NGL Energy Partners LP (NGL) 2014 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2014 NGL Energy Partners LP earnings conference call. My name is Lacy, and I'll be your coordinator for today. At this time, all participants are in listen-only mode. We will facilitate a question-and answer-session towards the end of the presentation.

(Operator Instructions)

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today, Mike Krimbill, Chief Executive Officer of NGL Energy Partners. Please proceed.

Thank you, and welcome to the call. Many of you may have been on the call just a few days ago, so we welcome you back.

This conference call will include forward-looking statements and 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, 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 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, quarterly reports on Form 10-Q, and other public filings and press releases. NGL 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 under Investor Relations for reconciliation of the differences between any non-GAAP measures discussed on this conference call and the most directly comparable GAAP financial measures. So with that, I would like to turn the call over to our CFO, Atanas Atanasov, to review the results.

Thank you, Mike. Our -- NGL's adjusted EBITDA for this quarter -- for the quarter ended September 30, 2013 is $42.1 million, excluding one-time acquisition costs of approximately $800,000. This compares to an EBITDA of $26.9 million for the same period last fiscal year, which represents an increase of 57%. Our guidance for the quarter was -- for this current quarter ended September 30, 2013 was $40 million, so we're pleased with our actuals exceeding that goal.

NGL reported $900,000 loss for the quarter ended September 30, 2013, compared to net income of $10.1 million for the same period last year. The primary driver for the difference in net income was attributable to approximately $9.5 million of unrealized gain that was included in the net income number, but excluded from the EBITDA for the same period last year. We started the fiscal year with EBITDA guidance in the range of $230 million to $235 million. 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 reaffirmed that guidance during last quarter's earnings call. We currently raised our guidance by $10 million to $260 million to $270 million to take into account the coastal acquisition, which we completed in early September.

At the beginning of the fiscal year, we indicated our expectation to incur approximately $22 million of maintenance CapEx. During last quarter's conference call, we increased that number to $25 million to $28 million, in view of the acquisitions completed during the summer months. And we're still comfortable with that range, $25 million to $28 million, for fiscal 2014.

If you look at the statement of cash flows, you'll notice that CapEx year to date is $67 million. This includes approximately $15 million of maintenance CapEx and $52 million of organic growth CapEx. With respect to organic growth CapEx, at the beginning of the fiscal year, our guidance was the range of $60 million to $70 million. Last quarter, we increased that estimate to $80 million, and we're still comfortable with that number. The majority of it will be financed internally with excess DCF.

We expect to generate approximately $195 million to $197 million of Bcf, based on interest expense of $45 million and maintenance CapEx in the range of $25 million to $28 million. So with that, I would give you the -- our updated quarterly guidance.

Obviously, for Q1 and Q2, we have the actuals of $26.8 million and $41.3 million respectively. For the third fiscal quarter ended December 31, 2013, our EBITDA guidance is $89 million. And for the fourth fiscal quarter ended March 31, 2014, that is $108 million, which adds up to a midrange of $265 million EBITDA for fiscal 2014. Since early July, through August 1, we completed -- through actually September, we completed eight acquisitions, primarily in the water and crude segments, for a total of $474 million, $81 million of which was financed with equity issued to sellers.

We guided to $500 million of total CapEx for fiscal 2014. Based on what we have spent so far, we'll be more -- we have more than exceeded our guidance. During the past quarter, we completed two equity offerings, selling approximately 14.5 million units for net proceeds of approximately $415 million. Currently, our leverage is below 2.3 times. Our balance sheet is in very good shape, which has allowed us to take advantage of acquisitions opportunities such as Gavilon.

In October, we launched our first high yield notes offering, raising $450 million at an interest rate of 6 7/8. We also reached agreement to acquire Gavilon Energy, with the expectation to close the transaction by the end of December 2013. In early November, we upsized our revolving credit facility to $1.671 billion from $1.05 billion, while reducing interest rates and extending maturity to November 2018.

In November, we also reached an agreement to sell $240 million of common units in a private placement, and the sale is expected to close concurrent with the close of the Gavilon transaction.

With respect to distribution growth, our guidance for fiscal 2014 was and is 12% to 15% growth, and 10% thereafter. We reaffirmed that guidance. With that, I'll turn it back to Mike.

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

(Operator Instructions)

And our first question will come from the line of Michael Gaiden with Robert W. Baird. Please proceed.

Gentlemen, thanks so much for all the financial detail and the update on guidance. Can I ask, quickly, a point of clarification? Do any of your numbers include any Gavilon-related items, or is that excluded from this guidance?

It does not include any of the -- Gavilon impact is excluded. We felt like we needed to close the transaction before we give any more guidance than we did on the last call.

Great. Thank you very much. And with such a robust M&A cadence over the last few months, can you talk about any bottlenecks that you might face now in continuing such a strong cadence of growth? Whether it's the need to find now bigger deals, because you've just grown, operational constraints, or anything else that we could think about? Is there any reason to expect a pause in your growth?

We appreciate your confidence in us, first. I don't -- I would not describe it as a pause. But we need to take a good six months to integrate what we have. So I wouldn't expect any additional growth of any significance in the next six months.

We did this January through June of this year. We had done quite a bit in the fourth quarter of 2012, and there were six months off to integrate before we started up with the water and the marine terminal, and then eventually Gavilon. So I would say next six months, you probably don't see much out of us, and we will be focused on hitting our numbers and exceeding them. And after that, who knows? We're certainly not going to slow down.

Great. Thanks a lot, Mike. I'll hop back into the queue.

(Operator Instructions)

And our next question will come from the line of Darren Horowitz with Raymond James. Please proceed.

Hello, Mike. Just a couple quick questions. I'm curious, and I know that you're still trying to get everything integrated. But as you're looking at the asset maps and overlaying Gavilon's assets and a few other assets that you bought with your existing base, and you're looking to identify a lot of the cost synergies and operational synergies that are going to come from that, Can you give us a better idea of the timing and magnitude with which you think those synergies will be realized? I'm just trying to get a feel for exactly which geographic areas, or across your asset footprint from a vertically integrated perspective, where you could get the most immediate benefit to the cash flow line.

This is David Kehoe. We fully expect the synergies to come, as you would anticipate, because of the nature of the business being complementary and similar. We don't anticipate that over the first six months. And when they do occur, we really expect them to be more in the form of growth, because of the opportunities that consolidation gives us.

So it's too early to speak about, in terms of costs, if you will, because we really weren't focused on how do we take the existing footprints and expand them. So that's a six-month process for us, in terms of timing on that. And we really wouldn't have anything from a dollar perspective today.

Okay, and then last question, more around the strategy, again, on a consolidated basis with the assets. How much opportunity does the integration of the Gavilon assets with your existing base business lend itself to water growth potential?

Again, it's David Kehoe. We think that's a significant opportunity for us, and from a macro perspective, just remember that you can't drill a well, complete a well, or produce a well without water. And in today's environment, with the oil/gas ratio where it is, everybody's obviously focused on crude oil. So it is an integrated service aspect.

And if you look at the water footprint and the crude oil footprint, you know, obviously our key focuser is water or Permian, Niobrara, and the same thing applies with respect to crude, Permian, Midcon, and Niobrara. So we're in the same place. We offer an ala carte menu all the way to the fully-integrated solution for our producers, and we fully expect that circle across the value chain to come together.

Thank you.

And the next question will come from the line of Ted Durbin with Goldman Sachs. Please proceed.

Hello, guys.

Hi.

Just wanted to ask, actually, about the base business, the NGL logistics business. Can you talk a little bit about some of the dislocations you've seen in the propane market here, with some of the crop drying? Base looks like it's moved around a little bit. Has that been an opportunity for you? And then obviously, prices were up on propane, as well. I'm wondering if that has any implications for margins in both NGL logistics and/or in the retail business.

Yes, we always look at crop drying. It seems to be a rumor most times, but we finally got some this year, so it happens every seems like four or five years. And that would have been predominantly in our upper Midwest markets, not in our New England markets. New England's our largest market.

We were looking at margins. When volumes pick up, to stay competitive with the moms and pops, they typically will lower margins. And so we want to follow as well, so that we're not pricing ourselves out of the market and losing customers.

So our margins will decline a couple cents versus the same quarter a year ago. And that's a good thing, because that means we're not going to lose customers. But the volumes have picked up. And with this early winter weather, we are seeing some opportunities for developing in what we call the wet barrel market, and some dislocations where the physical barrels are going to sell for a premium.

Got it. That's helpful. And then just coming back to Gavilon, I guess -- and maybe I missed this. But on the crude oil marketing business, are you expecting a similar profile on a per-barrel basin -- per-barrel basis, in terms of the margins you think you'll earn there, relative to what you've historically earned in crude business for logistics?

I think that conceptually, the margins -- on the margin base -- let me back up a step. So we see the Gavilon as an opportunity to further increase the fee-base business across both the NGL asset base and the Gavilon asset base, so we'll --

Right.

Yes. An increase in the fee-based portion of it. On the margin-based portion, that is something we can't and don't predict. We capture our margin relative to our logistical assets. So if you're referring to, we think the margins over the past 18 months, with the spread differentials continue, we don't know and budget for that. So our margins, from a go-forward basis, are just predicated around our logistics assets, and will be considered historical norms.

Okay. So if I interpret that right, then--

(multiple speakers) the same margins around their business as we do our business.

Yes. Got it.

Yes. The margin -- our margin assumptions, and our 7.5 multiple comment on the last meeting, were based on our margins being similar on the crude marketing. Between both the --

Are we the $2 per barrel range, or where do you think, $1 to $2? What are the -- just rough numbers?

Historically, we've said in the $1.50 to $2 range.

Yes.

Yes.

Still feel that's a good number?

Yes.

Okay. That was it for me. Thanks.

(Operator Instructions)

Our next question is a follow-up question from the line of Michael Gaiden with Robert W. Baird. Please proceed.

Thanks for taking my follow-up, guys. Can I lastly ask you one strategic question? Given some groups' long-standing ownership, and recently increasing ownership in NGL's general partner, and now your combined interest in the Glass Mountain pipeline after the Gavilon deal closes, is there any argument to be made for more formal financial or strategic ties between NGL and SemGroup, and/or NGL and Rose Rock? Would love to get your input.

Yes, I think -- the short answer is yes. But I think it's just because, obviously, their GP ownership and unit ownership, if they are going to look for a partner in a project that we would expect to be at the top of the list, or we would be a logical choice, because they would, in effect, capture part of the economics that the partner had, and -- through their ownership in us. So we think that makes sense, and we would love to participate with them and we think very, very highly of Norm.

Great. Thanks, Mike. And can you do that with the current ownership and organization structure that you have? Or would some change in the current structuring of the various organizations be helpful to that end?

No, I think with the way we're set up today, if they -- again, if they need a partner, we could be a good partner. And since we've increased our lines of credit and gotten larger, then we could be -- we could bring substantially more resources to any project, if it was a pipeline project, or terminal, whatever, or storage.

Great, Mike. Thanks for sharing your insight.

At this time, I show that we have no further questions in queue. I would like to turn the conference back over to Mike Krimbill, CEO, for closing comments.

Thank you, everyone. I -- you can tell that Ron Londy has retired on us, because he used to ask lots of questions. But we appreciate your time, and we will talk to you at the time of the next Q.

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