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NGL Energy Partners (NYSE: NGL), like most master limited partnerships (MLPs), struggled following the oil price crash of 2014. Units of the MLP plunged more than 75% from their peak at one point because the slump further weakened its already tenuous financial profile.
The midstream company, however, has worked hard to turn things around over the past few years. Those efforts are starting to pay off as evidenced by the more-than-50% rebound in the MLP's unit price this year. Even though the company still has work to do, it's worth watching, if only for its distribution, which yields more than 10%.
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NGL Energy Partners 101
NGL Energy Partners operates a diversified midstream business. While the company's name suggests it primarily focuses on natural gas liquids (NGLs), those activities supply only about 10% to 15% of its annual earnings. Instead, the company gets more than half of its earnings from providing water solutions to oil and gas producers. These activities include gathering water produced from wells and treating it for disposal or recycling. Another 30% to 35% of its earnings comes from crude oil logistics activities, such as operating oil pipelines and storage terminals. The final 5% to 10% of its profits comes from refined products and renewables.
Many of these activities provide the company with stable and predictable cash flow backed by long-term, fee-based contracts. The company has set a target to get 70% of its revenue from these steady sources. The rest comes from activities that are more sensitive to commodity prices. That split makes it a bit more exposed to volatility than most other MLPs, which like to get at least 85% of their revenue from stable sources.
Making progress on the turnaround
NGL Energy Partners' outsize exposure to commodity prices put pressure on its earnings and cash flow when oil prices plunged. That caused the company's leverage ratio to rise from its targeted level of around 3.25 times debt to EBITDA up to 4.7 times in 2017. Meanwhile, its distribution coverage ratio fell from around 1.1 to 0.8 last year, meaning it paid out more than 100% of its cash to investors. Those issues caused the MLP's unit price to plunge.
However, NGL Energy Partners has spent the past few years working to bolster its financial position. Last year the company sold several assets, including its retail propane business for $900 million and some noncore water assets for $238.8 million. These sales helped push the company's leverage ratio down to a much more comfortable 2.9 this year.