Martin Midstream Partners L.P. — Q2 2022 Form 10-Q
Business and period: Gulf Coast-focused midstream partnership with terminalling and storage, transportation, sulfur services, and natural gas liquids (NGL) businesses. This unaudited report covers the quarter and six months ended June 30, 2022; comparisons are with the corresponding 2021 periods. Amounts below are in millions of dollars unless noted.
Key financial results
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $267.0 | $184.3 | $546.2 | $385.3 |
| Operating income | $21.5 | $7.6 | $46.9 | $23.3 |
| Net income (loss) | $6.6 | $(6.6) | $18.1 | $(4.1) |
| Limited-partner earnings per unit | $0.17 | $(0.17) | $0.46 | $(0.10) |
| Adjusted EBITDA (non-GAAP) | $38.3 | $22.5 | $78.3 | $53.4 |
| Distributable cash flow (non-GAAP) | $22.3 | $7.3 | $43.1 | $20.1 |
| Adjusted free cash flow (non-GAAP) | $20.8 | $6.0 | $38.5 | $15.6 |
Operating margin was approximately 8.0% in Q2 2022 versus 4.1% a year earlier; six-month margin was approximately 8.6% versus 6.1%. Net cash from operating activities was $28.5 million for the first half, compared with $6.1 million in 2021. The filing’s reconciliation reports Q2 operating cash flow of $(2.5) million versus $2.2 million; working-capital movements materially affect period cash flows.
Financial position and liquidity
- At June 30, 2022, cash was $43,000; current assets were $237.5 million and current liabilities were $147.9 million. Inventories increased to $117.8 million from $62.1 million at year-end 2021.
- Long-term debt, net of issuance costs, was $489.3 million. Debt includes $149.0 million drawn on a $275 million revolving facility, $53.75 million of 10.0% notes due 2024, and $291.381 million of 11.5% notes due 2025.
- The revolver matures in August 2023. After borrowings, $39.0 million of letters of credit, and covenant limits, reported additional borrowing capacity was $87.0 million. The facility’s weighted-average rate was 5.00% at quarter-end; a 100-basis-point increase was estimated to add about $1.5 million of annual interest expense.
- Management reported compliance with debt covenants at June 30 and expected continued compliance for the next 12 months. The credit agreement generally limits quarterly distributions above $0.005 per unit unless the leverage ratio is below 3.75:1.
- First-half investing cash use was $15.5 million, including $14.6 million for property, plant and equipment and $1.6 million for turnaround costs. Financing cash use was $12.9 million. Cash declined by $9,000 over the period.
Material changes and operating drivers
- Q2 revenue rose 45% year over year and first-half revenue rose 42%, reflecting higher product prices and stronger transportation activity. Higher commodity prices increased reported sales and associated product costs.
- Transportation operating income improved to $6.2 million in Q2 from a $2.7 million loss, and to $7.9 million for the first half from an $8.2 million loss. Higher utilization, rates, load counts, and mileage contributed; fuel pass-through and employee costs also increased.
- Sulfur services operating income increased to $12.0 million in Q2 and $26.8 million for the first half. Higher prices and margins more than offset lower Q2 product volumes; first-half sulfur/fertilizer volumes were down 5% overall.
- Terminalling and storage operating income increased to $4.1 million in Q2 and $6.9 million for the first half, supported by higher product sales and service revenues. Utilities and employee-related expenses rose.
- NGL operating income weakened to $3.7 million in Q2 from $3.3 million, despite higher revenue, as costs rose slightly faster than prices and volumes declined 8%. First-half NGL operating income fell to $13.7 million from $17.7 million; volumes declined 19% and margin per barrel declined 20%.
- Interest expense declined 3% in Q2 and 4% for the first half year over year. The partnership reported a $2.2 million lower-of-cost-or-market and other non-cash adjustment in 2022.
Outlook, risks, and unusual items
- No numerical earnings or cash-flow guidance is provided. Management expects liquidity to come primarily from operating cash flows, revolver borrowings, and potential access to debt and equity markets, and says operating results and covenant limits affect borrowing capacity.
- The partnership declared a Q2 cash distribution of $0.005 per unit, payable August 12, 2022; this is $0.020 annualized. Distribution capacity is constrained by debt covenants.
- Commodity prices and interest rates are key exposures. No commodity hedging positions were outstanding at June 30, though accumulated other comprehensive income included $0.2 million of unrealized hedge gains. Seasonal demand affects NGLs and fertilizers; severe weather, including hurricanes, could disrupt operations.
- A customer’s indemnity counterclaims concerning settled motor-oil marketing lawsuits remain unresolved. The partnership says it cannot determine its potential exposure; trial is expected in December 2023. Management considers other ordinary-course claims not expected to have a material adverse effect.
- Martin Resource Management Corporation controls the general partner and is both a significant customer and supplier. Related-party sales were about 9% of first-half revenue; related-party transactions represented about 17% of first-half costs and expenses. The partnership has no employees and reimburses the affiliate for direct costs without a monetary cap.
- The facility’s August 2023 maturity, variable-rate exposure, limited cash balance, and reliance on available borrowing capacity are important liquidity considerations. Management stated there were no material changes to risk factors since the 2021 Form 10-K.
Important facts for investors to verify
- How the partnership plans to refinance or repay the revolver at its August 2023 maturity, and whether covenant-adjusted borrowing capacity remains available.
- Whether operating cash generation and working-capital requirements—especially inventory—support debt service, capital spending, and the current distribution.
- Whether improved transportation and sulfur profitability persists, and whether NGL margins and volumes stabilize.
- The outcome and potential financial exposure of the customer indemnity litigation scheduled for trial in December 2023.
- Related-party pricing, cost reimbursements, and governance safeguards, given the affiliate’s control and role in partnership operations.