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NGL Energy Partners LP (NYSE: NGL): Navigating Challenges, Unlocking Potential
Published on September 24, 2024 | Ticker: NGL

NGL Energy Partners LP (NYSE: NGL), a diversified midstream energy company, has faced a mix of headwinds and opportunities in its recent fiscal year. With a focus on transporting, storing, and marketing crude oil, natural gas liquids, and providing water logistics services, NGL has demonstrated resilience amidst industry volatility.

For the fiscal year ended March 31, 2024, NGL reported annual revenue of $6,956,571,000 and a net loss of $143,755,000. Despite the challenging environment, the company generated annual operating cash flow of $376,164,000 and annual free cash flow of $223,869,000, showcasing its ability to navigate the complexities of the energy landscape.

Segmental Performance: A Mixed Bag

NGL's business segments have exhibited varying degrees of performance in the recent fiscal year.

Water Solutions: A Bright Spot

The Water Solutions segment has been a consistent performer for NGL, reporting record full-year adjusted EBITDA of $508.3 million, a 10% increase over the prior year. This segment's success was driven by a 4.1% increase in physical annual water disposal volumes to 884.6 million barrels. NGL's focus on long-term, fixed-fee contracts and acreage dedications has provided stability and predictability to this business unit.

Crude Oil Logistics: Facing Headwinds

The Crude Oil Logistics segment, however, faced challenges during the fiscal year, with adjusted EBITDA declining to $86.9 million. This was primarily due to lower volumes shipped and sold on the Grand Mesa Pipeline, as well as wider-than-expected differentials, particularly in the first half of the fiscal year.

Liquids Logistics: Underperformance and Strategic Alternatives

The Liquids Logistics segment continued to underperform, with adjusted EBITDA reaching only $70 million for the full year. This segment was impacted by warmer-than-normal winters in key operating areas, reducing demand for propane and compressing margins. Additionally, the closure and sale of several terminals earlier in the fiscal year further impacted volumes. In response, NGL is exploring strategic alternatives for portions of this segment, including potential divestitures of underperforming assets.

Navigating the Capital Structure: Progress and Flexibility

During the fiscal year, NGL made significant strides in addressing its capital structure. The company completed a comprehensive refinancing, which included the issuance of $2.2 billion in senior secured notes and a $700 million term loan facility. This refinancing allowed NGL to redeem its existing 2025 and 2026 unsecured notes, as well as the 2026 senior secured notes, providing greater financial flexibility.

Furthermore, NGL made substantial progress in addressing its preferred unit arrearages. By the end of April 2024, the company had paid 50% of the outstanding arrearages to the holders of the Class B, C, and D preferred units. This achievement opens the door for NGL to explore further capital structure optimization, including the potential repurchase of common units, as evidenced by the recently announced $50 million common unit repurchase program.

Outlook

Looking ahead, NGL has provided guidance for fiscal year 2025, projecting consolidated adjusted EBITDA of $665 million, representing a 9% year-over-year increase. This growth is primarily driven by the Water Solutions segment, which is expected to deliver 8% to 10% EBITDA growth, further bolstered by the recently announced North South Ranch transaction and the upcoming LEX II project.

In the Crude Oil Logistics segment, NGL anticipates a turnaround, with the potential for increased volumes and improved margins on the Grand Mesa Pipeline. The company has been in discussions with several producers interested in shipping on the pipeline in the next 6 to 12 months, which could drive a meaningful increase in volumes.

As for the Liquids Logistics segment, NGL is exploring strategic alternatives, including potential divestitures of underperforming assets, to optimize its portfolio and unlock value.

Capital expenditures for fiscal year 2025 are expected to total $210 million, with approximately 60% allocated to the LEX II project, a significant expansion of the company's water infrastructure in the Permian Basin.

Risks and Challenges

While NGL has made progress in addressing its capital structure and positioning its business segments for growth, the company faces several risks and challenges:

1. Commodity Price Volatility: The midstream energy industry is inherently exposed to fluctuations in commodity prices, which can impact NGL's margins and profitability.

2. Regulatory Uncertainty: Changes in environmental regulations, particularly related to water disposal and treatment, could affect NGL's operations and compliance costs.

3. Competition and Market Dynamics: NGL operates in a competitive landscape, with the potential for new entrants or shifts in market dynamics that could pressure the company's market share and pricing power.

4. Execution Risks: The successful completion and integration of growth projects, such as the LEX II expansion, will be crucial for NGL to realize its anticipated benefits.

Conclusion

NGL Energy Partners LP has navigated a challenging fiscal year, with its Water Solutions segment delivering strong performance, while the Crude Oil Logistics and Liquids Logistics segments faced headwinds. The company's comprehensive refinancing and progress in addressing its preferred unit arrearages have provided greater financial flexibility, positioning NGL to explore further capital structure optimization and strategic alternatives.

Looking ahead, NGL's guidance for fiscal year 2025 suggests cautious optimism, with the Water Solutions segment expected to drive the majority of the projected 9% year-over-year adjusted EBITDA growth. The company's ability to capitalize on potential volume growth in the Crude Oil Logistics segment and effectively manage its Liquids Logistics portfolio will be critical in unlocking the full potential of its diversified midstream platform.

As NGL continues to navigate the evolving energy landscape, investors will closely monitor the company's execution on its strategic initiatives, its ability to manage risks, and its progress in enhancing shareholder value.

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