NGL Energy Partners LP — Form 10-Q Summary
Reporting period: Three months ended June 30, 2023, the first quarter of fiscal 2024. Comparisons are with the three months ended June 30, 2022, except balance-sheet comparisons, which are with March 31, 2023. NGL operates Water Solutions, Crude Oil Logistics and Liquids Logistics businesses.
Financial results and liquidity
- Revenue: $1.616 billion, down 35.3% from $2.497 billion. Lower commodity prices drove much of the decline, alongside lower volumes in crude oil and several liquids products.
- Profit: Operating income was $72.0 million, down from $87.3 million; net income was $19.6 million, versus $23.1 million. Net income attributable to NGL was $19.3 million. After preferred distributions and other allocations, common unitholders were allocated a $14.5 million loss, or $0.11 per unit, compared with a $4.7 million loss, or $0.04 per unit.
- Adjusted EBITDA: $134.7 million, up from $123.9 million. This is a non-GAAP measure; management’s reconciliation includes adjustments for derivatives, inventory valuation, asset disposals and other items.
- Margins: Operating margin was approximately 4.5%, compared with 3.5% a year earlier, calculated as operating income divided by revenue. Segment performance diverged: Water Solutions operating income increased to $69.3 million from $53.6 million; Crude Oil Logistics decreased to $17.0 million from $19.0 million; Liquids Logistics fell to $7.8 million from $26.6 million.
- Cash flow: Operating cash flow was $55.1 million, versus $2.5 million. Changes in receivables, inventory and payables materially affected cash flow. Investing activities used $1.4 million, including $35.8 million of capital expenditures, partly offset by asset-sale proceeds and derivative settlements. Financing activities used $51.3 million, including debt repurchases. Cash ended at $7.8 million.
- Debt and liquidity: Long-term debt, net of issuance costs, was $2.804 billion, down from $2.858 billion at March 31. NGL repurchased $99.3 million face value of 2025 notes for $92.0 million cash. The ABL had $180.0 million borrowed and approximately $141.7 million of letters of credit outstanding against $600 million of commitments, subject to its borrowing base. Current assets exceeded current liabilities by approximately $196 million. NGL reported compliance with debt covenants and no ABL Cash Dominion Event.
- Preferred distributions: Common and preferred distributions remain suspended. Preferred distributions in arrears totaled $286.4 million at June 30; unpaid amounts continue to accumulate.
Material changes and notable items
- Water Solutions benefited from higher produced-water volumes and fees; processed water averaged approximately 2.46 million barrels per day, up from 2.15 million. Recovered crude-oil revenue declined, in part because of lower prices and skim oil held for later sale.
- Crude Oil Logistics revenue contracted with lower crude prices and volumes. Average physical volumes on the Grand Mesa Pipeline were approximately 72,000 barrels per day, versus 79,000. The marine assets had been sold in March 2023.
- Liquids Logistics revenue declined with lower product prices and weaker propane, butane and other-product volumes or margins. Butane results included a $5.4 million lower-of-cost-or-net-realizable-value adjustment. Refined-products margins improved modestly.
- Interest expense fell to $59.5 million from $67.3 million, primarily following repayment of 2023 notes, partly offset by higher ABL rates and accrued interest related to a legal claim. The quarter included a $6.8 million gain on early extinguishment of liabilities.
- A June sale of certain Eagle Ford saltwater-disposal assets generated $3.0 million consideration, mostly a loan receivable, and a recorded $5.4 million loss.
Outlook, risks and contingencies
- Capital spending: Fiscal 2024 capital expenditures are expected to be approximately $115–$125 million. The filing provides no numerical earnings or revenue guidance.
- Management says operating cash flow and ABL borrowing capacity are expected to cover liquidity needs, including repayment of the 2025 notes. Working-capital needs are seasonal and sensitive to commodity prices; NGL uses economic hedges to limit exposure during inventory-building months.
- All distributions were suspended to deleverage and meet the 2026 secured-notes indenture’s leverage condition. Management expects to evaluate reinstatement in due course, considering leverage, liquidity, cash-flow sustainability, maturities, capital spending and business performance.
- NGL describes commodity-price volatility, interest rates, inflation, supply and demand, counterparties, regulation and environmental requirements as risks. Produced-water disposal has been associated with induced seismic activity in Texas and New Mexico; NGL has reduced injection volumes or temporarily shut in certain facilities, but says system capacity has prevented a material disposal impact to date.
- A Delaware jury returned a $36 million quantum meruit verdict in the LCT litigation, subject to statutory interest and costs. NGL disputes the verdict and appealed on July 28, 2023; it had accrued approximately $4.0 million at June 30. The filing states that the award, including interest through June 30, was approximately $21 million, so the relationship between that estimate and the jury’s stated award merits review.
- An approximately $8.4 million class-action settlement concerning Oklahoma statutory interest was paid into escrow and received final court approval in June 2023. Environmental liabilities were $1.4 million. NGL also guarantees an affiliate aircraft-company loan with approximately $2.2 million outstanding; no accrual was recorded.
Important facts for investors to verify
- Review the LCT appeal, potential exposure and reconciliation of the $36 million verdict with the filing’s approximately $21 million amount and $4 million accrual.
- Confirm the ABL borrowing base and actual remaining availability after borrowings and letters of credit, and assess refinancing of the 2025 notes and the larger 2026 maturities.
- Track leverage against the 4.75-to-1.00 distribution restriction, preferred-distribution arrears and any conditions for resuming distributions.
- Assess whether Water Solutions volume and fee growth can offset cost increases and seismic-related operating constraints, and whether Liquids Logistics margins recover from weaker commodity markets and inventory adjustments.
- Compare reported GAAP results and cash flow with Adjusted EBITDA, including the effects of derivative and inventory adjustments and working-capital movements.