NGL Third Quarter Update:
NGL Energy Partners (NGL) reported earnings last night (Feb 8th). They had already given a look at Q3 numbers before the recent bond issues and loan refinancings so numbers weren’t a huge surprise on the whole.
Adjusted EBITDA came in at $151.7 million versus the guide of $150-160 million. Water volumes were slightly lower than Q2, as the company had warned in the last earnings call. Customers are keeping more water at the wells for completion activity. These volumes will eventually go into the pipes, it just makes for “lumpy” results in the water segment, which still threw off $121.3 million of EBITDA. The company is still guiding for over $500 million of water solutions EBITDA for the year and $645 million for the full company for the year. CEO Krimbill said on the call that 2025 EBITDA will be higher.
Oil volumes on the Grand Mesa pipeline were weak. The company “remains constructive” on the DJ basin in Colorado based on recent open season results at Grand Mesa. The liquids business was fairly anemic because of a warm December. In my mind, these are both businesses that should be sold.
The good news is that the company continues asset dispositions. It upped its full year asset sale guide from $100 million to $150 million and expects the sales to close by March 31.
Preferred Unit Arrearage:
Asset sale proceeds plus the release of working capital (some of it permanent thanks to some new contracts) have given the company aggressive confidence for paying down the preferred unit arrearage (NYSE:NGL.PR.B).
It announced on Monday night that it was paying 50% of the arrearages for holders as of 2/17. Commentary from last night’s call indicated that the remaining 50% of arrearage would be paid in “very near future” and then the company would go back to current pay on the preferred units. Considering that another $8.89 is owed per unit (accrued distributions plus interest on the accrued distributions), another ~$.80 will be due on March 31 and interest on the unpaid balance will accrue until all is paid off, I still think these preferreds are interesting value.
If you just take the $8.89 owed, half of which coming to you in three weeks and the other half potentially by quarter end or shortly thereafter, you are paying just $21.71 net for these preferreds ($30.60-$8.89). At current interest rates, the preferred annual distribution is $3.20. $3.20/$21.70 is 14.7% yield. I do not think that this yield remains this high if/when the company goes current on the payments, which looks imminent.
Risk:
This is an MLP, and as I’ve explained, MLP’s trade sensitive oil, interest rates, and general retail investor sentiment. If rates spike hard, oil spikes down, or some other exogenous event shocks the market, these preferreds can get beaten up. For the yields you’re picking up for what I consider very safe paper, I think these risks are worth bearing.
Conclusion:
I have loved these preferreds for a while. They have performed nicely but still have plenty of upside. I think the stock is interesting as well here. It’s less than a turn of EBITDA on a capital stack that is getting cleaned up quickly. Once the preferred arrearage is cleaned up, the company is going to start addressing retiring the Series D preferred. That will show a path to capital return commencing for the common. The common could be lining up for a long-term win. Short term, I think the preferred is relatively easy money.
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