Executive Summary / Key Takeaways

• NGL Energy Partners LP is undergoing a profound strategic transformation, shedding volatile legacy assets to emerge as a focused Water Solutions and Crude Oil Logistics powerhouse, with Water Solutions projected to generate approximately 85% of its adjusted EBITDA.
• The company has demonstrated robust financial performance, with Q2 FY26 consolidated adjusted EBITDA from continuing operations increasing 12% year-over-year to $167.3 million, driven by record water volumes and significant growth in its Grand Mesa crude pipeline.
• Management has raised its full-year fiscal 2026 adjusted EBITDA guidance to $650-$660 million and provided initial fiscal 2027 guidance of at least $700 million, underpinned by new growth capital projects and substantial volume commitments in Water Solutions.
• NGL is aggressively fortifying its balance sheet through opportunistic debt and equity repurchases, including Class D preferred units and common units, aiming for a zero ABL balance by fiscal year-end and leverage below 4x.
• The company maintains a strong competitive moat in the Delaware Basin's water midstream sector, characterized by extensive permitted injection capacity, the largest pipeline system, and strategic pore space acquisition, positioning it favorably against evolving regulatory landscapes and industry consolidation.

NGL's Strategic Transformation and Market Leadership

NGL Energy Partners LP, established in 1940, is executing a deliberate and comprehensive strategic transformation, pivoting from a diversified and often volatile energy logistics provider to a streamlined entity predominantly focused on its high-growth Water Solutions segment, complemented by a robust Crude Oil Logistics business. This strategic shift is designed to enhance financial stability, reduce earnings volatility, and unlock long-term value for unitholders. The company's journey has involved significant asset divestitures and a concerted effort to fortify its capital structure, positioning it for sustained growth in its core areas.

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The midstream water market for oil and gas in the U.S. is projected to reach a total of $156 billion between 2025 and 2030, growing at a 2.1% compound annual growth rate. This expansion is fueled by robust energy demand and increasing water volumes, alongside growing seismic risks that necessitate more efficient water management strategies. NGL is capitalizing on this trend, with its Water Solutions segment becoming the primary engine of its financial performance and future growth.

In the competitive landscape, NGL distinguishes itself through several key advantages, particularly within its Water Solutions segment. Management asserts that NGL generates the most adjusted EBITDA annually, transports the greatest volume of water for disposal, and holds the largest volume of water under volume commitments among its peers. The company also claims to operate its water business with the lowest cost per barrel and provides the most capacity to move water, primarily through its extensive pipeline network. This integrated approach and operational efficiency create a significant competitive moat.

NGL's technological and infrastructure differentiators are particularly evident in the Delaware Basin. The company boasts over 5 million barrels per day of permitted injection capacity across 131 injection wells and 57 water processing facilities. Its pipeline system, spanning more than 800 miles—including approximately 700 miles of 12- to 30-inch diameter pipelines—represents the largest capacity network in the Delaware Basin. This extensive infrastructure is a critical metric, directly influencing physical volumes and ensuring reliable water takeaway for producers. Furthermore, NGL has strategically expanded its pore space inventory, securing approximately 4 million barrels per day of unburdened pore space in Andrews County, Texas, which is free from legacy injection, vertical production, or seismicity. This unique asset base provides a substantial foundation for future growth, potentially allowing NGL to more than double its current Delaware Basin volumes.

Beyond disposal, NGL is pioneering efforts to introduce the Delaware Basin's first large-scale produced water treatment plant. The company received the initial draft permit in October 2025 for influent volumes of approximately 800,000 barrels per day. This initiative underscores NGL's commitment to beneficial reuse and recharging the Pecos River Basin, offering an alternative disposal option for producer customers and further sustaining its pore space inventory. This forward-thinking approach to water management positions NGL favorably amidst increasing environmental scrutiny and evolving regulatory frameworks.

Operational Momentum and Financial Strength

NGL's strategic pivot is clearly reflected in its recent operational and financial performance. For the three months ended September 30, 2025 (Q2 fiscal 2026), consolidated adjusted EBITDA from continuing operations reached $167.3 million, marking a 12% increase from $149.4 million in the prior year's second quarter. This growth was predominantly fueled by the Water Solutions segment, which saw its adjusted EBITDA climb 18% to $151.9 million. Physical water disposal volumes in this segment rose 4% to 2.8 million barrels per day, with total paid volumes, including deficiency volumes, increasing approximately 14% to 3.15 million barrels per day over the same period. Notably, in October 2025, the Water Solutions segment averaged over 3 million barrels per day of physical disposal volume. The segment also maintained an impressive operating expense of $0.22 per barrel for the quarter, consistent with previous periods.

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The Crude Oil Logistics segment also contributed positively, with Grand Mesa pipeline physical volumes averaging approximately 72,000 barrels per day in Q2 fiscal 2026, a 30% increase over Q1 fiscal 2026 volumes. October 2025 volumes for Grand Mesa further strengthened, exceeding 80,000 barrels per day. This resurgence follows a period of reduced sales due to lower production in the DJ Basin and declining crude oil prices. The Liquids Logistics segment, while undergoing significant divestiture, saw its butane product margins improve due to enhanced rail utilization and supply optimization.

The company's strategic divestitures have significantly impacted its financial profile. The sale of the refined products business, the winding down of the biodiesel business, and the sale of the majority of the wholesale propane business, including 17 natural gas liquids terminals, have collectively eliminated an average of $60 million to $70 million in annual working capital, with peak requirements historically reaching over $100 million. These actions are designed to reduce working capital needs, smooth out EBITDA seasonality, and reduce overall debt.

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Capital Structure Fortification and Shareholder Value

NGL's management is intensely focused on strengthening its balance sheet and optimizing its capital structure. The company projects a zero ABL balance by the end of the current fiscal year and aims to achieve leverage below 4x. This deleveraging is supported by increased operating cash flow and proceeds from strategic asset sales.

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Since April 2025, NGL has repurchased 88,506 Class D preferred units, representing approximately 15% of the outstanding units. These repurchases are expected to generate $10.4 million in annual distribution savings. The company has also opportunistically repriced its Term Loan B twice since February 2024, reducing the SOFR margin from 375 basis points to 350 basis points in September 2025, resulting in annual interest savings of $15 million. Furthermore, under a board-authorized common unit repurchase plan, NGL has acquired an additional 4.4 million common units in Q2 fiscal 2026, bringing the total to approximately 6.8 million units, or about 5% of outstanding units, at an average price of $4.57 per unit. These actions demonstrate management's commitment to capital allocation flexibility and delivering attractive returns to investors.

Future Growth and Strategic Capital Allocation

NGL's outlook is characterized by strong growth projections, particularly in its Water Solutions segment. Management has increased its full-year fiscal 2026 adjusted EBITDA guidance range from $615-$625 million to $650-$660 million. This upward revision reflects the robust performance of Water Solutions and additional growth opportunities. For fiscal 2027, the company provides initial adjusted EBITDA guidance of at least $700 million, with the majority of this growth anticipated from new projects.

The company has underwritten new growth capital projects for approximately 750,000 barrels per day of newly contracted volume commitments, slated for service by the end of calendar year 2025. These new contracts will bring NGL's total volume commitments to 1.5 million barrels per day for fiscal 2027, with an average remaining term of almost 9 years. The increased contract volume necessitates an additional $100 million in growth capital expenditures, which management views as a worthwhile investment. In the Crude Oil Logistics segment, new long-term acreage dedication deals, such as with Prairie Operating, are expected to significantly enhance Grand Mesa volumes and profitability, with projections to reach 100,000 barrels per day.

Risk Factors and Resilient Positioning

Despite the positive outlook, NGL operates within an industry subject to inherent risks. Commodity price volatility remains a key concern, as fluctuations in crude oil and natural gas liquids prices can impact revenues and working capital demands. The global crude oil market, for instance, is bracing for anticipated oversupply in Q4 2025, which could exert downward pressure on prices. However, NGL mitigates this through its fee-based business model in Water Solutions and by utilizing economic hedges during inventory builds in its Liquids Logistics segment.

Credit risk, stemming from potential non-performance by counterparties, is managed through rigorous credit policies, including financial condition evaluations, collateral requirements, and master netting agreements. A significant portion of NGL's volumes, 80%, are with investment-grade counterparties, providing a layer of stability.

Seismic activity associated with produced water disposal in Texas and New Mexico presents a regulatory risk. The Railroad Commission of Texas (RRC) has issued new guidelines for Permian Basin disposal wells, effective June 1, 2025, which include expanded areas of review, limits on injection pressure, and volume restrictions. NGL's management, however, has proactively addressed this by securing a large inventory of legacy injection well permits and focusing on out-of-basin growth in Andrews County, where its pore space is unburdened by seismicity or existing production. This strategic foresight positions NGL to continue its growth trajectory without material impact from the new regulations.

Conclusion

NGL Energy Partners LP is in the midst of a transformative period, successfully shedding non-core, volatile assets to sharpen its focus on its high-growth Water Solutions segment and a revitalized Crude Oil Logistics business. This strategic pivot, underpinned by significant investments in infrastructure, extensive pore space, and pioneering water treatment initiatives, is establishing NGL as a leading pure-play water midstream company. The company's robust financial performance, marked by increasing Adjusted EBITDA and disciplined capital allocation towards debt reduction and preferred unit repurchases, signals a strengthening balance sheet and a clear path to enhanced shareholder value.

While commodity price fluctuations and evolving regulatory landscapes present ongoing challenges, NGL's strong contractual base, operational efficiency, and strategic positioning in key basins provide a resilient foundation. The market's recent positive sentiment, reflected in NGL's stock reaching new 52-week highs, underscores growing investor confidence in its strategic direction and the compelling narrative of its emergence as a dominant force in the essential water solutions sector. With clear guidance for continued growth and a commitment to further balance sheet improvements, NGL Energy Partners LP presents a compelling investment thesis for discerning investors seeking exposure to a focused and fundamentally strong midstream energy play.