Martin Midstream Partners L.P. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; financial statements are unaudited. The partnership operates natural gas services, terminalling and storage, sulfur services, and transportation businesses, primarily in the U.S. Gulf Coast region.
Financial performance
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $251.0 million | $307.1 million |
| Operating income | $10.7 million | $26.4 million |
| Net income (loss) | ($3.7 million) | $15.0 million |
| Limited partners’ net income (loss) per unit | ($0.09) | $0.33 |
| Net cash from operating activities | $40.6 million | $59.3 million |
| Adjusted EBITDA | $30.8 million | $46.3 million |
| Distributable cash flow | $9.6 million | $28.2 million |
Operating margin was approximately 4.3%, compared with 8.6% in Q1 2018. Management’s non-GAAP distributable cash flow calculation deducts maintenance capital expenditures and turnaround costs; it is not a GAAP measure.
At March 31, 2019, cash was $0.2 million, total assets were $1.10 billion, and partners’ capital was $163.8 million. Debt was approximately $774.2 million before finance lease obligations: $401.1 million on the revolving facility, net of issuance costs, and $373.1 million of senior notes, net. The balance sheet classified $406.7 million of debt and finance lease obligations as current. The revolving facility’s reported weighted-average rate was 5.49%.
Changes and key drivers
- Revenue declined about 18% year over year, while operating income fell about 59%; the partnership moved from net income to a net loss.
- Natural gas services operating income fell to $2.8 million from $16.7 million. Lower NGL prices and sales volumes reduced revenue, and management reported a 60% decline in per-barrel margins.
- Sulfur services operating income declined to $3.8 million from $7.7 million, primarily amid lower product volumes. Transportation operating income improved to $3.5 million from $2.6 million, and terminalling and storage operating income rose to $5.1 million from $3.6 million.
- Operating cash flow decreased 32%. Investing cash use increased to $33.9 million, including $23.7 million for MTI net assets; financing cash use was $6.7 million.
Acquisition, liquidity, outlook and risks
- The partnership acquired Martin Transport, Inc. (MTI) from its controlling sponsor, Martin Resource Management Corporation, effective January 1, 2019. The transaction closed January 2. Stated purchase price plus working-capital adjustment was $137.8 million, with $126.1 million cash consideration after assumed finance lease obligations; a further $10 million earn-out is possible. As a common-control transaction, MTI was recorded at historical carrying values, and comparative 2018 results were retrospectively revised to include MTI.
- The partnership also revised Q1 2018 expense presentation by reclassifying $1.5 million from cost of products sold to operating expenses. Q1 2018 included $1.5 million of discontinued-operation income from WTLPG, sold in 2018; that disposal proceeds had been used to repay revolver borrowings.
- At March 31, the revolver had $404 million outstanding against $664.4 million of commitments; the filing reports $260.4 million of nominal availability, but only approximately $47.5 million borrowable under then-current covenant capacity. Letters of credit totaled $16.9 million. The facility was due March 2020 and was classified as current. Management said it intended to extend the maturity and believed operating cash flow and borrowing capacity would cover working capital and anticipated 2019 maintenance capital expenditures.
- On April 16, 2019, the facility was amended, reducing commitments to $500 million and temporarily setting the permitted leverage ratio at 5.85 times for Q1 and Q2 2019 (and 5.50 times for Q3). The partnership stated it was in compliance with covenants at March 31 and expected compliance over the next twelve months.
- Management declared a $0.25-per-unit Q1 distribution on April 24, equivalent to $1.00 annualized, payable May 15, 2019. Distributions remain subject to facility terms and available cash.
- Market risks include NGL prices and floating interest rates: the filing estimates a $0.10 change in expected NGL settlement prices could affect net income by about $2.0 million, and a 100-basis-point rate increase could add about $4.0 million of annual interest expense. The partnership had NGL swaps covering 472,000 barrels settling April–September 2019 and no interest-rate swaps outstanding.
- Material considerations include dependence on the controlling sponsor for management and services, substantial related-party transactions, and the customer indemnification dispute described in the filing. Management said ordinary-course legal matters were not expected to materially affect results; the filing noted exposure in the indemnification dispute could not then be determined if the case were reopened.
The filing provides no formal earnings guidance. Management’s liquidity comments are expectations, not assurance; interim results may not indicate full-year performance.
Important facts for investors to verify
- Whether the revolver maturity was extended and whether reduced commitments and covenant limits leave adequate borrowing capacity.
- Debt covenant headroom, leverage, and actual liquidity after outstanding letters of credit and other restrictions.
- Whether NGL prices, volumes, and margins recover, given their substantial contribution to the earnings decline.
- MTI’s post-acquisition performance, any earn-out obligation, and the effects of the common-control accounting and related-party relationship.
- Whether distributable cash flow can support the declared distribution and planned capital, lease, and debt obligations.