NGL Energy Partners LP (NYSE: NGL) has recently made significant strides in addressing its financial commitments, particularly concerning its preferred stock arrears.
The company announced last Thursday that it would pay $3.02, covering 55% of what it still owed on its Series B preferred shares.
The following day, NGL announced the closure of an asset sale, bringing in $70 million, which raised questions about why these proceeds were not immediately applied to the remaining arrears.
Subsequently, the company addressed these concerns by announcing plans to settle the remaining arrears, amounting to $2.475 for Series B, by next Friday (April 19th).
Recent Developments and Financial Strategy
This sequence of payments will bring NGL Energy Partners up to date on its preferred distributions, with the current payment for Series B at approximately $0.80 per quarter. At a $25 par price, this equates to a 12.8% yield.
While Series B is currently callable at $25, and Series C will be callable in May at the same price, NGL has expressed its intention to prioritize redeeming the $600 million privately held Series D, which has a 2028 maturity date and more restrictive covenants, before reallocating capital elsewhere.
Fiscal Outlook for 2024
NGL is projected to generate about $645 million in EBITDA for the fiscal year 2024. Considering an estimated $150 million in capital expenditures, $200 million for interest, and about $100 million for preferred distributions, the company is expected to have roughly $200 million of free cash flow available for redeeming Series D.
This strategic allocation is projected to retire Series D within approximately two years, factoring in potential EBITDA growth from capital projects and lower preferred distributions.
Impact on Common Stock
The redemption of Series D preferred shares is poised to benefit common stockholders significantly. Each dollar redeemed is expected to accrete to the common shares, enhancing future cash flows available from reduced preferred distributions.
As Series D redemptions progress, increased cash flows will become accessible to common unit holders.
At a current price of $5.90 per common unit, NGL sports a market capitalization of $782 million.
With the anticipated $200 million in free cash flow, the free cash flow yield is slightly over 25%.
The elimination of Series D, without accounting for any EBITDA growth, would boost the free cash available to common shares to $270 million, enhancing the free cash yield to approximately 35%.
Market Position and Valuation
NGL Energy Partners LP is trading at compelling valuation metrics. With an enterprise value of $4.64 billion and an EV/EBITDA ratio of 7.2x based on a projected $645 million EBITDA for 2024, the company presents a favourable investment compared to many of its MLP peers.
An application of an additional 1x of EBITDA to the market cap could potentially increase the unit value by about 80%.
Risks and Considerations
However, investors should consider several risks associated with NGL Energy Partners. As a small-cap entity in the energy sector, the company faces natural liquidity and volatility challenges.
Its status as an MLP may deter some institutional investors due to ESG considerations or restrictions on holding energy-related assets.
Additionally, despite being somewhat insulated from fluctuations, NGL’s performance may still be influenced by significant swings in oil and natural gas prices.
Compelling Investment with High Yield Potential
NGL Energy Partners LP’s strategic financial management, particularly its handling of Series D redemptions and preferred stock arrears, positions it as a compelling investment for those seeking substantial yield and potential capital appreciation.
While the preferred shares have shown strong performance, offering an attractive carry perspective, the common units now present an intriguing opportunity for substantial growth over the next year, potentially doubling in value.
Investors should weigh these prospects against the inherent risks associated with the sector and the company’s market cap size.
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