Earnings Call Transcript
NGL Energy Partners LP (NGL)
Earnings Call Transcript - NGL Q3 2020
Operator, Operator
Thank you for joining us today for the Third Quarter Fiscal Year 2020 earnings call for NGL Energy Partners LP. I will now turn the call over to our CFO, Trey Karlovich.
Trey Karlovich, CFO
All right. Thank you, and welcome, everybody. As a reminder, this conference call includes forward-looking statements and information. Words such as anticipate, project, expect, plan, goal, forecast, intend, could, believe, may, and similar expressions and statements are intended to identify forward-looking statements. While NGL Energy Partners believes that its expectations are based on reasonable assumptions, there can be no assurance that such expectations will prove to be correct. A number of factors could cause actual results to differ materially from the projections, anticipated results, or other expectations included in the forward-looking statements. These factors include prices and market demand for natural gas, natural gas liquids, refined products, and crude oil; level of production of crude oil, natural gas liquids, and natural gas; the effects of weather conditions on demand for oil, natural gas, and natural gas liquids; and the ability to successfully identify and consummate growth opportunities and strategic acquisitions at costs that are accretive to financial results and to successfully integrate and operate assets and businesses that are built or acquired. Other factors that could impact these forward-looking statements are described in risk factors in the partnership's annual report on Form 10-K, quarterly reports on Form 10-Q, and other public filings and press releases. NGL Energy Partners undertakes no obligation to publicly update or revise any forward-looking statements as a result of new information, future events, or otherwise. This conference call also includes certain non-GAAP measures, namely EBITDA, adjusted EBITDA, and distributable cash flow, which management believes are useful in evaluating our financial results. Please see the partnership's earnings releases, investor presentations, and annual and quarterly reports on Form 10-K and Form 10-Q on our website, at www.nglenergypartners.com, under the Investor Relations tab for more information on our use of non-GAAP measures as well as reconciliations of differences between any non-GAAP measures discussed on this conference call to the most directly comparable GAAP financial measures. I will now turn the call over to our CEO, Mr. Mike Krimbill.
Mike Krimbill, CEO
Thanks, Trey. This is a historic quarter with record adjusted EBITDA in excess of $200 million, at least 20% higher than any retail analyst projection. In addition, our 12-month trailing common unit coverage ratio skyrocketed from 1 time to 1.5 times. During the quarter, we closed the Hillstone acquisition, which we previously discussed, and exited additional smaller refined products businesses, further reducing volatility and working capital indebtedness. The quarter benefited from the diversity of our business units with Crude Oil and NGL Logistics achieving record adjusted EBITDA results, while waiting for water volumes to ramp up significantly. Our water volume projections are provided by our producers. We do not make these up. You can read earnings transcripts and presentations from our customers to determine the exciting future rather than looking in the rearview mirror. For instance, the supermajor customer has only developed 3% of its position in the Delaware. Our water future is bright. First, I'd like to address some of these research reports that have recently been published that provide advice, promote a scorecard approach, and ask questions, which are correct in many cases, but misguided in others. First, is NGL focused on ratable, predictable cash flows? Obviously, yes. We have exited the two business units that were most volatile. Our Food segment remains highly contracted with long-term MVCs, and our Liquids business is asset-heavy, with 27 terminals and 5,000 railcars. We have substantially grown long-term contracted water revenues with acreage dedications and MVCs, and we have significantly increased these long-term contracts with investment-grade customers. Second, is NGL increasing its financial discipline? Again, yes. We have been decreasing indebtedness through asset sales, preferred equity issuances, and working capital reductions. We are dramatically reducing capex in fiscal 2021, beginning this April. We are approaching free cash flow positive status net of internal growth capex during fiscal 2021 as a result of lower capex and increasing distribution coverage. Is NGL management aligned with common unitholders? The answer clearly is yes, more so than most. First, NGL executives and directors own millions of common units. I personally own nearly 3 million common units. We've cut our distribution several years ago by 39%, which effectively eliminated 100% of the entire GP distribution owners, but only 39% of the LP distribution. We have not nor are we currently paying any distribution to the GP owners. We have defended our $1.56 unit distribution and refused to reduce it, even though our yield has increased to as high as 15% at times. We now have a common unit coverage ratio of 1.5 times and increasing. So we are comfortably earning our $1.56. Four, should NGL eliminate IDRs? The answer is yes, but how best to accomplish it without impacting the common unitholder? Most eliminations involved a significant dilution to the common unitholder and a unit price decline. We are taking our time in purchasing IDRs for cash in small increments to limit any future dilution. There is no difference between an MLP with no IDRs and an MLP with the IDRs that are distributing nothing to the GP owners while it purchases the IDRs. Research makes no sense when analysts place NGL in the penalty box because we have IDRs, but pay nothing, and they have no distribution increases projected. Fifth, should NGL convert to a C-corp? Historically, C-corp conversions or simplifications were disguised common unit distribution cuts. These conversions often resulted in large tax gains to the common unitholder. These C-corps will eventually become taxable and have the added risk of rising future corporate income tax rates. NGL is aligned with a common unitholder. We will not convert. We will not stick our common unit holders with a large tax gain. One reason given to convert is that C-corp should turn 25% in 2019 and MLPs lost 2%. These returns are correct, but we must scratch the surface to determine why. The LP returns were down due to significant decline in the G&P sector. During 2019, NGL actually provided a 35% total return, better than the C-corp average. Looking ahead, we ask ourselves, where would the NGL common unit price have to be in five years in order to provide a 25% annual total return for each of those five years? The answer is approximately $21 or only a $2 per year increase in the common unit price. NGL should not be penalized because it is not a C-corp. It should not be penalized because it has IDRs that pay nothing to the owners. NGL should be embraced for successfully completing its transformation, looking out for the common unitholder, and creating an attractive value proposition going forward. So finally, our focus for the future. What is it? One, self-funding; two, continued deleveraging. These two are now possible with a 1.5 common unit coverage and decreasing growth capex requirements. Three, we're increasing acreage dedications, MVCs, and extending the tenure of existing contracts. And fourth, targeting investment-grade financial metrics and credit rating. So with that, Trey, turn it back to you.
Trey Karlovich, CFO
Thank you, Mike. There's much to be enthusiastic about regarding NGL both now and in the future. Let's discuss the quarter. We achieved robust financial results this quarter and made noteworthy strides in streamlining our business. Key financial highlights include the strong ongoing performance of our Crude Logistics segment, which was supported by robust volumes on the Grand Mesa Pipeline, a record quarter for our Liquids segment benefiting from lower propane and butane prices, growing demand for our products, and continued increases in our Water Solutions volumes. Additionally, we fully integrated the Mesquite and Hillstone assets into our Delaware Basin operations and further reduced our refined products segment as we completed winding down our mid-continent operations and streamlined our remaining businesses. As a result, we posted an adjusted EBITDA exceeding $200 million for the quarter, which surpassed analyst expectations and allowed us to raise our annual guidance. Our current distribution coverage is at 2.5 times for this quarter, with a last twelve months coverage ratio around 1.25 times. We anticipate maintaining coverage above our target in the foreseeable future. Our last twelve months pro forma adjusted EBITDA as of December 31, 2019, is approximately $660 million, calculated for our debt covenant compliance. This includes historical adjusted EBITDA from continuing operations and pro forma adjustments for a full year of acquisitions, mainly Mesquite and Hillstone, along with credits for organic capital expenditures, subject to certain conditions. We financed the Hillstone acquisition this quarter with an additional $200 million in Class B preferred units and utilized our revolving credit facility for the remaining purchase price. We also established a small joint venture for Limestone Ranch in Lea County, New Mexico, using about $55 million for that transaction. The winding down of our refined products business and excess earnings contributed to a significant reduction in our borrowings. Total debt as of December 31, 2019, was just under $3.1 billion, which results in a total leverage of five times as calculated under our credit facility. We expect to maintain this level over the next few quarters while eliminating working capital, integrating Hillstone, and increasing produced water volumes. Our target leverage, including working capital borrowings, is four times or lower, and we are committed to achieving that goal. We have demonstrated our ability to take necessary steps to meet our financial targets, and we expect to continue doing so. Over the last two years, we've reduced total leverage by about two times, including cutting future working capital needs by at least $400 million. Our distribution coverage has improved by over 40% during this time, and we have also grown our business by over 40% in terms of EBITDA throughout the same period. All of this was accomplished alongside enhancing our cash flow profile, increasing the predictability of earnings, and simplifying our business while focusing on our core strengths. Now we'll go over some specifics that influenced our operating results for the third quarter and year-to-date fiscal 2020. Adjusted EBITDA, excluding discontinued operations, was about $200 million for the quarter, totaling nearly $428 million year-to-date. Discontinued operations encompass the historical results from the TPSL and mid-continent businesses, which have been liquidated, as well as results from our glass blending business, which is also being liquidated. Notably, the discontinued operations for the current quarter includes TPSL’s $17 million share of biofuel tax credits, retained in the sale of that business, which we will benefit from. The remaining $14 million benefit from these credits is reported in the continuing operations of the Refined Products segment. As a reminder, while I discuss each segment, adjusted EBITDA is a non-GAAP measure that we reconcile with operating income, a GAAP measure for each segment in our earnings release, investor presentations, and quarterly reports. Looking at the Crude Oil division, it continues to show solid performance with approximately $56 million of adjusted EBITDA for the quarter and $162 million year-to-date. This aligns with the upper half of our initial adjusted EBITDA guidance for 2020. We are revising and tightening our guidance for this segment to a range of $215 million to $220 million for the full year. Grand Mesa volumes averaged 134,000 barrels per day this quarter and around 130,000 barrels per day for the year, meeting our expectations. We expect volumes to remain steady at these levels in the coming quarter. Other Crude Logistics assets met our expectations, with our marine fleet operating at full capacity, strong demand for Cushing storage, and minimal volatility despite changes in crude prices due to very limited commodity exposure in this segment. Moving to Water, adjusted EBITDA was $62 million for the quarter and reached $160 million year-to-date. The current quarter results include two months of Hillstone, which closed on October 31. Total disposal volumes were nearly 1.6 million barrels per day during the quarter, adjusted for only 61 days of Hillstone ownership. Increased volumes from Mesquite assets contributed significantly, averaging almost 475,000 barrels per day, while Hillstone added around 270,000 barrels per day adjusted for the same 61 days. Growth in the Delaware Basin was partially offset by decreases mainly in Eagle Ford due to declining rig counts and timing issues in the DJ Basin. About 67% of disposal volumes were transported via pipeline this quarter, and we ended the quarter with over 70% of volumes on pipe. We anticipate continued increases in pipe volumes as our growth focuses on the Delaware Basin gathering system, which continues to show strong performance from producers executing drilling and development projects. We expect disposal volumes in the basin to rise and anticipate a significant jump next year when Exxon launches the Poker Lake project and other producers increase volumes. The Poker Lake dedication covers approximately 70,000 acres in Southern New Mexico under a 20-year fee-based contract with Exxon. This infrastructure is nearly finished, needing minimal incremental capital for disposal volume support. Exxon is in the early stages of Delaware Basin development, so we do not expect substantial contributions from this dedication until mid-2020. Our average disposal fee was $0.62 per barrel for the quarter, consistent with year-to-date figures. Our skim oil volumes averaged about 3,400 barrels per day this quarter, with realized skim oil revenues after hedges of approximately $56.90 per barrel, accompanied by an average skim oil cut of 21 basis points. We are well-hedged for 2020 with about 3,700 barrels per day at an average price exceeding $56 per barrel, and we have hedges into 2021 at around $55 per barrel. Fresh water sales also increased this quarter. We have fresh water agreements in place to support significant portions of our New Mexico permitted volumes for 2020. Our Karns City solid facility in Eagle Ford resumed operations during the quarter, contributing to the modest rise in solid volumes. The work on this facility, along with various well workovers, pump replacements, and upgrades, accounted for our maintenance capital expenditures thus far this year. Operating expenses were $0.42 per barrel for the quarter, adjusted for Hillstone’s partial quarter, compared to $0.40 per barrel year-to-date. This rise primarily relates to integrating acquired systems and not yet realizing expected synergies. Operating expenses currently exceed budget as we automate facilities, enhance utilization, integrate acquisitions, and streamline operations. We are also transitioning facilities from costly diesel generators to electric power grid connections. We are committed to lowering disposal operating expenses across our system with a target of $0.30 per barrel. Based on results thus far and updated timing from producers regarding anticipated volume increases, we currently expect to fall below the low end of our adjusted EBITDA guidance for fiscal 2020. Conversations with producer customers and observed activity in the field suggest that Water volumes are about three months behind our original expectations. Consequently, we are updating our fiscal 2020 adjusted EBITDA guidance to a range of $240 million to $250 million. Regarding Liquids, adjusted EBITDA for this segment reached a record $69 million for the quarter and totaled $100 million year-to-date, surpassing our previously raised annual guidance. We are again increasing our adjusted EBITDA guidance for this segment to a forecast of $115 million to $120 million for fiscal 2020. The quarterly results reflect solid management rather than just timing factors, as we continue to benefit from recently acquired terminals, including our Chesapeake export facility, which has handled 29 shiploads since April, driven by demand that exceeded our early expectations. The Chesapeake team has effectively managed this volume increase while upgrading the facility for future opportunities. Butane sales remained robust this quarter, aided by low commodity prices and building our inventory position. Propane demand started strong this winter, fueled by late-season crop drying and a cold November, favorably impacting margins early on. However, forecasts indicate warmer weather later in the winter in some areas, which may affect volumes although we are well-prepared from an inventory perspective. Potentially lower propane volumes have been incorporated into our updated guidance for this segment. Lastly, regarding Refined Products, our remaining business will largely involve rack marketing, which holds minimal inventory, and our Renewables division focused on biofuels marketing. These areas contribute to our ongoing operations, while other divisions have been removed and categorized as discontinued. Adjusted EBITDA for continuing operations was $24 million this quarter and $34 million year-to-date, above our adjusted EBITDA guidance, largely due to biofuel tax credits. We benefited from credits pertaining to 2018 and 2019 during this quarter, with about $14 million linked to our ongoing business reflected within this segment. We do not foresee the biofuel market creating the volatility of previous years as credits are secured through 2022. Our ongoing operations are more stable, predictable, and hold less inventory compared to businesses we've exited. Given our restructuring and year-to-date results, along with tax credit benefits, we are also raising our adjusted EBITDA guidance for this segment to a range of $35 million to $40 million. Our growth capital spending is decreasing now that we are finishing large infrastructure projects, such as the Western Express and Lea County Express pipelines and integrating the Mesquite and Hillstone systems into our legacy network. Maintenance capital expenditures have remained steady over past quarters and are expected to continue at this level. We expect to finance our growth capital expenditures in fiscal 2021 through excess cash flow from operations. In summary, this has been a record quarter for NGL, and we take pride in our achievements. We have simplified our business strategy while maintaining a balanced cash flow diversity. We have concentrated on our core competencies and significantly expanded our business. We remain dedicated to reducing our leverage while executing for our stakeholders. That concludes our prepared remarks. We will now open the line for questions.
Operator, Operator
Thank you. Our first question comes from TJ Schultz with RBC Capital Markets.
TJ Schultz, Analyst
Good morning, everyone. I wanted to start with a question about the Water volumes. You mentioned that they are about three months behind schedule. Does this delay affect the exit rate you previously indicated, which was between 1.8 million to 2 million barrels a day, pushing it into June? Also, does the range you provided from March exclude Poker Lake? Could you clarify what the expected exit rate will be at the end of this calendar year after considering Poker Lake?
Trey Karlovich, CFO
Let me start. So I'll start, TJ. So we were at about 1.6 million barrels for the quarter. That includes the two months of Hillstone. We are seeing volumes grow this quarter. I think we'll be at the low end of that range heading into the exit for 4Q. But again, what we're seeing is a delay in volumes. Poker Lake is not expected to come on until mid-2020. So we are not factoring Poker Lake into our exit rate for the fourth quarter.
TJ Schultz, Analyst
Okay, that makes sense. And then I think SCO has some pretty sizable units to the North of Poker Lake. If I look at maps, it's published that includes like James Ranch and Big Eddy. Have those water rights been dedicated yet?
Mike Krimbill, CEO
They have not.
TJ Schultz, Analyst
All right. That's fine. Is that something that you would expect? They look at dedications this year?
Mike Krimbill, CEO
I don't know, Doug? Do you have any thoughts on that, what timing might be other than...
Doug White, VP of Operations
Mike, I would say we cannot speak to that publicly at this time.
TJ Schultz, Analyst
Okay, that's fine. I'll see you there. Thanks, guys.
Trey Karlovich, CFO
Thanks, T.J.
Mike Krimbill, CEO
Thank you.
Operator, Operator
Our next question comes from the line of Shneur Gershuni with UBS.
Shneur Gershuni, Analyst
Good morning, everyone. I would like to start by discussing the Water business. I am aware of the delay with one of your producers, but I want to focus on the margin aspect. You have made a number of acquisitions and expansions over the past few years. Can you tell us if the margin you are achieving in the Water business this quarter is indicative of future performance? Additionally, I would appreciate any insights on the impact of skim. When you began this process years ago, skim was a significant concern, and I thought investments would help reduce that. Can you provide information on what percentage of the business it represents or how it affects margins? How should we view it on a normalized basis?
Trey Karlovich, CFO
Thank you, Shneur. To begin with the margin, I'd like to clarify that the current margins are not what we anticipate moving forward. We expect our net margin to improve over time. Year-to-date, our disposal fee has consistently been around $0.62 per barrel. While that rate might decrease slightly as we increase our pipeline capacity, I believe it's a reliable figure to consider. Our skim oil has generated approximately $0.14 per barrel, which should also remain steady since we are hedged for the upcoming years. This places our revenue at around $0.75 to $0.76 per barrel. However, operating expenses have not yet reflected the synergies expected from our acquisitions. We are still in the process of converting all our disposal facilities to electrical power, which has resulted in higher operating costs per barrel. Additionally, our current operating expenses include extra costs associated with fresh water, solids, and managing ranches in Southern New Mexico. We plan to detail these expenses for better modeling insights. Overall, we anticipate a significant reduction in operating expenses. Specifically, we aim for our disposal costs to be at $0.30 per barrel, which we believe is entirely achievable. The substantial improvement in our overall margin will come from lowering these operating costs.
Shneur Gershuni, Analyst
Okay. And just a quick follow-on specifically on the topic. So with Poker Lake, will it have the same margin as everything that you've got on a go-forward basis? Or is it a higher margin or lower margin relative to what you have right now?
Trey Karlovich, CFO
Yes. We can't talk about the specific rates, but what I would indicate is Poker Lake is all delivered at one point. So very little operating expenses expected from the Poker Lake volumes.
Shneur Gershuni, Analyst
Okay, cool. And maybe as a follow-up, sorry, yes?
Trey Karlovich, CFO
Your follow-up question was about skim oil. As we increase the volumes on pipe, the skim oil percentage relative to disposal volume decreases. We have been guiding in that direction. For this quarter, we reported 21 basis points. As we continue to add volumes on pipe, we expect that percentage to be lower than what we have seen historically when we were primarily using trucked volumes. We will keep updating our expectations as we provide our annual guidance regarding skim oil.
Shneur Gershuni, Analyst
Okay, that's definitely helpful. I have a question for Mike. In your prepared remarks, you mentioned that capex will be lower in the future, allowing for debt reduction and similar measures. Could you provide us with an estimate of the decline rate you're anticipating for capex? Also, does a temporary halt on acquisitions play a role in this? Do you believe you have acquired enough, particularly in the Water business, to reach the scale you initially aimed for, and will future acquisitions be rare and opportunistic?
Mike Krimbill, CEO
Yes. I believe we have completed the purchases of the Hillstone and Mesquite systems. Our current focus is on acreage dedications and minimum volume commitments. We have the 4 million barrels of capacity in place.
Trey Karlovich, CFO
Total capacity, permit capacity.
Mike Krimbill, CEO
There's plenty of room for growth, and we've finished our Lex and pipe no 24 inch projects. Our Poker Lake 30-inch project should be complete around June 30. The only project left is the Orla 24-inch. We haven't finalized the capital expenditures yet, but we've estimated around $100 million for Water, primarily for the remaining piping.
Shneur Gershuni, Analyst
All right, I guess that makes sense. Perfect. Thank you very much guys appreciate the color.
Operator, Operator
And our next question comes from the line of Pearce Hammond with Simmons Energy.
Pearce Hammond, Analyst
Good morning and thank you for taking my questions. First question pertains to the Water business and just following up on the color that you just provided on some questions related to that. But if you were to think about the adjustment in the EBITDA for the Water business in three buckets. Then the buckets being, volumes, and like you said, the volumes are coming in, they're coming, but they're just coming at a slower pace than what you're expecting. Revenues and then operating expenses. Where do you think the majority of that adjustment is coming from within those three buckets?
Trey Karlovich, CFO
So Pearce, volumes and operating expenses will be the main drivers. As we increase volumes, we will naturally reduce our operating expense per barrel due to higher utilization of our facilities. This is primarily about volumes. We believe that the long-term dedications and minimum volume commitments we've secured allow us to capture a significant portion of the volumes in our key focus area, which we consider the best location in the country. While volumes remain the focal point, we should not overlook operating expenses. Regarding the rate per barrel, as I mentioned earlier, I don’t think we will be increasing rates, nor do I foresee significant decreases.
Pearce Hammond, Analyst
Okay, great. And then my follow-up just pertains to the competitive dynamics on the ground. If you are trying to sign up, say, new water deals with producers, what's the environment like right now? How competitive is it? Just some color around that would be great.
Mike Krimbill, CEO
Doug, could you cover that one?
Doug White, VP of Operations
Sure. Focus being the Delaware Basin, there really are not a lot of large acreage dedications or MVCs available. Through Hillstone, Mesquite, and legacy NGL, we have a very large share of the commitments in the Delaware. And then, obviously, some of our competitors, they have their dedications as well. So from a competitive basis, much of the opportunity for others to come in and greenfield or start competing with us, it's very tough for that environment due to the fact there a lot of the long-term dedications have already been inked. And that's why it's a perfect opportunity for us to now focus on fold ins as far as folding in our contracts into our subregions within the Delaware into our growth pipes and existing online capacity. So to answer your question, the competitiveness remains, but a large amount of the contracts and dedications have already been wrapped up in the basin.
Pearce Hammond, Analyst
Okay, thank you very much.
Trey Karlovich, CFO
Thanks.
Mike Krimbill, CEO
Great. Thank you.
Operator, Operator
And our next question comes from the line of Spiro Dounis with Credit Suisse.
Spiro Dounis, Analyst
Hey, morning, gentlemen, Mike, appreciate your comments around some of the qualitative attributes being cited as an overhang. But I guess, I'd still argue that strong fundamentals should be able to overcome maybe all or most of that. And you mentioned being forward-looking here on Water, it sounds like it's got a really strong outlook. And I don't want to dwell in the past. But I guess there's been some iterations here of missed Water results that to some degree have been outside of your control, it sounds like customer-related, but I mean, it's driving investors to maybe discount some of the outlook from here. And so can you just maybe walk through some of the specifics on what exactly is driving some of that underperformance? And then what's going to basically abate going forward?
Mike Krimbill, CEO
Sure. Doug?
Doug White, VP of Operations
Sure. As Trey mentioned regarding our underperformance this quarter, a significant portion, about one-third of our budget shortfall, stemmed from unbudgeted expenses related to generators and diesel. In Delaware, particularly in New Mexico, there is an abundance of generation capacity, but a significant lack of distribution. The local provider has struggled to get power distributed effectively, which has resulted in unexpected challenges for us. However, we have made progress; we took approximately one-third of our generators offline in January, which is promising. We expect that by mid to late summer, most of the remaining generators will be offline and we will be using on-site power. This will positively impact our EBITDA. Regarding volumes, as Mike mentioned, we received a forecast directly from our customers that ended up being lower than anticipated. However, entering February, we saw a significant turnaround. We're now encountering much higher water volumes than expected, which is a great problem to have. We’re working to address that increase. The forecasts are actually surpassing previous estimates. In addition, with respect to operational expenditures, we're focused on integrating the Mesquite and Hillstone assets, which involves reducing OpEx and achieving the synergies we planned. This integration is progressing well, and we are enhancing our operations at Mesquite. As Mike pointed out, one of our largest customers has only developed 3% of their area, indicating there is ample room for midstream development from our side and necessary infrastructure development, such as power. We anticipate significant advancements in this area during fiscal Q4 and Q1 of '21.
Spiro Dounis, Analyst
Got it. Very helpful, Doug. Second question, maybe for you, Trey, on Grand Mesa. Performing really well this year, it looks like that should continue based on the outlook, but just curious how you're thinking about maybe some of the credit risk right now? I think some of your major customers are seeing some of their bonds trade a little bit lower here. So how do you think about the credit risk against Grand Mesa being of pretty strategic importance in the basin?
Trey Karlovich, CFO
Sure. So we do have a diversified customer base on Grand Mesa. Obviously, some of the larger customers do have some credit risk associated with them. We monitor that very closely. We feel very comfortable with what all of our producers are saying publicly as well as to us directly. We do have foresight; they're nominating volumes ahead of when they're reporting publicly. So we do get to see what is coming down the pipeline. So that gives us some foresight into what's happening. And as you can see from the volumes, the volumes have remained strong. So we feel good about where things stand. It's something that we will, obviously, pay very close attention to. But Grand Mesa was built for these particular producers. We're a strong partner with these producers, and we will continue to partner with these producers on a future basis. Even under the long-term contracts, there is still a lot of work between the producer customers and pipeline to make sure that we're meeting each other's needs.
Spiro Dounis, Analyst
Thank you, gentlemen.
Trey Karlovich, CFO
Thanks.
Michael Blum, Analyst
Hey, thanks. Good morning, everyone. Maybe just to stay on Grand Mesa for a second. So I noticed in the quarter you talked about the purchase of third-party volumes. I just wanted to understand, is that your marketing company buying those barrels? And if so, how do we think about the margin on that barrel versus a barrel that's just shipped by a third party? And should we just expect that, that is going to be sort of a normal course of operations going forward?
Trey Karlovich, CFO
So Michael, yes. That's consistent with how the pipeline has operated from the beginning. NGL Crude Logistics is a shipper on the pipeline. They pay the tariff rate to the pipeline. We report Grand Mesa on a net basis and account for any loss that Crude Logistics may incur in our reporting. This has been consistent since the start of the pipeline. The margin that Crude Logistics can generate typically aligns with the differential from the basin. I've seen some recent reports indicating it’s in the $2 to $3 range, which is consistent with our expectations as well.
Michael Blum, Analyst
Great. My second question is regarding the recent hiring of an Executive VP of Strategic Initiatives. Could you explain that role and what it will entail? Given that it seems you've already made significant progress on M&A with regard to the acquisitions you're targeting, I’d like to understand more about this position.
John Ciolek, Executive VP of Strategic Initiatives
I think this is John Ciolek, Executive Vice President of Strategic Initiatives. The role here is really to ensure that we do not miss any opportunities from a strategic acquisition or divestiture perspective. Additionally, the company is focused on other important initiatives, including ESG. Looking ahead, we want to ensure that we effectively present our story and communicate with investors on an ongoing basis. You can expect to see increased transparency around various aspects throughout this fiscal year and beyond.
Michael Blum, Analyst
Great, that's all I have. Thank you.
Trey Karlovich, CFO
Thank you.
Michael Blum, Analyst
Thank you.
Operator, Operator
And I'm showing no further questions at this time. I will now turn the call back over to CEO, Mike Krimbill, for closing remarks.
Mike Krimbill, CEO
Well, thank you for joining, and we'll talk to you in a few months.
Operator, Operator
Ladies and gentlemen, this concludes today's conference call. Thank you for participating, and you may now disconnect.