NGL Energy Partners LP
Q1 2019 Earnings Call Transcript

Published: 8 Aug 2018

[Executives:]

Trey Karlovich – Chief Financial Officer Mike Krimbill – Chief Executive Officer

[Analysts:]

TJ Schultz – RBC Capital Markets Shneur Gershuni – UBS Dennis Coleman – Bank of America Matt Niblack – HITE Jordan Stevens – Caspian

[Operator:]

Good day, ladies and gentlemen, and welcome to the First Quarter 2019 NGL Energy Partners LP Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the call over to your host for today’s conference Trey Karlovich, Chief Executive Officer. Sir, you may begin.

[Trey Karlovich:]

I have not been promoted, I’m still the Chief Financial. Thank you for joining us this morning and welcome. This conference call includes forward-looking statements and information. Words such as anticipate, project, expect, plan, goal, forecast, intend, could, believe, may, and similar expressions and statements are intended to identify forward-looking statements. While NGL Energy Partners believes that its expectations are based on reasonable assumptions, there can be no assurance that such expectations will prove to be correct. A number of factors could cause actual results to differ materially from the projections, anticipated results or other expectations included in the forward-looking statements. These factors include prices and market demand for natural gas, natural gas liquids, refined products and crude oil, level of production of crude oil, natural gas liquids and natural gas; the effect of weather conditions and demand for oil, natural gas and natural gas liquids; and the ability to successfully identify and consummate growth opportunities and strategic acquisitions at costs that are accretive to financial results and to successfully integrate and operate assets and businesses that are built or acquired. Other factors that could impact these forward-looking statements are described in risk factors in the partnerships annual report on Form 10-K, quarterly reports on Form 10-Q and other public filings and press releases. NGL Energy Partners undertakes no obligation to publicly update or revise any forward-looking statements as a result of new information, future events or otherwise. This conference call also includes certain non-GAAP measures, namely EBITDA, adjusted EBITDA and distributable cash flow, which management believes are useful in evaluating our financial results. Please see the partnership’s earnings releases, investor presentations and annual and quarterly reports on Form 10-K and Form 10-Q on our website at www.nglenergypartners.com under the Investor Relations tab for more information on our use of non-GAAP measures as well as reconciliations of differences between any non-GAAP measures discussed on this conference call to the most directly comparable GAAP financial measures. I will now turn the call over to our CEO, Mr. Mike Krimbill. Mike?

[Mike Krimbill:]

Good morning. During the previous earnings call, we discussed NGL’s transition in strategic direction. First, moving away from pipelines of business to a less complex and less seasonal MLP, we accomplished that in July as we sold our remaining Retail Propane business for $900 million. Second, we work to focus on our two growth businesses

[Trey Karlovich:]

All right. Thanks, Mike. As Mike mentioned, we closed the Retail Propane sale to Superior Plus on July 10. So this will be our final quarter to include retail in our financial results. We will recognize a gain of over $400 million in the upcoming quarter related to this sale. We’ve used the proceeds to immediately reduce borrowings on our credit facility. The net debt reduction from this transaction was approximately $875 million after working capital and certain transaction costs, which should be reflected in our 9/30/2018 balance sheet once it is released. Our first quarter results were highlighted by the following

[Operator:]

Thank you. [Operator Instructions]. Your first question comes from TJ Schultz with RBC Capital Markets. Your line is open.

[TJ Schultz:]

Hey, guys. Good morning. Just first on the water acquisitions. What annualized EBITDA are you expecting from the $126 million in acquisitions? And what impact did those deals have on 1Q?

[Trey Karlovich:]

Hey, TJ. So, those deals are all completed towards the latter part of the first quarter. Obviously, we had our last earnings call on the 30th of May. We completed those acquisitions post that earnings call. So there was very minimal impact for the first quarter. Annualized EBITDA is expected to be about five times, which is about $30 million. So that’s how we’re thinking about it from an annualized perspective. Obviously, no impact during the first quarter. So we are expecting three quarters of that impact for the rest of this fiscal year.

[TJ Schultz:]

Okay. And then the $15 million in organic growth CapEx in 1Q, can you just expand on some of those organic initiatives that you’ve planned in the water business? And what kind of remaining growth CapEx you’ve planned in water through the rest of the year?

[Trey Karlovich:]

So, yes – so the growth CapEx in water included completion of wells, adding permits, adding land for additional properties as well as this beginning of the construction of pipelines to connect our disposal facilities in the Delaware Basin. Most of that CapEx is in the Permian and, specifically, in the Delaware. The CapEx for this fiscal year is more weighted to the front half of the year. As we complete the already permitted locations as well as the pipelines, we would expect that CapEx to diminish throughout the year at this point in time. But again, with some of these acquisitions, we could have some opportunities for growth beyond that.

[Mike Krimbill:]

I’ll just add to that, TJ, that in New Mexico, going to the Devonian, the – we drilled three wells and the drilling costs, I believe, were $6 million for one. We are very fortunate $8 million for one and third was between $8 million and $10 million. And then we’re putting pipe and some truck unloading facilities. So you’re looking at an average of probably $10 million plus on each of those. Those are not some – I think, two of them are in service towards the end of the quarter, one is just beginning this quarter. So we’re – it sounds like a lot of money, but that in New Mexico, that’s three to four wells.

[TJ Schultz:]

Okay, that makes sense. I guess, just lastly, switching gears, do you have any view on this Colorado initiative, 97 making the ballet, just any color you have on the potential for that to pass and what could the impacts potentially be to your crude and water cash flows, if it does pass?

[Mike Krimbill:]

Well, we’re working with the industry and trying to educate folks and, again, we do have view, I don’t believe they have the signatures yet to put it on the ballet. If they do, it’s the same story of such setback where the anti-fracking crowd is trying to reduce the fracking in Colorado. We don’t think it’ll be successful. But if it was successful, I mean, I’ve heard crazy numbers like over half of the drilling activity would be curtailed in Colorado, which obviously would be devastating for the economy. But we don’t see it happening. In fact we can say, we don’t – our producers are drilling. We’re seeing an increase – dramatic increase in water in the DJ in the end of July or early August because of the additional gas processing coming on. So perhaps we’re not seeing anybody pullback.

[TJ Schultz:]

Okay, fair enough. I appreciate it guys.

[Operator:]

Thank you. Your next question comes from Shneur Gershuni with UBS. Your line is open.

[Mike Krimbill:]

Hey.

[Shneur Gershuni:]

Yes. Starting off with water – hey, Mike.

[Mike Krimbill:]

Hey.

[Shneur Gershuni:]

Maybe, just starting off with the water segment, When you originally presented your guidance last quarter, if I remember correctly, you had said that there was a contemplation of some acquisitions that needed to be accomplished to sort of hit that number. The acquisitions that were closed during this quarter – is that – are those the acquisitions that were contemplated and anything further would result in a positive revision in guidance? Or are there a few more that still need to be done to get your numbers, I’m just trying to understand how the acquisitions play into your overall guidance as you presented it last quarter?

[Mike Krimbill:]

You’re correct. Those are the ones we’re referring to. So anything in additional would be, you’re right, an upward revision in guidance.

[Shneur Gershuni:]

Okay, fair enough. And then just the Refined Products segment, I mean, you said that the margin had expectations. We were expecting a little bit higher. Just kind of want to understand what’s – where we are at this stage in that segment? I understand the bigger macro issues there, but are you seeing shorter hauls and so forth. I’m just trying to understand what’s happening in the business right now? How is it evolving here from how it used to be?

[Trey Karlovich:]

Yes, Shneur. So, for us, specifically, obviously, colonial is the lion share of our Refined Products business and what we do along colonial with our line space as well as our position in TransMontaigne’s storage facilities. What we’ve seen, obviously, different is the contracting along that pipeline is different, line space is no longer factored into the contracts or has any significant impact to the contracts. We are still seeing high volumes, but we are seeing more exports out of the Gulf, and so the basis differential is not as significant as it once was. Rack margins have continued to be relatively stable through this quarter. Again, the biggest challenge for that business is hedging the inventory and what is now a backwardated market versus the past several years would have been primarily a contango market. We’ve modified our strategy, obviously bringing on the blending operations as the primary component of that to try to supplement the cash flows that we’ve lost from the change in basis and the change in line space. That business is now operational. We’re expecting to see benefit from that through the blending season, which really starts in September. So hopefully, some impact – positive impact in this upcoming quarter and then the real impact in the third and fourth quarters.

[Shneur Gershuni:]

Okay. So, from a seasonality perspective, when I’m thinking about this blending business, you get a little bit kind of mid-September when the winter-summer plan switches and then 3Q – sorry, I guess, fiscal – or sorry, annual 4Q and annual 1Q, we would see a pickup and then we would see a reverse basically in the first quarter of next year in terms of kind of the flows or the seasonality of that business. Is that the right way to think about it?

[Trey Karlovich:]

Yes, that’s correct.

[Shneur Gershuni:]

Okay, perfect. And then just on working capital, I understand that you definitely need working capital for the Crude Logistics and Refined Products business. But with the sale of Retail Propane, do you foresee less working capital needs going forward? I assume you’re no longer buying in the summer for the winter or actually you are effectively doing some of that for Superior stage right now.

[Trey Karlovich:]

We will still do that for our third-party customers, including Superior through our Wholesale Propane business, which is embedded in the Liquids segment. The Retail Propane business used anywhere from $25 million to $75 million of working capital, depending on the time of the year. So that obviously will go away. We don’t expect changes in the rest of the business from where we are currently. And so a slight reduction in working capital, but not significant.

[Shneur Gershuni:]

Okay. And a follow-up question, you’d mentioned utilization is up with your railcars. I guess, kind of a two-part type of question here. Is utilization up solely because you’ve turned back lease on some of the cars where the leases are up? Or are you seeing a combination of those more utilization and a smaller fleet?

[Trey Karlovich:]

It’s a combination of both. So smaller fleet, obviously, is helping the utilization, but we’re also moving more volumes. Some of that has been driven by some of the challenges in the Northeast in the Liquids market with the Mariner projects, but we’ve seen higher volumes, which has also helped on the utilization side.

[Mike Krimbill:]

The Bakken’s also helped with the Overland Pass, I think, being full. So we’re seeing more volume out of the Bakken and then more out of the Marcellus.

[Shneur Gershuni:]

Do you see an environment, where you give up more cars going forward, like as they come off lease or is there a scenario where you’ve got the cars you have, but as they – as the leases are up, you can actually take the cost down further, but still maintain the same size. I was just wondering how that can potentially unfold.

[Trey Karlovich:]

We’re continuing to roll out of some leased cars through this year. A big portion of those came off at the end of last fiscal year. There are some more that will come off this year as well. Obviously, we want to maximize the cars we have, but additionally, there are some leases that while they’re rolling off, we may re-lease those cars just at a much lower rate. So we’re continuing to try to optimize.

[Mike Krimbill:]

The railcar fleet could remain the same, but cost will continue to go down as we get rid of the $1,000 a month cars and re-lease it whenever the market is $500 or $600 a car.

[Shneur Gershuni:]

So that – so you sort of have a twin operating leverage benefit, the benefit of just utilizing the assets more and at the same time they potentially can be cost utilized?

[Mike Krimbill:]

Correct.

[Shneur Gershuni:]

Perfect. Really appreciate the color guys. Thank you very much.

[Trey Karlovich:]

Thanks, Shneur.

[Mike Krimbill:]

Yes.

[Operator:]

Thank you. Your next question comes from Dennis Coleman with Bank of America. Your line is open.

[Trey Karlovich:]

Good morning, Dennis.

[Dennis Coleman:]

Hello. Can you hear me?

[Trey Karlovich:]

Yes.

[Dennis Coleman:]

Okay, great. A couple from me on the water business, if you would, just to make sure I’m understanding. So the guidance $200 million to $225 million, I guess, a little bit of the question is, what gets you to that $225 million end of the guidance and does that include some additional M&A? Or is there any contemplation of that? I guess, this might have sort of been answered, but trying to make sure I understand it.

[Trey Karlovich:]

Right. So, the upper end of the guidance does not include any additional acquisitions. It would include higher – obviously, higher volume. Commodity price is not as significant of an impact to the business. As I’ve mentioned on the call, we have a vast majority of the skim oil hedged at this point in time. So higher commodity price does not have a significant impact. The differential has had a little bit of an impact in the Permian during the first quarter. So that getting cleaned up a little bit would be helpful to get to the high end of that guidance, but it’s really going to be based on volume growth.

[Dennis Coleman:]

Okay. And then – so the M&A opportunities that you’ve mentioned, I mean, what kind of scale could those be? Are they similar sized to what we’ve seen or?

[Trey Karlovich:]

Well, we probably shouldn’t say, but they are – I would say, they’re similar or larger.

[Dennis Coleman:]

Okay, okay. That’s great. Couple, I just cleaned up on – I think, I heard this right, you said that the crude cut has been on the lighter end in the first quarter and I’m not sure whether you’re suggesting that there is a seasonal aspect of that?

[Trey Karlovich:]

There is a little bit of a seasonal aspect. The average and you saw this last year also is about – we’re expecting 0.42%. I think, we’re a little bit better than that last year. When it’s colder, you get a little bit more oil out of the water. So generally, late falls, winters, when you see a little bit higher skim oil cut. So our fiscal first quarter and second quarter will probably be under that average and then the back half of the year should be slightly over that average.

[Dennis Coleman:]

Got it. Got it. And, Trey, if I can just ask you, could you walk us through those maintenance CapEx numbers? Again, it seemed like there were a couple of moving parts there with the Retail Propane coming out in the first quarter.

[Trey Karlovich:]

Sure. So $12.4 million is what we incurred during the first quarter. $3.4 million of that was Retail. So run rate was nine for the quarter, that included some onetime costs in water. Water was seven of that nine. We’re expecting each quarter going forward to be between five and seven. So call it, 15 to 20 for the rest of the year.

[Dennis Coleman:]

Perfect. Perfect. Thanks for clarifying. That’s it for me.

[Trey Karlovich:]

Okay. Thank you.

[Operator:]

Thank you. Your next question comes from Adam [indiscernible]. Your line is open.

[Unidentified Analyst:]

Thanks for taking my call. Appreciate it. Can you talk a little bit more in detail about what you’re actually buying in your acquisitions? Are you buying wells, parts of pipeline, additional trucks? Just maybe a little more color on what you’re exactly doing there.

[Mike Krimbill:]

No trucks. We don’t think that, that’s really a repeatable-type business. So no trucks. The acquisitions at this point have been majority of wells, not sure how much in pipe.

[Trey Karlovich:]

A small amount in actual pipe during this quarter. We will be spending the growth capital on pipe, and we did acquire a significant amount of write away in this quarter.

[Unidentified Analyst:]

Got it. And that’s used for building at the pipeline, I assume. Is that correct?

[Trey Karlovich:]

Yes. That’s correct. Our strategy is, and you can kind of see this on our maps when is to connect our facilities from the – in the Delaware Basin from the New Mexico, Texas border, all the way down to Pecos so – and to tie all of those facilities together via pipeline.

[Unidentified Analyst:]

Got it. And I guess, a previous question was how you built up to the $200 million to $225 million of EBITDA. Is the right way to look at that? And again, I’m reasonably new to the story, so excuse me if I’m asking stupid questions. But if you did, $39 million this quarter, call that a $160 run rate, plus you did $126 million of acquisitions, you paid five times that, that’s another $25 million. You did another $46 million of acquisitions in July, add a similar five multiple, there’s another $10 million, so you have the $10 million, the $25 million and the $39 million during the quarter that pretty much gets you to $200 million. Is that the right way to look at it? Or am I missing something?

[Trey Karlovich:]

That’s the way that we’re looking at it also, Dennis.

[Unidentified Analyst:]

Okay. It’s Adam, but you called me Dennis.

[Trey Karlovich:]

Adam sorry, sorry, sorry, Adam. Dennis was right before you. Yes, that is how we’re looking at it.

[Unidentified Analyst:]

Okay. Again, you have things like you mentioned you’re building out three more wells, so obviously, there is a return on that capital plus whatever else you do and any additional volumes to get you to $25 million. Is that correct?

[Trey Karlovich:]

That’s correct. And then the CapEx incurred in the back half of the year most likely lead to growth in the following fiscal year.

[Unidentified Analyst:]

Exactly. Okay. Great. I appreciate you’ve taken my call. Thanks very much.

[Trey Karlovich:]

Thank you.

[Operator:]

Thank you. Your next question comes from Matt Niblack with HITE. Your line is open.

[Matt Niblack:]

Hi, thank you for taking the question. So I think for people that get comfortable coming back to the NGL units, one of the key things is being able to hit the guidance numbers and there is a miss versus consensus here this quarter, but I think it’s kind of difficult to model quarter-to-quarter. So that’s probably not a big deal. But when you think internally about the guidance, how conservative have you tried to make it or have you tried to make it conservative such that we’re much more likely than not to hit it on the full year? How do you think about that internally? Can you put that number out there?

[Mike Krimbill:]

You are correct. We’ve tried to be very conservative and make sure we beat our numbers. Unfortunately, we didn’t give, I would say, the quarterly guidance. So the analysts had to come up with their own numbers. If they’d all come up with $50 million everyone would say, tremendous success instead we – they came up with numbers and several have said, miss. Well, we’re extremely happy with our number. Our number is very close to our internal budget, which is higher than the $450 million. So we’re – we don’t consider it miss at all. We think it’s a great quarter, and it’s just – Trey gave the guidance already each quarter after this, I think you said $20 million to $25 million higher.

[Trey Karlovich:]

And just to add to that, so what we’ve done differently from the past? Obviously, last quarter, we gave ranges for each business segment, which is the first time we’ve given ranges by business segment and a target for the company. If you took the low end of the range, obviously, that was below that target. The high end of the range was much higher than that target. As I mentioned in my prepared remarks, earlier if you took those ranges for the first quarter, we would have been $70 million to $82 million. We came in at $80 million. So we’re at – we are already at the higher end of our ranges, which as you project out, would be on the higher end of the ranges across the board. However, we did not change our overall guidance. We believe those ranges are still accurate and our best forecast. As we’ve mentioned before, if we’re in a higher crude price cycle or higher commodity price cycle with the backwardated market, crude, water should perform very well, Refined Products and Liquids to some extent may struggle and vice versa. So if we’re in a contango market, while crude and water may struggle, Refined Products and Liquids should be at the higher end of those ranges. So overall, we’ve changed the way that we’re delivering those expectations. As Mike mentioned, we did not give quarterly guidance. The consensus was fairly wide. There were several analysts close to $80 million, and there were a couple in the – at $90 million or even, I believe, there was one well above $90 million. So we need to work with the analyst community to make sure that we’re getting the quarterly expectations in line, which, again, we’ve mentioned in the prepared remarks that we’re expecting a fairly radical increase, although it will be different based on the seasonality for Refined and Liquids. But a radical increase of between $20 million to $25 million each quarter, which will get you – which would bridge around the $82 million to our current target of $450 million.

[Matt Niblack:]

That’s very helpful. Mike, I think you mentioned that your internal budget is actually higher than the guidance. Can you give us some color on about how much higher?

[Mike Krimbill:]

Well, probably not, I think Trey has covered it with the ranges.

[Trey Karlovich:]

Yes. I would say that our internal budget, which is, again, used for multiple reasons is at the higher end of the ranges that we gave for each segment.

[Matt Niblack:]

Okay. Fair enough. Really appreciate it. Thank you.

[Operator:]

Thank you. Your next question comes from Jordan Stevens of Caspian. Your line is open.

[Jordan Stevens:]

Hi guys. Just had a quick question on the balance sheet. I know on the last quarterly call, you had discussed essentially targeting taking out some of the bond issue, as you know, I think the only thing you maybe had foreclosed is the longest dated issue and I noticed in your release you kind of quoted that you’d immediately applied the proceeds or for now outside the proceeds of the sale through the revolver. Any sort of thoughts on kind of how you’re thinking about the balance sheet and any timing of potential actions there?

[Trey Karlovich:]

So we have some new dated maturities with 2019 notes. We also have a step-down in the call feature of the 21s that occurs in October. And then our highest cost debt are the 2023 notes. Those would be the primary targets for debt reduction. However, we also want to maintain liquidity on the credit facility and make sure that we have the balance between fixed rate debt as well as some floating rate debt. Obviously, we’re in an increasing interest rate environment. So that’s working against us a little bit today, but with the large amount of working capital borrowings at a floating rate, we obviously are managing that perspective as well. So nothing definitive to announce today, but we are – we would be looking at some of the notes whether that’s through open market repurchases or like we’ve done historically or a tender or a call.

[Jordan Stevens:]

Great. Thanks guys.

[Operator:]

Thank you. And I’m showing no further questions at this time. I’d like to turn the call back over to Mike Krimbill, CEO for closing remarks.

[Mike Krimbill:]

Well, thank you for your attention and questions. And we will talk to you at the end of the second quarter.

[Operator:]

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program. You may all disconnect.