Business Overview and History
NGL Energy Partners LP (NGL) is a diversified energy partnership that has undergone significant transformations in recent years, positioning itself for long-term growth and stability. With a focus on water solutions, crude oil logistics, and liquids logistics, the company has navigated through industry headwinds, emerging as a more streamlined and efficient operation poised to capitalize on emerging opportunities.
NGL Energy Partners LP is a Delaware master limited partnership that was formed in 2010. The company operates three main business segments: Water Solutions, Crude Oil Logistics, and Liquids Logistics.
In the Water Solutions segment, NGL transports, treats, recycles and disposes of produced and flowback water generated from crude oil and natural gas production. The company also sells produced water for reuse and recycle and brackish non-potable water to its producer customers. This segment's activities are supported by long-term, fixed fee contracts and acreage dedications. Additionally, the Water Solutions segment aggregates and sells recovered crude oil, known as skim oil, and performs other ancillary services such as truck and frac tank washouts.
The Crude Oil Logistics segment purchases crude oil from producers and marketers and transports it to refineries or for resale at pipeline injection stations, storage terminals, barge loading facilities, rail facilities, refineries, and other trade hubs. This segment also provides storage, terminaling, and transportation services through its owned assets. The operations in this segment are supported by certain long-term, fixed-rate contracts which include minimum volume commitments on the company's storage tanks and owned and leased pipelines.
The Liquids Logistics segment conducts supply operations for natural gas liquids, refined petroleum products and biodiesel to a broad range of commercial, retail and industrial customers across the United States and Canada. These operations are conducted through NGL's 23 owned terminals, third-party storage and terminal facilities, nine common carrier pipelines and a fleet of leased railcars. The segment also provides services for marine exports of butane through its facility located in Chesapeake, Virginia, and owns a propane pipeline in Michigan. The company attempts to reduce its exposure to price fluctuations in this segment by using back-to-back physical contracts and pre-sale agreements that allow it to lock in a margin on a percentage of its winter volumes. The company also enters into financially settled derivative contracts as economic hedges of its physical inventory, physical sales, and physical purchase contracts.
Over the years, NGL has faced some challenges in its Liquids Logistics segment, including volatility in commodity prices and warm weather impacting seasonal demand. The company has also experienced declining volumes on its Grand Mesa crude oil pipeline. To address these issues, NGL has worked to simplify its asset base and reduce working capital requirements by winding down its biodiesel business and selling non-core assets like natural gas liquids terminals and railcars. These strategic actions have helped smooth out the seasonality and volatility in NGL's adjusted EBITDA and free cash flow.
Despite these challenges, NGL has also achieved some key operational milestones, such as the successful completion and start-up of its Lea County Express Pipeline expansion project (LEX II) in 2024. The company has also been able to add new customers and increase volumes on the Grand Mesa pipeline, which is expected to enhance the profitability of the Crude Oil Logistics segment going forward.
Financial Performance and Ratios
NGL Energy Partners' financial performance has shown improvement in recent quarters. For the third quarter of fiscal 2025 (ended December 31, 2024), the company reported total revenues of $1.55 billion. The partnership's net income for the quarter was $13.51 million, while operating cash flow stood at $153.79 million and free cash flow at $95.37 million.
On a quarterly basis, NGL Energy Partners reported a net income of $14.6 million in the third quarter of fiscal 2025, compared to $45.8 million in the same period of the previous year. The company's adjusted EBITDA for the third quarter of fiscal 2025 was $147.7 million, down from $151.7 million in the third quarter of fiscal 2024. However, excluding the impact of the winding down of the biodiesel business, NGL's adjusted EBITDA for the third quarter was approximately $160 million, around 5% higher than the prior year third quarter.
NGL's financial position shows a mix of strengths and challenges. As of December 31, 2024, the company had $226 million outstanding under its $600 million asset-based revolving credit facility (ABL Facility), and $87.6 million in letters of credit outstanding. This indicates that the company has access to additional liquidity if needed, which is crucial for managing working capital and funding growth initiatives.
Segmental Performance
NGL Energy Partners operates through three main business segments: Water Solutions, Crude Oil Logistics, and Liquids Logistics.
The Water Solutions segment, which accounts for a significant portion of the company's overall operations, reported an adjusted EBITDA of $132.7 million in the third quarter of fiscal 2025, up from $121.3 million in the same period of the previous year. This performance was driven by an increase in produced water volumes processed, which reached 2.62 million barrels per day, up from 2.38 million barrels per day in the prior-year quarter. For the nine-month period ended December 31, 2024, the Water Solutions segment generated revenues of $550.54 million.
The Crude Oil Logistics segment generated an adjusted EBITDA of $17.4 million in the third quarter of fiscal 2025, compared to $17.0 million in the same period of the previous year. The segment's performance was impacted by lower volumes on the Grand Mesa Pipeline, which averaged 61,000 barrels per day, down from 70,000 barrels per day in the prior-year quarter. For the nine-month period ended December 31, 2024, the Crude Oil Logistics segment reported revenues of $719.51 million.
The Liquids Logistics segment, which has historically been a challenging area for the company, reported an adjusted EBITDA of $8.2 million in the third quarter of fiscal 2025, down from $26.3 million in the same period of the previous year. This decline was largely attributable to the winding down of the company's biodiesel business, which had a negative $12.1 million impact on the segment's adjusted EBITDA. For the nine-month period ended December 31, 2024, the Liquids Logistics segment had revenues of $3.02 billion.
Strategic Initiatives and Divestitures
NGL Energy Partners has been actively executing a strategy to streamline its operations and reduce its debt burden. In recent quarters, the company has made several strategic moves to achieve these objectives.
In the third quarter of fiscal 2025, NGL announced the sale of 17 of its natural gas liquids terminals for approximately $75 million, plus working capital. Additionally, the company sold its natural gas liquids terminal in Green Bay, Wisconsin for around $3.8 million, also including working capital. These divestitures are part of the partnership's ongoing efforts to focus on its core business segments and strengthen its financial position.
Moreover, NGL successfully wound down its biodiesel marketing business, which had been a drag on the Liquids Logistics segment's performance. This strategic decision permanently reduces the company's working capital requirements by an estimated $30 million to $40 million annually.
The partnership also entered into new long-term acreage dedication agreements with producers in the DJ Basin, which are expected to significantly enhance the volumes and profitability of the Grand Mesa Pipeline within the Crude Oil Logistics segment.
Outlook and Guidance
For the full fiscal year 2025, NGL Energy Partners has provided updated guidance for adjusted EBITDA of $620 million. This updated guidance reflects the ongoing challenges in the Liquids Logistics segment, particularly the impact of the biodiesel business wind-down.
The company's management team remains focused on further streamlining its operations, reducing debt, and capitalizing on growth opportunities within its core business segments. The successful execution of strategic divestitures and the expansion of the Grand Mesa Pipeline's customer base are expected to contribute to the partnership's long-term financial stability and profitability.
Risks and Challenges
NGL Energy Partners operates in a dynamic and competitive energy industry, which presents various risks and challenges that the company must navigate. Volatile commodity prices, changing regulatory environments, and industry consolidation can all have a significant impact on the partnership's financial performance.
The company's reliance on a limited number of large customers in its Crude Oil Logistics and Water Solutions segments also presents a risk, as the loss of a key customer could adversely affect NGL's operations and financial results.
Additionally, the ongoing transition away from fossil fuels and the increasing focus on sustainability and renewable energy sources pose long-term challenges for the partnership's business model. NGL's ability to adapt and diversify its service offerings will be crucial in addressing these industry-wide shifts.
Conclusion
NGL Energy Partners has undergone a transformative journey in recent years, navigating industry challenges and positioning itself for a more sustainable future. By streamlining its operations, reducing debt, and capitalizing on growth opportunities in its core business segments, the partnership is working to enhance its financial performance and create value for its unitholders.
While the company faces various risks and challenges, NGL's management team has demonstrated its commitment to strategically aligning the business with evolving industry trends. The company's diversified business model across the Water Solutions, Crude Oil Logistics, and Liquids Logistics segments has enabled it to generate steady revenues and profitability, despite the challenges faced in certain business lines, such as the winding down of the biodiesel operations within the Liquids Logistics segment.
As NGL Energy Partners continues to execute its strategic initiatives, investors will closely monitor the partnership's ability to deliver consistent and reliable financial results. The updated guidance for fiscal year 2025 and the positive trends in the Water Solutions segment provide a foundation for cautious optimism, while the ongoing efforts to optimize the Crude Oil Logistics and Liquids Logistics segments will be crucial for the company's long-term success in the evolving energy landscape.