Martin Midstream Partners L.P. — Q1 2012 Form 10-Q
Business context and period: Gulf Coast-focused master limited partnership operating in terminalling and storage, natural gas services, sulfur services, and marine transportation. This unaudited report covers the three months ended March 31, 2012; comparisons are with Q1 2011 unless otherwise noted. Dollar amounts below are in millions except per-unit data.
Key financial results
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Revenue | $338.3 | $283.0 | +19% |
| Operating income | $15.2 | $13.5 | +12% |
| Net income | $10.5 | $7.3 | +44% |
| Net income per limited partner unit | $0.40 | $0.31 | +29% |
| Cash from operating activities | $(1.5) | $28.1 | Down $29.5 |
| Capital expenditures | $30.1 | $14.9 | +102% |
Operating margin was approximately 4.5% of revenue, versus 4.8% in Q1 2011; net margin was approximately 3.1%, versus 2.6%. Revenue growth did not translate proportionately into operating income. Natural gas services revenue rose 20%, but segment operating income fell 42% to $1.9 million as NGL and natural gas margins narrowed. Sulfur services operating income increased 56% to $12.5 million, principally reflecting higher product prices and per-ton margins. Terminalling and storage operating income rose to $3.7 million from $3.2 million. Marine transportation posted a $0.6 million operating loss, compared with $0.8 million income, as costs rose while revenue was nearly flat.
Financial position, debt and liquidity
- At March 31, 2012, cash was $8.8 million, current assets $224.2 million and current liabilities $154.9 million; working capital was approximately $69.3 million.
- Total debt and capital lease obligations were $433.9 million, compared with $460.2 million at December 31, 2011. This included $197.9 million of 8.875% senior notes and $230.0 million outstanding on the revolving facility; the balance was capital leases. The revolver carried a 3.03% weighted-average rate at quarter-end.
- The $375 million revolving facility had approximately $144.9 million available after borrowings and $0.1 million of letters of credit. Its maturity is April 2016. The filing reports compliance covenants, including maximum leverage of 5.00-to-1.00, maximum senior leverage of 3.25-to-1.00 and minimum interest coverage of 2.75-to-1.00; it does not state the actual quarter-end ratios.
- Operating cash flow was negative despite higher net income, with significant cash outflows including reductions in trade payables and affiliate balances. Investing used $37.5 million; financing provided $47.5 million, including $91.4 million net proceeds from the January unit offering, partly offset by debt payments and $19.4 million in distributions.
- Net proceeds from the January offering of 2.645 million common units were used to reduce debt. The offering increased weighted-average limited partner units to 22.58 million from 18.76 million.
Material changes, outlook and risks
- Management outlook: Management said current projects were expected to be funded through operating cash flow, cash and available revolver capacity, while noting future capital needs could require additional funding. It planned to increase growth capital spending over the next two years, primarily in terminalling and storage and sulfur services, and emphasized liquidity, asset utilization and cost control. No numerical earnings or distribution guidance was provided.
- Capital investment: Q1 property and equipment spending was $30.1 million, of which $28.3 million was expansion spending, primarily for terminalling and sulfur projects. Contributions to unconsolidated entities were $8.4 million.
- Subsequent debt action: On May 24, 2012, the Partnership planned to redeem $25 million of senior notes at 108.875% of principal, using January offering proceeds that had temporarily paid down the revolver. The filing reports a $0.251 million debt prepayment premium in Q1; the subsequent redemption is separate.
- Operating environment: Management cited lower drilling activity in Northeast Texas, continuing uncertainty and delays in Gulf of Mexico permitting, and reduced refinery production and excess marine capacity. It also noted improved activity in terminalling and marine businesses associated with developing basins, including the Eagle Ford.
- Market exposure: Commodity hedges covered approximately 42% of estimated commodity risk by volume for 2012 and 8% for 2013. All $230 million of revolver debt was unhedged floating-rate debt; a 1% rate increase was estimated to raise annual interest expense by about $2.3 million. Commodity prices, weather, counterparty performance and hedge-accounting effectiveness can affect results.
- Related parties and contingencies: Martin Resource Management controlled the general partner, held approximately 28.5% of common units and supplied personnel and services. Q1 revenue from related parties was $24.4 million; related-party costs and expenses were substantial, and the Partnership reimbursed $25.4 million of direct expenses. Management said ordinary-course claims were not expected to have a material adverse effect. Several disclosed lawsuits concern Martin Resource Management and its affiliates, not the Partnership; one related case remained stayed pending appellate matters. No material change to the Form 10-K risk factors was reported.
Most important facts for investors to verify
- Whether operating cash flow recovers from the Q1 working-capital-driven outflow and supports distributions and planned expansion spending.
- Actual covenant headroom and the effect of higher floating rates, including the post-quarter increase in the revolver margin to 3.00%.
- Whether natural gas services margins stabilize and marine transportation utilization and costs improve.
- The completion, premium and financing effects of the planned $25 million senior-note redemption, and subsequent changes in revolver borrowings.
- The scale and terms of related-party reimbursements, service arrangements and transactions, given Martin Resource Management’s control and ownership.
- Whether commodity hedges remain effective and how price movements affect unhedged volumes and reported earnings.