Executive Summary / Key Takeaways

• NGL Energy Partners is undergoing a significant strategic transformation, divesting non-core, volatile Liquids Logistics assets to focus primarily on its stable, fee-based Water Solutions business and a recovering Crude Oil Logistics segment.
• The Water Solutions segment is the core growth engine, demonstrating strong operational performance with increasing volumes and controlled costs, underpinned by long-term contracts, acreage dedications, and strategic infrastructure like the new LEX II pipeline.
• Recent financial performance reflects this shift, with Water Solutions driving Adjusted EBITDA growth, while asset sale proceeds have been strategically deployed to significantly reduce debt and begin addressing high-cost preferred equity.
• Management's FY2026 guidance implies underlying growth in the core business despite headwinds from lower commodity prices and asset sales, supported by expected volume increases in both Water and Crude segments and reduced capital spending.
• Key factors for investors to monitor include continued execution on deleveraging targets, progress on reducing the Class D preferred units, sustained volume growth and operational efficiency in Water Solutions, and the anticipated recovery in Grand Mesa pipeline volumes.

Setting the Scene: A Midstream Transformation

NGL Energy Partners LP operates within the dynamic U.S. and Canadian midstream energy sector, providing essential services across three primary segments: Water Solutions, Crude Oil Logistics, and Liquids Logistics. Originally formed in 2010, the partnership has evolved significantly, particularly over the past several years, through a deliberate strategic repositioning. This effort has aimed to sharpen the company's focus, enhance the stability and predictability of its cash flows, and fortify its balance sheet.

The core of this transformation involves a strategic pivot towards NGL's Water Solutions business, while rationalizing and divesting assets, particularly within the historically volatile Liquids Logistics segment. This shift is designed to leverage the partnership's competitive strengths in key producing basins and transition towards a business mix predominantly underpinned by long-term, fixed-fee contracts, often featuring acreage dedications or minimum volume commitments. This foundational strategy sets the stage for understanding NGL's recent performance and future outlook.

Within the competitive midstream landscape, NGL operates alongside larger, more diversified players like Enterprise Products Partners (EPD), Plains All American Pipeline (PAA), Kinder Morgan (KMI), and ONEOK (OKE). While these competitors often possess greater scale, broader pipeline networks, and higher profitability margins (e.g., EPD's operating margins often exceed 25%, compared to NGL's estimated 9-10% TTM operating margin), NGL carves out a niche, particularly in its Water Solutions segment. NGL's integrated approach, combining transportation, treatment, recycling, and disposal, offers a differentiated service model. While direct, precise market share figures for all niche competitors are not publicly detailed, NGL positions itself by offering comprehensive solutions, aiming for operational efficiency and strong customer relationships within its targeted basins.

NGL's Water Solutions segment benefits from proprietary well maintenance programs designed to enhance injection rates and extend the useful lives of its disposal wells. Furthermore, the company holds multiple patents for processing technologies, which management believes can be quickly implemented at new facilities. While specific quantifiable performance metrics for these technologies relative to competitors are not detailed, the strategic intent is clear: to improve operational efficiency, support environmental compliance for producers, and potentially enable water reuse and recycling. The company is also exploring R&D initiatives in areas like mineral extraction and desalinization, although these are not yet proven economically viable. This technological focus, particularly in water treatment and disposal, contributes to NGL's competitive moat, offering specialized services that differentiate it from competitors primarily focused on hydrocarbon logistics.

Performance Reflecting Strategic Shift

NGL's recent financial performance underscores the impact of its strategic repositioning and the differing contributions of its segments. For the fiscal year ended March 31, 2025, the partnership reported total revenues of $3.47 billion, a decrease from $4.15 billion in FY2024 and $5.68 billion in FY2023. This top-line trend reflects the significant divestiture activity, particularly the sales of higher-revenue, lower-margin businesses within Liquids Logistics and Crude Oil Logistics. Despite the revenue decline, operating income saw a notable increase to $329.36 million in FY2025, up from $161.91 million in FY2024 and $243.99 million in FY2023. This improvement highlights enhanced profitability in the remaining core operations and the impact of reduced impairment charges compared to prior years.

The Water Solutions segment stands out as the primary driver of profitability and growth. It generated operating income of $311.46 million in FY2025, a substantial increase from $231.26 million in FY2024. This growth was fueled by a rise in produced water volumes processed from contracted customers and higher fees for interruptible spot volumes. Physical water disposal volumes reached 2.63 million barrels per day in FY2025, up from 2.42 million in FY2024. The segment also demonstrated strong cost control, with operating expenses per barrel processed at $0.22 in FY2025, down from $0.24 in FY2024. The LEX II expansion, which commenced operations in October 2024, contributed to volumes and revenue, further solidifying the segment's performance.

The Crude Oil Logistics segment's operating income decreased to $46.10 million in FY2025 from $52.07 million in FY2024. This was primarily attributed to lower sales volumes on the Grand Mesa Pipeline (averaging ~61,000 bbl/day in FY2025 vs. ~70,000 bbl/day in FY2024) and lower crude oil prices, which impacted product margins. However, transportation and other sales revenue increased, benefiting from higher tariffs on Grand Mesa and increased terminaling/throughput activity in other areas. Management believes this segment is bouncing off a low point.

The Liquids Logistics segment, significantly impacted by divestitures and the winding down of the biodiesel business (which incurred negative Adjusted EBITDA), saw its operating results improve from a loss of $13.18 million in FY2024 to income of $14.06 million in FY2025 for continuing operations. This improvement, despite lower overall volumes due to asset sales, reflects better performance in the remaining businesses and potentially improved margins in certain product lines like butane, although propane margins were pressured by market conditions.

Liquidity has been a key focus. The debt refinancing in February 2024, which included $2.2 billion in senior secured notes and a $700 million Term Loan B, restructured the partnership's long-term obligations. This, combined with over $270 million in proceeds from asset sales in FY2025, allowed NGL to pay off its ABL facility and begin repurchasing Class D preferred units. As of March 31, 2025, the partnership had $109 million outstanding on the ABL, with a borrowing base of $397.7 million, indicating sufficient short-term liquidity.

Outlook, Guidance, and Strategic Priorities

Management's fiscal year 2026 outlook reflects confidence in the trajectory of the core business despite facing headwinds. The guidance for consolidated Adjusted EBITDA is set at $615 million to $625 million, with a midpoint of $620 million. While this is comparable to the FY2025 actual Adjusted EBITDA of $622.9 million (as reported in the Q4 2025 call), management highlighted that this guidance effectively absorbs an estimated $20 million decline in skim oil revenues due to lower expected crude prices and another $20 million reduction from the Adjusted EBITDA contribution of assets sold in FY2025. This implies an underlying growth expectation of $20 million to $25 million in the go-forward business.

The Water Solutions segment is expected to remain the primary growth engine, projected to contribute approximately 85% of FY2026 Adjusted EBITDA. Early FY2026 volumes in this segment have already exceeded internal expectations, supported by the full-year contribution of the LEX II pipeline and continued strong performance from contracted volumes (90% committed, 80% investment grade). Management anticipates continued opportunities for growth within the Delaware Basin.

In Crude Oil Logistics, the outlook includes expected volume increases on the Grand Mesa pipeline, driven by new customer contracts like the one with Prairie Operating, with initial new volumes anticipated in early July 2025. Management believes volumes could potentially reach 100,000 to 115,000 barrels per day over the next 6 to 12 months, contributing to the segment's recovery.

Capital expenditures are projected to decrease significantly in FY2026, guided at $105 million total, down from $210 million in FY2025. Of this, $60 million is allocated to growth projects, primarily within the Water Solutions segment, signaling a focused investment strategy.

Strategic priorities remain clear: lowering leverage (with a target below 4x), further reducing the Class D preferred units (identified as the highest cost of capital), and continuing to grow the Water Solutions segment. The authorization of a $50 million common unit repurchase program provides additional flexibility to return value to unitholders, reflecting management's view that the common units are currently undervalued based on cash flow generation.

Risks and Challenges

Despite the positive strategic direction, NGL faces several risks that could impact its performance and outlook. Commodity price volatility remains a significant factor, affecting producer activity levels (and thus water and crude volumes), skim oil revenues, and margins in the Liquids Logistics segment. While contracting strategies mitigate some of this exposure, prolonged periods of low prices could pressure results.

Regulatory risks, particularly concerning environmental regulations related to hydraulic fracturing and saltwater disposal (including concerns about induced seismicity), could lead to increased operating costs, restrictions, or delays for NGL and its customers. Although NGL has legacy permits and strategically located assets that currently mitigate some of these risks, the regulatory landscape is evolving.

Competition across all segments is intense, with larger players potentially leveraging scale and financial resources. While NGL's specialized services offer differentiation, competitive pressures could impact pricing and market share. The ability to secure new long-term contracts and retain existing customers is crucial.

Executing on the strategic plan, including completing planned asset sales and successfully integrating new volumes on Grand Mesa, carries inherent risks. Furthermore, the obligation to potentially redeem Class D preferred units starting in 2027 requires careful balance sheet management and access to capital.

General economic conditions, interest rate fluctuations (impacting variable debt and preferred distributions), and operational hazards are also ongoing considerations that could affect financial results and the ability to execute the strategic vision.

Conclusion

NGL Energy Partners is actively transforming its business, shedding volatility and focusing on its core strengths, particularly the high-growth, fee-based Water Solutions segment. The strategic divestitures, coupled with a successful debt refinancing and the initiation of preferred unit and common unit repurchases, demonstrate a clear commitment to strengthening the balance sheet and optimizing the capital structure.

The investment thesis centers on the potential for value creation driven by sustained growth in the Water Solutions business, a recovering Crude Oil Logistics segment benefiting from new volumes, and the financial benefits derived from deleveraging and reducing high-cost capital. While commodity price volatility and regulatory uncertainties present ongoing challenges, NGL's focus on contracted revenues and operational efficiency in its core segment provides a degree of stability. Investors should closely monitor the partnership's progress in achieving its leverage targets, the strategy for addressing the Class D preferred units, and the execution of growth initiatives within the Water Solutions segment as key indicators of the long-term value creation potential.