10-K: NGL Energy Partners LP Files 10-K Report, Details Financial Performance and Strategic Initiatives

NGL Energy Partners LP releases its annual 10-K report, outlining its financial results, strategic actions, and future outlook for the fiscal year ended March 31, 2024.

Summary

• NGL Energy Partners LP is a diversified midstream energy partnership focused on water solutions, crude oil logistics, and liquids logistics.
• The company's Water Solutions segment handled approximately 884.6 million barrels of produced water during the year ended March 31, 2024.
• NGL's Crude Oil Logistics segment transported approximately 25.6 million barrels of crude oil on the Grand Mesa Pipeline during the year ended March 31, 2024.
• The Liquids Logistics segment sold approximately 2.5 billion gallons of natural gas liquids, refined products, and renewables products during the year ended March 31, 2024.
• On February 2, 2024, NGL closed a debt refinancing transaction of $2.9 billion, including $2.2 billion in senior secured notes and a $700 million term loan B credit facility.
• The company is focused on reducing absolute debt and leverage and maintaining sufficient liquidity to reinstate common unit distributions.
• NGL is expanding its Lea County Express Pipeline System from 140,000 barrels per day to 340,000 barrels per day, expected to be completed in the second half of fiscal year 2025.
• The company sold approximately 122,250 acres of real estate on two ranches in New Mexico on April 5, 2024.

Sentiment

Score: 4

Explanation: The document presents a mixed picture. While the company has made strategic moves like debt refinancing and pipeline expansion, it also reports a net loss and faces significant risks and challenges. The sentiment is cautiously negative due to the financial results and the numerous risk factors.

Positives

• NGL is the largest independent produced water transportation and disposal company in the United States.
• The company has a strong presence in key crude oil and natural gas producing areas, including the Delaware, DJ, and Eagle Ford Basins.
• NGL's water processing facilities are strategically located near areas of high crude oil and natural gas production.
• The company has a diversified operations that allow it to generate more predictable and stable cash flows on a year-to-year basis.
• NGL has a seasoned management team with extensive midstream industry experience.
• The company is focused on generating revenues under long-term fixed fee contracts and back-to-back contracts which minimize commodity price exposure.

Negatives

• The Crude Oil Logistics and Liquids Logistics segments are margin-based businesses sensitive to changes in product prices.
• The company's profitability can be negatively impacted by price and inventory risk.
• NGL faces significant competition in all of its segments.
• The company's business is subject to seasonal weather conditions and natural or man-made disasters.
• The company's results of operations, cash flows and financial position could be materially adversely affected by significant changes in interest rates.
• The company's cash and cash equivalents may be exposed to failure of its banking institutions.
• The company's substantial indebtedness may limit its flexibility to obtain financing and to pursue other business opportunities.

Risks

• The company's business depends on the ability and willingness of other parties to explore for and produce crude oil and natural gas.
• Declining demand for hydrocarbons, commodity prices and production volumes, inventory risk, the availability of transportation and storage capacity, and increased transportation and leasing costs could adversely affect the company.
• Competition from other midstream, transportation, and terminaling and storage companies could impact the company's business.
• Interruption of service at the company's principal storage facilities or on common carrier pipelines or railroads could adversely affect the company.
• The fees charged to customers for products and services may not cover increases in costs.
• The company's risk management procedures and the use of derivative financial instruments cannot eliminate all commodity price risk, basis risk, or risk of adverse market conditions.
• Reduced demand for the company's products due to energy efficiency, new technologies, alternative energy sources and new regulations could impact the company.
• Seasonal weather conditions, including warm winter weather and natural or man-made disasters could severely disrupt normal operations.
• The company's ability to successfully complete, integrate and operate accretive acquisitions and organic growth projects could impact the company.
• Constructing new transportation systems and facilities subjects the company to construction risks.
• The company may face opposition from various groups to the operation of its pipelines and facilities.
• The company's business is dependent on the leadership, involvement and retention of key and qualified personnel.
• The company is subject to the impact of executive orders and federal, state, provincial and local laws and regulations with respect to environmental, including climate change, safety and other regulatory matters.
• The company is subject to FERC jurisdiction over its current and potential future operations.
• The company is subject to governmental regulation and other legal obligations related to privacy, data protection, and data security.
• The company is subject to regulations related to cross-border operations.
• The company's Partnership Agreement limits the fiduciary duties of its GP to its unitholders and restricts the remedies available to its unitholders.
• The company's GP and its affiliates have conflicts of interest with the company and limited fiduciary duties to its unitholders.
• The company's unitholders have limited voting rights.
• Control of the company's GP or the IDRs may be transferred to a third party.
• The company's GP has a limited call right that may require its unitholders to sell their common units at an undesirable time or price.
• The company's Partnership Agreement requires that it distribute all of its available cash.
• The company may issue additional units without the approval of its unitholders.
• The company's GP may elect to cause the company to issue common units while also maintaining its GP interest in connection with a resetting of the target distribution levels related to its IDRs.
• The company's unitholders liability may not be limited if a court finds that unitholder action constitutes control of the company's business.
• The company's unitholders may have liability to repay distributions that were wrongfully distributed to them.
• The Preferred Units give the holders thereof liquidation and distribution preferences over the company's common unitholders.
• The issuance of common units upon exercise of certain warrants would cause dilution to existing common unitholders.
• The company's tax treatment depends on its status as a partnership for federal income tax purposes.
• The company's unitholders may be subject to limitation on their ability to deduct interest expense incurred by the company.
• The company may be subject to additional entity-level taxation by individual states.
• The tax treatment of publicly traded partnerships could be subject to potential changes or interpretations.
• The IRS may challenge certain income tax positions, methodologies or treatments that the company has taken.
• The company's unitholders will be required to pay taxes on their share of the company's income even if they do not receive any cash distributions from the company.
• Certain action the company takes, such as issuing additional units, may increase a unitholders tax liability.
• Tax gain or loss on the disposition of the company's common units could be more or less than expected.
• Tax exempt entities and non-United States persons owning the company's common units face unique tax issues.
• The company has subsidiaries that are treated as corporations for federal income tax purposes and subject to corporate level income taxes.
• A unitholder whose common units are loaned to a short seller to effect a short sale of units may be considered as having disposed of those common units.
• There are limits on the deductibility of the company's losses that may adversely affect its unitholders.
• Purchasers of the company's common units may become subject to state and local taxes and return filing requirements in jurisdictions where the company operates or owns or acquires properties.
• Treatment of distributions on the company's Preferred Units as guaranteed payments for the use of capital creates a different tax treatment for the holders of Preferred Units than the holders of the company's common units.
• The default by significant customers and counterparties or the loss of one or more significant customers could materially or adversely affect the company.
• The company may fail to maintain an effective system of internal control, including internal control over financial reporting.
• The company is subject to pandemics, terrorism and political unrest.
• The company is subject to product liability claims and litigation.
• The company is subject to a failure in its operational systems or cybersecurity attacks on any of its facilities, or those of third parties.

Future Outlook

The company expects to continue to evaluate the capital markets and may opportunistically pursue financing transactions to optimize its capital structure. The company is focused on reducing absolute debt and leverage and maintaining sufficient liquidity to reinstate common unit distributions. The company expects the LEX II Expansion to be completed during the second half of fiscal year 2025.

Management Comments

• The board of directors of our GP expects to evaluate the reinstatement of the common unit distributions in due course, taking into account a number of important factors, including our leverage, liquidity, the sustainability of cash flows, capital expenditures and the overall performance of our businesses.

Industry Context

The document highlights NGL's position as a diversified midstream energy partnership, operating in a competitive industry with various players, including major integrated oil companies and other midstream companies. The company's focus on long-term contracts and strategic asset locations is a response to the cyclical nature of the oil and gas industry and the need for stable cash flows.

Comparison to Industry Standards

• NGL's water solutions business is compared to other independent produced water transportation and disposal companies and the water transportation and disposal operations owned by oil and gas production companies themselves.
• NGL's crude oil logistics segment faces competition from other entities engaged in the crude oil logistics business, some of which are larger and have greater financial resources.
• NGL's liquids logistics segment faces significant competition from other natural gas liquids wholesalers, trading companies and companies involved in the natural gas liquids midstream industry.
• The company's performance is benchmarked against the prices of crude oil, natural gas liquids, gasoline, diesel, and biodiesel, as well as the availability of supply and demand for these products.
• The company's ability to maintain or increase margins is compared to industry standards and competitors.

Legal Proceedings

• The company is involved from time to time in various legal proceedings and claims arising in the ordinary course of business.
• The company is subject to the LCT Capital, LLC legal matter, which resulted in a $36.0 million accrual during the year ended March 31, 2024.
• The company is subject to a class action complaint filed in the federal court in the Northern District of Oklahoma styled Gary R. Underwood, Successor Trustee for the James L. Price Revocable Living Trust, on behalf of the Trust and all others similarly situated v. NGL Energy Partners LP, Case No. 4:21-cv-00135-CVE-SH, which was settled for $8.4 million.

Related Party Transactions

• The company purchases goods and services from certain entities that are partially owned by its named executive officers.
• The company has a joint and several guarantee for the benefit of the lender for KAIR2014 LLC's outstanding loan, which is partially owned by the company's Chief Executive Officer.

Stakeholder Impact

• Shareholders may be concerned about the company's net loss and the suspension of common unit distributions.
• Employees may be affected by the company's cost-cutting measures and potential restructuring.
• Customers may be impacted by changes in the company's pricing policies and service offerings.
• Suppliers may be affected by changes in the company's purchasing policies and payment terms.
• Creditors may be concerned about the company's high level of indebtedness and its ability to service its debt obligations.

Next Steps

• The company will continue to focus on reducing absolute debt and leverage.
• The company will continue to evaluate the capital markets and may opportunistically pursue financing transactions to optimize its capital structure.
• The company will complete the LEX II Expansion during the second half of fiscal year 2025.
• The board of directors of the company's GP expects to evaluate the reinstatement of the common unit distributions in due course.

Key Dates

Keywords

midstream energy, water solutions, crude oil logistics, liquids logistics, produced water, debt refinancing, pipeline expansion, natural gas liquids, refining, transportation, storage