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Why Units of NGL Energy Partners Are Tumbling Today

By Matthew DiLallo - Jan 20, 2021 at 3:51PM

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The midstream company has settled a dispute, but with a deal that will cut into its earnings.

What happened

Units of NGL Energy Partners (NGL -2.05%) were trading more than 10% lower as of 3 p.m. EST Wednesday after the MLP provided a financial update to investors.  

So what

NGL Energy Partners has settled its dispute with oil producer Extraction Oil & Gas. During that company's Chapter 11 bankruptcy proceedings, it rejected two transportation service contracts with Grand Mesa Pipeline, a subsidiary of NGL Energy Partners. The companies have since reached a resolution on a new long-term supply agreement that includes a new rate structure based on the monthly price of oil and a $35 million payment to settle the claim. 

The silutet of two people shaking hands with oil pumps in the background.

Image source: Getty Images.

Overall, the agreement will reduce NGL Energy Partners' adjusted EBITDA for its fiscal 2021 (which ends March 31) by $45 million, bringing it to $500 million. In addition, the company expects to record a non-cash impairment charge of between $380 million and $400 million relating to Extraction's bankruptcy and settlement. 

Meanwhile, the midstream energy company initiated guidance for fiscal 2022, forecasting between $570 million and $600 million of adjusted EBITDA. It also plans to spend $100 million to $125 million on growth and capital expenses. 

Now what

NGL Energy Partners is one of several midstream providers that was impacted by last year's wave of oil company bankruptcies. While heavy debt burdens sank many producers as oil prices plunged, they also couldn't afford the high-cost midstream contracts they had signed. Because of that, NGL Energy Partners had to renegotiate its rates, which will cut into its earnings and the value of its assets. This makes it an even less attractive investment since it puts its distribution -- which it already cut by 50% in October -- on an even weaker foundation. At current share prices, that payout yields more than 15%.

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