Martin Midstream Partners L.P. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. The partnership operates four Gulf Coast-focused businesses: terminalling and storage, transportation, sulfur services, and natural gas liquids (NGLs). Unless otherwise noted, amounts below are in millions of dollars; financial statements are unaudited.
Financial results and liquidity
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $229.3 | $211.3 | $775.5 | $596.5 |
| Operating income (loss) | ($12.2) | $8.2 | $34.7 | $31.5 |
| Net income (loss) | ($28.0) | ($6.9) | ($10.0) | ($11.0) |
| Net loss per limited partner unit | ($0.71) | ($0.17) | ($0.25) | ($0.28) |
| Adjusted EBITDA (non-GAAP) | $18.8 | $21.5 | $97.1 | $74.9 |
| Distributable cash flow (non-GAAP) | ($3.5) | $5.2 | $39.6 | $25.3 |
Cash flow: For the nine months, operating activities used $16.8 million of cash, versus $12.4 million used in 2021. Investing activities used $23.1 million, mainly reflecting higher capital and turnaround spending; financing activities provided $39.8 million. Cash was $45,000 at quarter-end.
Debt and liquidity: Total debt was approximately $543.1 million, including $202.0 million drawn on the $275.0 million revolving credit facility. The facility had $44.2 million of reported additional borrowing capacity after letters of credit and covenant limits. The facility’s variable rate averaged 5.85%; its maturity is August 31, 2023. Current liabilities exceeded current assets by approximately $78.5 million. The partnership reported compliance with debt covenants at September 30.
Material changes and operating drivers
- Q3 revenue rose about 9% year over year, but the partnership swung from operating income to an operating loss. Nine-month revenue increased about 30%, while operating income rose about 10% and the partnership remained loss-making overall.
- A non-cash NGL inventory net-realizable-value adjustment of approximately $18.5 million increased Q3 cost of products sold. NGL segment operating results turned sharply negative; management also cited lower sales volumes and compressed per-barrel margins.
- Transportation revenue and operating income improved substantially, reflecting higher utilization, rates, load counts, miles, and ancillary revenue. Terminalling and storage operating income also increased.
- Sulfur services reported a Q3 operating loss, with lower product volumes and higher commodity costs pressuring margins. Nine-month segment operating income was approximately flat year over year despite higher revenue.
- At September 30, inventory was $135.6 million, compared with $62.1 million at December 31, 2021, including a significant increase in NGL inventory.
Outlook, risks, contingencies, and other notable items
- Refinancing and going concern: Because the credit facility matures within twelve months of the balance-sheet date, the partnership classified its outstanding facility borrowings as current. The filing says failure to extend the maturity by August 31, 2023 could impair its ability to meet obligations, lead to collateral foreclosure and cross-defaults, and raises substantial doubt about its ability to continue as a going concern. Management was pursuing an extension or refinancing but gave no assurance of success.
- Distributions: The partnership declared a Q3 cash distribution of $0.005 per common unit, equivalent to $0.02 annualized. The credit facility generally limits quarterly distributions above $0.005 per unit unless a leverage condition is met.
- Subsequent asset sale: On October 7, 2022, the partnership sold its Stockton, California sulfur terminal for approximately $5.25 million net proceeds and used the proceeds to reduce credit-facility borrowings.
- Market risks: The partnership had no outstanding commodity hedges at quarter-end. A 100-basis-point rise in interest rates was estimated to increase annual interest expense by approximately $2.0 million on its unhedged floating-rate debt. Management also noted exposure to commodity prices, fuel and other operating costs, seasonal demand, and severe weather.
- Legal matter: A customer’s counterclaims seek, among other things, defense and settlement costs related to previously settled marketing lawsuits. The partnership said its ultimate exposure, if any, could not be determined; trial is expected in 2024, and it intends to defend the claims.
- Related parties: Martin Resource Management Corporation controls the general partner, owns about 15.7% of common units, provides services, and is both a customer and supplier. Its sales represented about 10% of Q3 revenue; related-party transactions represented about 18% of costs and expenses.
Important facts for investors to verify
- Progress, terms, and completion risk of extending or refinancing the August 2023 credit facility, and the resulting liquidity and going-concern implications.
- Whether NGL inventory valuation charges recur, and whether NGL margins and segment results recover as commodity prices and volumes change.
- Cash generation after working-capital needs, capital spending, and turnaround costs, including the sustainability of the declared distribution.
- Debt balances, covenant headroom, borrowing capacity, and sensitivity to further increases in floating interest rates.
- Developments in the customer litigation, including any change in the currently unquantified potential exposure.