In a Dec. 20, 2018, research note, Raymond James analyst Justin Jenkins reported that following NGL Energy Partners LP's (NGL:NYSE) Analyst Day, which focused primarily on the company's water solutions segment, "we came away from our trip with increased conviction in the long-term story" and "we continue to believe ample long-term value [in NGL] exists."
In general, Jenkins noted, water solutions will keep driving cash flow for the limited partnership (LP) and "is propelling its ongoing efforts to right-size its capital structure and generate discounted cash flow per unit growth (along with enhancements to its other businesses, with notable success in the crude oil segment)."
Further, to supplement these operational improvements, management garnered about $1.8 billion in cash from sales of assets during the past year or so. "With both coverage and leverage improving due to these trends, and an attractive current yield, we continue to like the total return value proposition of NGL," he added.
Jenkins highlighted these points from his time spent with the LP's management:
1. The geographic area with the most significant growth opportunity for NGL is the Permian Basin, as it produces more water than any other basin. Its water:oil ratio is 3:1 or 4:1 versus that of other basins, at about 1:1.
2. NGL has a first mover advantage. For example, with its recently acquired ranch properties, it intends to provide integrated services to its potential exploration and production customers.
3. The economics of disposal wells seem attractive, with an average returned EBITDA of 60–65%.
Jenkins left Analyst Day "incrementally more positive on the water services platform NGL has built" and believes the business should be viewed as any traditional mainstream business is.
He commented briefly on NGL's other segments as well. With respect to crude oil logistics, he noted volumes on the Grand Mesa pipeline continue to be robust and are likely ahead of forecasts. "If volumes remain resilient, even in the face of the recent decline in oil prices, there could be upside potential to financials related to Grand Mesa."
Concerning the liquid logistics segment, competition in the space seems to be easing, according to management. "While commodity volatility remains, we still believe FY19 guidance is achievable and that upside potential actually exists for this business in the near-to-intermediate term," Jenkins wrote.
As for refined products, dropping commodity prices are reducing the working capital requirements for the segment, in which the MLP continues with operational improvements.
Finally, in the capital allocation division, "buybacks are a large part of the conversation," indicated Jenkins, adding that, looking forward, NGL should see "incremental optionality for deploying capital."
Jenkins concluded that "as NGL's integrated water solutions platform exhibits consistent execution and growth, coupled with the addition of unit buybacks, we believe the limited partnership's equity can bounce off its depressed multiples." NGL stock, on which Raymond James has an Outperform rating, is currently trading at around $10.54 per share.
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Disclosures from Raymond James, NGL Energy Partners LP, December 20, 2018
ANALYST INFORMATION
Analyst Holdings and Compensation: Equity analysts and their staffs at Raymond James are compensated based on a salary and bonus system. Several factors enter into the bonus determination including quality and performance of research product, the analyst's success in rating stocks versus an industry index, and support effectiveness to trading and the retail and institutional sales forces. Other factors may include but are not limited to: overall ratings from internal (other than investment banking) or external parties and the general productivity and revenue generated in covered stocks.
The analysts Justin Jenkins and J.R. Weston, primarily responsible for the preparation of this research report, attest to the following: (1) that the views and opinions rendered in this research report reflect his or her personal views about the subject companies or issuers and that no part of the research analyst's compensation was, is, or will be directly or indirectly related to the specific recommendations or views in this research report. In addition, said analyst(s) has not received compensation from any subject company in the last 12 months.
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