Martin Midstream Partners L.P. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. Financial statements are unaudited. Unless noted otherwise, amounts below are in millions of dollars.
Business context
The partnership operates primarily in the U.S. Gulf Coast region across terminalling and storage, natural gas services, sulfur services, and marine transportation. Martin Resource Management controls the general partner and is also a significant customer, supplier, and service provider.
Financial performance and liquidity
- Q2 revenue: $190.3 million, down 24% from $251.1 million a year earlier. Operating income was $10.3 million versus $19.6 million; net loss was $1.2 million versus net income of $11.0 million. Limited partners’ loss per unit was $0.14, compared with income of $0.19.
- First-half revenue: $416.0 million, down 25% from $556.5 million. Operating income was $34.6 million versus $44.3 million; net income was $14.7 million versus $28.2 million. Limited partners’ income per unit was $0.19 versus $0.56, including discontinued operations in the 2015 comparison.
- Margins: Operating margin was approximately 5.4% in Q2 versus 7.8% in Q2 2015, and 8.3% for the first half versus 8.0%. Net margin was approximately negative 0.6% and 3.5% in those 2016 periods, respectively.
- Cash flow: First-half operating cash flow was $74.8 million, down from $104.1 million. Investing activities used $21.4 million; financing activities used $53.4 million. Capital expenditures and plant turnaround costs totaled $24.0 million, and cash distributions paid were $66.7 million. Ending cash was only $28,000.
- Debt and liquidity: Long-term debt, net, was $878.9 million at June 30, up from $865.0 million at year-end. Gross revolver borrowings were $515.0 million; the $664.4 million facility had $149.3 million nominal availability, of which approximately $90.7 million was borrowable under the company’s covenant-based calculation. Working capital was $37.8 million. The partnership reported compliance with debt covenants and expected compliance for the next 12 months.
- Distribution: The partnership declared a Q2 cash distribution of $0.8125 per common unit, or $3.25 annualized, payable August 12, 2016.
Material changes and operating drivers
- Lower product volumes and commodity-related revenue drove much of the revenue decline. Natural gas services revenue fell 35% in Q2 and first-half segment operating income fell 7%; lower NGL sales volumes were a key factor.
- Marine transportation revenue fell 28% in Q2 and 25% for the first half, reflecting reduced fleet utilization amid excess inland barge supply and weaker activity. The segment recorded a $4.1 million goodwill impairment and a $1.6 million loss on disposal of non-core vessels; it reported an operating loss for both comparison periods.
- Sulfur services operating income increased 42% in Q2 and 15% for the first half, as lower product costs improved margins despite lower revenue and volumes. Terminalling and storage operating income increased 39% in Q2 and 13% for the first half, despite lower revenue.
- Adjusted EBITDA was $41.6 million in Q2 versus $45.0 million, and $90.9 million for the first half versus $95.4 million. Distributable cash flow was $25.4 million in Q2 versus $31.9 million, and $57.9 million for the first half versus $69.0 million.
- First-half revenue comparisons also reflect lower sales volumes and prices; 2015 investing cash flow included $41.3 million of proceeds from the sale of floating storage assets.
Outlook, risks, and unusual items
- Management said it reduced planned growth capital spending to preserve liquidity and reduce reliance on uncertain capital markets. It expected operating cash flow and revolver capacity to cover 2016 working capital, anticipated maintenance capital expenditures, and scheduled debt payments. The filing provides no earnings or revenue guidance.
- Management cited sustained weak commodity prices, reduced drilling and throughput, and excess marine capacity as risks to utilization, volumes, rates, and profitability. Interest-rate exposure is material: a 100-basis-point increase was estimated to raise annual interest expense by approximately $5.2 million.
- The April 2016 credit-facility amendment reduced borrowing capacity from $700 million to $664.4 million and extended maturity from 2018 to 2020. The facility is secured by substantially all partnership assets and includes financial and distribution restrictions.
- WTLPG shippers challenged a 2015 rate increase. The Texas regulator ordered pre-increase rates to apply during the proceeding; a hearing was scheduled for October 19, 2016. The partnership owns a 20% interest in WTLPG.
- The partnership received $9.1 million related to the required relocation of a Corpus Christi dock. It expected to recognize a gain when relocation is completed, expected no later than Q3 2017.
- Two legal matters have uncertain exposure: a Louisiana lease dispute and a customer demand for defense and indemnity related to lawsuits concerning motor-oil marketing. Management said it could not determine potential damages or exposure in those cases.
- Related-party dependence merits attention: Martin Resource Management accounted for approximately 13% of first-half revenue and provides personnel and services. Management noted that direct expense reimbursements are not subject to a monetary cap.
Important facts for investors to verify
- Whether reduced marine utilization, barge oversupply, and weak commodity conditions persist, and whether additional impairments or operating losses result.
- Actual covenant headroom and usable revolver capacity relative to the reported $90.7 million, particularly if operating performance weakens.
- Whether operating cash flow can sustain the distribution and fund maintenance needs alongside substantial debt service.
- The outcome and financial effect of the WTLPG rate proceeding and the two legal matters with unquantified exposure.
- Timing and final gain or costs associated with the Corpus Christi dock relocation.