Since our initial article, the share price of NGL Energy Partners LP (NYSE: NGL) is up nearly 29%. In this article, we will dive deeper into the third quarter results announced on February 9 and update the valuation.
Q3 results – growing volumes but below market expectations
The results were good and they continued the trend of increasing volumes thanks to the high price of crude oil. However, the market reacted negatively as volumes were lower than expected and forecasts were revised down for the year. As a result, the stock price fell nearly 23% from $2.48 to $1.92. The main reasons for the missed volumes were lower disposal volumes by customers and lower liquid volumes due to warmer than normal temperatures. Third quarter EBITDA was 18% higher than the prior year, totaling $147.7 million.
Water segment revenues increased by 32.1% to USD 130.7m thanks to a 30% increase in volumes to 1.84m barrels. The higher water volume was mainly driven by the Delaware Basin where volumes increased from 1.22M to 1.55M barrels. The EBITDA margin decreased by 300 basis points to 63.3% to reach an EBITDA of 82.7 M USD.
By crude oil segment, revenue increased 25.1% to $607.2 million. This increase was due to higher crude oil prices and higher volumes transported, offset by lower crude oil sales. Crude oil transported increased by 19.2% to 7.6 million barrels. This was supported by a 20% increase in volumes in the Grand Mesa pipeline to 83,000 barrels per day. However, crude oil sold fell 30% to 7.5 million barrels. As a result, the EBITDA margin decreased by 60 basis points to 4.9%, representing an EBITDA of $29.8m.
Liquids Logistics segment revenue increased 63.4% to $1.4 billion despite lower volumes. Propane volume decreased 22.9% to 294.3 million gallons due to unseasonably warm weather. Butane volumes decreased 15.3% to 180.2 million gallons due to a tight supply market and increased export demand. In addition, the volume of refined products decreased by 4.8% to 203.9 million gallons. EBITDA margin decreased by 210 basis points to 1.6%, representing EBITDA of $23.2m. The lower margin is mainly attributable to the propane business. Propane has seen weaker demand, lower prices and higher expenses. This was slightly offset by a higher margin in refined products and butane due to a tight supply market.
Management reduced its EBITDA forecast by $10m, from $560-570m to $550-560m, and increased its capex forecast by a further $10m, from $115m to $125- $130 million. While the decline in EBITDA is due to lower volumes, the increase in capital expenditure is due to unexpected repairs.
Management expects to fully offset these contra asset sales of $20 million. These assets are real estate and idle assets. So far they have closed on $12 million and another $8 million is in the process of being closed.
Additionally, during the quarter, they repaid $20 million of the 2023 unsecured notes and reiterated their goal to repay it when the bonds matured.
Discounting the valuation, the target stock price remains at $4.80 as there is no structural change in the investment thesis. NGL only 7.5% away from meeting 2024 revenue target, EBITDA margin has suffered a temporary hit but margins are expected to recover thanks to OpEx saving initiatives and to the partnership with XRI, and debt reduction appears to be progressing as planned and based on the cash flow projection, they should be able to repay the 2023 notes.
The third quarter results were good but below expectations, which led to a downward revision of the annual results. However, the changes are not significant and the loss of EBITDA will be offset by asset sales. The investment thesis and target price of $4.80 per share are intact. Additionally, the CEO has continued to buy stocks because he believes they are undervalued. He bought 100,000 shares at an average price of $2.10 per share.