Ladies and gentlemen, thank you for standing by, and welcome to the Q1 Fiscal Year 2021 NGL Energy Partnership LP Earnings Conference call. At this time all participants are in a listen-only mode. [Operator Instructions] Please be advised that today’s conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Mr. Trey Karlovich, CFO. Please go ahead, sir.

Great. Thank you, and welcome, everybody. First, I hope everyone is staying safe and healthy. As a reminder, this conference call includes forward-looking statements and information. Words such as anticipate, project, expect, plan, goal, forecast, intend, could, believe, may, and similar expressions and statements are intended to identify forward-looking statements. While NGL Energy Partners believes that its expectations are based on reasonable assumptions, there can be no assurance that such expectations will prove to be correct. A number of factors could cause actual results to differ materially from the projections, anticipated results or other expectations included in the forward-looking statements. These factors include prices and market demand for natural gas and natural gas liquids, refined products and crude oil; level of production of crude oil and natural gas liquids and natural gas; the effect of weather conditions on demand for oil, natural gas and natural gas liquids; and the ability to successfully identify and consummate growth opportunities and strategic acquisitions at costs that are accretive to financial results; and to successfully integrate and operate assets and businesses that are built or acquired. Other factors that could impact these forward-looking statements are described in risk factors in the partnership’s annual report on Form 10-K, quarterly reports on Form 10-Q and other public filings and press releases. NGL Energy Partners undertakes no obligation to publicly update or revise any forward-looking statements as a result of new information, future events or otherwise. This conference call also includes certain non-GAAP measures, namely EBITDA, adjusted EBITDA and distributable cash flow, which management believes are useful in evaluating our financial results. Please see the partnership’s earnings releases, investor presentations, and annual and quarterly reports on Form 10-K and Form 10-Q on our website at www.nglenergypartners.com, under the Investor Relations tab for more information on our use…

Thanks, Trey. The past quarter presented us with many challenges and opportunities, which we have been managing, like all of our peers and most companies in general. We have seen unprecedented volatility in crude prices and other commodities, significant reductions in demand for crude, refined fuels and certain liquid products and an increase in upstream producers facing significant financial difficulties. We have taken numerous steps to reduce operating costs and capital expenditures while optimizing our assets. We have been working closely with our producer customers to make sure we are meeting their operational needs and helping them to manage through this environment as well. We took advantage of an extremely steep contango crude environment in April, May, only to see the forward curve flatten considerably in June and through July. As Trey said, a significant portion of our profits are embedded in our inventory at June 30, and we expect to recognize these margins when the product is sold in our second quarter. We held skim oil barrels in tank and expect to monetize those in the upcoming quarter as well at higher average prices than we saw throughout the first quarter. We have also taken this opportunity to add acreage dedications, expand our market share and further solidify our core operating areas in the Water Solutions business. In the Delaware Basin, we have all of our large diameter pipe online and flowing water. The 24-inch LEX Pipeline East to Andrews County, Texas is in service, the 24-inch WEX pipeline from Eddy County to Mentone, Texas is operational as is the 24-inch Orla Express from Lee County to Mentone. Our new 30-inch pipeline in Southern Eddy County, South of Texas is in service and flowing water as well. This is a major milestone for NGL as these capital expenditures are now behind us. Water volumes are currently increasing with additional substantial contracted volumes coming on the remainder of the year. As Trey mentioned, we have reduced operating expenses in our Water segment by approximately $2 million per month beginning in June, which we will continue to fully realize in our future quarters. In closing, we took this quarter to focus on items that we can control as we continue to position NGL for long-term success, focusing on the future while managing the short-term obstacles and opportunities. With that, shall we open it up for questions?

[Operator Instruction] And we have a question from Pearce Hammond from Simmons Energy. Please go ahead.

Congrats on some of the recent success with some of the acreage dedications in the Delaware Basin. And I was just curious, what are leading-edge disposal fees right now within the Delaware Basin?

Doug, I’ll call on you for that one, but I think they’re different in Texas versus New Mexico. But Doug, what are your thoughts?

The range in Texas is anywhere from $0.45 to $0.55 generally. And in some areas, such as our Hillstone, Loving County assets, they’re somewhere from that range, but maybe a little bit higher due to its unique area, lack of electricity, station power, such as that. So we do have higher rates in that area. New Mexico, with the Devonian wells, they are much more expensive to develop, lack of reliable offtake and takeaway. We see those prices range anywhere from the lows of $0.55 to $0.80. You would imagine prices may have decreased during this downturn, but we have not seen that. We’ve seen some very temporary rate reductions to help the producers. But those rates, subsequent to the increase in commodity price, have gone back up to pre-COVID levels.

Okay. And then Mike and Trey, I just wanted to expound a little bit upon your prepared remarks comments on asset divestitures and potentially joint ventures to help reduce leverage. What are your thoughts there? What’s the sense of timing? What’s the market like for that right now?

Yes. So thanks, Pearce. So as we’ve done historically, we’re always looking at opportunities. It is a more challenged market, however, we are seeing it improve. We’ve got some significant opportunity ahead of us as well with – in particular, with our Water business, but really across all of our lines of business. So those are things that we continually evaluate and would expect to do so in these circumstances as well. Now generally speaking, the multiples that we would look at for those types of transactions, they have to be deleveraging in order to make an impact. So that’s what we would be targeting. So I would say nothing is on sale. Mike, I don’t know if you have anything to add.

Okay. Great. And then if I could squeeze one more in. Just what’s the latest update on Poker Lake?

As Mike stated previously, our 30-inch pipeline is in the ground and taking water. We – our timing of that development is unchanged from previous discussions. That’s all we can say about it currently publicly.

[Operator Instructions] And we have a question from James Spicer from TD Securities. Please go ahead.

The reduction in guidance, sort of the addition of the range to the guidance, $560 million to $600 million, I assume that reflects the $11 million onetime hit that – it doesn’t look like you can get that one back. Is there anything else built into that range that we should be thinking about?

So yes, it does include the onetime item in Crude. The other commentary I would add to that is that when we put the guidance up initially in April and then reiterated at the end of May, there was an extremely steep contango, which continued through May. That obviously disappeared in June. We do not expect contango to come back during the second half of this year and into next year. So we’ve removed the expectations for any significant contango barrels being held, which will help from a working capital perspective to reduce working capital needs, but obviously has the impact of not generating that incremental EBITDA either. So we captured contango during the first quarter. When we gave our original guidance, we expected to capture some contango throughout the year. And at this point in time, we’re not expecting that. Otherwise, no other real changes.

Yes. I would just add, it’s – we’re really in this transition period. I mean if you’re going to have significant contango, you’re going to have low crude prices, which is certainly not good for future crude and water production. So we’re in this period here of – I think some of our peers talked about – they – over $40 is a good thing. We’re not going to have contango. I think fiscal 2020 or calendar 2021 is close to $45. And so this should lead to some rigs being put back into service we think no later than the first calendar quarter of 2021. I don’t mean we get some DUCs completed in the last half of this year. So rather have a higher crude price than the contango.

And our next question comes from the line of Patrick Fitzgerald from Baird. Please go ahead.

Yes, thanks for taking the question. Is there any way you could help us with kind of – it seems like the obvious question about the capital structure with the maturities in 2021. What’s your plan to refinance that?

I’ll start. This is Trey. So our 2021 maturity is our credit facility. It’s – so it’s October of 2021. Our expectation is to have that extended prior to it going current. So that’s something that we’ve been working on. We’ve been in communications with our bank group. We expect the banker group to be constructive. There are a couple of ones that we’ve been working through, including we did the refi of a term loan. We completed that with Apollo back in June, so that we needed to complete that. And then the recent bankruptcy filing, we’ve been working through that as well. So this is something that is the number one priority of the finance team, expect it to be extended. That’s something that we’re working through.

Okay. And you bought back some bonds in the quarter, it looks like. I mean, do you plan to use capital for that purpose throughout the remainder of the year given where these prices are?

So we’ve always evaluated our bonds in the open market for opportunity. We bought those bonds at less than $0.50 on the dollar. We’ve done that in the past as well. We did that in 2016. So that’s something that we continue to evaluate. A lot of factors go into that decision on what is the best use of capital? What do liquidity needs look like? How does it impact leverage? What are our maturities? So all of those things are weighed. I wouldn’t take anything off the table, but I wouldn’t say that that’s a core strategy either.

Okay. And then the $560 million to $600 million guidance, that – I mean, how much of that factors in the – what’s going on with the bankruptcy proceedings and the litigation?

So that’s our latest expectation. At this point in time, both parties are operating under the existing contracts. So at this point in time, that’s what’s factored into our guidance. And again, we haven’t given a range. We are going on the fifth month of the year. So as this continues, it continues to operate under the existing contract structure.

Okay. Is there – say things go well, obviously, that probably doesn’t impact it. If things go against you, would you – is there any range you could provide on how much that – of an impact that could be?

So when we provided our expectations for the year, we expected a 5% to 10% reduction in volumes on Grand Mesa from last year’s results. So last year was about 130,000 barrels a day. So assuming about a 10% reduction, would be about 117,000 barrels a day. We’re running just above that. So we attempted to factor that in. Most of the volumes on Grand Mesa are under MVCs. We attempted to factor this situation into our overall guidance as well. I think that’s what I can say publicly and what’s been stated previously as well.

Let me add to that. This is an area we’ve seen some misconceptions, to be nice, in some of these people who volunteered their opinions on the Internet. It’s not only an EBITDA issue. You’re going to either have a contract or you’re going to have a very large unsecured claim, which results in ownership or both. And if some of what you have is ownership, then that is positive, you might say, to your leverage because you’re going to sell and pay down debt. So it’s hard for us at this point to decide – to determine where this thing is going. Is there going to be – are they going to accept the contract? Are we going to own a bunch of the company? Are we going to reduce debt? Is EBITDA going to be the same or a little less? Just – we just can’t say. I mean we have no idea. But you don’t end up with nothing, which is what some of the folks on the Internet have set.

And our next question comes from TJ Schultz from RBC Capital Markets. Please go ahead.

Thanks, good afternoon. Just on that last point on the Grand Mesa contract. Has there been any discussion to negotiate a lower MBC to provide more flexibility? Or is it at this point just a full accept or reject decision to the court and then going through with the unsecured claim?

Probably the easiest thing to say is we have not spoken to anyone representing or the bondholders themselves. So it’s hard to negotiate with a ghost.

Okay. Understood. Just a question on their exposure for your Water segment. If they are able to reject their water disposal contract, how material is that to you, if at all?

TJ, I would call it minimal. The DJ Basin, we have a very large area of dedication with lots of producers. I would not call it significant to the company or to the DJ on a standalone basis.

Okay. Understood. Just last on, I’m moving on. So the Water segment, the OpEx per barrel, I think you mentioned a partial benefit in this last quarter. And then as we think into the September quarter, maybe with a full quarter benefit, would you expect to get to that’s up $0.30 this quarter? Or is there still more to do throughout the year to fully realize that? Thanks.

Yes. We would expect to be at that $0.30 for this upcoming quarter and to stay at or below that level on a go-forward basis.

TJ, it’s Mike, just – I’ll add to that for your first question on the water contract. Again, you don’t end up with zero value. So that just increases – continues to increase our unsecured claim.

No. I understand, appreciate.

And I’m showing no further questions in the queue at this time.

Again, thank you, everybody, for your interest, and we look forward to talking to you on the next earnings call. Have a good evening. Thank you.

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.