NGL Energy Partners LP (NGL) 2013 Q4 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Quarter Four 2013 NGL Energy Partners, LP, Earnings Conference Call. My name is Kathy, and I will be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference.

(Operator Instructions)

As a reminder, this call is being recorded for replay purposes. I would like to turn the call over to Mr. Michael Krimbill, Chief Executive Officer of NGL Energy Partners. Please proceed, sir.

Thank you and welcome to our fiscal 2013 call. This conference call will include forward-looking statements information. 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 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 and natural gas, and natural gas liquids; and the ability to successfully identify and consummate strategic acquisitions at purchase prices that are accretive to financial results, and to successfully integrate acquired assets and businesses.

Other factors that could impact any forward-looking statements are described in Risk Factors in the partnership's annual report on Form 10-K recently filed, 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.

Please see the partnership's website 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.

That's pretty impressive, I read that without one error (laughter). Thanks for being here, and we're pretty excited about '13 and looking into '14. I would like to begin with our CFO, Atanas Atanasov, commenting on the March 31, 2013, results.

Thank you, Mike. Net income for fiscal '13 came in at $48.2 million. Adjusted EBITDA for the year is $183.5 million, excluding one-time acquisition costs of $5.6 million. This exceeds our previous guidance by $6.2 million.

If you look at the statement of cash flows, you will notice that CapEx for fiscal '13 is $72.5 million. This includes approximately $14 million of maintenance CapEx and $59 million of organic growth CapEx. At the beginning of fiscal '13, we had indicated that maintenance CapEx was going to be around $22 million, and later in the year we lowered the estimate to around $12 million, $13 million. The main driver behind the lower maintenance CapEx is the result of integrating retail propane acquisitions, which has allowed us to consolidate vehicle fleets and to purchase -- not purchase as many new vehicles. The impact of such efficiencies is generally one time, so going forward we would anticipate our maintenance CapEx to be in the range of $20 million to $22 million.

During fiscal '13, NGL Energy Partners generated distributable cash flow of $135 million, based on EBITDA of $183.5 million, one-time acquisition costs of $5.6 million, interest expense of approximately $29 million, and maintenance CapEx of approximately $14 million. Net of distributions paid of $71.6 million, we generated excess cash flow of approximately $64 million, which we used to finance all of our organic growth.

Our fiscal 2014 EBITDA is expected to be in the range of $230 million to $235 million. This is inclusive of our large acquisition at the end of December 2012, as well as the incremental EBITDA from the $59 million of organic CapEx spent in 2013 fiscal, but does not give effect to any of the acquisitions or organic growth that will take place in fiscal '14. In fiscal 2014, we expect to spend approximately $20 million to $22 million in maintenance CapEx, and between $60 million and $70 million in organic growth CapEx. With respect to acquisitions, we're looking at $300 million to $500 million.

We expect to generate approximately $170 million of distributable cash flow, based on interest expense of $38 million and maintenance CapEx of $22 million. Here I'd like to give you the quarterly EBITDA breakdown by quarter -- for Q1 we expect $28 million; for Q2 we expect $34 million; for Q3 we expect $75 million; for Q4 we expect $93 million, which adds up to $230 million. Mike, I'll turn it back to you.

Great, thank you. Before I get into talking about one of our segments in particular, again we just want to emphasize fiscal '14 EBITDA in the $230 million to $235 million range, without giving effect to any acquisitions or the internal growth projects. There's obviously a lag with internal growth projects, and we spend the money when the EBITDA comes on stream. With acquisitions, it's -- the cash flow's immediate, but we only get the cash flow in the current year for that portion of the year we owned it.

Again, on the -- going forward, acquisition CapEx, we're pretty comfortable in the range of $300 million to $500 million -- at multiples in the 6 to 7 range. So for those of you that are modeling, probably a 6.5 is fair. This CapEx is predominantly expected to be in the water services and the crude oil logistics parts of our business. But we do continue to purchase the smaller mom and pop retail propane businesses that are in our current footprint.

I would like to spend a little time on water services business, and why we're so excited about it, and really what maybe sets us apart from competition. We gather and treat both flow-back and produced waste water from oil and gas wells. We do not provide fresh water for fracking. Flow-back water is the water used for fracking that returns to the surface. Produced water is the naturally occurring water underground that is produced along with the oil and gas throughout the life of the well.

We're in four major producing basins, the Pinedale Anticline in Wyoming, the DJ Basin in Colorado, and the Permian Eagle Ford basins in Texas. The waste water in each basin is different, and is measured by total dissolved solids. You'll hear about TDS in the industry, and these total dissolved solids are the salts, boron, iron, calcium, magnesium, and other minerals. The waste water can be treated to different qualities depending on the ultimate destination for that water.

Much of the waste water in the US is treated to remove suspended solids or sediment, so the water can be pumped down a salt water disposal well. This is called disposal. You want to clean it up to certain standards so you maintain the integrity of your salt water disposal well. Next, the waste water can be cleaned up further and sent back to the producer for use in fracking. This is called recycled water. Finally, the water can be cleaned up to a quality exceeding drinking water and returned to the environment, and this is called discharge. So when you read our 10-K or hear us on calls, you've got disposal, recycle, and discharge.

We have a research and development facility that tests all the water we treat to determine the most effective and cost-efficient process. We spend several million dollars each year at this facility. We process water through as many as 14 individual steps to achieve the cleaner-than-drinking-water, or discharge, quality. We have six process patents issued, and more in the patent-pending status. The need for this technology varies by basin at the present time. For instance, in the Pinedale Anticline, the salt water disposal wells have a very low capacity, and waste water must be recycled or discharged into the environment; and we actually do both and discharge into the Green River. In the DJ Basin, there is demand for recycled water, but there's not a discharge requirement, because there's enough salt water disposal well capacity. In the Permian and the Eagle Ford, there's only need at the present time for disposal. We can drill and operate a salt water disposal well as well as anyone, and we have the technology available as regulations become more demanding.

With respect to fiscal 2013, we drilled two more salt water disposal wells in the Eagle Ford, the combined capacity of 18,000 barrels per day. Then we drilled two additional ones in the DJ with a combined capacity in excess of 20,000 barrels a day. We also recently signed a long-term contract to gather waste water by pipeline, and return recycled water for use by the producer in the DJ. We have plans to drill several more wells in fiscal 2014.

With respect to our internal growth projects, we had indicated I think $60 million to $70 million. These are predominantly in the water service area. As you know, we're drilling some more wells and setting some pipe in surface facilities, and then the crude oil logistics part of our business, which specifically would be our terminals and our barge business. We would expect investments that are internal growth -- in the internal growth category -- to be made at a five times multiple or less. Finally, we would like to confirm or affirm our LP unit distribution guidance of a 10% to 12% increase over the next four quarters, which would be fiscal 2014. With that, I'd like to open up the line for questions.

(Operator Instructions)

The first question comes from the line of T.J. Schultz, RBC Capital Markets. Please go ahead.

Hi, Mike, good morning. Thanks for all the color on 2014. Just the acquisitions, $300 million to $500 million -- I understand it sounds like a lot of it's in water or crude logistics. Could you just give a little more color on the areas that you're potentially looking at, where it makes the most sense to try to grow through acquisitions on the water side?

Yes, the water side would be the Permian and the Eagle Ford would be the highest probability. We're looking at -- we operate in those areas already, which is why it would be the higher probability. We've been looking at things, at some assets in the Bakken, but haven't found anything that looks attractive to us. Really, that's pretty much where we see it for the next 12 months. On the crude oil side, it's really up the center of the country and into Canada.

Okay. What about the potential in new areas on the water side -- mainly thinking about the Marcellus and the line of sight on getting traction potentially there?

The Marcellus, we had -- we have a pilot project going on in our R&D facility, where we are -- we've actually succeeded in the process of taking water and then turning it into commercial products. So you basically don't have any stream of the outlet side to dispose of. We're in the process now of seeing what the market is for those products. That's still really in the research and development phase.

Okay. Just lastly, just to be clear, on the EBITDA guidance, that does not -- the $60 million to $70 million of organic CapEx, you're not including -- I think you said a five times multiple -- but you're not including any of that EBITDA in that guidance; so that, just depending on timing, would be additive to your guidance?

That's correct.

Okay, great. Thanks, Mike.

Thank you for your question. The next question comes from [Michael Kline] of Wells Fargo. Please proceed, sir.

Just following up on T.J.'s last question. Just to be clear of organic capital spending for fiscal '14, are you saying that it basically won't impact results until fiscal '15, or there could be some impact in '14, it's just not in the guidance?

Your last statement's correct. There will be impact in '14. We don't know how much, because really we just need to get the wells drilled and the projects complete. So there will be some in the second half, but that will just add to the $230 million to $235 million.

Okay. Then the $300 million to $500 million of acquisitions, how visible is that to you today? Do you have a tangible deal that you're working on that you feel like that number is easily in your sights, or is that more just based on your prior track record and history and you know you'll have opportunities?

It is the former. We have a number of deals in the pipeline right now. They won't all close, but we feel given -- comfortable enough that we'll -- we feel like $300 million's pretty easy, and it could be $500 million.

Okay. Then could you just talk about -- you have the head of your NGL logistics segment retiring. Who's going to be running that business, what's the status of that?

Yes. Brian Pauling was one of the original founders of NGL Supply, and he agreed to stay actually a longer period of time than perhaps he had planned on, because he -- we needed him to upgrade a number of our terminals so they could handle both propane and butane. We actually expanded our terminals in west Springfield, Mass., and Portland to become more commercial terminals, and not just serve our own retail. We were building -- we've built our own terminal at Conway. He -- we're very grateful to him to get all that finished, and then he decided to retire and I guess have some fun, and leave the rest of us here to have fun. So we replaced him. He helped us pick a successor. He took the successor to all of our assets and terminals and so we shouldn't miss a beat.

Okay. So that's an internal hire?

We actually hired him from another one of our competitors, but --

Oh, okay.

Somebody with quite a bit of construction experience.

Okay. On the quarter -- for the year, really -- if I look at the crude business, your margins were quite strong. I'd say much stronger than I think what you internally budget. I'm assuming that some of that is due to spreads, and so as spreads have come in a bit, should we -- how should we think about that for fiscal '14?

You are correct. The spread's wide enough, where we -- we're shipping quite a few barges out of our Catoosa Green terminal. The spreads came in, and so that -- some of what we were doing last year is at the moment not economic, but when we did our budget and we came up with this $230 million to $235 million, we eliminated the spread profits from last year. So our number, the $230 million to $235 million doesn't have spreads in it.

Okay. Then on the -- in the water segment, it looks like the volumes were down sequentially, but looks like margins are up a little bit. Could you just talk a little about what happened in the fourth quarter in that segment?

Are the volumes down?

Maybe they were, we're just trying to back into the numbers?

Yes, what you -- Michael, this is Atanas. When you're looking at the volumes, those volumes are obviously for -- we're looking at partial year. That's one thing. So you're not -- when we talk about our water run rate, we generally give you a full 12 months. Another thing is to keep in mind is in the Anticline, because of the lower drilling activity volumes have been down where we have got to rely on a lot of our [Pacopay] contracts and the DJ acreage that dedication. But in general, they're consistent with our expectations. We have had some immaterial delays on a couple of the wells we have been drilling, but those are coming in on line now. We anticipate to continue the run rate that we've indicated previously. Those two factors -- those delays, as well as the lower drilling activity -- would account for that, for the lower volume. That's to be expected.

Then the last question also on this segment was you had talked previously about working on a new facility in the DJ, and drilling two new wells in the Eagle Ford. I just was once just curious for what the update is on that?

Yes, we're actually in discussions on a new facility in the DJ; but again, discussions -- we haven't signed a contract yet.

Okay. Great, thank you guys.

Thank you for your question. Sir, you have no questions at this time.

(Operator Instructions)

Okay, thank you very much. We'll see you in I guess only a few months now for the first quarter. Thanks.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.