NGL ENERGY PARTNERS LP
Fitch Ratings has assigned a 'BB-'/'RR2' rating to
The notes are co-issued by
The company will use the net proceeds from the proposed notes to repay a large portion of its outstanding
Fitch has reviewed preliminary terms for the proposed senior secured notes and assumes no material variations in the final terms.
Key Rating Drivers
Pari-Passu Transaction: Total debt balance and EBITDA leverage are not affected by this refinancing transaction. The 'BB-' rating on the proposed senior secured notes is consistent with the ratings of Operating's existing senior secured notes. The proposed notes will rank equal in right of payment with Operating's proposed term loan facility.
Capital Structure: NGL's capital structure is comprised of sizable, cumulative high-coupon preferred units, including class D, which features an investor put option effective in FY 2028. Fitch views the complex capital structure as a credit negative due to its potential impact on the partnership's financial health and investment strategies.
Fitch views the subject notes offering in conjunction with a term loan B offering launched last week as positive. Once closed, these capital raises will facilitate NGL's addressing the preferreds arrearages. These arrearages are now accruing at high interest rates. Once the arrearages are cleared away, NGL can address the potential medium-term liquidity overhang posed by the class D preferred units, which have a term that constrains NGL's liquidity.
Sustained Focus on Delevering: Management employed credit supportive measures in recent years, including operating costs control, capex reduction and dividends suspension. In addition, NGL continues to sell non-core assets and use the proceeds to accelerate debt reduction. The company has achieved positive cash flow since FY 2022, and Fitch anticipates sustained positive FCF over the forecast period. Fitch anticipates that NGL remains dedicated in improving the balance sheet.
Fitch calculates leverage of around 6.0x as of FYE
Fitch's leverage calculation differs from management's, as Fitch includes the following in its calculation: i) 50% of class B and class C preferred units (including accumulated unpaid distribution); ii) the entirety of class D preferred units (including accumulated unpaid distributions of the class D preferred units) in the debt balance. The different treatment of the preferred units resulted in an approximately
Volumetric Risks and Customer Profile: Approximately 70% of NGL's businesses are fee-based with over 33% pipeline contracts containing minimum volume commitments (MVCs). Over 90% of NGL's water pipeline volumes are contracted with acreage dedication and a weighted average remaining tenor of approximately nine years. The partnership's businesses are largely tied to the crude oil production activities and subject to volumetric risk. NGL benefits from its strategic location in the highly economic
Another mitigating factor to the volumetric risk is NGL's diversified customer base, which includes a high percentage of public and investment-grade companies. Approximately 77% of NGL's Water Solutions revenues are generated by investment-grade counterparties. Additionally, compared with the private producers, the partnership's publicly traded producer customers tend to remain more disciplined in production when facing headwinds of declining commodity prices.
Commodity Price Exposure: NGL sells the skim oil recovered from the water volumes, and the margin is directly exposed to the commodity price volatility. Skim oil contributes approximately 20% of revenues to the Water Solutions segment in FYE 2023. The Crude Logistics and Liquids segments contributed over 20% of NGL's FYE 2023 EBITDA, and was mainly from activities that vary on the relationships between two prices for a commodity or commodities. The spreads can relate to location or time. The partnership leverages back-to-back contracts and financial derivatives to fully hedge the exposure in these two segments.
Size and Scale: With EBITDA generation of over
Derivation Summary
WATOPE has higher volumetric risk with an immaterial MVCs compared to NGL which has over one third of its contracts supported by MVCs. However, WATOPE has limited commodity price exposure whereas NGL's exposure is approximately 30%.
WATOPE's leverage is forecast to decline below into the lower 6x range by YE 2023. Fitch anticipates that NGL's leverage will be approximately 2-3 ticks lower during the same period after the proposed term loan B offering.
NGL has the same IDR as WATOPE, as they have similar business and financial risks. NGL's larger size and lower volumetric risks are offset by its higher commodity price exposure and execution risk in the Crude and Liquids segments. NGL's slightly lower leverage is offset by the potentially higher medium-term liquidity overhang posed by the class D preferred units.
Key Assumptions
Fitch Oil and Gas Price Deck: WTI (USD/bbl)
Base interest rates reflect Fitch Global Economic Outlook, e.g., 4.75% for calendar year 2024, and 3.50% for 2025;
Mid-single digit growth for Water Solutions business in FY 2024;
Capital spending largely in line with management expectations;
Asset sales of
Proactive financing to repay
Recovery Analysis
The recovery analysis assumes that NGL would be considered a going-concern in bankruptcy and that the partnership would be reorganized rather than liquidated. Fitch has assumed a 10% administrative claim (standard). The going-concern EBITDA estimate of approximately
Fitch used a 6x EBITDA multiple to arrive at NGL's going-concern enterprise value. The multiple reflects the recent reorganization multiples of 6x in the energy sector.
There have been a limited number of bankruptcies and reorganizations within the midstream space but in the limited sample such as bankruptcies of Azure Midstream and Southcross Holdco, the reorganization multiples were between 5x and 7x by Fitch's best estimates. In Fitch's recent bankruptcy case study report 'Energy, Power and Commodities Bankruptcies Enterprise Value and Creditor Recoveries,' published in
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade
EBITDA leverage sustained below 5.5x.
Factors that could, individually or collectively, lead to negative rating action/downgrade
Inability to proactively improve liquidity profile;
EBITDA Leverage is expected to sustain above 6.5x;
EBITDA interest coverage is expected to sustain below 2.0x.
Liquidity and Debt Structure
Liquidity Satisfactory: As of
The ABL is subject to a borrowing base. The commitments under the ABL totaled
The cash flow in NGL's Liquids Logistics segment is highly seasonal. The cash needs are high when the partnership builds inventory for its marketing businesses in the non-winter seasons. Fitch believes NGL will be able to fund its operation needs through cash in hand and capacity of the ABL through the forecast period.
Fitch believes the partnership will be able to comply with the ABL financial covenants in the forecast period. Upon the occurrence and during the continuance of a Cash Dominion Event (as defined in the ABL agreement), the company shall not permit the Fixed Charge Coverage Ratio to be less than 1.0x. At
The ABL features a springing maturity of 91 days prior to the earliest maturity date in respect to any of NGL's indebtedness in an aggregate principal amount of
The partnership's next maturity is approximately
The subsequent maturity after 2025 notes is the
Fitch assumes prompt debt issuance (which may be supplemented by application of FCF or asset divestiture proceeds to fully repay the 2026 secured notes, 2025 unsecured notes and the 2026 unsecured notes.
In the medium term, the company faces potential liquidity overhang triggered by the put option embedded in the series D preferreds units on and after
Issuer Profile
Date of Relevant Committee
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
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