NGL Energy Partners LP — Form 10-Q Summary
Reporting period: Quarter and nine months ended December 31, 2020. This is the partnership’s fiscal third quarter of fiscal 2021; the supplied request metadata labels it “2020 Q3.” Amounts below are in U.S. dollars.
Business context
NGL operates Crude Oil Logistics, Water Solutions, and Liquids and Refined Products businesses. Its results were affected by COVID-19-related demand weakness, lower commodity prices, reduced producer activity, and Extraction Oil & Gas’s bankruptcy and rejection of a Grand Mesa Pipeline transportation contract. Prior-year comparisons are also affected by the sale of TPSL, Mid-Con, and Gas Blending, which are reported as discontinued operations.
Key financial metrics
| Metric | Three months ended Dec. 31, 2020 | Nine months ended Dec. 31, 2020 |
|---|---|---|
| Revenue | $1.462 billion, versus $2.227 billion | $3.475 billion, versus $5.903 billion |
| Operating income (loss) | $(346.3) million, versus $96.4 million | $(320.8) million, versus $174.0 million |
| Net income (loss) | $(380.5) million, versus $43.0 million | $(409.9) million, versus $(150.3) million |
| Net income (loss) per common unit | $(3.13), versus $0.18 | $(3.72), versus $(2.49) |
| Adjusted EBITDA, continuing operations | $125.0 million, versus $200.5 million | $354.0 million, versus $427.7 million |
| Interest expense | $47.3 million | $138.1 million |
Quarterly revenue fell across all three operating segments. Crude Oil Logistics reported a $382.2 million segment operating loss, including impairment charges; Water Solutions reported $15.8 million of segment operating income; and Liquids and Refined Products reported $32.4 million. Revenue is a high-volume trading measure, so it should be considered alongside product margins and Adjusted EBITDA.
For the nine months, continuing-operations cash from operations was $187.3 million, versus $273.6 million. Total cash from operations, including discontinued operations, was $185.6 million. Investing activities used $151.0 million, compared with $1.406 billion in the prior period, which included substantial acquisition spending. Financing activities used $48.1 million. Cash declined to $9.2 million from $22.7 million at March 31, 2020.
At December 31, 2020, total assets were $5.952 billion and total equity was $1.193 billion. Current assets exceeded current liabilities by approximately $196.3 million. Long-term debt, net of issuance costs and current maturities, was $3.278 billion; current debt maturities were $2.1 million. The balance sheet reported $1.681 billion of revolving-facility borrowings and $250 million under the term credit agreement.
Material changes and unusual items
- Reported results include $237.8 million of Crude Oil Logistics goodwill impairment and $145.8 million of impairment of an Extraction-related customer commitment intangible asset. These noncash charges were recorded in the quarter.
- NGL recognized a $5.7 million bad-debt write-off for Extraction deficiency volumes. The December 2020 settlement provided for a new long-term supply agreement and a $35 million payment for unsecured claims, received January 21, 2021.
- In February 2021, after quarter-end, NGL issued $2.05 billion of 7.5% senior secured notes due 2026 and entered a $500 million asset-based revolving credit facility. Proceeds and facility borrowings refinanced and terminated the prior revolving facility and $250 million term credit agreement. The filing estimated offering costs and expenses at approximately $150 million, including make-whole and consent costs; the term-loan repayment included a $55.6 million make-whole fee.
- The refinancing extended debt maturities and changed the financing mix, but management expected interest expense to increase because floating-rate borrowings were refinanced with higher-rate fixed debt. NGL also paid Class D preferred holders $40 million for consent to the refinancing.
- Common-unit distributions were suspended beginning with the quarter ended December 31, 2020; preferred-unit distributions were to be suspended beginning with the quarter ending March 31, 2021. Management said suspension is intended to support deleveraging and liquidity. The notes restrict distributions until the total leverage ratio is no greater than 4.75 to 1.00.
Outlook, risks, and contingencies
Management said it expects operating cash flows and the new ABL borrowing capacity to meet liquidity needs, but noted uncertainty around COVID-19, refined-product demand recovery, commodity prices, and producer drilling and production plans. It forecast capital expenditures of $10–$20 million for the three months ending March 31, 2021, and $100–$125 million for fiscal 2022. No earnings or revenue guidance is provided in the filing.
Other material risks include commodity-price and counterparty exposure, reduced Grand Mesa volumes following Extraction’s contract rejection, seasonal working-capital needs, debt service and covenant restrictions, environmental and operating hazards, and the possibility that customers or counterparties fail to perform. NGL accrued $2.5 million for the LCT lawsuit; a new trial on quantum meruit damages had not been scheduled. Environmental liabilities were $1.8 million. A Hillstone-related subsidy arrangement could require payments of up to $6.5 million through 2022.
The filing reports compliance with the covenants under the Senior Unsecured Notes as of December 31, 2020 and with the new ABL Facility after its February closing. The Class D consent also grants approval rights over specified debt, asset transactions, and investment or expansion capital expenditures while distributions remain in arrears.
Important facts for investors to verify
- How the February refinancing’s fees, make-whole payment, $40 million consent payment, and higher borrowing costs affect ongoing interest expense and liquidity.
- Whether operating cash flow and the $500 million ABL facility are adequate through seasonal inventory needs and the planned capital program.
- Progress toward the 4.75-to-1.00 leverage threshold, and the resulting timing and conditions for resuming common and preferred distributions.
- Grand Mesa throughput, the economics and performance of the new Extraction supply agreement, and the collectability of remaining bankruptcy-related amounts.
- Whether segment-level operating performance and Adjusted EBITDA recover as demand, prices, and producer activity change; Adjusted EBITDA is a non-GAAP measure and should be assessed against GAAP cash flow and earnings.