Martin Midstream Partners L.P. — Q3 2020 Form 10-Q
Business context and period: The partnership operates four Gulf Coast-focused businesses: terminalling and storage, transportation, sulfur services, and natural gas liquids (NGLs). This unaudited filing covers the three and nine months ended September 30, 2020; amounts below are in millions unless stated otherwise.
Financial performance
- Revenue: Q3 revenue was $152.5 million, down 14.3% from $177.9 million. Nine-month revenue was $492.1 million, down 18.7% from $605.3 million. Lower product prices and reduced volumes, including weaker transportation activity, contributed to the declines.
- Profitability: Q3 operating income was $11.0 million versus $25.5 million; net loss was $10.8 million, or $0.27 per limited partner unit, compared with net income of $13.3 million, or $0.33 per unit. The quarter included an $8.5 million loss on the senior-note exchange and a $4.5 million gain on insurance proceeds for damaged property. Nine-month operating income was $34.6 million versus $40.1 million; continuing-operations loss was $4.2 million versus $2.1 million. 2019 nine-month net loss of $181.6 million included a $178.8 million loss on the sale of discontinued natural gas storage assets.
- Cash generation and margins: Nine-month operating cash flow was $19.2 million, versus $25.6 million. Property and equipment spending was $23.7 million, with another $0.6 million for turnaround costs. Management-defined adjusted EBITDA was $22.5 million in Q3 versus $22.0 million, and $77.5 million for nine months versus $72.8 million. Distributable cash flow was $8.1 million in Q3 versus $8.3 million, and $38.9 million year to date versus $21.0 million.
- Interest and debt: Q3 net interest expense increased 8% to $12.9 million; nine-month expense fell 21% to $32.2 million. At September 30, total debt carrying value was $569.8 million, including $205.0 million drawn on the revolver and $28.8 million of 2021 notes classified as current. The August refinancing exchanged most 2021 notes for $292.0 million of 11.5% notes due 2025 and $53.8 million of 10.0% notes due 2024.
- Liquidity and capital: Cash was $1.9 million; the $300 million revolving facility had $77.6 million of borrowing capacity available, after outstanding letters of credit. Partners’ capital was a deficit of $44.5 million. The partnership reported compliance with debt covenants at quarter-end and expected compliance for the next 12 months.
Material changes and management outlook
- COVID-19-related weakness in refined-product demand and refinery utilization continued to pressure results. Management expected adverse effects to persist through the remainder of 2020, while noting substantial uncertainty about the pandemic’s duration and severity.
- Management expected storage activity to be relatively protected by minimum-volume commitments, but identified risks to packaged lubricants, transportation, NGL butane optimization, and third-party sulfur volumes. It anticipated continued reservation-fee income in parts of the sulfur business.
- The partnership was pursuing expense reductions and deferred certain maintenance and growth capital spending until 2021. It recorded $4.4 million of long-lived-asset impairment charges in Q1; no goodwill impairment was identified. Management cautioned that sustained weakness could lead to further impairment and affect financing access.
- The credit-facility amendment reduced commitments from $400 million to $300 million, raised pricing and introduced a 1% LIBOR floor, and imposed tighter financial covenants. Quarterly distributions above $0.005 per unit are restricted unless the total leverage ratio is below 3.75:1.
- On October 21, the partnership declared a Q3 distribution of $0.005 per unit, payable November 13, 2020. This equals $0.02 annualized.
Risks, contingencies, and other considerations
- Market exposure includes commodity-price and floating-rate debt risk. The filing estimates that a $0.10 change in settlement prices for outstanding NGL hedges could affect net income by approximately $2.7 million; a 100-basis-point interest-rate increase could add approximately $2.1 million of annual interest expense.
- Related-party dependence is significant: Martin Resource Management Corporation controls the general partner, supplies personnel and services, and accounted for approximately 13% of nine-month revenue. The partnership reimburses it for direct costs without a stated monetary cap, in addition to approved indirect expenses.
- The partnership disclosed an unresolved customer defense-and-indemnity dispute related to lubricant marketing lawsuits; potential exposure was not determinable if the case is reopened or the customer’s insurance claim succeeds. Management did not expect ordinary-course legal matters, in aggregate, to have a material adverse effect.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether operating performance and cash generation can sustain the distribution while the partnership complies with amended leverage and coverage covenants.
- The refinancing’s ongoing cash-interest burden, remaining 2021-note repayment requirements, and actual revolver availability under covenant limits.
- Subsequent trends in refinery utilization, product demand, transportation volumes, NGL margins, and sulfur volumes, and any resulting impairment or liquidity effects.
- The extent and terms of related-party reimbursements and commercial transactions, given the controlling affiliate’s role and contribution to revenue and costs.
- Progress on expense reductions and deferred capital spending, and the outcome or financial exposure of the customer indemnity and insurance dispute.