MLP Bottom Fishing 7: NGL Energy Partners LP

| About: NGL Energy (NGL)

Summary

NGL is another beaten down MLP that closed Monday at $8.48 and yields 30.2%.

NGL is anticipating revenue growth based on the completion of major expansion and anticipates enough cash flow to continue to support its distribution.

NGL has a relatively simple capital structure with no preferred or subordinated units. Its incentive distribution rights kick in at levels below current distributions.

NGL appears to be unit holder friendly and has just sold a major position in order to strengthen its balance sheet and protect distributions.

NGL Energy Partners LP (NYSE:NGL) is another Master Limited Partnership (MLP) which fits the criteria of this series of articles. Its price has fallen substantially; NGL traded in the 30s last summer and its price held up at levels over $15 until December. Priced at Monday's close at $8.48 - it has a distribution yield of 30.2%. This series of articles is addressed to MLPs whose prices have declined precipitously and whose cash flow provides prospects for substantial appreciation. The first article addressed the compression companies; the second Azure Midstream (NYSE:AZUR), the third Capital Product Partners (NASDAQ:CPLP), the fourth Crestwood Equity (NYSE:CEQP), the fifth JP Energy Partners (NYSE:JPEP) and the sixth American Midstream (NYSE:AMID).

NGL is larger than most of the companies covered in the series and is engaged in a variety of businesses including crude oil logistics (primarily pipelines, terminals, and storage facilities), water solutions (treating and disposing of water used in fracking), natural gas liquids transportation, storage, and terminals and the marketing of refined products and propane. Its extensive retail propane business has "roll-up" growth potential. NGL is a growing company with expansion projects underway so that it is difficult to match up trailing revenue with its capital structure. When a company is growing and investing in expansion, it may already have incurred debt for an ongoing project which is not as yet producing revenue. Growth projects include the Sawtooth Underground Storage Facility which will be a large storage facility for natural gas liquids and the Grand Mesa Pipeline which will be completed in late 2016.

Financial Performance - NGL has a fiscal year which ends on March 31, so that we are still working with nine-month numbers for 2015. For the last three months of 2015, adjusted EBITDA was $113.5 and for the nine months starting on April 1, 2015, adjusted EBITDA was $270.1 million suggesting a pattern of growth within the year (all data is based upon NGL filings with the SEC). NGL has projected adjusted EBITDA of $450 million for the fiscal year starting on April 1, 2016. NGL has interest expense in the range of $140-$150 million per year, so that NGL will probably wind up with distributable cash flow (DCF) of a bit less than $300 million.

Capital Structure - Compared to some of the other MLPs we have seen, NGL has a relatively simple capital structure. There are no preferred or subordinated units and there are 106.2 million common units on a fully diluted basis. The current distribution is $2.56 per year so that projected DCF would appear to cover distributions comfortably. Unfortunately, the situation is not so simple. Incentive distribution rights (IDRs) kick in as soon as distributions reach the level of $1.55 per year and reach the 48% level a little north of $2.00. Thus, it costs more and more per additional penny of annual distributions as the level increases. Still, DCF of $300 million would come close to covering total distribution expense (including IDRs) at current levels. NGL has demonstrated its commitment to shareholders by selling a major asset earlier this year. NGL sold its general partner interest in TransMontaigne Partners (NYSE:TLP) for $350 million. This will also allow NGL to deconsolidate its balance sheet and remove some $250 of TLP debt from its capital structure. NGL retained roughly 3.2 million common limited partner units in TLP. After the end of the most recent reporting period, NGL sold those limited partner units for an additional $112.4 million.

Risks - NGL is an oil-oriented MLP and oil production in the United States is declining and we should expect that the need for oil field logistics will decline as well. NGL is engaged in some expansion and it is always possible that the expansion will prove to be more expensive than anticipated. NGL also took the very unusual action of not having a conference call in connection with its most recent earnings release (the release for the third quarter ending December 31, 2015). I don't read too much into the skipped conference call but I would sure like to see one in connection with the next financial report.

Bottom Line - I am a buyer here but there is always a danger of distribution cuts so that investors should tiptoe in with the realization that lower prices (it has recently traded as low as $5.70) may be available going forward. The reality is that the distribution could be cut to $1.55 thereby eliminating IDRs and reducing the necessary DCF to roughly $165 million per year (or well below anticipated levels). Assuming a distribution of $1.55 per year, at current prices, the distribution yield would still be more than 18%. There has been significant insider buying both in March (at levels below $7.00 a share) and back in December 2015, at levels in the low teens. NGL owns some strategic assets and should be able to weather the storm and emerge as an MLP producing reasonably reliable yield at least in the teens based on the current price. NGL should hold conference calls in connection will all quarterly earnings releases and should consider a special business status update presentation and conference call in the near future to clear the air.

Disclosure: I am/we are long NGL, AZUR, JPEP, CPLP, CEQP, AMID.

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.