NGL Energy Partners LP (NGL) 2016 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q1 2016 NGL Energy Partners LP earnings conference call. My name is Whitley, I'll be your operator for today.

(Operator Instructions)

I would now like to turn the conference over to your host for today, Mr. Mike Krimbill, CEO of NGL Energy Partners. Please proceed.

Thank you, and welcome.

This Conference Call will include forward-looking statements and information. While NGL Energy Partners LP believes 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 liquids, and the ability to identify and consummate strategic acquisitions at purchase prices that are accretive to financial results, and to successfully integrate acquired businesses and assets. Other factors could impact any forward-looking statements are described in Risk Factors in the [participating] standard 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 differences between any non-GAAP measures discussed in this conference call and the most directly comparable GAAP financial measures.

All right, let's get started. I'll turn it over to Atanas first and then I think I'll have a few more comments and then we'll open it up for questions.

Thank you, Mike. Good afternoon, everyone.

Overall we are extremely pleased with our quarterly results and performance. We recorded adjusted EBITDA of $89 million for the quarter, which compares to EBITDA of $43.1 million for the same period last year, which represent an increase of 106%. NGL reported net loss of $38.5 million for the quarter ended June 30, 2015, compared to a net loss of $39.9 million for the same quarter last year. If we exclude the year-over-year increase in performance units and [l-tip] awards of $32.3 million, we would be approximately $34 million higher.

During the first fiscal quarter we incurred $7.7 million of maintenance CapEx. This excludes $2.9 million of TLP maintenance CapEx, and we still expect maintenance CapEx to be in the range of $30 million to $35 million for FY16. During the first quarter we also spent approximately $186 million on growth CapEx and acquisitions, of which acquisitions accounted for $78 million and organic growth CapEx, approximately $108 million. This excludes $5.4 million attributable to TLP growth CapEx, and we still maintain our guidance of $750 million to $1 billion total for FY16.

Distributable cash flow for the first fiscal quarter is $55 million; and this is based on EBITDA of $89 million, interest expense of $26.4 million, and maintenance CapEx of $7.7 million. The interest expense of $26.4 million excludes $2.1 million of interest, attributable to TLP; and $2.3 million of non-cash amortization of deferred financing costs.

We also reaffirm our adjusted EBITDA guidance of $500 million [or greater] for FY16, and we reiterate our distribution growth guidance of 6% to 8% for calendar years 2015 and 2016.

I'd also like to add some more color to our operating segments to highlight our year-over-year performance and growth. For crude and logistics, volume is 260,000 barrels a day, versus 212,000 barrels a day last year, which represents an increase of 23%. Average margin per barrel was $0.71 compared to $1.12 last year. The margin compression was driven primarily by significant drop in crude prices since the third quarter of FY15, but this was more than offset by additional profits generating from the increased utilization of our storage assets at Cushing. As a result, segment operating income was up $10.5 million versus the same period last year.

For water solutions, volume was at 600,000 barrels a day versus 300,000 barrels a day last year, which represents an increase of 100%; and gross margin per barrel was $0.90 versus $1.25 for the same period last year. The main driver behind the decrease in margin per barrel was our continued growth in the Permian and Eagle Ford Basins, where the fee for barrel generally lower, versus the DJ and Anticline Basins, as well as lower oil prices.

The refined fuels segment has grown dramatically since the acquisition of TransMontaigne, Inc., in July 2014, and continues to outperform our expectations. We are currently moving approximately 230,000 barrels a day at an average margin of $0.06 per gallon, versus $0.01 per gallon on our legacy refined fuels business.

For our liquids segments, propane volume was 228 million versus 184 million gallons for the same time last year, which represents an increase of 24%. And that increase was driven primarily by our continued push to longer-term supply marketing agreements and pre sales. Propane gross margin was breakeven for the quarter, versus $0.02 at the same time last year; and the primary driver for the decrease in margin was the decline in propane prices during the quarter, which affected our weighted average cost of goods, similar to prior years. This basically represents a timing difference, which will reverse itself out once the actual pre-sold gallons are pulled by the customers during the winter quarters, the December 31, 2015 and March 31, 2016 quarters. We experienced a very similar dynamic last fiscal year, when we recorded $30 million of profit in the last fiscal quarter, thus recouping the earlier loss based on [wake-ott].

Our other NGLs within the liquids segment recorded volumes of 192 million gallons versus 187 million gallons last year, which is an increase of 3%; and margins were very healthy, at $0.05 versus $0.04 during the same time last year. The margin increase was driven primarily by regional market pricing dislocations, which has allowed us to increase profitability by optimizing our railcar fleet.

And finally, our retail propane business continues to outperform our expectations. Volume was at 24.4 million gallons versus 23.6 million gallons for the same period last year, for an increase of 3%. And margins were at $1.10 this quarter versus $0.96 for the same time last year, which is an increase of 15%.

So overall, very happy with our operating results and performance. And with this, I'll turn it back to Mike.

Thanks, Atanas.

I'd like to give a few comments on the macro. We're all sitting here looking at the MLP space together and commodity prices to evaluate what's going on, what's happening. So if we start back last December through this March, we saw crude oil prices fall from the $90 level into the high $40s; and of course the upstream MLPs were hurt first, having to cut capital budgets, ultimately distributions. But it dragged all of that, everyone in the MLP sector down. So then what happens? Crude prices recover to $60. Everyone is happy, and then -- fall again. So again, we're getting the equity prices depressed.

The flip side of that, which we all seem to focus on the negatives and not the positives, is that construction costs have dropped dramatically. And on several projects we have we're saving upwards of $200 million in capital because of the lower cost. It also causes a higher contango, so if you have storage like we do you, can take advantage of that. You'll make up for much of the fault with higher contango revenues. And because we have a multiple segments, with lower crude prices you have lower refined product prices. Our BOB gasoline is down to $1.65. We all know demand is increasing, I'll say significantly, but it's 4% is a pretty big move for gasoline or refined products.

So, third, what happens? NGL prices fall dramatically. We've all heard about Canadian producers having to pay to have their propane moved to the storage hubs which is true, but a dramatic decline from over $1 a year ago, I think the hubs today are in the $0.28 to $0.35 range. But again, lower prices cause higher demand, so we are seeing higher sales, which impacts our propane, butane, and NGL logistics business, but also, our retail propane business, where you'll see our volumes are actually up 3%. The major competitors in the industry indicated their volumes are actually down approximately 7%. And then in addition we have storage, and as you know, we lease almost 3.5 million barrels of storage. A really nice contango market develops around storage, which a much higher current month versus a fourth and first quarter than I think I've ever seen.

So if that's not bad enough, the high-yield market falters. And really, as we saw it start with the Greek -- call it Greek tragedy -- and the high-yield market effectively shut down for about a week; and now it's coming back, but I think recent trades have been for midstream companies in the 5.5% to upwards of 7% depending on your credit rating. But again, capital is available, although what this does is impacts yields on the MLPs. You just can't disconnect the high-yield market from yields on MLPs.

So, I guess point number one is we are sitting here with, I think, the average MLP or the index is about 8.4% yield, and a ten-year Treasury around 2.23%, I think it was this morning. So we're about 620 basis points above the 10-year Treasury, and in our mind that doesn't make any sense. I think the 10-year average was about 393, which included the 2009 spike, and if you take out the 2009 spike you'll be closer to 300 over is the average and here we are at 620. So I think a couple of things. In the 2009 spike, what was the case? There was no access to capital; there is today. The equity is more expensive but the debt markets are still there.

There was significantly decreasing demand -- or an increasing demand situation; and there was significant margin selling, and we're not seeing margin selling causing the market to be further depressed. But I think what is being factored in is zero distribution growth; and that just isn't the case. As you know, we've consistently said 6% to 8%, and we've been raising our distribution so that we'll be in that range and we'll continue to do so. I think as Atanas said, we're doing that in calendar 2015 and calendar 2016. So the midstream MLPs are significantly undervalued.

Then, I think the point number two is, there's always capital available for good projects. We still see many very attractive internal growth projects -- which we're delighted because those have the lowest multiples -- and several in crude and a number in our other segments. Again, having the five segments is very helpful, and always having a pipeline of really attractive projects at a 6.5 multiple or less.

Another question we should be asking instead of, is the sky falling, is -- what's happening to your competitors? And in several of our segments our competitors have disappeared. And when we come out of this, we're going to have a much stronger segment in areas like water disposal than we had going into it, so let's not forget about next year -- not just next quarter.

So with that, let's open it up to questions.

(Operator Instructions)

Your first question comes from the line of Brian Zarahn with Barclays.

Good afternoon. Mike, following off some of your comments about the capital markets, how does that impact your plans? You have a robust CapEx program for this year, Grand Mesa being a big chunk of that, how does if we're in this type of capital market situation for the remainder of the year how does it impact your financing?

You know, we have access to the high yield market. We're evaluating that weekly. Was daily, now it's weekly, meaning we don't really see it's going to be a huge recovery. But that's still at a rate that is acceptable and of course well below our yield on our common units.

Do we expect our common unit price to sit here? No. Is it difficult to issue at this level? Yes. But if you've got a 20% or 25% project you can still kind of hold your nose and it's just some equity. So I don't think it impacts this year.

Next year, if we stay at this level, we're just going to have to do projects that are four to five multiples and issue equity at 10%. I think it doesn't mean you go out of business on the acquisition internal growth side. It just means you have to do deals with higher rates of return and we were fortunate enough to have a lot of those.

Is there potential for some projects to be deferred until the markets stabilize?

No. We went back and looked before this call at all our projects, and we're moving ahead, full speed ahead. I think the interesting thing is going to be what new things come up at really attractive prices of some of our -- some other MLP folks get to the point where they have to sell some assets. So no, we are not slowing anything down, we're again what does that mean? We're still full speed ahead on Grand Mesa.

We're washing out -- drilling and washing out more caverns on Sawtooth underground storage because the demand is there. They get completely contracted up before we can actually even get them in service. So we have a number of smaller things that are going on that we don't issue press releases on that we are not delaying. We think there's an opportunity here to get ahead of some of our competitors especially in Water, some in Crude and Refined Products actually. But we aren't slowing down by any means.

Turning to, you mentioned Grand Mesa. Any impact on your expectations for that project, and any changes in how you assess counterparty risk in this environment?

No changes. We are over 80% complete on right-of-way, permitting environmentals on schedule. We disclosed -- obviously we have got another third party interconnect that will bring more volume to the pipeline and we're building additional Cushing storage tanks, which we've accelerated so we can get them in service by February and take advantage of the contango market while we're waiting for the pipeline to come on stream and go into service in September.

So looking at our counterparties, we meet with them, the public and private ones. We've looked at their production curves. Frankly, most of them are telling us they're adding rigs, so we don't have any concern at this point that someone is not going to show up or not be able to meet their commitments.

Last one for me. Turning to the quarter you had good results in your Refined Products Renewables business. Can you elaborate a little bit more on the improvement in that business?

Sure, the biggest is just the fact that we had a full quarter of Morgan Stanley/TransMontaigne which we didn't have last year. Last year we have what we called the legacy Gavilon business, so most of the increase is due to just having a business this year we didn't have last year. But that said, demand is up 3% or 4% for gasoline.

We're seeing -- we're probably a little different on the distillate side because we're on the Colonial Pipeline and line two, which is distillate, is now on allocation much of the time like line one. So we wouldn't expect to see a decline in our distillate sales. The margins are stronger on gasoline than they are on distillates, that being said.

But combined, margins are up. And when we say -- a penny is a lot of increase, so we're tickled pink to get an extra penny per gallon. So, thank goodness we got the business, because we are seeing some weakness on our crude oil marketing as everyone is when you have lesser volume and you have the same number of competitors then folks start dropping their margin to try to keep their business, or win new. But on the flip side we're going to have contango.

Contango is increasing dramatically. Today it looked like we had three or four months over $0.70 and some outer months at $0.60. And that's an area we're real excited about because we think -- and I think some of our competitors mentioned this, as well. You get out of the driving season after Labor Day and you get some turnarounds. It's our understanding some refiners, if not many, have delayed turnarounds. Take advantage of margins this summer so if we have a lot of turnarounds in October you could see the Cushing inventories spike up again, and that should give rise to some really nice contango margins, which we'll lock in.

Just last one, on the segment, obviously the year-over-year was on TransMontaigne, but asking more quarter-over-quarter your gross margin was improved quite a bit.

Yes.

Go ahead.

The improvement was totally a result of the business we bought from Morgan Stanley/ TransMontaigne. We were running a penny or a little more on the Gavilon legacy business. And with the TransMontaigne -- and really it's Morgan Stanley business. And we get our share of TransMontaigne. But all this volume you're seeing is volume that we purchased from Morgan Stanley that we put through those southeast terminals.

A lot of it is contracted out 12 months or over.

Yes, it's all contracted.

Versus the legacy business, which is primarily a rack business where you could charge usually just a penny here, we're having this allocated line space that we all want Colonial, gives us -- allows us to harvest the additional profitability. And that's what also makes our ownership in these terminals along the Colonial Pipeline very valuable because it allows us to optimize our margins based on whether profitability is higher.

Thanks.

(Operator Instructions)

Your next question is from the line of Miles Barnett with HITE Hedge.

Hi. This is Matt Niblack with HITE. Congratulations on really strong performance through a tough strip for many of your competitors, and particularly taking share on the propane side, which it seems is clear you've done.

Question on the Morgan Stanley assets. How close are you getting to full potential versus the plan when you bought the assets?

We're over full potential. I think we had budgeted about half of what we're actually experiencing today.

Last year we said that we were going to do -- for the first nine,12 months we said that we're going to book EBITDA of $30 million, and just last year for nine months we did over $50 million. And this quarter you'll see (inaudible) we are well ahead of the run rate from last year, so extremely pleased.

We aren't expecting to increase margins at all. We're happy as clams with these. What we did do is we went out -- there was for a market for line space that lasted about one week as a result of a proposed change to the tariffs on Colonial, and we purchased an additional 25,000 barrels per cycle, which would be 5,000 barrels per day on a five-day cycle. So we've tried to increase our volumes where we could and very happy with the margins.

How long is the contract on Colonial?

With the customers those contracts are one to two years.

But your space on Colonial?

It's much like the propane pipeline, common care pipelines, where it's based on what you nominate. So as long as you continue nominating shipping the same volume, then you will keep your line space in perpetuity.

Got it. And so given that you've actually changed the business by adding Colonial, are the higher margins something that should be sustainable?

I'll say yes as a result of line one being on allocation all the time, which is gasoline, so you can't get anymore gasoline. So if demand increases you say, well what happens? So margins would go up a little bit but you're going to -- eventually, if margins go up so much, then it will become economic to rail product in, or truck it in. Some other mode of transportation.

And then I missed this earlier in the call, but there was a large line item for stock-based compensation, and it was surprising that this was so large, given the direction that the stock has went along with the rest of the market, obviously. Could you give a little color on what that is, and how it got to be so big, and is it something we'll see repeated?

Yes, I think we filed it on an 8-K but it's a performance plan, and it's based on a trailing three-year performance. So you look back at three years ago what was the unit price. We're using the Alerian Index as the measurement tool. And then you look at the price at the end of June. And so at the end of June we were around a little over $30, so that caused us to be in the top quartile in terms of performance. Now with the fall in price, it's anybody's guess what happens next year. And wherever we put $24 or $25, and I think we've fallen further than most, and I would say it may not be repeatable.

Got it, and so the way that we can think about the magnitude of that number is that it's going to be correlated to the June of the year it's paid versus June 3 years ago and the out-performance or under-performance relative to the Alerian Index over that time frame?

I'm not sure--

So for 2016, it will be June 2016, June 30, 2016 share price, less June 30, 2014.

That's correct.

Okay.

13 or 14. 13.

13. But it's not the absolute share price return, it's the relative performance over that period compared to the Alerian Index?

Correct.

So if everyone goes down--

You're right.

So if everybody is up and you're up less then there's no or very little of it, and if you're up everybody is down and you're up more and everyone is down and you're not down as much, then there could still be a good number there?

Yes if we're in the bottom half of the Alerian, there is zero payout.

Understood, okay thank you.

Your next question comes from the line of Selman Akyol with Stifel.

Thank you, good afternoon.

You talked about some of your competitors disappearing and I'm wondering are you anticipating or watching any assets that they have that appeal to you? Or is there any way that overly will work to your benefit in terms of picking up market share or picking up assets, expanding your footprint?

Yes, in Water in particular, there are very few competitors, if any, that we would be interested in buying because you just don't know what they've done to their wells. We would much rather drill our own and take care of them: they'll last 15 years.

We can still pick up market share by providing other services, which is what we're doing. We process solids now, building water pipelines, which basically gets you an acreage dedication without having the contract. Although you do have a contract on price and they have to bring you all of the volumes that go to that water collection site. So I think if we get larger market share, we get other revenue streams without having to spend money other than for our water pipelines and our Solids plans.

All right, thank you.

That concludes our Q&A. There are no further questions, so I'll now turn the call over back to Mr. Mike Krimbill for closing remarks.

Well, thank you very much. I guess as long as we beat our numbers we'd have short calls. So thank you and we'll talk to you again in a few months.

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