Executive Summary / Key Takeaways

• NGL Energy Partners is undergoing a significant strategic transformation, pivoting from a diversified, volatile midstream entity towards a focused partnership centered on its stable and growing Water Solutions segment.
• Recent major divestitures of non-core Liquids Logistics and other assets, totaling over $270 million, are simplifying the business mix, reducing volatility and working capital needs, and providing capital for debt reduction.
• The Water Solutions segment, particularly its integrated Northern Delaware Basin system and the new LEX II pipeline, is the primary growth engine, delivering record performance in fiscal 2024 and expected to contribute approximately 85% of future Adjusted EBITDA, underpinned by long-term, contracted volumes with investment-grade counterparties.
• Significant progress has been made in strengthening the balance sheet through a major debt refinancing in early 2024, the full payment of preferred unit distribution arrearages by April 2024, and subsequent actions including warrant repurchases and a common unit buyback authorization, with a stated priority on further reducing leverage and addressing Class D preferred units.
• While facing competition from larger, more financially robust peers like Targa Resources (TRGP) and Kinder Morgan (KMI), NGL-PC leverages its cost leadership and operational efficiency in water logistics, driven by proprietary technology, as a key competitive differentiator in its core market.

Strategic Transformation: Forging a Focused Future

NGL Energy Partners LP, established in 2010, has historically operated as a diversified midstream energy partnership. However, the partnership has embarked on a significant strategic repositioning over the past several years, aiming to sharpen its focus, enhance cash flow stability, and improve its financial health. This transformation is fundamentally reshaping NGL-PC into a more streamlined entity, increasingly centered on its robust Water Solutions business.

The core of this strategic pivot involves divesting non-core, volatile, and capital-intensive assets, particularly within the Liquids Logistics segment, while simultaneously investing in and expanding the higher-margin, fee-based Water Solutions business. This deliberate simplification is designed to reduce exposure to commodity price fluctuations and seasonal demand swings that historically impacted results, thereby improving the predictability and repeatability of cash flows.

Complementing this operational shift is a concerted effort to strengthen the balance sheet. This includes refinancing existing debt, reducing overall leverage, and addressing the preferred equity layer, all aimed at providing greater financial flexibility and enhancing value for common unitholders.

Business Segments and Operational Strength

NGL-PC operates through three primary segments: Water Solutions, Crude Oil Logistics, and Liquids Logistics. The strategic transformation is leading to a significant shift in the relative importance and contribution of these segments.

The Water Solutions segment is emerging as the undisputed core and future growth engine of the partnership. This segment provides essential services for the energy production process, transporting, treating, recycling, and disposing of produced and flowback water. Its operations are strategically located in prolific basins like the Delaware, DJ, and Eagle Ford, underpinned by long-term, fixed-fee contracts, acreage dedications, and minimum volume commitments, largely with investment-grade producers. This contractual structure provides a high degree of revenue stability, minimizing direct exposure to commodity price volatility.

A key operational strength is the integrated network in the Northern Delaware Basin, featuring over 800 miles of large-diameter pipelines, recycling facilities, and disposal wells. The recent completion of the LEX II Expansion in October 2024 significantly bolstered capacity, adding an initial 200,000 barrels per day (expandable to 500,000 bbl/day) under a new MVC and acreage dedication. This expansion, along with increased commitments like the 100,000 bbl/day increase at Poker Lake (totaling 450,000 bbl/day), de-risks future growth expectations. The segment demonstrated strong performance in fiscal 2024, achieving record Adjusted EBITDA of $508.3 million and record physical volumes of 884.6 million barrels, with total paid volumes (including deficiencies) up 7% year-over-year. Management continues to drive operational efficiency, maintaining industry-leading operating expenses per barrel, targeting the $0.23 to $0.25 range.

The Crude Oil Logistics segment, centered around the Grand Mesa Pipeline from the DJ Basin to Cushing, Oklahoma, and strategically located terminals, has faced headwinds from lower production on dedicated acreage and unfavorable differentials, contributing to weaker performance in fiscal 2024. However, management believes the segment is bouncing off a low point, with new customer contracts, including a long-term dedication with Prairie Operating and another producer, expected to significantly increase Grand Mesa volumes, potentially reaching north of 100,000 barrels per day over the next six to twelve months. This anticipated volume increase, requiring minimal maintenance capital, is expected to provide a direct boost to free cash flow.

The Liquids Logistics segment, historically involved in NGL supply, marketing, and terminals, has been a source of volatility and underperformance, impacted by factors like warm winters reducing propane demand and challenging market dynamics in biodiesel and refined products. As part of the strategic pivot, NGL-PC has undertaken significant divestitures in this segment, including the sale of 17 NGL terminals and most of the wholesale propane business, and the wind-down of the biodiesel business. These actions, completed in early fiscal 2025, are aimed at shedding volatility and reducing working capital needs. The remaining assets in this segment include the Ambassador propane pipeline, the Chesapeake butane export facility, and the Port Hudson and West Point terminals.

Technological Differentiation and Competitive Edge

NGL-PC's competitive positioning, particularly in its core Water Solutions segment, is bolstered by technological differentiation and operational efficiency. The company utilizes proprietary well maintenance programs and possesses technological capabilities that can be quickly implemented across its facilities.

While specific, detailed metrics on all technologies are not publicly disclosed, the competitive landscape analysis highlights NGL-PC's cost leadership in water logistics, partly attributed to its water recycling technology. This technology is noted for offering quantifiable benefits, including an estimated 20% higher efficiency in water treatment and the potential to reduce disposal costs by 30%. These efficiencies contribute directly to maintaining the segment's industry-leading operating expenses per barrel.

Furthermore, NGL-PC is actively exploring new technological avenues within water solutions, including reuse, mineral extraction, and desalinization. While these initiatives are in development, the strategic intent is clear: to derive additional value from the processed water, mirroring efforts by competitors and potentially opening new revenue streams or further enhancing cost advantages in the future.

For investors, NGL-PC's technological approach in Water Solutions translates into a stronger competitive moat. The ability to operate more efficiently and at a lower cost per barrel than some competitors enhances margins and cash flow generation in its most critical segment. The focus on developing future water-related technologies also signals a commitment to long-term relevance and potential for continued differentiation in an evolving market.

Financial Performance and Strengthening the Balance Sheet

NGL-PC's financial performance in recent periods reflects both the challenges of its historical business mix and the positive impact of its strategic transformation. Fiscal year 2024 saw Adjusted EBITDA of $610 million, impacted by weakness in the Liquids and Crude segments, but fiscal year 2025 results are showing improvement, with Q4 fiscal 2025 Adjusted EBITDA from continuing operations increasing 20% year-over-year, primarily driven by Water Solutions. Full-year Adjusted EBITDA for fiscal 2025 reached $622.9 million, exceeding previous guidance.

A central focus has been addressing the capital structure. In February 2024, NGL-PC completed a major $2.9 billion debt refinancing, securing new senior secured notes and a Term Loan B, which allowed the redemption of previous notes. This was a critical step in managing near-term maturities. Following this, the partnership prioritized clearing the accumulated distribution arrearages on its Class B, C, and D preferred units, successfully becoming current on all classes by April 25, 2024, after paying approximately $475 million.

Subsequent actions underscore the commitment to balance sheet improvement. Proceeds from recent asset sales, totaling over $270 million, have been directed towards debt reduction, enabling the payoff of the ABL facility balance post-fiscal year-end. The partnership also repurchased 92% of its outstanding warrants in November 2024, eliminating significant potential future dilution for common unitholders. A $50 million common unit repurchase program has been authorized, providing flexibility, although the stated priority for capital allocation remains further reducing leverage and addressing the Class D preferred units, considered the highest cost of capital. The goal is to reduce leverage to below four times.

Competitive Landscape and Positioning

NGL-PC operates within the competitive midstream energy sector, facing established players across its segments. In NGL logistics, it competes with major companies like Targa Resources and Phillips 66 (PSX). In crude oil transportation and storage, it competes with pipeline giants like Kinder Morgan and other midstream operators. The Water Solutions segment faces competition from other independent water disposal companies and water operations owned by producers themselves.

Compared to larger, more diversified peers like TRGP and KMI, NGL-PC generally operates at a smaller scale and has historically exhibited greater financial volatility and higher debt levels. While precise, directly comparable market share figures for all niche competitors are not publicly detailed, NGL-PC positions itself by leveraging its specific asset footprint and operational capabilities.

NGL-PC's key competitive advantages lie in its strategically located assets and, particularly in Water Solutions, its integrated network and cost efficiency driven by proprietary technology. The Northern Delaware Basin system's scale and connectivity provide a significant barrier to entry for competitors. The ability to maintain low operating costs per barrel in Water Solutions, supported by efficient recycling and well maintenance technology, is a quantifiable edge that enhances profitability in its core business. In Crude Logistics, the Grand Mesa Pipeline and integrated terminals offer specific access points and services that differentiate it from pure pipeline operators.

However, NGL-PC faces vulnerabilities, including its historical leverage profile and the need to continue executing on its deleveraging strategy. While its technology provides a cost advantage in water, larger competitors like TRGP and KMI possess greater financial resources and scale, which can enable faster infrastructure development and potentially more aggressive pricing strategies in competitive areas. PSX, while facing its own profitability challenges, benefits from vertical integration in refined products.

NGL-PC's strategic pivot towards Water Solutions is, in part, a response to these competitive dynamics, focusing capital and effort on a segment where it has established a strong, differentiated position and can leverage its specific operational and technological strengths.

Risks and Challenges

Investing in NGL-PC involves considering several key risks and challenges. The partnership remains exposed to commodity price volatility, which can impact drilling activity levels and thus affect volumes in both the Water Solutions and Crude Oil Logistics segments, as well as the profitability of skim oil sales. While the Water segment benefits from contracted volumes, a sustained downturn in commodity prices could still pressure producer activity and potentially impact contract renewals or renegotiations in the future.

Operational risks inherent in transporting and handling energy products, including potential spills or facility disruptions, could lead to environmental liabilities, regulatory penalties, and reputational damage. The Water Solutions business, specifically underground injection wells, faces increasing scrutiny related to induced seismic activity, which could lead to regulatory restrictions on injection volumes or well operations, although management believes its diverse locations and legacy permits mitigate this risk.

Competition across all segments is intense, potentially limiting pricing power and market share gains. The success of the Crude Logistics segment's volume recovery depends on producers' drilling plans and market dynamics in the DJ Basin. The remaining Liquids Logistics businesses, while reduced in scope, still carry some exposure to market fluctuations and weather sensitivity.

Furthermore, the partnership's capital structure, while significantly improved, still includes substantial long-term debt and preferred equity. While management is prioritizing deleveraging and addressing the Class D preferreds, the ability to execute on these goals depends on generating sufficient cash flow from operations and potentially further asset monetizations. Changes in interest rates could impact financing costs on variable-rate debt and preferred unit distributions.

Outlook and Investment Thesis

NGL-PC's outlook is fundamentally tied to the successful execution of its strategic transformation. Management's guidance for fiscal year 2026 Adjusted EBITDA of $615 million to $625 million, with total capital expenditures of $105 million (60% allocated to Water growth), signals a period of focused execution. While the midpoint approximates fiscal 2025 results, it accounts for headwinds like lower expected skim oil revenues and the absence of EBITDA from divested assets, implying underlying operational strength in the core business.

The investment thesis for NGL-PC is increasingly centered on the growth and stability of its Water Solutions segment. This segment's predictable, fee-based cash flows, driven by long-term contracts and supported by operational efficiency and technological capabilities, are expected to form the vast majority of the partnership's future earnings. The successful integration and ramp-up of the LEX II pipeline and other contracted volumes are key near-term catalysts.

Upside potential exists in the Crude Oil Logistics segment if Grand Mesa volumes increase as anticipated, leveraging existing infrastructure with minimal additional capital. The strategic divestitures in Liquids Logistics, while reducing overall scale, are expected to enhance the quality and predictability of consolidated cash flows by shedding volatile businesses.

The ongoing focus on strengthening the balance sheet through debt reduction and addressing the preferred equity layer is critical to unlocking value. Successfully lowering leverage below four times and beginning redemptions of the Class D preferreds would significantly improve the financial risk profile and potentially pave the way for future capital structure optimization, although a common unit distribution reinstatement is not anticipated in the near term.

In conclusion, NGL Energy Partners is in the midst of a profound strategic shift, moving decisively towards a Water Solutions-centric model. The recent operational achievements, successful debt refinancing, and proactive steps to address the preferred arrearages and warrants demonstrate tangible progress. While competitive pressures and market risks persist, the partnership's differentiated position in water logistics, coupled with its commitment to deleveraging and focused growth investments, forms the basis of the investment narrative. The key factors to watch are the continued performance and expansion of the Water Solutions segment, the realization of anticipated volume increases on Grand Mesa, and the pace of further balance sheet improvements.

Conclusion

NGL Energy Partners is undergoing a significant and deliberate transformation, shedding its historical complexity and volatility to focus on its core strengths, predominantly within the Water Solutions segment. This strategic pivot, marked by substantial asset divestitures and a concerted effort to fortify the balance sheet, is designed to create a more stable and predictable cash flow profile. The Water Solutions business, with its robust infrastructure, long-term contracts, and operational efficiencies driven by proprietary technology, is positioned as the primary engine for future growth and profitability, expected to contribute the vast majority of the partnership's earnings.

The successful execution of the debt refinancing, the clearing of preferred distribution arrearages, and the proactive management of the equity structure signal a strong commitment to improving financial health and enhancing unitholder value. While challenges remain in a competitive energy landscape and risks associated with commodity prices and regulations persist, the focused strategy on water infrastructure development and the potential upside in crude logistics volumes, combined with ongoing deleveraging efforts, define the investment thesis for NGL-PC. The path forward involves disciplined capital allocation to high-return water projects and continued balance sheet optimization, aiming to unlock the inherent value in its increasingly specialized asset base.