In general, the results were pretty good, mainly driven by the Water Segment. Processed barrels were 1.8 million barrels per day growing 94,000 barrels per day versus the last quarter. This was due to demand growth in every basin but especially in the Delaware Basin.
As per the Crude Oil Logistics segment, volumes increased to 80,000 barrels per day in Grand Mesa which is 3,000 barrels per day higher than the last quarter.
In the Liquid segment, we saw higher demand for butane and a tighter supply market which helped margins.
Management provided guidance/forecast not just for 2022 but also for 2023 and 2024. For 2022, they expect EBITDA to be in the range of 570-600M USD driven by the increased volume in the Water Segment which would contribute around 350M USD. Once we deduct interest and capex, management expects free cash flow to be around 250M USD.
In 2023, they expect EBITDA growth driven by a 10% increase in the Water Segment and 5% in the Liquids Segment. This would be translated to a free cash flow of 300M USD. In 2024, they expect a further increase of 10% in the water segment translating to a free cash flow of 400M USD.
When I plug the assumptions into my model, I obtain slightly different numbers. First EBITDA for 2022, 2023 and 2024 are 568M USD, 642M USD and 657M USD respectively. Assuming the capex guidance of 115M USD (2022), 75M USD (2023) and 95M USD (2024), cash flow would be 239M USD (2022), 323M USD (2023) and 272M USD (2024). Note that I expect NGL to exit 2023 with net leverage of 4.3x. As this is lower than the 4.75x required to start paying the preferred dividend, I expect them to make the first payment in 2024.
As you can see below, I expect them to generate free cash each year in my forecast which could be used to pay down debt and eventually reinstate the dividend for common shareholders.
Based on the cash flows above and a WACC of 9.7% (unlevered beta of 0.83 for O&G services sector and a debt-to-capital ratio of 45%), my fair value for the common shares is $4.80 per share.
In November and December, management bought shares in the company. Note that those were informative purchases of shares. Informative transactions are transactions that indicate the insiders’ confidence in the company.
As per TipRanks:
Uninformative transactions indicate that an Insider is buying/selling shares for reasons that do not necessarily indicate confidence in the company. Therefore, they do not hold much significance. For example, an Uninformative Buy in insider trading can be an insider who is given shares as a form of compensation. Likewise, Uninformative Sells are often Insiders who are exercising options that are about to expire, or cashing in shares that are given to them as a form of payment.
Informative Buy/Sell transactions are deliberately made by Insiders, thus donning a vote of confidence in the company
The purchases were done by the CEO, the general counsel and the EVP of Strategic Initiatives.
In early January, Reuters published that operators having disposal wells in the Permian basin could lose 50% of their saltwater disposal capacity, NGL operates in that basin. The regulator wants to reduce the number of tremors, in 2021 there were 2,000 magnitudes 2.0 or higher earthquakes in Texas.
However, as per the earning call, there are no NGL assets within the impacted area but around it. In fact, NGL stands to benefit from this situation as more customers would like to use them as an alternative.
Earlier this month, NGL announced that it is partnering with XRI to increase the use of recycled and reused produced water in the Permian Basin. I think this partnership is a response to the customer demands for more sustainable use of produced water in completion activities and ease the demands from regulators.
In the last quarterly results, we saw the volume recovery in the Water segment and this is expected to continue in the medium term supported by the demand for NGL’s assets. The margin in the other two segments will continue to expand due to supply challenges in the butane market and the high price of crude. All this will generate strong cash flows in the coming years which will delever the balance sheet. This would allow them to pay the preferred dividend by 2024. While the stock already appreciated 40% since my initial article, I see the potential for the stock to double to $4.80.
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Disclosure: I/we have a beneficial long position in the shares of NGL either through stock ownership, options, or other derivatives. 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.