Executive Summary / Key Takeaways

• Pure-Play Water Transformation Complete: NGL has shed 85% of its former EBITDA volatility by divesting non-core liquids and crude assets, emerging as a water solutions company with 85% of EBITDA from this segment. Water disposal generates stable, fee-based cash flows that are immune to commodity price swings, fundamentally altering the company's risk profile from a cyclical midstream player to a utility-like water infrastructure provider.

• Dominant Competitive Position with Measurable Moats: NGL processes more produced water than any competitor (2.8 million barrels/day physical, 3.15 million including deficiency payments), operates at the lowest cost per barrel ($0.22), and controls the largest pipeline network (800+ miles) and permitted injection capacity (5+ million barrels/day) in the Delaware Basin. This scale advantage translates directly into pricing power and margin expansion, with Water Solutions EBITDA margins approaching 72%—a level that competitors cannot match without equivalent infrastructure.

• Capital Structure Optimization Creating Shareholder Value: The company has retired 15% of Class D preferred units since April 2025, repurchased 5% of common units at an average price of $4.57, and reduced Term Loan B interest costs by $15 million annually through two repricings. These actions are accretive to common unitholders because preferred distributions represent the highest cost of capital (estimated 12-15% yield), and every dollar redirected from preferred payments to debt reduction or unit buybacks directly increases distributable cash flow per unit.

• Visible Growth Pipeline with Contracted Volumes: NGL has secured 1.5 million barrels/day of volume commitments with an average 9-year term, including 500,000 barrels/day of new contracts requiring $100 million in growth capex by year-end 2025. This contracted backlog provides revenue visibility that midstream peers lack, with management guiding to $700+ million EBITDA in fiscal 2027—implying 10% annual growth that will drive leverage below 4x and potentially enable distribution reinstatement.

• Valuation Disconnect Despite Fundamental Improvement: Trading at $9.81 with an EV/EBITDA multiple of 6.6x on fiscal 2026 guidance ($650-660 million), NGL trades at a significant discount to water-focused peers and a 50% discount to broader midstream companies, despite superior growth and margin profile. The market has not yet repriced the equity for its transformed business model, creating an asymmetric risk/reward where the downside is protected by asset-backed cash flows while upside comes from multiple expansion as investors recognize the pure-play water story.

Setting the Scene: From Diversified Midstream to Water Infrastructure Pure-Play

NGL Energy Partners LP, founded in 1940 and headquartered in Tulsa, Oklahoma, spent decades as a traditional midstream conglomerate—crude oil logistics, liquids marketing, propane distribution, and marine transport. For years, this diversification was a liability, not a strength. The company carried leverage above 4.75x, struggled with $475 million in preferred dividend arrearages, and operated a collection of assets that generated volatile, seasonal cash flows ill-suited for an MLP structure. Warm winters crushed propane demand; crude price swings gutted marketing margins; biodiesel policy changes rendered entire business lines unprofitable.

The strategic pivot began in earnest in February 2024. Management recognized that the midstream landscape had bifurcated: large-cap players with investment-grade balance sheets would dominate crude and NGL pipelines, while niche operators could win in specialized, high-margin services. NGL chose the latter path, targeting produced water disposal—a service mandated by regulation, essential for oil production, and characterized by long-term contracts with minimum volume commitments (MVCs) from investment-grade producers.

Water disposal stands out as more than a commodity service. The regulatory environment in Texas and New Mexico has grown increasingly stringent regarding induced seismicity , creating barriers to new permit approvals. NGL's 35-45 legacy permits in the Reeves and Loving areas, plus 25 pre-guideline valid permits in Andrews County, represent a scarce asset that cannot be replicated. The company has spent years and hundreds of millions building 800+ miles of pipeline, 131 injection wells, and 57 processing facilities. This infrastructure moat means that as Permian production grows, NGL captures an increasing share of the 20-30 million barrels of water generated daily—water that must go somewhere, and increasingly must go to permitted, seismically-safe facilities like NGL's.

The asset sales tell the story of focus: $270 million in proceeds from selling crude oil trucking, marine divisions, New Mexico ranches, the rack marketing refined products business, and 17 NGL terminals. These divestitures permanently eliminated $60-70 million in annual working capital needs and removed the EBITDA volatility that had plagued the company. The remaining Liquids Logistics segment—just butane blending and a propane pipeline—now generates enough EBITDA to cover corporate overhead, effectively becoming a break-even cost center rather than a profit driver. Management's discipline shines through in sacrificing revenue to improve quality of earnings, a trade-off that the market typically rewards with higher multiples.

Technology, Products, and Strategic Differentiation: The Water Moat

NGL's competitive advantage in water solutions rests on four pillars that are quantifiable and defensible: scale, cost, connectivity, and regulatory positioning.

Scale and Cost Leadership: Processing 2.8 million barrels/day physically (3.15 million including deficiency payments) makes NGL the largest water disposal operator in the Permian. More importantly, operating expenses of $0.22 per barrel are the lowest in the industry. This cost advantage stems from pipeline density—moving water via pipe costs 70-80% less than trucking, and NGL's 800+ miles of 12-30 inch diameter pipelines create a network effect where each new customer connection lowers average cost across the system. For investors, margin expansion proves structural, not cyclical. As volumes grow 10% annually, fixed costs are spread over a larger base, driving EBITDA per barrel higher even without price increases.

Connectivity and Integration: The LEX II pipeline, placed in service in November 2024 under a five-year, 200,000 barrel/day MVC contract, exemplifies the "build it and they will come" strategy. The pipeline connects producing areas in the western Delaware Basin to NGL's injection facilities in Andrews County, creating a captive flow of water that competitors cannot intercept. This connectivity locks in volumes for years while providing customers with a single-vendor solution for gathering, transport, and disposal. The result is 90% of volumes committed through acreage dedications and MVCs, with 80% from investment-grade counterparties—effectively turning water disposal into a subscription business with 9-year average contract life.

Regulatory Moat and Pore Space: NGL's most underappreciated asset is 4 million barrels/day of permitted pore space in Andrews County, Texas, that is "unburdened by legacy injection, vertical production, or seismicity." In an era where new permits face heightened scrutiny and induced seismicity concerns have shut down competitors' facilities, this clean pore space is irreplaceable. The company has also received the first draft TPDES permit in Texas for an 800,000 barrel/day produced water treatment plant for beneficial reuse. This positions NGL for the next evolution of water management: treating produced water to recharge the Pecos River Basin, creating a new revenue stream while preserving disposal capacity for higher-margin oilfield customers.

Skim Oil Integration: The water segment's economics are enhanced by recovering and selling skim oil from processed water. At 5,002 barrels/day in Q2 2026, this represents a high-margin revenue stream that competitors without integrated processing facilities cannot capture. While crude price volatility affects skim oil revenue (management estimates a $20 million annual impact from lower prices), the cost to produce this oil is negligible—it's a byproduct of disposal operations. This integration adds 300-400 basis points to Water Solutions margins, creating a cost advantage that pure-play disposal competitors cannot replicate.

Financial Performance & Segment Dynamics: Evidence of Strategic Execution

The financial results provide clear evidence that the transformation is working and accelerating.

Consolidated Performance: Q2 fiscal 2026 Adjusted EBITDA of $167.3 million represents 12% year-over-year growth, but the composition reveals the real story. Water Solutions contributed $151.9 million (91% of total), up 18% YoY, while Crude Oil Logistics and Liquids Logistics combined for just $27.1 million (9% of total). Water Solutions EBITDA is growing at 15-18% annually while legacy segments are flat to declining, meaning every incremental dollar of EBITDA comes from the high-quality, high-growth water business.

Water Solutions Deep Dive: The segment's $151.9 million Q2 EBITDA on $209.7 million revenue yields a 72.3% margin—extraordinary for any industrial business. Volume growth of 4% physical (14% including deficiency payments) drove the increase, but pricing discipline and cost control amplified the impact. Operating expenses held steady at $0.22 per barrel despite inflationary pressures, demonstrating operational leverage. The 14% increase in total volumes paid (including deficiency payments) shows NGL is collecting MVC shortfall payments from producers—a cash flow stream that competitors without long-term contracts cannot access.

Crude Oil Logistics: Managed Decline: Grand Mesa pipeline volumes averaged 72,000 barrels/day in Q2, up from 63,000 YoY but still well below the 100,000+ barrel/day capacity. The segment generated $16.6 million EBITDA, down 4% YoY. This underperformance is actually strategic—management is not investing growth capital here, instead focusing on maintaining existing contracts and capturing spot volumes. The Prairie Operating deal, which will add volumes in early fiscal 2026, demonstrates that the asset is not stranded but rather in harvest mode. For investors, Crude Oil Logistics serves as a cash-generating asset requiring minimal maintenance capex, with any volume upside translating directly to free cash flow.

Liquids Logistics: Right-Sized to Zero: The segment's $10.5 million Q2 EBITDA is a shadow of its former self, but this is intentional. The sale of 17 terminals and the wholesale propane business eliminated $60-70 million in working capital needs and removed seasonal volatility. Remaining assets (butane blending, propane pipeline) generate just enough EBITDA to cover corporate costs. This transforms a volatile, capital-intensive business into a stable, low-maintenance operation that no longer distracts management or consumes capital.

Capital Structure Transformation: Since April 2025, NGL has repurchased 88,506 Class D preferred units (15% of outstanding) and 6.8 million common units (5% of float) at $4.57 average price. The preferred repurchases save $10.4 million in annual distributions, while the common buybacks are accretive at current valuations. The Term Loan B repricing from SOFR+375bps to SOFR+350bps saves $15 million annually. After paying $475 million in arrearages and reducing leverage from >4.75x to ~4x, management is now optimizing the capital stack to maximize per-unit cash flow.

Outlook, Management Guidance, and Execution Risk

Management's guidance history demonstrates credibility and conservatism. Fiscal 2025 guidance of $620 million was exceeded at $622.9 million. Fiscal 2026 guidance was initially $615-625 million, then raised to $650-660 million after Q2 outperformance—a 5% increase that suggests management is confident but not promotional. The implied Water Solutions EBITDA of ~$560 million at the midpoint represents 10% growth, consistent with contracted volume commitments.

The fiscal 2027 guidance of "at least $700 million" is particularly significant because it assumes completion of 750,000 barrels/day of new projects by year-end 2025. These projects require $100 million in growth capex and will generate the majority of their EBITDA in fiscal 2027. The 10% annual growth rate is credible because it is backed by 1.5 million barrels/day of volume commitments with 9-year average terms—effectively pre-sold capacity that only requires execution.

Execution risk centers on three factors: (1) completing growth projects on time and budget, (2) maintaining the $0.22 per barrel cost structure as volumes scale, and (3) managing skim oil price volatility. Management's track record on the LEX II pipeline (on time, on budget, performing as expected) and their 35-45 legacy permits provide confidence. The cost structure is defensible because 90% of volumes flow through owned pipelines, creating operating leverage. Skim oil volatility is manageable—at $20 million annual impact, it represents just 3% of total EBITDA, and the company can hedge or pass through pricing adjustments.

The capital allocation framework is clear and shareholder-friendly. Management prioritizes: (1) debt reduction to <4x leverage, (2) Class D preferred redemptions (highest cost of capital), (3) common unit buybacks when trading below intrinsic value, and (4) growth capex with 15-20% returns. Free cash flow is allocated to the highest-return opportunities, with common unitholders benefiting from both direct buybacks and indirect value creation through capital structure improvement.

Risks and Asymmetries: What Could Break the Thesis

Regulatory and Seismic Risk: The Texas Railroad Commission's enhanced guidelines for Permian water disposal could restrict injection volumes or require costly monitoring. NGL is well-positioned with legacy permits and Andrews County pore space, but a seismic event near their facilities could trigger regulatory shutdowns. The risk is moderate—management's proactive compliance and geographic diversification mitigate it—but not zero. If multiple facilities were shut, EBITDA could be impacted by 10-15% until remediation.

Customer Concentration and Production Declines: While 80% of volumes are with investment-grade producers, a sustained oil price collapse below $50/barrel could reduce Permian drilling activity and water volumes. NGL's MVCs provide protection—customers pay for committed volumes even if not produced—but a multi-year downturn could lead to contract renegotiations. The risk is low near-term given producer hedges and Permian breakeven costs, but it's the primary macro sensitivity.

Growth Project Execution: The $100 million in growth capex for 750,000 barrels/day of new capacity must be executed by year-end 2025. Delays could push EBITDA recognition from fiscal 2026 to 2027, creating a guidance miss. Management's experience with LEX II and their 35-45 legacy permits reduces this risk, but construction and permitting delays are always possible.

Capital Market Access: While NGL has $399 million of ABL availability and is projecting zero balance by year-end, a credit market disruption could limit their ability to refinance the 2029 and 2032 senior notes. The company has demonstrated access through two Term Loan B repricings, but rising rates or a high-yield market freeze could increase funding costs.

Asymmetric Upside: The TPDES permit for beneficial reuse could unlock a new revenue stream treating 800,000 barrels/day for agricultural or industrial use. If NGL can monetize this at even $0.10 per barrel, it adds $30 million in high-margin EBITDA. Similarly, industry consolidation (e.g., Western (WES)'s acquisition of Ares) validates NGL's asset value and could make them a takeover target at a premium. The company's own admission that "the market rewards pure-play water companies" suggests they are positioning for either standalone value creation or strategic monetization.

Valuation Context: Discounted Transformation Story

At $9.81 per share, NGL's market cap is $1.25 billion and enterprise value is $4.28 billion. Against fiscal 2026 EBITDA guidance of $650-660 million, the EV/EBITDA multiple is 6.6x at the midpoint. This valuation stands out because:

• Peer Comparison: Water-focused peer WTTR (WTTR) trades at 8.0x EV/EBITDA despite lower margins (1.65% operating margin vs. NGL's 15%) and slower growth. Midstream giants EPD (EPD), TRGP (TRGP), and OKE (OKE) trade at 11.1x, 12.2x, and 11.0x respectively, with lower growth profiles. NGL's 6.6x multiple reflects its historical conglomerate discount, not its current pure-play water business.

• Historical Context: During its leveraged, diversified phase, NGL traded at 8-10x EBITDA with higher risk. The current 6.6x multiple suggests the market has not repriced the equity for the improved quality of earnings and reduced volatility.

• Free Cash Flow Yield: With $117 million in quarterly free cash flow ($468 million annualized), NGL trades at a 5.4x P/FCF multiple—a 18.5% free cash flow yield. This is exceptional for a business with 90% contracted revenues and 10% growth visibility.

• Asset Value Floor: The company's 5 million barrels/day of permitted injection capacity, 800+ miles of pipeline, and 4 million barrels of clean pore space represent replacement value well in excess of the enterprise value. In a liquidation scenario, these assets would command premiums in an M&A market that is consolidating (e.g., Western's Ares acquisition at premium valuations).

The valuation disconnect is most apparent in the preferred unit treatment. Class D preferreds trade at implied yields of 12-15%, which management is actively retiring. Each $50 million redemption saves $6-7.5 million in annual distributions, directly boosting common unit cash flow. The market has not yet priced in the accretion from these redemptions or the potential for distribution reinstatement once leverage falls below 4x.

Conclusion: The Final Leg of Value Creation

NGL Energy Partners has completed a remarkable transformation from a leveraged, diversified midstream conglomerate to a focused water infrastructure leader. The evidence is unambiguous: 85% of EBITDA from Water Solutions, 72% segment margins, 10% volume growth backed by 9-year contracts, and a capital structure that is being optimized for common unitholders.

The investment thesis rests on three pillars that are increasingly visible in the financial results: (1) a dominant competitive position in the Permian water disposal market that generates stable, growing cash flows; (2) aggressive capital structure improvement that is accretive to common units through preferred redemptions and debt repricing; and (3) a valuation that reflects the old NGL, not the new pure-play water company.

The asymmetry is compelling. Downside is protected by $468 million in annual free cash flow, $399 million in ABL availability, and hard asset values that exceed the enterprise value. Upside comes from multiple expansion as the market recognizes the water story, continued 10% EBITDA growth through 2027, and potential distribution reinstatement that could drive yield-seeking investors to revalue the equity.

Management's guidance of $700+ million EBITDA in fiscal 2027, combined with leverage below 4x and continued preferred redemptions, sets the stage for a final leg of value creation. The company has gone from crisis (4.75x leverage, $475 million arrearages) to strength in 18 months. For investors willing to look past the historical midstream discount, NGL offers water infrastructure exposure at a midstream price—a disconnect that is unlikely to persist as the pure-play water story becomes impossible to ignore.