Shares of oil and gas midstream company NGL Energy Partners (NYSE:NGL) are down 20% as of 11:00 a.m. EST today after the company reported fiscal third-quarter 2018 results. To put it lightly, the results weren't great.
NGL Energy Partners is a business that has been heavily bogged down by debt in recent years, with its debt to EBITDA ratio climbing as high as 15 times. Management has said that it intends to pay down that debt and get its capital structure back on more solid footing, but that didn't happen this quarter.
NGL reported a net income result of $39.9 million or $0.32 per diluted share. It should be noted, though, that this gain was largely attributed to a $110 million gain on the disposal of some assets. Were it not for that sale, the company would have slipped into the red -- Wall Street analysts were expecting a $0.19 per share gain for the quarter.
In terms of debt reduction, the company announced that the sale of its Glass Mountain pipeline netted $300 million in cash that it will use to pay down debt. It has also entered into an agreement to sell $200 million of its propane distribution business that will close this quarter. All of the proceeds are expected to go toward debt reduction, but it should be known that NGL Energy Partners has about $2.9 billion in debt. So while this covers a decent chunk, the company still has a ways to go.
Investing in midstream oil and gas companies is all about locating management teams that can find that right balance of spending on growth, financial discipline, and returning cash to shareholders. The business is inherently full of debt loads that are much larger than most other industries, so all it takes is one or two wrong moves until the offending company is in deep trouble.
It's pretty clear that NGL Energy Partners is in rough shape. Having to shed income generating assets to pay down its debt load is a no-win situation because now it has a smaller earnings stream to service that debt. This company looks like an obvious stay-away candidate.