New buyback plan and what it could mean for NGL units

NGL Energy Partners (NYSE:NGL) has authorized a new unit repurchase program of up to US$100 million, with no fixed end date, which puts capital returns and ownership concentration on investors’ radar.

This type of buyback plan can influence both trading liquidity and per unit financial metrics over time, depending on how actively management uses the authorization in relation to other capital priorities.

The new buyback plan follows a sharp run in the units, with a 30 day share price return of 15.7%, a 90 day share price return of 42.91% and a very large 1 year total shareholder return that suggests momentum has been building rather than fading.

If you are weighing what to do next after NGL’s strong run, it can help to compare it with other income focused infrastructure themes using our 33 power grid technology and infrastructure stocks

With NGL units already up sharply and the partnership trading at what looks like roughly a 20% discount to an estimated intrinsic value, the key question is whether this is still a mispricing or if the market is already factoring in future growth.

Preferred Price to Sales ratio of 0.5x: Is it justified?

NGL Energy Partners is trading on a P/S of 0.5x, which sits well below both the US Oil and Gas industry average of 2x and a peer average of 4.1x, while the units trade at roughly a 20.3% discount to an estimated intrinsic value of $18.21 versus the last close of $14.52.

The P/S ratio compares the partnership’s market value to its $3,525.45m of revenue and is often used for companies where earnings are volatile or currently negative. This is the case for NGL, with a reported net loss of $33.629m. For pipeline, logistics and water solutions businesses, revenue can be a useful anchor because volumes and contracts often drive the top line even when accounting items keep net income in the red.

On this measure, Simply Wall St’s checks describe NGL as good value compared with both the wider US Oil and Gas industry and a set of peers. The estimated fair P/S multiple is also 0.5x, which suggests the current ratio is already in line with where the SWS fair ratio model indicates the market could settle if it re rated. That sits alongside the SWS DCF model, which points to a fair value of $18.21, implying the current unit price is below that estimate.

Compared with the industry’s 2x P/S and peers at 4.1x, NGL’s 0.5x multiple is described as materially lower. This indicates the market is pricing its revenue at a significant discount to comparable businesses on this single metric, even though the fair ratio model points to 0.5x as the reference level.

Result: Price to Sales ratio of 0.5x (ABOUT RIGHT)

However, there are clear risks to keep in mind, including an annual revenue contraction of 31% and a reported net loss of US$33.629m, which could challenge the current thesis.

Another angle on value: cash flows vs sales

The P/S of 0.5x makes NGL look inexpensive against the US Oil and Gas industry at 2x and peers at 4.1x, and it matches the 0.5x fair ratio that the model suggests the market could gravitate toward.

Yet the SWS DCF model comes at this from a different direction, valuing NGL at $18.21 per unit versus the recent $14.52 price. This implies the units trade below that cash flow based estimate. When two methods line up this way, the real question is what could shift sentiment enough for the market to close, widen, or ignore that gap.

Simply Wall St performs a discounted cash flow (DCF) on every stock in the world every day (check out NGL Energy Partners for example). We show the entire calculation in full. You can track the result in your watchlist or portfolio and be alerted when this changes, or use our stock screener to discover 61 high quality undervalued stocks. If you save a screener we even alert you when new companies match - so you never miss a potential opportunity.

Next Steps

All this paints a mixed picture, so it makes sense to move quickly and test the numbers against your own expectations. To see what the market is optimistic about, take a closer look at the 3 key rewards.

Looking for more investment ideas?

If NGL has caught your attention, do not stop here; some of the most interesting opportunities show up when you compare it with other focused stock ideas.

• Spot potential bargains early by reviewing companies that screen well on value and quality using the 61 high quality undervalued stocks.
• Prioritise resilience by assessing companies that show strong stability traits with the 73 resilient stocks with low risk scores.
• Hunt for future standouts before the crowd by scanning the screener containing 23 high quality undiscovered gems.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.