Martin Midstream Partners L.P. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Amounts below are in millions of dollars unless noted. The Partnership operates Gulf Coast-focused terminalling and storage, transportation, sulfur services, and specialty products businesses.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $195.6 | $267.0 | $440.2 | $546.2 |
| Operating income | $17.3 | $21.5 | $34.8 | $46.9 |
| Net income (loss) | $1.1 | $6.6 | $(4.0) | $18.1 |
| Limited partner earnings (loss) per unit | $0.03 | $0.17 | $(0.10) | $0.46 |
| Adjusted EBITDA (non-GAAP) | $25.5 | $38.3 | $47.3 | $78.3 |
| Adjusted EBITDA after butane exit adjustment (non-GAAP) | $31.8 | $38.9 | $62.4 | $73.2 |
Q2 operating margin was approximately 8.9%, versus 8.0% a year earlier; six-month operating margin was approximately 7.9%, versus 8.6%. Interest expense rose 19% in Q2 to $15.3 million and 22% in the first half to $30.9 million. First-half results included a $5.1 million debt-extinguishment loss tied to refinancing.
First-half operating cash flow was $98.8 million, compared with $28.5 million in 2022; investing cash outflow was $13.4 million and financing cash outflow was $85.4 million. Management attributed the operating cash flow increase largely to favorable working-capital changes, including $75.1 million from liquidation of butane-business working capital, which it says will not recur. Q2 operating cash flow was $49.5 million, versus an outflow of $2.5 million in Q2 2022.
Balance sheet and liquidity
At June 30, 2023, cash was $0.06 million, total debt net of issuance costs was $436.5 million, and partners’ capital was a deficit of $63.8 million. Debt declined from $512.9 million at year-end 2022. The $175 million revolving credit facility had $60.5 million drawn and $11.5 million of letters of credit outstanding; covenant-adjusted additional borrowing capacity was approximately $56.3 million. The Partnership reported compliance with debt covenants and expected to remain compliant over the next 12 months. The facility’s weighted-average rate was 8.85% at quarter-end; management estimated a 100-basis-point increase would add approximately $0.6 million of annual interest expense.
Material changes and management commentary
- Revenue declined 27% in Q2 and 19% for the first half. Lower commodity prices and lower sales volumes weighed on specialty products and sulfur product sales; sulfur segment operating income fell 42% in Q2 and 55% in the first half. Transportation revenue grew 7% in the first half, while operating income was broadly flat.
- The Partnership completed its exit from butane optimization in Q2 and plans to operate a fee-based butane logistics business instead. It expects this model to reduce commodity exposure, earnings and cash-flow volatility, and working-capital needs. Historical butane revenue and costs remain in reported periods and are not expected under the new model.
- In February 2023, the Partnership issued $400 million of 11.5% senior secured notes due 2028, refinancing its 2024 and 2025 notes and repaying part of the revolver. The amended facility matures in February 2027, with commitments scheduled to decline to $150 million in June 2024. The refinancing extended maturities but introduced a higher-coupon note and incurred the $5.1 million extinguishment loss.
- A quarterly distribution of $0.005 per common unit was declared for Q2, equivalent to $0.02 annualized. Credit-facility terms generally limit quarterly distributions above $0.005 per unit unless specified leverage and liquidity tests are met.
- The Partnership expects approximately $20 million of capital expenditures in 2023–2024 related to its electronic-level sulfuric acid joint venture and associated services. It holds a 10% non-controlling interest and expects to provide feedstock and transportation services.
Risks, contingencies, and other items
- A customer’s counterclaims seek recovery of costs related to settled marketing lawsuits. The Partnership disputes its obligation to indemnify the customer; it cannot determine its potential exposure. Trial is expected in Q1 2025.
- Martin Resource Management Corporation controls the general partner, owns approximately 15.7% of common units, and is a significant customer, supplier, and provider of services. Related-party sales were approximately 17% of Q2 revenue and 13% of first-half revenue. The Partnership reimburses direct costs without a stated monetary cap and also pays approved overhead allocations.
- Commodity prices and variable borrowing rates remain risks; no commodity hedging positions were outstanding at June 30. Seasonality affects NGL and fertilizer demand, and severe weather may affect operations. Management reported no material changes to the risk factors in its 2022 Form 10-K.
- The filing provides no formal earnings or revenue guidance. Management stated it expected to remain in compliance with debt covenants for the following 12 months. Environmental costs and liabilities were not material in the first half.
Investor verification points
- Assess how much first-half operating cash flow depended on the non-recurring $75.1 million butane working-capital release.
- Verify the economics and execution of the fee-based butane logistics transition and whether it offsets the loss of historical optimization activity.
- Review refinancing costs, the 11.5% notes, variable-rate exposure, covenant headroom, borrowing capacity, and distribution restrictions.
- Track segment margins and volumes, especially sulfur and specialty products, and distinguish price effects from volume and margin changes.
- Monitor the unquantified customer litigation exposure and the scale, terms, and governance of related-party dealings.