Well, my take on NGL after the report is ......
The report was pretty disappointing. A big miss on EBITDA in March Q. Fortunately, the key segment (Water) did well and forward guidance for water is about in line. Water provided ~83% of last year's EBITDA, and it should provide a similar percentage next year (which implies the other two segments bounce back from the bad March Q).
They have a pipeline (Grand Mesa) which is perpetually under capacity. They think it may get more useage this year, but I think they've thought that for a long time, so we'll see. They said something about it's volumes increasing by 50%, but I don't think that's signed contracts, it's perhaps just talk.
The other business (propane/butane wholesale) is lumpy, and they say they are exploring selling it or parts of it. They've been able to get good multiples of EBITDA in sales. This business had $70m EBITDA in a disappointing year last year. If they can get anything close to $700m cash, that would be amazing I think. It would allow them to repurchase all their preferreds ($930m) using sales proceeds and the revolver. Hopefully they unload this business this year.
The other interesting bit of the NGL story now is they're spending $125m on a water pipeline expansion project (Lex 2). It coimpletes in October and begins producing revenue immediately as they have a signed long term customer with minimum commitment. That project is 60% of the $210m Cap Ex they'll spend this year. This is interesting, because if it completes on time, it means from October 2024 their annual Cap Ex run rate is about $100m rather than this year's $210m, and they will have a step up in EBITDA as the Lex 2 begins contributing. That combo of higher EBITDA and lower Cap Ex sounds like a great recipe for a common unit distribution. It sounds like more than $125m per year free cash flow from October on compared to Jan to Sep 2024. It's plenty to implement a $1.00 per unit distribution.
NGL has about $930pm preferred stock, which all pay about 13% from this summer.
So......if they can sell the Butane/Propane business for anything close to $700m, they could use the line of credit and the proceeds to repurchase the high yielding preferreds, and then in October when the Lex 2 comes online, they'll have reduced Cap Ex costs since the Lex 2 project isn't consuming Cap Ex cash any more, they'll have a step up in Ebitda due to Lex 2 going into service, but ..... they'll have about $80m reduced EBITDA due to selling the propane/butane biz. The preferreds now are consuming $110m in annual dividends, so.......selling propane/butane and buying all the preferreds actually IMPROVES cash flows.
I think Lex 2 is a given, just complete the project. The big question is whether they can get an attractive price for the propane/butane business. If so, NGL should look pretty good by Q4 2024, and implement a common distribution in 2025.
So conclusion = March 2024 results were poor due to weakness in the two less important divisions, but the forward outlook is, well, potentially awesome.
I think a year from now NGL is likely $8.00 or so, and it could be higher if the distribution number is higher. |
