would you consider doing something with that to take those out potentially.

You bet. Yes, the way that our free cash flow builds through the year, it's really back-end loaded.

So a bulk of our free cash flow comes in, in Q3, Q4. Obviously, with the LEX 2 project this year, heavy capital burden in the first couple of quarters. But as we see the free cash flow unwinding or coming to us, I guess, in Q3 and Q4 and the working capital unwinding the back end of the fiscal year, our plan would be to utilize those dollars and start making redemption payments on the Class Ds.

I think our free cash flow over the next couple of years can comfortably address the Class Ds. If there was a market opportunity, I guess, to take out some debt to look at additionally knocking down the Ds, we would consider it. But I think for us right now, just being very, very pragmatic with how we spend our free cash flow and attack the Ds through free cash flow and asset sales.

Okay. But you have nothing on the horizon in terms of like big asset sales to -- so you're going to be paying those for -- in all your preferreds for a while, I guess, is the intel free cash flow is generated enough to take them out?

That's correct. Yes. That's our current base plan.

Okay. Could you just talk about the step-up to 2.7 million barrels a day in July from the average in the fiscal first quarter? And then you're getting paid on 3 million barrels a day. What did you get paid on in the first quarter, I guess, is would be the question. And then why did it step up so significantly?

Yes. Yes, really, the first quarter, I think, as I mentioned earlier, impacted by recycling.

So as producers are using water on location to frack wells. At some point, that flush water production is going to come our way. That's what we're seeing at the start of the second quarter.

I think Mike hit on his comments, we will see some lumpiness in volumes day-to-day, month-to-month as a result of producers in their completion cadence.

For the quarter.

First quarter, yes, for the quarter, we got paid on -- about almost 2.6 million barrels, 2.59 million barrels.

All right. And then I guess you talked about this last quarter, you talked about this quarter, but like why do you think we're at the bottom here for crude logistics in the DJ?

I just think that producers are starting to -- it's more efficient that add rigs, we are anticipating an increase in the volume.

Our last question comes from the line of Jason Mandel with RBC Capital Markets.

I just wanted to follow up from a comment, I think, from the last conference call about exploring strategic alternatives on a portion of the Liquids business. Any updates to that? It sounds like you may be thinking about some asset sales but not the whole business? So just any clarity would be helpful.

Yes. No updates at this time.

I think we'll just continue to look at opportunities to come our way. But no updates on that business at this point in time.

Questions. I will now turn the conference back over to Brad Cooper for closing remarks.

Thanks, everyone, for your interest in NGL. We look forward to catching up with everyone in a couple of months on the fiscal '25 second quarter call. Thanks, and have a nice weekend.

This concludes today's conference call.

You may now disconnect.