The Long Case For NGL Energy Partners

May.31.13 | About: NGL Energy (NGL)

Company overview

NGL Energy Partners (NYSE:NGL) is a diversified, vertically integrated midstream MLP (formed in 2010, IPO in May 2011) with businesses including crude oil and natural gas liquids logistics, water treatment and retail propane. NGL continues to acquire growth with 11 acquisitions totaling $1.5 billion.

Investment thesis

NGL trades at a discount to its diversified asset base (despite a 28% return over the past year due to investor desire for yield) based on a sum of the parts valuation and using conservative EBITDA multiples.

Source: Company presentation

Retail propane business. This business has an "acquisition put" given the acquisition activity over the past two years (here and here) as the industry continues to bifurcate with the top three companies controlling a third of the market and the rest controlled by smaller local businesses. This trend should continue given low multiples, low integration risks and the desire for a strong regional and national footprint.

Positive factors include:

  • Amerigas (NYSE:APU) said on their recent conference call that its propane business benefited from colder weather in 1Q13 (January and February 11% colder than last year and March 78% colder than last year). This should drive higher sales for the retail propane business of NGL when it reports annual results next month.
  • APU said propane is trading at 37% of crude and below the prior year relationship of 43%, increasing the competitive advantage of propane and discouraging conservation
  • Secular growth trend of increasing natural gas production (due to fracking) should result in lower propane prices and increased demand
  • Geographic diversity mitigates weather risk with operations in more than 20 states
  • Less volatility from warm weather as margins increase when demand falls
  • Cost plus margins allow immediate pass-through of wholesale price increases

Source: Company presentation

Water treatment business. This business also has an "acquisition put" given the high levels of interest shown by financial and strategic buyers in water infrastructure assets due to secular growth led by a growing population and decades of underinvestment.

Positive factors include:

  • Long-term, deliver-or-pay contracts and acreage dedication contracts reduce cash flow volatility
  • Benefits from increasing production in basin/shale
  • Advanced technology led by high R&D and multiple process patents
  • Water recycling technology able to be quickly implemented at new locations

Source: Company presentation

Crude oil and natural gas liquids logistics. This business (purchase, sale and transport of crude and natural gas products) is a low risk, high cash flow play on the growing domestic energy production (e.g. basin and shale).

Positive factors include:

  • National distribution channels
  • Strong brand/customer relationships
  • Increasing volumes/margins through growing rail and barge transportation
  • Ability to go from "producer to end user" with wide range of assets (e.g. terminals, trucking, rail, pipeline connections, storage)
  • Shift from leasing to owning assets (e.g. recent barge acquisition) and repeatable fee-based cash flow
  • Strong risk management through "back-to-back" contractual agreements, "pre-sale" agreements and hedging

Financial strength. Management is shifting focus to integrating past acquisitions and smaller (though accretive) internal projects rather than continue its acquisition spree. This should result in accelerated debt reduction as growing free cash flow can be directed towards paying down a shrinking (rather than growing due to acquisitions) debt load. Furthermore, this lower leverage should help facilitate the goal of management to achieve an investment grade rating.

The current debt level is easily manageable given the following:

  • Recently expanded credit facility
  • Low leverage ratio of 3x
  • Interest coverage ratio >8x
  • High FCF
  • No near term debt maturities
  • Ability to covenant strip due to the extremely favorable financing market and refinance existing $250 million in senior notes with restrictive covenants with new cov-lite debt.


If this valuation discount persists, do not be surprised if an activist investor with experience in the commodities industry such as Barry Rosenstein at Jana Partners (Agrium, Ashland) pushes to unlock value by selling the retail propane and/or water treatment businesses and focus on the crude oil and natural gas liquids logistics businesses.

The time horizon is 12-18 months. As always, risk management is paramount so a stop loss should be placed below 25.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.