Martin Midstream Partners L.P. — Q3 2023 Form 10-Q
Period: Three and nine months ended September 30, 2023. Unless stated otherwise, dollar amounts below are in millions. The partnership operates in terminalling and storage, transportation, sulfur services, and specialty products, primarily in the U.S. Gulf Coast region. Interim results are unaudited.
Financial performance and liquidity
- Q3 revenue: $176.7, down 23% from $229.3 in Q3 2022. Nine-month revenue: $616.9, down 20% from $775.5.
- Operating income: $14.7 in Q3 versus an operating loss of $12.2 a year earlier; $49.5 for nine months versus $34.7. Net loss: $1.1 in Q3 ($0.03 per limited partner unit) versus $28.0 ($0.71 per unit); $5.1 for nine months ($0.13 per unit) versus $10.0 ($0.25 per unit).
- Adjusted EBITDA (non-GAAP): $26.2 in Q3 versus $18.8; $73.4 for nine months versus $97.1. Adjusted EBITDA giving effect to the butane-business exit was $26.2 versus $20.4 in Q3 and $88.5 versus $93.6 for nine months.
- Cash flow: Operating cash flow was $7.3 in Q3 and $106.1 for nine months, compared with cash use of $45.2 and $16.8, respectively, in 2022. Distributable cash flow (non-GAAP) was $5.0 for Q3 and $24.2 year to date, versus negative $2.0 and $36.1. Adjusted free cash flow (non-GAAP) was $1.5 and $18.1, versus negative $3.0 and $30.4.
- Balance sheet: Cash was just $0.05; current assets were $111.9 and current liabilities $81.0. Total assets were $507.9, total liabilities $572.9, and partners’ capital was in a $65.0 deficit.
- Debt: Long-term debt, net, was $439.8, including $380.9 net carrying value of 11.5% senior secured notes due 2028 and $59.0 drawn on the variable-rate credit facility. The facility’s weighted-average rate was 8.93%. The partnership reported covenant compliance.
- Borrowing capacity: The $175.0 million facility had $62.5 million drawn and $9.4 million in letters of credit. Reported unused capacity was $103.1 million; after financial covenant limits, additional borrowing ability was approximately $84.1 million.
Changes versus the prior comparable period
- Revenue declined primarily because of the completed exit from butane optimization and lower specialty-products sales volumes and prices. Butane exit-related revenue was absent in Q3 2023; the prior-year quarter included $28.4 million. Specialty-products operating income improved to $6.0 million from an $13.3 million loss, while transportation operating income fell 45% to $6.7 million.
- Sulfur services operating income recovered to $2.7 million from a $6.7 million loss in Q3, as lower product costs and higher sales volumes improved quarterly margins. For nine months, sulfur-services operating income declined 17% to $12.6 million amid lower product prices and margins.
- Nine-month operating cash flow improved substantially, but management attributed $107.3 million of the favorable working-capital variance to liquidation of butane-business working capital, which it says will not recur. Accordingly, operating cash flow should not be read as a normalized run rate.
- Interest expense rose 8% in Q3 to $15.0 million and 17% for nine months to $45.9 million. The nine-month results also include a $5.1 million loss on extinguishment of debt.
Outlook, material developments, and risks
- The partnership completed its butane optimization exit in Q2 2023 and plans to continue in butane as a fee-based logistics business, using storage and transportation assets. Management expects the model to reduce commodity exposure, earnings and cash-flow volatility, and working-capital needs.
- In February 2023, it issued $400 million of 11.5% secured notes due 2028 to refinance its 2024 and 2025 notes, repay part of the credit facility, and cover transaction costs. Credit-facility commitments are scheduled to fall to $150 million in June 2024. Debt documents restrict distributions and other actions; the facility generally limits quarterly distributions above $0.005 per unit unless specified leverage and liquidity tests are met.
- The partnership declared a Q3 distribution of $0.005 per common unit, or $0.02 annualized, payable November 14, 2023. It stated that it expects to remain in compliance with debt covenants over the next 12 months.
- For the electronic-level sulfuric acid joint venture, the partnership expects approximately $22.5 million of capital expenditures in 2023–2024; approximately $4.6 million had been funded through September 30, 2023.
- A customer’s indemnity-related counterclaims remain pending in litigation; the partnership says potential exposure cannot currently be determined, intends to defend the claims, and expects trial in Q1 2025. Management says other ordinary-course claims are not expected to have a material adverse effect.
- Risks include variable-rate debt, commodity and seasonal exposure, potential weather disruption, and reliance on Martin Resource Management Corporation (MRMC) for management and services. MRMC owns about 15.7% of common units and controls the general partner. Related-party sales represented about 15% of Q3 revenue, and related-party transactions represented about 29% of Q3 costs and expenses.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It reported no material changes to the risk factors in the 2022 Form 10-K.
Important facts for investors to verify
- How much of reported operating cash flow and liquidity is sustainable after the one-time butane working-capital release?
- Whether adjusted EBITDA, distributable cash flow, and adjusted free cash flow can support debt service, planned capital spending, and the $0.005 quarterly distribution.
- Facility covenant headroom and refinancing options as commitments decline, given the 11.5% notes, variable-rate borrowing, and restrictive distribution provisions.
- Execution, funding requirements, and expected economics of the sulfuric-acid joint venture and the fee-based butane logistics strategy.
- Potential financial exposure and developments in the customer litigation, as well as the terms and governance of material MRMC-related transactions.