What happened
Shares of energy products supplier NGL Energy Partners LP (NGL +2.05%) jumped 15% today after the company announced fiscal fourth-quarter and full-year 2018 results. The business continues to improve, as demonstrated by adjusted EBITDA of $155.9 million in the final three months of the fiscal year. That was a 28.6% increase from the year-ago period.
However, that was only part of the reason for Wall Street's excitement. NGL Energy Partners also announced the sale of its retail propane business for a cool $900 million. That will provide ample financial firepower to deleverage the balance sheet and reposition the business to focus on crude logistics and water solutions for its oil and gas customers.
As of 12:35 p.m. EDT, the stock had settled to a 4.7% gain.
Image source: Getty Images.
So what
While NGL Energy Partners struggled to match its performance from fiscal 2017 where it matters most (net income and cash flow), a few accounting items in each of the last two years were the main contributing factors. The business did manage to deliver strong adjusted EBITDA growth, however, which attempts to account for year-to-year fluctuations.
|
Metric |
Fiscal 2018 |
Fiscal 2017 |
Change (YOY) |
|---|---|---|---|
|
Revenue |
$17.3 billion |
$13.0 billion |
32.7% |
|
Operating income |
$138.3 million |
$255.1 million |
(45.8%) |
|
Adjusted EBITDA |
$408.2 million |
$381.3 million |
7% |
|
Net income attributed to common unitholders |
($130.9 million) |
$106.7 million |
N/A |
|
Distributable cash flow |
$180.0 million |
$211.0 million |
(14.8%) |
Data source: Press release. YOY = year over year.
In the year ahead (that would be fiscal 2019), NGL Energy Partners has set initial expectations for $450 million in adjusted EBITDA. That includes up to $225 million in adjusted EBITDA from the water solutions segment, up from $116 million last year, and up to $155 million from the crude oil logistics segment, up from $117 million last year. The two remaining segments are not expected to deviate from the prior year.
What's impressive about the expectation for $450 million in adjusted EBITDA is that it excludes the retail propane business, which contributed $109 million in adjusted EBITDA in fiscal 2018.
Moreover, the $900 million in proceeds from the sale will help to deleverage a toxic balance sheet that held $1.71 billion in long-term debt at the end of March 2018. Management said it plans to immediately repay $800 million in debt and decrease the company's leverage ratio to 3.5 in the process -- a huge overnight improvement.
Now what
A focus on efficient crude oil logistics and a booming water business are about to pay off for NGL Energy Partners. The well-timed sale of the retail propane business will allow the company to reduce its long-term debt by nearly half, while saving tens of millions of dollars on interest expenses and maintenance expenses each year. That will boost net income and operating cash flow and make it easier to reach the target distribution coverage ratio of 1.3, which makes the 14% yield a little safer. Assuming, of course, the business delivers on its goals -- and that remains to be seen.
