The last time we covered NGL Energy Partners LP (NYSE: NGL), we gave our Strong Sell to common and preferred stock. In our defense, our hands were tied. “Get Out Of Dodge” is still not among the choices available on Looking for Alpha. On common stocks, the timing was excellent. NGL went straight down from there like a lead balloon.
Preferred shares showed a bit of divergence. The B’s (NYSE: NGL.PB) decreased by about 26%.
The units C (NYSE: NGL.PC) fell by just 11%.
We update the bear’s thesis with these and general market moves and examine where a negative position would be best served.
NGL has a fiscal year ending in March. The Q1-2023 results that were released after our last article were another disappointment. Although first quarter Fiscal 2023 Adjusted EBITDA increased to $123.9 million from $91.1 million, it was still lower than one would expect in a climate of extremely high oil prices. NGL directly benefits from crude oil prices and this can be seen in their commentary.
Revenues from recovered crude oil, including the impact of skim oil hedges, totaled $32.9 million for the three months ended June 30, 2022, an increase of $16.9 million from the period of the previous year. This increase is attributable to higher barrels of skimmed oil sold due to higher volumes of treated produced water, higher volumes of skimmed oil captured per barrel of treated produced water and higher realized crude oil prices from the sale of barrels of skimmed oil.
Source: NGL press release
On the bullish side, NGL actually raised its full-year guidance for the water solutions segment to over $400 million and maintained the original adjusted EBITDA target for the company at over $400 million. $600 million.
One unusual thing was that NGL made this small debt payment, not from organic cash flow, but by borrowing against its credit facility. Net cash from operating activities was only $2.5 million and after subtracting $36.4 million of investment, base cash flow was strongly negative.
There is a lot of working capital movement in the first quarter, which probably led to the use of the credit facility to buy back debt. Total debt actually increased during the quarter.
All things being equal, next quarter results, which include extremely high oil prices with the removal of some of the company’s oil price hedges, should be quite good. It is beyond that, when the tailwind of these prices has disappeared, that we will have to see if the company can meet the challenges of this environment. NGL will also have to deal with rising tariffs on its ABL facility, which will really add numbers in 2023.
As of June 30, 2022, $171.0 million had been borrowed under the ABL Facility and we had outstanding letters of credit of approximately $143.6 million. The ABL Facility shall mature no earlier than (a) February 4, 2026 or (b) 91 days prior to the earliest maturity date in respect of any of our indebtedness in the aggregate principal amount of 50 $.0 million or more, if such debt is outstanding at the time, subject to certain exceptions.
As of June 30, 2022, borrowings under the ABL facility had a weighted average interest rate of 4.84% calculated as the prime rate of 4.75% plus a margin of 1.75% on the alternative base borrowings and the weighted average SOFR of 1.28% plus a margin of 2.75% for SOFR borrowings. As of June 30, 2022, the prevailing interest rate on the letters of credit was 2.75%.
Source: NGL 10-Q
On its publicly traded debt, we also have an interesting divergence. Below are the numbers for June 5, 2022 that we had in the last article.
Here are today’s numbers. Outside of the November 2023 maturities, all other bonds, including senior covered bonds, are lower today.
For us, that probably means NGL is having a good quarter and is focusing all of its firepower on reducing that debt. This offer keeps this one strong compared to the others.
Common stocks have plunged significantly since the last article and we are turning tactically neutral at this point, moving them to a Hold from a Strong Sell. We would be looking to take a bearish view after a likely rebound from next quarter’s results. We still don’t think debt repayment will happen fast enough in the next 14 months and NGL is likely heading towards Chapter 11. But in trading, tactics are as important as strategy and we are ready again. to declare victory on this appeal. .
Preferred shares remain an enigma for us. We don’t see any results where a single penny will be paid on them, even though we’re dead wrong that NGL won’t be successful until 2023. There are a lot of hurdles to jump through and all those notes above were made to a time of very benign credit conditions. The closest after 2023 has a yield to maturity of 15.9%. The earliest we would think the preferred dividends could be paid would be after crossing the 2026 deadlines. We maintain a sell rating on the preferred shares, while noting that NGL.PC is a relatively better sell here.
For those looking for NGL yield and maintaining that the turnaround is happening right before their eyes, we would consider the Senior Secured Notes with a yield to maturity of 11.3% over the Preferred Shares. This latest set will probably never pay a penny more.
Please note that this is not financial advice. It may seem, seem, but surprisingly, it is not. Investors are required to do their own due diligence and consult a professional who knows their objectives and constraints.