We recommend buying NGL’s 7.500% Sr Notes due 2026 which currently trade ~91, with a yield-to-worst (“YTW”) of ~11.14% and a current spread of ~722 bps (~302 bps wider than the US Corp HY Index and ~415 bps wider than the Midstream HY Index)
NGL’s bonds have been under stress given the Partnership’s lack of consistent historical performance and the refinancing risk of its capital structure. We think the current commodity price environment will allow producers to maintain adequate drilling activity and thus provide additional volumes for NGL’s water and crude oil logistics segments. The Partnership benefited from this in 3Q23 as it posted record FCF, bought back debt at a discount, and recently announced its intention to redeem their 7.5% Sr Notes that were coming due in November of 2023. NGL will redeem these notes with a combination of FCF and $111.65mm of proceeds from the sale of its marine assets
In summary, the 2026s provide incremental yield relative to the HY & Midstream index with manageable risks that the Partnership is actively working to mitigate in the near term. We believe the current commodity price environment will allow for NGL to at least maintain adequate financial performance, continue to reduce leverage, and addresses its remaining maturities though one or more of the following ways:
Continued FCF generation focused on debt reduction: Current commodity price levels should provide for stable levels of drilling and thus provide additional volumes for NGL’s water solutions and crude oil logistics segments
Refinancing to extend maturities: If NGL can consistently perform over the next few quarters, we would expect the Partnership to be able to refinance its 2025s ahead of them becoming current in March of 2024
Continued non-core asset divestitures: NGL has sold assets in the past in order to reduce debt
Use the ABL if necessary: Although this would not be a favorable solution, NGL could use its ABL facility to refinance at least a portion of the 2025s
NGL Energy Partners (“NGL” or the “Partnership”) is a publicly traded MLP active in several basins in the United States, including the DJ Basin in Colorado, the Eagle Ford in Texas, and the Permian Basin in New Mexico and Texas. The Partnership operates through three principal segments: Water Solutions (70% of 3Q23 Segment EBITDA), Crude Oil Logistics (19%), and Liquids Logistics (11%). As of 12/31/2022, NGL had total tangible assets of $4.1bn including pipeline systems, storage terminals, water treatment facilities, and disposal wells.
Recent Highlights
In February, NGL successfully amended its ABL to retain its $600mm size and extended the maturity to February of 2026
Later in that same month, the Partnership announced that it intended to call its Sr. Unsecured Notes that were scheduled to mature in November
In March, NGL announced the $111.65mm divestiture of marine assets. Details of the transaction included the following:
The marine fleet included 13 tow boats and 25 tank barges which provided waterborne transportation of refined products and crude oil.
The net proceeds of this divestiture would be used to repay the $39mm marine equipment note and repay outstandings under the ABL.
Management also increased FY23 guidance, including FY23 EBITDA of $630mm vs $600mm, previously.
With the above, the CEO commented that NGL will be able to report leverage of <4.75x (excluding preferred units), as the Partnership was successful in reducing total debt by ~$600mm since 9/30/22.
Sources & Uses and Pro Forma Capitalization
F3Q23 Commentary (Quarter End 12/31/22)
During F3Q23, Adj. EBITDA increased 30.8% to $193mm vs $148mm during F3Q22 as a result of the following:
Water Solutions: 37% increase in water volumes and higher spot rates in the Partnership’s water segment. This was coupled with lower costs related to less brackish water needing to be purchased during the quarter
Crude Oil Logistics: High commodity prices and lower expenses offset lower volume related to lower production in the DJ Basin
Corporate segment included $29.5mm from a legal settlement that offset what would be a negative line item. The Partnership stated that they could not provide further comment on the specific matter
The positive effects mention were above were partially offset by Lower butane product margins in the Partnership’s liquids segment
Leverage (ex-pref) decreased to ~5.28x given the above as well as reduced debt related to the Partnerships continued effort to buy back a portion of their bonds at a discount
Liquidity remains adequate with ~$280.5mm including $4.5mm of cash, plus ~$276mm of availability under the Partnership’s $600mm ABL ($156mm outstanding + ~$168mm of issued L/Cs)
In February of 2023, NGL announced that they had successfully amended their ABL to remain at $600mm, instead of reducing by $100mm to $500mm on March 31st, 2023
After the quarter, NGL sold its marine assets for $111.65mm and redeemed its bonds that were going to be due in November of this year
Enterprise Value & Recovery Analysis
In our recovery analysis we ran two different default scenarios. In both scenarios, we assume the Partnership’s performance degrades over time and 2024E EBITDA is 25% lower than our current estimate. We also assume $171mm of admin claims in both scenarios which equates to 5% of scenario one’s EV at default
Scenario 1: We used the Partnership’s current trading level of 6.75x EV/EBITDA to derive an assumes EV at default of ~$3.4bn.
This valuation is able to cover the entire debt stack and still have an equity cushion of 57%
Scenario 2: We reduced the EBITDA multiple by 0.50x to 6.25x which is slightly lower than the 6.50x assumption S&P uses. We also assume NGL draws up 60% of its current available capacity under the ABL to fund operations before default
This valuation would not be able to cover the entire debt stack and there would be a potential loss of ~22%. I believe this would be an acceptable risk of loss given the current yield of the notes being recommended