NGL Energy Partners LP
Q2 2015 Earnings Call Transcript

Published: 10 Aug 2015

[Operator:]

Good day, ladies and gentlemen, and welcome to the Q1 2016 NGL Energy Partners LP Earnings Conference Call. My name is Whitney, and I’ll be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions]. As a reminder, this call is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Mike Krimbill, CEO of NGL Energy Partners. Please proceed.

[Michael Krimbill:]

Thank you and welcome. This conference call will include forward-looking statements and information. While NGL Energy Partners LP 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 the prices and market demand for natural gas liquids and crude oil, the level of production of crude oil and natural gas, the effect of weather conditions on demand for oil, natural gas and to gas liquids and the ability to identify and consummate strategic acquisitions at purchase prices that are accretive to financial results and to successfully integrate acquired businesses and assets. Other factors that could impact any forward-looking statements are described in risk factors in the Partnership’s annual report on Form 10-K, quarterly reports on Form 10-Q and other public filings and press releases. NGL Energy Partners LP undertakes no obligation to publicly update or revise any forward-looking statements as a result of new information, future events or otherwise. Please also see the Partnership’s web site at www.nglenergypartners.com under Investor Relations for reconciliations of the differences between any non-GAAP measures discussed on this conference call and the most directly comparable GAAP financial measures. Alright, let's get started. I’ll turn it over to Atanas first, and then I think I have a few more comments and then we will open up for questions.

[Atanas Atanasov:]

Thank you, Mike. Good afternoon, everyone. Overall, we’re very intuitively pleased with our quarterly results and performance. We recorded adjusted EBITDA of 89 million for the quarter which compares to EBITDA 43.1 million for the same period last year, which represents an increase of 106%. NGL reported net loss of 38.5 million for the quarter ended June 30, '15 compared to a net loss of 39.9 million for the same quarter last year. If we exclude the year-over-year increase in performance unit [indiscernible] awards of 32.3 million, we would be approximately 34 million higher. During the first fiscal quarter we incurred 7.7 million of maintenance CapEx, this excludes 2.9 million of TLP maintenance CapEx and we still expect maintenance CapEx to be in the range of 30 million to 35 million for fiscal '16. During the first quarter we also spent approximately 186 million of growth CapEx and acquisitions of which acquisitions accounted for 78 million and organic growth CapEx approximately 108 million. This excludes 5.4 million attributable to TLP growth CapEx and we still maintain our guidance of 750 million to 1 billion of total for fiscal '16. Distributable cash flow for the first fiscal quarter is 55 million and this is based on EBITDA of 89 million, interest expense of 26.4 million and maintenance CapEx of 7.7 million. The interest expense of 26.4 million excludes 2.1 million of interest attributable to TLP and 2.3 million of non-cash amortization of deferred financing costs. We also reaffirmed our adjusted EBITDA guidance of 500 million or greater for fiscal year 2016 and we reiterate our distribution growth guidance of 6% to 8% for calendar years '15 and '16. I'll also like to add some more color to our operating segments to highlight our year-over-year performance and growth. For crude logistics, volume is 260,000 barrels a day versus 212,000 barrels a day last year which represents an increase of 23%. Average margin per barrel was $0.71 compared to $1.12 last year. The margin compression was driven primarily by significant drop in crude prices since the third quarter of fiscal '15, but this was more than offset by additional profits generating from the increased utilization of our storage assets at Cushing, as a result segment operating income was up 10.5 million versus the same period last year. For water solutions, volume was at 600,000 barrels a day versus 300,000 barrels a day last year which represents an increase of 100% and gross margin per barrel was $0.90 versus $1.25 for the same period last year. The main driver behind the decrease in margin per barrel was our continued growth in the Permian and Eagle Ford basins where the fee per barrel were generally lower versus the DJ and [indiscernible] basins as well as the lower oil prices. For the refined fuels, the refined fuels segment has grown dramatically since the acquisition of TransMontaigne Inc. in July 2014 and continues to outperform our expectations. We're currently moving approximately 230,000 barrels a day at an average margin of $0.06 per gallon versus $0.01 per gallon on our legacy refined fuels business. For our liquids segment, propane volume was 228 million gallons versus 184 million gallons for the same time last year, which represents an increase of 24% and that increase was driven primarily by continued push to longer term supply marketing agreements and presales. Propane gross margin was breakeven for the quarter versus $0.02 the same time last year and the primary driver for the decrease in margin was the decline in propane prices during the quarter which affected our weighted average cost of goods similar to prior years. This basically represents a timing difference which will reverse itself out once the actual presold gallons are port by the customers during the winter quarters, the 1231 '15 and the 331 '16 quarters. We experienced a very similar dynamic last fiscal year when we recorded 30 million of profit in the last fiscal quarter thus recouping the earlier loss based on [indiscernible]. Our other NGLs within the liquid segments reported volumes of 192 million gallons versus 187 million gallons last year which is an increase of 3% and margins were very healthy at $0.05 versus $0.04 during the same time last year. The margin increase was driven primarily by regional market pricing dislocations which has allowed us to increase profitability by optimizing our railcar fleet. And finally our retail propane business continues to outperform our expectations. Volume was 24.4 million gallons versus 23.6 million gallons for the same period last year or an increase of 3%. And margins were $1.10 this quarter versus $0.96 for the same time last year which is an increase of 15%, so overall very happy with our operating results and performance and with this I'll turn it back to Mike.

[Michael Krimbill:]

Thanks Atanas. I'd like to give a few comments on the macro as we're all sitting here looking at MLP space together and commodity prices to evaluate what's going on what's happening. So if we start back, last December through this March. We saw crude oil prices fall from the $90 level into the high 40s and of course the upstream MLPs [what we heard] first having to cut capital budgets, ultimately distributions but it dragged all, everyone in the MLP sector down. So then what happens? Crude prices recover to $60, everyone's happy, and then fall again. So again we're getting the equity prices depressed. The flip side of that which we all seem to focus on the negatives and not the positives is that construction costs have dropped dramatically and on several projects we have, we're saving upwards of $200 million in capital because of the lower cost. It also causes a higher contango, so if you storage like we do you can take advantage of that. You're going to make up for much of the fall with higher contango revenues. And because we have multiple segments, with lower crude prices you have lower refined product prices. Our bob gasoline is down to a $1.65, we all know demand is increasing, I'll say significantly it's 4%, so pretty big move for gasoline refined products. So third what happens? NGL prices fall dramatically. We've all heard about Canadian producers having to pay to have their propane moved to the storage hubs which is true but a dramatic decline from over a $1 a year ago, I think the hubs today are in the $0.28 to $0.35 range. But again lower prices cause higher demand. So we are seeing higher sales which impacts our propane, butane NGL logistics business but also our retail propane business where you'll see our volumes are actually up 3%. The major competitors in the industry indicated their volumes are actually down approximately 7%. And then in addition we have storage and as we know we lease our 3.5 million barrels of storage a really nice contango market develops around storage which much higher current month versus fourth and first quarter than I think I've ever seen. So if that's not bad enough the high yield market falters and really as we saw it start with the Greek, Greek tragedy and the high yield market effectively shut down for about a week and now it’s coming back but I think recent traits have been for midstream companies in the 5.5 to upwards of 7% depending on your credit rating. But again capital is available although what this does is impacts yields on the MLPs. You just can't disconnect the high yield market from yields on MLPs. So I guess point number one is we are sitting here with the, I think the average MLP or the index is about 8.4% yield on a 10 year treasury around 223 I think it was this morning. So about 620 basis points above the 10 year treasury and in our mind that doesn't make any sense, I think the 10 year average was about 393, which included the '09 spike and if you take out the '09 spike you're going to be closer to 300 over, is the average and here we are at 620. So I think a couple of things. When we get -- in the '09 spike what the case, there was no access to capital, there is today. The equity is more expensive but the debt markets are still there. There was significant decrease in demand; we're in an increasing demand situation. And there was significant margin selling and we're not seeing the margin selling causing the market to be further depressed, but I think what is being factored in is zero distribution growth and that's just isn't the case, as you know we've consistently said 6% to 8% and we've been raising our distribution so that we will be in that range, we'll continue to do so and I think as Atanas said, we're doing that calendar '15 and calendar '16. So, MLP's are -- the midstream MLP's are significantly undervalued. And then I think point number two is there's always capital available for good projects. We still see many very attractive internal growth projects which we're delighted because those have the lowest multiples and several improved and the number in our other segments again having the five segments is very helpful and always having a pipeline of really attractive projects, at 6.5 multiple order last. Another question we should be asking instead is the sky falling is -- what's happening to your competitors and in several of our segments, our competitors have disappeared. When we come out of this we're going to have a much stronger segment in areas like water, disposal then we had going into it and so let's not forget about next year not just next quarter. So, with that let's open it up for questions.

[Operator:]

[Operator Instructions] Your first question comes from the line of Brian Zarahn with Barclays. Please proceed.

[Brian Zarahn:]

Mike, I guess following up some of your comments about the Capital Markets, how does that impact your plans, you've a robust CapEx program for this year Grand Mesa being a big chunk of that, how does -- if we are in this type of Capital Market situation for the remainder of the year, how does it impact your financing?

[Michael Krimbill:]

We have access to the high yield market where we're evaluating that weekly -- was daily now it's weekly, so we don't really see -- it's going to be of huge recovery but that's still at a rate that is unacceptable and of course well below our yield on the -- on our common units. Do we expect our [common units] price to sit here? No, is it difficult to issue at this level? Yes. But if you've got a 20 year 25% project, you can still kind of hold your nose and issue some equity. So I don't think it impacts this year, next year if we stay at this level, we're just going to have do projects that are four to five multiples and issue equity at 10%. I think it doesn't mean you've got a business on the acquisition internal growth side, just means you have to do deal with higher rates of return, and we're fortunate to have a lot of those.

[Brian Zarahn:]

So, is there potential for some projects to be deferred until the markets stabilize?

[Michael Krimbill:]

No, we went back and looked before this call at all our projects and we're moving ahead, full speed ahead I think the interesting things are going to be what new things come up at really attractive prices at some of our -- some other MLP folks get to the point where they have to sell some assets. So, no, we're not slowing anything down -- again, what does that mean? We're still full speed ahead on Grand Mesa, we're washing out more Caverns on Sawtooth and underground storage, because the demand is there, they get completely contracted up before we can actually even get them in service. So, we have a number of smaller things that are going on that we don't issue press releases on that we're not delaying -- we think there's an opportunity here to say get ahead of some of our competitors, especially in waters and some in crude and in refined products actually that we're not slowing down by any means.

[Brian Zarahn:]

Turning to -- you mentioned Grand Mesa, any impact on your expectations for that project and any changes in how you assess counterparty risk in this environment?

[Michael Krimbill:]

No changes, we are over 80% complete on right away, permitting environmentals on schedules, we disclosed obviously we got another third party interconnect that will bring more volume to the pipeline and we're building additional Cushing storage tanks which we've actually accelerated so we can get them in service by February and take advantage of the contango market while we're waiting for the pipeline to come on stream and go into service since September. So looking at our counterparties I mean we meet with them, the public and private ones that we've looked at their production curves, they frankly most of them are telling us they're adding rigs. So we don’t have any concern at this point that someone is not going to show up or not going to be able to meet their commitments.

[Brian Zarahn:]

And last one for me turning to the quarter you had good results in your refined products renewables business. Can you elaborate a bit more on the improvement in that business?

[Michael Krimbill:]

Sure the biggest is just the fact that we had a full quarter of Morgan Stanley/Trans Montain which we didn’t have last year. Last year we had we called the legacy Gavalon business. So most of the increase is due to just having a business this year we didn’t have last year. But that said, demand is up 3% to 4% for gasoline. We’re probably a little different on the distillate side because we're on the colonial pipeline and in line to which is distillate is now on allocation much of the time like Line 1. So we wouldn’t expect to see a decline in our distillate sales. The margins are stronger on gasoline and they are on distillates that being said. But combined margins are up and when we say margin, penny is a lot of increase. So we're [tickle paying] and get an extra penny per gallon. So thanks goodness we got the business because we are seeing some weakness on our crude oil marketing as everyone is when you have lesser volume and you have the same number of competitors then folks start dropping their margin to try to keep their business or win new. But that’s on the flip side we're going to have contango, contango is increasing I think dramatically today I looked like we had three or four months over $0.70 and then some other months of $0.60 and that’s an area we really excited about. Because we think and I think some of our competitors have mentioned this as well you get out of the driving season after Labor Day and you get some turnarounds, it's our understanding some refiners if not many, of delay turnarounds take advantage for margins this summer. So if we have a lot of turnarounds in October you could see the Cushing inventories spike up again and that should give rise to some really nice contango margins which we will lock in.

[Brian Zarahn:]

Just last one on the segment obviously the year-over-year or Trans Montain. Asking more about I guess quarter over quarter your gross margin has improved quite a bit.

[Michael Krimbill:]

Yes the improvement was totally a result of the business we bought from Morgan Stanley Trans Montain. We were running I think a penny or little more on the Gavalon legacy business and with the Trans Montain and really its Morgan Stanley basis we get our share of Trans Montain but all this volume you're seeing is volume that we purchased from Morgan Stanley and that we put through those South east terminals.

[Atanas Atanasov:]

And a lot of it's contracted out for 12 months or over versus the legacy business which is primarily a wrap business where we can charge usually just a penny. Here we're having this allocated line space that we own on colonel allows us to harvest the additional profitability and that’s what also makes our ownership in these terminals along the colonel pipeline very valuable because it allows us to optimize our margins on profitability each time.

[Operator:]

[Operator Instructions] Your next question is from Mile [indiscernible] of HITE Hedge. Please proceed.

[Matt Niblack:]

Hi this is Matt Niblack with HITE. Congratulations on really continuing a strong performance through a tough strip here from many of your competitors and particularly taking share on the propane side which just seems clearly you’ve done. Question on the Morgan Stanley assets how close are you getting to full potential versus the plan when you bought the assets?

[Michael Krimbill:]

Yes we're over full potential. I think we had budgeted about half of what we're experiencing today.

[Atanas Atanasov:]

Yes, for last year we said that we were going to do -- for the first nine to twelve months we said that we're going to book EBITDA 30 million and just last year nine months we did over 50 million and this quarter -- obviously when you book to the same [Technical Difficulty] well ahead of that -- the run rate from last year, so extremely pleased.

[Michael Krimbill:]

I'll just say, we're not expecting the increased margins at all, we're happy to climb with these. What did do is we went out there was a market for line space that lasted about one week as a result of a proposed change to the tariffs on Colonial and we purchased an additional 25,000 barrels per cycle which would be 5,000 barrels per day on a five day cycle. So, we've tried to increase our volumes where we could and very happy with the margins.

[Matt Niblack:]

How long is the contract on Colonial?

[Michael Krimbill:]

With the customers, those contracts are one to two years.

[Matt Niblack:]

But your space on Colonial?

[Michael Krimbill:]

It's much like the propane pipeline -- common care pipelines where it's based on your -- what you nominate so, as long as you continue nominating and shipping the same volume then you will keep your line space in perpetuity.

[Matt Niblack:]

So, given that you've actually changed the business by adding Colonial are the higher margins, something that should be sustainable?

[Michael Krimbill:]

I'll say yes, as a result of line one being on allocation all the time which is gasoline so you can't get any more gasoline. So, if demand increases you kind of see what happens. So, margins would go up a little bit, but you're going to -- eventually if margins go up so much then it will become economic to reel product in or truck it in some other motor transportation.

[Matt Niblack:]

And then, apologies if I missed this earlier in the call, but there was a large line item for stock based compensation and it was surprising that this was so large given the direction that the stock has went along with -- the rest of the market obviously, could you give a little color on what that is and how it got to be so big and is this something we'll see repeated?

[Michael Krimbill:]

Yes, I think filed it on 8-K but it's got the performance plan and it's based on a trailing three year performance, so you look back at three years ago what was the unit price we're using the Olerian index as the measurement and then you look at the price at the end of June and so at the end of June we were around 30 -- little over $30 so that caused us to be in the top quartile in terms of performance, now with the fall in price it's anybody's guess what happens next year wherever we put $24, $25 then I think we've fallen further than most than I would it may not be repeatable.

[Matt Niblack:]

And so the way that we can think about the magnitude of that number, it's going to be correlated to the June of the year it's paid versus June three years ago and the outperformance or underperformance relative to the Olerian index over that timeframe?

[Michael Krimbill:]

I'm not sure it's….

[Matt Niblack:]

So, for 2016, it will be June 2016's -- June 30, 2016 share price last June 2014?

[Michael Krimbill:]

That's correct.

[Matt Niblack:]

But it's not the absolute share price return, it's the relative performance over that period compared to the Olerian index?

[Atanas Atanasov:]

Correct, so if everyone was down --

[Michael Krimbill:]

You're right.

[Matt Niblack:]

So, everybody's up and you're up last and there is no or very little of it and if everybody's down you are up more. Everyone's down you're down as much, then there'll be still be a good number than?

[Michael Krimbill:]

Yes, if I we're in the bottom half of the Olerian, there is zero payout.

[Operator:]

Your next question comes from the line of Selman Akyol with Stifel. Please proceed.

[Selman Akyol:]

You talked about some of your competitors to disappearing and I'm just kind of wondering are you anticipating or watching any assets that they have that appeal to you or is there any way that overly work to your benefit in terms of either picking up market share or picking up assets expanding your footprint?

[Michael Krimbill:]

Yes in water particular there are very few competitors if any that we would be interested in buying because you just don't know what they've done to their wells. We much rather drill our own and take care of them the last 15 years. And so we can still pick out market share by providing other services which is what we're doing, we process solids now, building water pipelines which basically gets you kind of an acreage dedication without having the contract. Although you do have a contract on price and they have to bring the volumes that go to that water collection site. So I think we get a larger market share we get other revenue streams without having to spend money other than four our quarter pipelines and our solid plan.

[Operator:]

That concludes our Q&A there are no further questions. I’ll now turn the call back over to Mr. Michael Krimbill for closing remarks.

[Michael Krimbill:]

Well thank you very much I guess as long as we beat our numbers we do have short calls. Thank you and we'll talk to you again in a few months.

[Operator:]

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.