NGL Energy Partners LP — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended September 30, 2020. The quarter is the three months ended September 30. Amounts below are in U.S. dollars; financial figures are rounded to millions where appropriate.
Business context
NGL operates Crude Oil Logistics, Water Solutions, and Liquids and Refined Products. Its activities include crude oil transportation and marketing, produced-water treatment and disposal, and marketing of natural gas liquids and refined products. Results are affected by commodity prices, product demand, producer activity, and seasonal inventory needs. Comparisons with 2019 are also affected by acquisitions completed in fiscal 2020 and the sale of several businesses, which are reported as discontinued operations.
Key financial results
| Metric | Three months ended September 30, 2020 | Prior-year quarter | Six months ended September 30, 2020 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $1,168.2 million | $1,804.3 million | $2,012.6 million | $3,676.2 million |
| Operating income | $36.3 million | $30.1 million | $25.5 million | $77.6 million |
| Income (loss) from continuing operations | $6.0 million | ($15.6 million) | ($27.8 million) | ($6.6 million) |
| Net income (loss) attributable to NGL | $5.7 million | ($201.2 million) | ($29.6 million) | ($192.9 million) |
| Basic loss per common unit | ($0.14) | ($1.72) | ($0.58) | ($2.68) |
| Adjusted EBITDA from continuing operations (non-GAAP) | $138.0 million | $123.5 million | $229.0 million | $227.2 million |
| Cash from operating activities—continuing operations | Not separately provided for the quarter | Not separately provided for the quarter | $145.3 million | $19.4 million |
Quarterly revenue fell about 35% year over year, primarily reflecting lower commodity prices and weaker refined-products demand. Quarterly operating income improved, and continuing-operations Adjusted EBITDA increased. However, six-month operating income and continuing-operations earnings declined. The six-month cash-flow improvement included working-capital movements, notably changes in receivables; it should not be assumed to represent a recurring run rate. Adjusted EBITDA is a company-defined non-GAAP measure and is not a substitute for GAAP earnings or cash flow.
Quarterly results included a $13.7 million gain on early extinguishment of liabilities, principally from repurchasing notes below face value. Six-month results included $33.1 million of such gains. The prior-year net loss included substantial discontinued-operations losses; therefore, the large year-over-year improvement in total net loss does not by itself indicate comparable improvement in continuing operations.
Segments and material changes
- Crude Oil Logistics: Quarterly segment operating income rose to $48.2 million from $38.5 million. Lower crude prices reduced sales revenue, while improved crude product margins and a July 2020 Grand Mesa Pipeline tariff increase supported results. Pipeline financial volumes averaged approximately 123,000 barrels per day in the quarter.
- Water Solutions: Quarterly segment operating loss was $13.3 million, compared with $21.3 million of income a year earlier. Higher depreciation and derivative losses outweighed cost reductions and slightly higher water volumes. Six-month operating loss was $29.3 million versus $35.0 million of income in the prior-year period. Acquisitions and developed facilities increased water volumes and depreciation.
- Liquids and Refined Products: Quarterly segment operating income increased to $14.3 million from $8.8 million, helped by propane margins and lower expenses. Six-month segment operating income declined to $18.9 million from $24.2 million, including weaker butane and other-product margins and lower refined-products activity.
- Quarterly general and administrative expense declined to $17.5 million from $43.9 million, principally because of lower equity-based compensation and acquisition costs. Depreciation and amortization increased to $87.5 million from $63.1 million in the quarter, in part reflecting Water Solutions acquisitions and facilities.
Cash, debt and liquidity
- At September 30, cash was $16.9 million, total current assets were $728.7 million, and current liabilities were $630.0 million; management reported working capital of approximately $98.8 million.
- Long-term debt, net of issuance costs and current maturities, was $3.275 billion; total debt book value including current maturities was approximately $3.288 billion. Debt face amount was approximately $3.311 billion. The revolving facility had $1.703 billion outstanding, and the Apollo-affiliated term loan had $250 million outstanding.
- The revolving credit agreement provides up to $1.915 billion of commitments and matures October 5, 2021. It had $107.3 million of letters of credit outstanding; working-capital availability may also be constrained by its borrowing base. NGL was negotiating an extension with lenders, but approval on proposed terms was not assured.
- At quarter-end, NGL reported compliance with debt covenants. Its reported leverage ratios were 3.12x senior secured, 3.51x interest coverage, and 5.32x total leverage indebtedness; the revolving-credit total-leverage ceiling was 5.50x.
- Six-month cash from operating activities was $143.7 million including discontinued operations; investing activities used $153.5 million and financing activities provided $4.1 million. Cash declined by $5.8 million during the period. Cash interest paid was $87.8 million.
- Six-month capital expenditures were $132.3 million on the cash-flow statement. Management expected full-year fiscal 2021 growth and maintenance capital expenditures combined to be approximately $100 million; the filing’s accrual-basis capital-expenditure presentation differs from the cash-flow figure.
Outlook, distributions and risks
- Management discontinued earnings guidance, stating that prior guidance should no longer be relied upon because of uncertainty from COVID-19, energy markets, the economy, and Extraction Oil & Gas’s bankruptcy. The filing says the continuing impact on results could be material.
- Common-unit distributions were reduced from $0.39 to $0.20 per quarter in April 2020 and, after quarter-end, to $0.10 per quarter. Management cited liquidity and deleveraging objectives. Class B and Class C preferred distributions continued; the Class D distribution rate increased by 1% after an adjusted leverage threshold was exceeded.
- Extraction bankruptcy: On November 2, 2020, after quarter-end, the bankruptcy court ruled that Extraction could reject crude-oil transportation contracts effective June 14, 2020. NGL intended to appeal. Extraction owed $5.7 million for pipeline deficiency volumes and approximately $0.8 million for prepetition water-disposal services. NGL described an approximately $650 million unsecured claim; under Extraction’s then-current reorganization plan, unsecured claims could be converted to equity. Contract loss could also prompt impairment of pipeline assets and goodwill. The filing identifies $537.0 million of pipeline long-lived assets, including a $188.6 million customer-commitment intangible, and $579.8 million of Crude Oil Logistics goodwill.
- COVID-19 and low commodity prices reduced refined-products demand and contributed to lower producer activity. Management also cited counterparty nonpayment, contract rejection, commodity-price volatility, and potential asset impairments as risks.
- Other notable items include a $9.4 million write-off related to an impaired third-party facility loan, lightning-related equipment damage and abandoned Water Solutions projects, a $2.5 million accrual for the LCT litigation, and $1.8 million of environmental liabilities. The LCT matter remained subject to appeal; management estimated the Partnership’s potential allocation would be less than $4 million.
- After quarter-end, NGL repurchased additional 2023 and 2026 notes and entered into a $45 million equipment loan at 8.6%, secured by certain barges and towboats.
Important facts for investors to verify
- The outcome and financial effect of NGL’s appeal of the Extraction contract-rejection ruling, including recoverability of claims and any required asset or goodwill impairment.
- Whether lenders approve an extension of the revolving credit agreement, the final terms and restrictions, borrowing-base availability, and covenant headroom.
- Whether operating cash flow and liquidity remain adequate through seasonal inventory needs, debt maturities, interest payments, and preferred distributions.
- Whether Water Solutions can restore segment profitability despite increased depreciation, lower skim-oil recovery, and customer activity and pricing pressures.
- The assumptions behind management’s $100 million fiscal 2021 capital-spending expectation and the timing and cash cost of common and preferred distributions.