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The Update
NGL Energy Partners (NGL) announced the launch of a $2.1 billion secured bond offering split between new five-year and new eight-year bonds. These bonds plus a $700 million loan deal announced last week will refinance all of the company’s debt and more importantly, pay the accrued distributions on the preferred units (NYSE:NGL.PR.B) and (NGL.PR.C) in short order (I estimate sometime this quarter).
The B series of the preferred are far more liquid, so that’s what I’ve been playing. As a reminder from my first article on this trade, the company stopped paying distributions on the preferred three years ago. Since then almost $8 worth of distributions have accrued. The bond and loan issue will allow the company to refinance its debt structure and pay the over $300 million of total accrued preferred distributions. After that, the preferred should go back to regular distributions, in the case of B’s, the yield (on $25 par) is ~12.8%.
The Trade
Running the numbers with the B’s at $29.60 (as of this writing), you should get ~$7.80 paid to you by March 31. These preferred units are callable at $25 now, but the company has said repeatedly that they want to take out the $600 million privately held series D preferred first. Based on cash flow, I think it will take the company about 2 years to call the D’s. Therefore, given the yield, I suspect the series B preferred will trade above $25 immediately after the accrued distributions are paid out.
Net/net I believe that with the series B preferred at $29.60, you have about 11% upside from the accrued payment, and then you will be left with paper trading somewhere north of $25 paying you about $3.20 in distributions per year. For those looking for income and upside, this is about as good as it gets in my opinion.
Risk
There is the risk that the company decides to continue not paying its preferred distributions. I see that as incredibly remote. There is also the risk that oil and gas trade down, dragging down anything associated with energy. That’s a risk you take with any energy investment though.
Conclusion
I have loved this trade for several months now. it has performed nicely, but upside remains and yields will be good after the accrued is paid. I think the stock has upside, too as people realize that the company will slowly be able to return capital to shareholders via buyback or distributions once the preferred distributions are current. The capital returns to shareholders will increase as the series D preferred are retired (they have restrictive covenants). But the stock is a different trade from the one I described here.
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