Martin Midstream Partners L.P. — Q1 2023 Form 10-Q
Business context and period: The partnership operates four Gulf Coast-focused businesses: terminalling and storage, transportation, sulfur services, and specialty products. This unaudited report covers the three months ended March 31, 2023; comparisons are with Q1 2022. Unless otherwise stated, amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q1 2023 | Q1 2022 / prior date |
|---|---|---|
| Revenue | $244.5 million | $279.2 million |
| Operating income | $17.5 million | $25.4 million |
| Net income (loss) | $(5.1) million | $11.5 million |
| Limited-partner net income (loss) per unit | $(0.13) | $0.29 |
| Operating cash flow | $49.3 million | $28.4 million |
| Distributable cash flow (non-GAAP) | $9.5 million | $15.2 million |
| Adjusted free cash flow (non-GAAP) | $8.7 million | $12.0 million |
| Cash at quarter-end | $0.06 million | $0.05 million at Dec. 31, 2022 |
| Long-term debt, net | $475.2 million | $512.9 million at Dec. 31, 2022 |
| Partners’ capital (deficit) | $(64.7) million | $(59.4) million at Dec. 31, 2022 |
Operating margin was approximately 7.2%, compared with 9.1% in Q1 2022; net margin was approximately negative 2.1%. Interest expense rose 26% to $15.7 million. The reported net loss included a $5.1 million loss on extinguishment of debt related to the February refinancing. Management’s non-GAAP adjusted EBITDA was $21.7 million, versus $40.0 million; adjusted EBITDA after giving effect to the planned butane-business exit was $30.6 million, versus $34.3 million.
Operating cash flow increased by $20.9 million year over year, primarily because of a $30.5 million favorable working-capital variance, despite weaker operating results and other non-cash items. Investing activities used $4.2 million, including $7.5 million of property, plant and equipment spending; financing activities used $45.0 million. These cash flow results should not be taken as a measure of recurring earnings.
Material changes versus Q1 2022
- Revenue fell 12%, reflecting lower product sales prices and volumes. Sulfur services revenue declined 40% and specialty-products revenue declined 14%; transportation revenue increased 19% and terminalling and storage revenue increased 7%.
- Operating income decreased 31%. Transportation segment operating income improved, while sulfur services and specialty products operating income declined; terminalling and storage moved from a small operating loss to a small profit.
- Gross product costs also fell, but not enough to offset weaker product revenue and reduced segment earnings. Sulfur product volumes were down 32%; specialty-products volumes were up 5%.
- Effective January 1, 2023, the partnership moved underground NGL storage into terminalling and storage and packaged lubricants and grease into specialty products. Prior-period segment figures were revised to reflect the reorganization.
Debt, liquidity, outlook, and risks
- Refinancing: In February, the partnership issued $400 million of 11.5% senior secured second-lien notes due 2028. Proceeds funded the repurchase or redemption of its 2024 and 2025 notes, repayment of part of its credit-facility borrowings, and related fees and expenses. The credit facility was amended, extended to February 2027, and reduced from $275 million to $200 million, with scheduled commitment reductions to $175 million in June 2023 and $150 million in June 2024.
- Liquidity and covenants: At March 31, $100 million was drawn on the facility and $19.2 million of letters of credit were outstanding. The filing reports $80.8 million of nominal remaining capacity but approximately $39.6 million of additional borrowing capacity after financial covenants. The partnership reported compliance with covenants and expected to remain compliant over the next 12 months. The facility’s weighted-average interest rate was 8.46%; a 100-basis-point rate increase on unhedged floating-rate debt would add approximately $1.0 million of annual interest expense.
- Distributions: The partnership declared a Q1 distribution of $0.005 per common unit, or $0.02 annualized. Credit-facility terms generally restrict quarterly distributions above $0.005 per unit unless specified leverage and liquidity tests are met. The 2028 notes also restrict distributions and other actions.
- Business plans: The partnership anticipated exiting its butane optimization business after the Q2 2023 selling season. A planned electronic-level sulfuric-acid joint venture involves an expected approximately $20 million of aggregate capital expenditures in 2023 and 2024; the partnership expects to hold a 10% non-controlling interest and supply feedstock and transportation services.
- Contingency: A customer seeks defense and indemnity costs in litigation related to marketing lawsuits. The partnership disputes the obligation, says it cannot determine its ultimate exposure, and expects a trial in 2024. Management states ordinary-course claims are not expected to have a material adverse effect.
- Other risks and governance: Commodity and interest-rate exposure, seasonal demand, weather events, operating costs, and debt covenants may affect results and liquidity. No commodity hedges were outstanding at quarter-end. Martin Resource Management Corporation controls the general partner, owns about 15.7% of common units, supplies management services, and is a significant customer and supplier; related-party transactions and expense allocations are material considerations. No material risk-factor changes from the 2022 Form 10-K were reported.
Important facts for investors to verify
- Whether operating performance and distributable cash flow improve after the sharp year-over-year declines, and how much Q1 operating cash flow depended on working-capital movements.
- Available borrowing capacity after covenant calculations, compliance with debt tests, and the effect of scheduled credit-commitment reductions and high variable rates.
- Whether the $0.005 quarterly distribution is sustainable and what conditions would permit any increase.
- Execution, costs, and expected benefits of the butane-business exit and sulfuric-acid joint venture, including the planned capital investment.
- Potential exposure and developments in the customer-indemnity litigation, alongside the partnership’s related-party arrangements and cost allocations.