NGL Energy Partners LP (NGL) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2014 NGL Energy Partners earnings conference call. My name is Derek. I will be your operator for today. All participants are in listen-only mode. We shall facilitate a question-and-answer session at the end of the conference.

(Operator Instructions)

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to Mr. Mike Krimbill, CEO of NGL Energy Partners. Please proceed.

Thank you. 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 and natural gas and natural gas liquids, and the ability to successfully identify and consummate strategic acquisitions of purchase prices that are accretive to financial results and to successfully integrate acquired 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, 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 website at www.NGLEnergyPartners.com under investor relations for reconciliations of the difference between any non-GAAP measures discussed on this conference call and the most directly comparable GAAP measures.

Thank you for joining us today. On the call today we have David Kehoe, our COO, and Atanas Atanasov, our CFO. We will start with the press release, and then dig into some numbers.

We reported adjusted EBITDA of $27.4 million for the three months ended June 30, 2013, our first fiscal quarter compared to adjusted EBITDA loss of $2.7 million for the same quarter a year ago, both of these exclusive of costs related to acquisitions. We also reported a net loss of $17.5 million for this quarter compared to a net loss of $24.7 million for the same quarter of a year ago. Couple of the highlights -- we completed six acquisitions during the April through August time frame, primarily to expand our water services and crude oil logistics businesses. CapEx was about $346 million of which $74 million was equity issued to sellers. So we still have some interest by sellers in our equity, which is great. We increased our distribution per limited partner unit to $0.49375 per unit, or $1.975 on an annual basis, which is an increase of 19.7% over the same quarter of a year ago, and 3.4% over the previous quarter. So with that, we will turn it over to Atanas to go through the some of the numbers, and then we'll open it up for questions.

Thank you, Mike. Like Mike indicated, our adjusted EBITDA for the quarter is $27.4 million excluding those one-time acquisition costs of approximately $600,000, and that compares to $2.7 million of EBITDA for the same period last quarter which also excluded acquisition costs. Our EBITDA is in line with our guidance which was $27.8 million, and I think we rounded to $28 million during our last call. With respect to net income, we're at $17.5 million loss compared to $24.7 million of loss for the same period last year. When we started this fiscal year, our EBITDA guidance was in the range of $230 million to $235 million, but upon closing the two acquisitions in early July, one in crude logistics and the other one in water services, we increased our guidance by $10 million to $240 million to $245 million. After completing our water acquisition in the Eagle Ford in early August, we further increased our guidance to $255 million to $260 million. And we would like to reaffirm our guidance of $255 million to $260 million for fiscal 2014.

At the beginning of the fiscal year we also indicated our expectation to incur approximately $22 million of maintenance CapEx, which is a little less than 10% of our run rate of our guidance at the time. In view of the recent acquisitions, we have increased that number to $25 million to $28 million. If you look at our statement of cash flows, you will notice that CapEx for Q1 fiscal was approximately $30 million. This includes approximately $6 million of maintenance CapEx and $24 million of organic growth CapEx. With respect to growth CapEx at the beginning of the fiscal year, our guidance was in the range of $60 million to $70 million. After the recent acquisitions, we've increased the upper range to $80 million. So we expect to grow CapEx to come anywhere from $60 million to $80 million this fiscal year and the majority of that will be financed internally with excess DCF which is what we did last fiscal year as well. We expect to generate approximately $192 million to $194 million of DCF which is based on our EBITDA guidance, estimated interest expense of approximately $38 million, and maintenance CapEx in the range of $25 million to $28 million.

So with that, we'd like to give you our updated quarterly EBITDA breakdown which is as follows. Q1, which you already have the actuals of $27 million. For the second fiscal quarter, that number is $40 million. For the third fiscal quarter that will be $84 million, and for the fourth fiscal quarter that will be $104 million, which gives you $255 million which is the lower end of our range of EBITDA guidance. Also, since early July through August 1, we completed six acquisitions for a total of $346 million. Mike pointed out earlier about $74 million of that was financed with equity that we issued to sellers. We feel comfortable with at least $500 million of total CapEx for this fiscal year. Subsequent to the quarter end, we completed our first follow-on equity offering of 10,357,000 units(sic-see press release "10,350,000 units") at $29 per share. We used all of the proceeds which were about $287.5 million to pay down debt. Currently, our leverage is under 2.5 times, so our balance sheet is in very good shape which would allow us to take advantage of good acquisition opportunities as they present themselves. With that Mike, I'll turn it back to you.

Thanks, Atanas. Why don't we open it up for questions.

(Operator Instructions)

Our first question will be coming from the line of Michael Gaiden, Robert W. Baird.

Good afternoon, gentlemen. Thanks for taking my question. Can I ask about the sequential growth outlook and volumes for both the water and the crude logistics, please? Could you perhaps frame what we should expect as we go through the year as far as volumetric progression in those two businesses?

David, would you like to handle that?

Sure, Mike. Volumes on both those businesses will continue to grow. They will be subject to any future acquisitions, obviously. We have recently gone and increased -- the volumes on the water segment have been increasing sequentially year-over-year in all basins but one. The crude oil volumes will continue to grow much as the industry projections, so we continue to see our share grow up. Are you asking specifically for volumes? Because I don't think I can speak to exactly what volume, but we will increase volumes, both crude oil and water.

Thank you. I certainly appreciate your position with not wanting to get overly specific, but you guys certainly had a nice smart increase in the water segment quarter-over-quarter. Just wondering, should we continue to see perhaps double-digit growth as we go into the second quarter and beyond in your core water business excluding any operations? Or should we expect that to moderate quite a bit?

No, I actually would suggest to you again, it's a specific target I don't want to tie down, but I think that low double-digit growth would be anticipated.

Great. Thank you. And then, Mike, if I could please ask you a question? Could you talk about the role of seller financed equity as you continue your acquisition strategy? Is it nice to have? Is it key to have? And in general, if you had your druthers, how much would you like to see as you continue to grow the business through M&A?

It's not critical. We're now able to use the S-3. We've had the follow-on. We're adding additional firms and equity analysts. It's nice to have, as I think it shows a commitment on the seller's part to help us maintain and grow the business. It helps us keep our balance sheet in shape, obviously a little more than it otherwise would be. I think it should be also a signal that the sellers have faith that there's some nice upside to the business.

And is that story getting easier to tell as you get bigger and continue to demonstrate the growth in your business.

You know, I think there's two parts to that. One is our partners who knew us and our previous MLPs could see what we did in the past so they had, I think, some faith early on right after the IPO. And now, folks that perhaps we haven't known for a long time are more comfortable that we're executing on our model and we're hitting our numbers and we're getting some substance so that they're getting comfortable with taking some equity.

Great. Thanks for that color, Mike.

Your next question is from the line of James Jampel from HITE.

Thanks for taking the question. Can you give us a little more of a sense of the timeframe, when you might expect further analyst coverage to begin on NGL? Sure seems like you guys are flying far under the radar now, given your current yield and likely distribution growth.

You know, when we -- on the follow-on, we added some additional book runners as compared to the IPO, and as you know, they don't -- or they can't commit to picking up coverage. We hope they will, but we don't a timeframe. I know BofA Merrill did so, but we haven't had any others. But that's all I know.

Thank you.

Your next question is from the line of Matt Niblack from HITE.

Thank you. Two questions really. The first one is, given the financial flexibility that you have to execute additional acquisitions, I assume that operational integration capacity is the largest barrier. Does that prevent you from executing an acquisition in the near term? Then the other question, unrelated, on the base business. Are you seeing any trends in terms of both water usage per well drilled and use of internal versus external capacity for water handling?

I will start with the first one. On the integration, having the four segments and having the four Management teams makes it easier to integrate. So we have done a water deal. We can do another water deal. We could do crude terminals or retail just fine. So we haven't found integration as a barrier yet. I think the group it's toughest on is our corporate folks, because every deal has to be accounted for and reported financially. But so far, no barriers there. David, how about the trends in water usage and internal/external use for water?

We are seeing an increase in the amount of water used per well completion, both on the traditional vertical drilling as well as on the horizontal drilling. So there is a definite trend upward in the amount of water being used. We are actually seeing a decrease in the amount of internal capacity being used by producers. The returns are such that they're putting their money back in the ground. So we aren't seeing the producers using their own resources, be that trucks or other water handling capacities. That's actually coming to the midstream companies.

Okay. I assume that your economics go up with volume of water used and not based on the number of completions you support.

We are volumetrically driven, that's correct.

Can you put a quantification on year-over-year, how much the volume per well is increasing? Is it low single-digits we could think about?

That's a difficult question because it varies so much by basin to give a single number. The situation, not to be flippant, is fluid. (laughter) The drilling in all of the different locations with pad drilling, I just couldn't speak to it. It's a producer issue. We can just tell that you we are seeing increased volumes and increased sizes of the stimulation jobs being performed. But it varies dramatically from region to region.

Okay. Then, last question, could you speak to the competition in the water business? As you're getting larger are you able to erect barriers to entry through customer relationships or local scale? Do you see, in general, an increase or decrease in the level of competition for these contracts?

We obviously compete first from a technology standpoint. We're very technology focused and driven. Secondly, we have the size and scale to compete. Both of those present quite formidable barriers to entry to our competitors. While we see a large number of very small independent competitors trying to be in the business, our size and scale is obviously preventing them from gaining the market share that we have. So we're comfortable with our position going forward from a competitive standpoint.

So you don't see any larger players or diversified MLPs entering the space in a material way or competing in the areas you're competing?

I don't see that on the horizon now.

Great. Thank you.

Your next question is from the line of T.J. Schultz, RBC Capital Markets.

Hello, guys. Good afternoon. I guess staying on that topic, and as we look at the OWL transaction, are you at a point now in the Eagle Ford where you have the critical mass to really be negotiating more directly with the producers versus some of the haulers? What does this mean as your ability to put longer term contracts on some of the capacity you have?

You've got our business strategy down. The answer is yes, we do have that have critical mass requisite to talk to producers. And we are, in fact, negotiating longer term contracts and dealing directly.

What kind of terms -- and when you say longer term contracts, would you expect on water capacity?

Well they, again, vary depending upon the producer and it's 3 to 10 years, to give you a range. I would prefer not to get too specific with respect to that just because of the competitive nature of the business.

Okay, understood. And then just a clarification on the OWL transaction. The potential purchase price adjustment -- this relates to the following six months post closing, first is that correct? And then what are some of the variables you see near term that would cause you to reach that threshold on the -- that would trigger that adjustment?

I'll handle the first part, David. You are correct. It's just the six-month measurement period, and it's a monthly measurement. To the extent that a given month in the next six exceeds a $40 million annualized EBITDA, then the earn-out would kick in. And, I don't know, David, if you have some flavor on the second part of the question.

Pretty much it's very simple. It's volumetrically driven. The essence of that is all around the volumes.

Got it. Mike, earlier this year, I know you had discussed some of the pilot tasks that you guys were doing for some of the zero discharge water handling solutions that would be applicable to potential solutions in the Marcellus. Is there any update on how that process is going?

Yes. Dave, do you want to give us the latest?

We're proceeding forward on that project. The pilot is completed and we're in negotiations on the commercial aspects.

So, T.J., there were two parts to it. One was could we actually end up with a zero discharge. We've determined the answer to that is yes. Then can we -- well, basically, what can you sell these commercial products for, which will then determine what you would charge the producers for their water. So that second part, that we're working on today.

Okay. That's all I got. Thanks, guys.

Thanks.

(Operator Instructions)

At this time I'm showing no further questions in queue. I would like to turn the call back over to Mr. Mike Krimbill for any closing remarks.

Thank you very much, and we'll talk to you after the second quarter.

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