NGL Energy Partners LP (NGL) 2015 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2015 NGL Energy Partners LP earnings conference call. My name is Denise and I will be the operator for today. (Operator Instructions).

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

Thank you and welcome.

This conference call includes 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 prices and market demand for natural gas, liquids, and crude oil; 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 at purchase prices that are accretive to financial results and to successfully integrate acquired assets and businesses.

Other factors that could impact these 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 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 differences between any non-GAAP measures discussed on this conference call to the most directly comparable GAAP financial measures.

I think that's the best I have ever read that. Why don't we jump into some of the numbers, and then we'll give you a flavor of what's going on within each of the divisions. So Atanas, go ahead.

Thank you, Mike.

Adjusted EBITDA for the quarter is $43.1 million, which excludes one-time acquisition costs of approximately $3.8 million. This compares to an EBITDA of $27.4 million for the same period of last fiscal year, which represents an increase of 57%.

NGL reported net loss of $39.9 million for the quarter ended June 30, 2014, compared to a net loss of $17.5 million for the same period last fiscal year. The primary driver of the difference in net income was attributable to approximately $16 million of additional depreciation and amortization expenses and $9 million of additional interest expense related to the acquisitions we completed.

We started the fiscal year with EBITDA guidance in the range of $425 million to $430 million, and now we are reaffirming our guidance for fiscal 2015 to be in the range of $425 million to $430 million.

At the beginning of the fiscal year, we indicated our expectations to incur approximately $30 million of maintenance CapEx. During the first fiscal quarter of 2015, we spent $6.5 million on maintenance CapEx and we still expect to be around $30 million for the fiscal year.

Our expectation for EBITDA for the second fiscal quarter ended September 30, 2014, is in the range of $70 million to $75 million, and with this, I will turn it back to Mike.

Thanks, Atanas.

Today, we would like to give a little more flavor on the individual divisions or segments. So starting with retail, and we have read some of the reports out on another retailers, in terms of volumes this quarter versus the same quarter of a year ago, our volumes are actually up 1%, and the -- I think I had seen some reports talk about receivables. Our receivables went from $24 million last year to $33 million this year, so they increased about one-third.

Our actual EBITDA results were about 10% better than last year, so along with the volume increase, a slight increase, we had a margin increase of about 5%. And our bad debt expense is actually lower for the quarter this year than last year. So our retail guys did just a fantastic job.

Within liquids, we had the situation this quarter we had two years ago, and you may remember. It is somewhat of an annoying explanation, but we have to aggregate all of our inventory in a given location, which in this case is Conway, so in Conway we have both our presold gallons and our -- and this is where our ratable barrels are coming in daily.

Because of last year being so cold and I think customers perhaps not having all the propane they needed, we have had a fantastic pre-sales season. In terms of presold propane gallons, we are twice -- we have twice as many this year, nearly 200 million gallons, versus the same quarter of last year.

But in a declining market with the propane prices falling because of the quick ramp-up in propane inventories, we're having to average the presold gallon cost, which was at a higher level in April, May, June than the ratable gallons that we sell, to balance each day, so we're actually -- we actually had lost money on the ratable gallons from an accounting perspective that we had to report for this quarter.

So, basically our inventory values are dropping, so when we deliver the presold gallons, we will recoup all of the margin that we reported lost in this quarter. So, that part of our business actually had negative -- I think we were approximately $5 million behind our forecast, and that will show up in the third and fourth quarters as we deliver those presold gallons. So that is definitely a timing piece.

Water is just a great story. It continues to be a shining star within NGL. As you can tell, I think our water volumes were up over 100%. About 70% of that was due to acquisitions and the other 30% was organic. Our EBITDA from that side of the business more than doubled and it continues to be a real driver of growth.

The margins are a little tricky there because it depends where you are adding your volumes. What we charge in the Permian and Eagle Ford is less than what is charged up in the Anticline or the DJ, because in the Eagle Ford, we are not recycling and spending the additional money to recycle water or to discharge it back into the environment. So, we are extremely happy with our water side.

On the crude, this is where we continue to have some difficulty. We had some margin compression and particularly with the legacy NGL business prior to the Gavilon acquisition. We are being hurt by the backwardation of the market and that is hurting us in a couple places. We have had higher inventories due to refinery turnarounds, so in this quarter, we experienced more velocity to backwardation on those inventories. And our Cushing storage that we picked up in the Gavilon transaction, approximately, and David may have -- he may have better numbers, but 3 million barrels, plus, we have not been able to lease out because of the backwardated market.

So those are things that can turn around if the market goes flat to contango. But if not, the Cushing storage will continue to hurt us, but we will reduce inventories as the refiners complete their turnaround.

In addition, we lost one large transportation customer and we're involved in litigation with that customer, but that's costing us about $500,000 EBITDA per month. So that's just a customer we have to replace with other business, which we will do throughout the rest of the year.

So with that, why don't we open it up for questions?

(Operator Instructions). Shneur Gershuni, UBS.

First question, just specifically EBITDA guidance for the year was maintained. Trying to understand, is it this is going to be typically the seasonal weak quarter and you are expecting a stronger outcome as the year unfolds? And I was wondering if you had incorporated any GP cash flows from TLP as part of your guidance now versus previously?

The first part of the question was -- what was the first part of the question?

The second half of the (multiple speakers)

Oh, second half, oh, yes. I am sorry, the guidance at $425 million is reaffirming what we previously provided, so it doesn't include it. The timing -- some of this is timing, which is the liquids. We had some also timing happening in our ethanol and our renewables business. So that will come back.

And then, the crude oil, we're going to, as we said, continue to lose some of that going forward if the market continues to be backwardated, and then we'd just have to make up for that in other areas.

So with the full answer, I guess, the GP cash flows are not included.

Okay, so there is -- would that roll in on a lagged basis, just as TLP reports, and as you had reported, I guess, a quarter later, assuming TLP doesn't close in the immediate future?

If I could answer that question, that should not be because that will be an equity investment. And each quarter, we are basically picking up our 20% equity pickup from the EBITDA, so that should not be.

That should not be a lag, okay. Cool.

And then, just when you were talking about the liquids side in your prepared remarks, (multiple speakers) basically say it's basically a non-cash inventory adjustment? Is that the way to crystallize it without putting words directly in your mouth?

The answer is yes. You're right. Our inventory value is dropping.

But no cash impact on the other side?

Correct. That's correct.

Okay, cool. Then I was wondering if you could talk about crude oil logistics a little bit. You had mentioned the issue of the inventories -- the inventory issue with refinery turnarounds. Cushing is a challenging market at this point right now, but historically, there's also been opportunities to make money with respect to the widening of the spreads and so forth.

Is it fair to say that you are still able to take advantage of some of those opportunities, even though LLS and WTI narrowed throughout the quarter versus where it was previously? Or is the spread that is that tight, you don't have much of an opportunity to take advantage of that in this type of market?

David, do you have an answer?

I do. And so, we have not seen the basin -- we have some small basin differentials; for example, the Permian to the Cushing market differential. We are taking advantage of those where we can.

The bigger picture is that those differentials aren't in place today, so we are seeing still compression of margins. To the extent they exist, we take advantage of them. They are much more limited today than they have been in the past.

Okay. And when you think about the Cushing storage longer term, do you see an opportunity for storage opportunities to merge, via Houston basically getting filled up and refiners willing to effectively take cheaper storage in Cushing and then use the pipeline network to connect and so forth? Do you see that as more and more action happens on the Houston side and rates start to go up and so forth? Is that how we should think about the next couple of years as to how Cushing storage prices unfold?

We do see that. That's a good explanation of our viewpoint, so I won't belabor it. So we see that as an opportunity.

The other things that we see within the Cushing on a go-forward basis are a desire for refiners to control quality, so they are ultimately looking to back up to the storage hubs and take control of their quality there. So we see some activity there from the refiners.

And then, thirdly, we see a lot of the connectivity from some of the other basins. For example, there is new pipes, whether it be Pony Express, others, coming into Cushing, and we're making the necessary adjustments to be able to pick up some of those volumes.

So, those three things would be the macro view of Cushing going forward.

Okay, great. Guys, thank you very much. That's all for me.

T.J. Schultz, RBC Capital.

I just want to go back to the guidance again. I know last quarter you gave quarter-by-quarter guidance for EBITDA, and first quarter was a bit low, what you had guided, and it sounds like second quarter is basically almost in line with where you had previously guided, which means, if you're keeping the guidance, there is quite a bit of uptick in the back half of the fiscal year.

So, just curious what has changed or what you're seeing that you expect more later this fiscal year. I understand some of this is the liquids that -- the presold volumes, but it sounded like there was only about a $5 million impact, so just looking for any other color on the back end of the year.

You are correct. David, do you have thoughts on crude oil?

From a crude oil perspective, we have volumes that are coming online in the third and fourth quarter, both around some pipe capacities that have been delayed that are coming online and producer aggregation that we've committed to those pipelines that are delayed. So the biggest piece of the crude oil segment is just a volumetric increase in the third and fourth quarters. Some of the new systems come online and we are able to move more volumes.

Okay. Maybe, Mike, moving over to the distribution growth guidance, I think you reiterated 15% growth this calendar year. The uptick in the June quarter was a bit more than I expected, so just trying to get my arms around that 15% guidance. It seems a bit conservative, but you continue to stick with it.

If I look at the year-over-year 2014 versus 2013 distributions, that would imply your distributions flat for the next couple of quarters from where they are now. So just some color on that 15% year-over-year guidance and potential that that proves out conservative?

That's a good point. We had the 15%, and then when we closed the purchase of TransMontaigne Inc., we jumped that one quarter from -- would have been $0.08 up to $0.15.

So for the year, it actually will be more than 15%. It would have been 15% plus the $0.07, which is probably another 3%. So they will actually end up around 18% for this calendar year.

Okay. The NLT combination proposal to LP NGL, can you just tell us where you are in that process? And then, if you could give us any guidance on synergies, say, from a combination there, operational or cost synergies that you can discuss?

Sure. We submitted our offer letter, I think it was, July 10, and so we're eternally in the process with the special committee that was formed at TLP. So that process is ongoing and that is really all we can say at this (technical difficulty)

Okay, fair enough, thanks.

Michael Blum, Wells Fargo.

Sorry to harp on the guidance. Just to clarify, does your guidance assume in the crude segment that conditions remain the same for the balance of the year or they improve? And I guess that's both on the spreads, but also in terms of your ability to recontract the storage at Cushing?

I will start off on that, and if I -- Dave, you can jump in.

But no, we are assuming -- there will be an improvement, but our improvement is going to be pipelines that we have already taken out space on that are going to start up in the second half of the year, increased transportation volumes, increased volumes that we will be earning a margin on.

It does not assume that we go contango. It assumes that we continue in this backwardated market.

So we have looked at continuing to lose a certain amount each month on our inventories, as well as continuing to not be able to lease out the storage that we inherited with the Gavilon transaction that we had leased from Rose Rock.

Okay.

So if the market starts (multiple speakers) -- yes, if the market turns around in terms of contango, then obviously our numbers will be better.

Okay. And then, if you can, can you say what the contribution, the EBITDA contribution, was from Gavilon in the quarter?

We haven't said that, nor do we have the pieces with us, so we will have to pass on that one.

Okay. And just to clarify on TransMontaigne, on the piece that you already own --

Yes.

-- so do you receive any distributions for this current quarter? Is that reflected in your numbers in any way?

No, no, because these numbers obviously go through June 30 and we closed the transaction July 1.

Okay.

Right, so nothing would be in these numbers. And then going forward, as Atanas said, we will get our percentage of the EBITDA in our EBITDA, so we'll get increased earnings from that. And then when we get distributions, that would just be a decrease in our investment. It wouldn't show up in the P&L.

Okay. But that will be reflected in DCF?

Yes.

Okay. And the contribution that you're expecting to get from TransMontaigne in the EBITDA, that is reflected in your guidance or it's not reflected in your guidance?

It is not.

It is not, okay. Thank you very much. That's all I had.

(Operator Instructions). Matt Niblack, HITE.

In the storage business, are there any contract renewals coming up that could represent another step down?

David?

No.

When is the next renewal?

The next renewal is --

Next material renewal?

Two years.

Two years, great.

And then, in terms of the water business, it seems like there is increasing pressure in certain areas around the seismic activity that might be caused by the injection wells. Is that a concern for you or is it even potentially a benefit as regulation gets some of the smaller guys out of the business?

I would say it's both. We do not see any connection between disposal and seismic activity where we are, and so, your concern is are there groups -- even though there is no scientific evidence that it would cause issues for us, that's always a concern. But fracking has had the same concerns as well and probably even more so.

But certainly if regulation -- if that causes regulation to move more towards cleaning water, that is very good for us.

But you haven't seen [rate] out of the seismic activity or groundwater pollution or any of these concerns, scientifically based or not? You haven't seen major efforts that concern you in any of your areas of operation?

No, we have not -- there is nothing with the migration of this water to drinking water. We haven't seen that anywhere. The seismic activity that is probably the same thing you hear about is -- seems to be centered more in Oklahoma and, to some extent, in Colorado.

Right.

Right? So we are not in Oklahoma and we do have some net operations in Colorado, but at this point, there's nothing that concerns us.

And then, switching over to TransMontaigne, and I know you can't really comment on the process specifically, but you have had some more time to think about the asset. Is your perception of the synergy that is available there growing as you have more time with the asset or would you say it's similar to when you bought it? Any guidance there would be helpful.

I think we are just as pleased, if not more so, with that operation than when we -- back in June or early July. Everything we see is very positive.

Great. Thank you very much.

[Adha Benha], [Renuit Securities].

Just had a couple of quick questions. One is on the crude differentials. I know you said because of the backward market, you are feeling pressure there. I was trying to think -- do you see anything positive in this quarter versus what you saw last quarter because of differentials change or anything in that regard?

David?

I am sorry. I want to make sure I understood the question correctly. Are you asking do we see differentials changing in this current quarter, such as (multiple speakers)

Right, anything that is going to be more positive for you guys this quarter versus what you experienced last quarter.

We see the differentials in the same place as last quarter, not any significant movement.

Not any. Thank you.

And can you make a comment on the water margin trend? I know you think volumes could be up, but how should we think about that trend in the margin going forward from here?

Our average margin will decline because our mix continues to be predominantly in the Permian and the Eagle Ford. We're adding in the DJ, but we're adding more in Texas. So you're going to see an average margin decline, but the EBITDA will continue climbing.

Sure, sure. And regarding the propane, how are wholesale propane or other liquid margins trending? And do you expect similar volumes versus last year? Because it was a quarter into last year, so volume growth -- what kind of volume growth do you have baked in 2015 guidance?

We don't bake any growth in. We go back to a normal winter, so our budget would be less than and our forecast would be less than -- significantly less than what we experienced last year.

So if we had a normal winter, colder than normal, to some extent, not as cold as last year, then we should exceed our forecast.

And any comment you have on the margin trend for the propane business?

The reason we don't lose customers -- net loss of customers -- is because we don't try to push those margins. As we have said, we buy a regional business. We just leave them -- we are happy and we budget the margins that were there historically.

So if we are up, like we are, 5% over last year, that is great, but we are not -- you're not going to see our margins marching up year after year because that's how you start losing customers.

Right, right. Okay, and just last one, when I look at the EBITDA contribution, what you have in the slide, last slide that you guys had, where it says crude levels [stay] at 45% or so, water at 23%, in that regard, is there anything that has changed essentially that we should be wary of or everything is as it is?

I think that's still a pretty accurate picture of where we are going and where we are.

Okay. Thank you, that's all I have.

We have no further questions. I will now turn the call back over to Mr. Mike Krimbill for closing remarks. Please proceed.

Okay, that's it. Thank you very much.

This concludes today's conference. You may now disconnect. Have a great day.