Business context and reporting period
Martin Midstream Partners L.P. filed this unaudited Form 10-Q for the three months ended March 31, 2020. Its Gulf Coast-focused businesses are terminalling and storage, transportation, sulfur services, and natural gas liquids (NGLs). The 2019 comparison excludes the natural gas storage business, sold in June 2019 and presented as discontinued operations.
Financial results and liquidity
Unless indicated otherwise, amounts are in U.S. dollars; financial statement amounts below are in millions.
- Revenue: $198.9 million, down 17.1% from $240.0 million. Lower NGL prices and volumes were a principal factor.
- Profitability: Operating income was $15.6 million versus $9.6 million; net income was $8.8 million versus a $3.7 million net loss. Continuing-operations income per limited partner unit was $0.22 versus a $0.12 loss. Operating margin was approximately 7.8%, compared with 4.0%.
- Cash flow: Operating cash flow was $44.9 million versus $40.6 million. Investing used $6.3 million; financing used $41.4 million. Cash fell $2.8 million during the quarter to $68,000. Distributable cash flow from continuing operations, a non-GAAP measure, was $18.3 million versus $4.8 million.
- Debt and liquidity: Total debt was approximately $529.7 million, including $364.1 million of 7.25% senior notes due February 2021 and $170.0 million drawn on the revolving facility. Cash was $68,000; covenant-adjusted additional borrowing capacity was approximately $46.2 million. Total assets were $612.2 million and partners’ deficit was $29.5 million. The notes’ carrying amount was $364.1 million versus estimated fair value of $146.8 million.
- Distribution: The partnership declared $0.0625 per common unit for Q1, equivalent to $0.25 annualized. Management said distribution reductions were expected to preserve approximately $68.2 million annually for debt reduction and investment.
Changes, outlook, and material risks
- Revenue fell, but segment operating results improved in sulfur services and NGLs; transportation and terminalling and storage operating income declined. NGL segment revenue dropped 29%, while reported operating income increased as lower product costs more than offset lower revenue.
- Results included a $3.5 million gain from repurchasing $9.3 million face value of senior notes. Other operating income included impairment charges of $4.4 million on long-lived assets, partly offset at the consolidated level by other gains. Sulfur services recorded $6.8 million of other operating income, including business-interruption insurance recoveries and a gain on asset dispositions.
- Debt refinancing is the central near-term risk. The notes mature within twelve months; if not refinanced by August 19, 2020, the revolving facility may mature then as well. Management disclosed substantial doubt about the Partnership’s ability to continue as a going concern pending successful refinancing. It hired Stephens Inc. as financial adviser on April 6 and said it was pursuing strategic alternatives; refinancing and covenant compliance were not assured. The Partnership reported covenant compliance at March 31.
- COVID-19 and market risks: Management expected adverse impacts through the remainder of 2020 from reduced refined-product demand and refinery utilization. It cited potential weakness in packaged lubricants, land transportation loads, NGL butane availability, and third-party sulfur volumes. Storage minimum-volume contracts, sulfur reservation fees, and possible marine floating-storage demand could provide support. Management was considering expense reductions and deferred certain maintenance and growth capital spending until 2021; no numerical earnings guidance was provided.
- COVID-19-related impairment testing resulted in the $4.4 million long-lived-asset charge; no goodwill impairment was recorded. Management said assessments of credit losses, inventory, and contract modifications had no material impact as of March 31, but further deterioration could cause additional impairments and restrict financing access.
- Related-party exposure is significant: Martin Resource Management Corporation controls the general partner, supplies management and services, accounted for about 11% of revenue, and related-party transactions represented about 21% of costs and expenses in the quarter. A lubricants-customer indemnity dispute remains unresolved; the Partnership could not estimate potential exposure if the case or related insurance claim proceeds.
Important facts for investors to verify
- Whether the 2021 notes were refinanced or otherwise addressed before the August 19, 2020 facility trigger date, and the resulting debt terms, liquidity, and covenant headroom.
- Whether operating cash flow and available borrowing capacity remained adequate as COVID-19 effects developed, particularly given near-zero quarter-end cash.
- Whether segment trends, including refined-product demand, NGL margins and volumes, and sulfur volumes, matched management’s stated outlook.
- How much of reported earnings and cash generation depended on the note-retirement gain, insurance recoveries, asset-disposal gains, working-capital movements, and other unusual items.
- Whether the reduced distribution was sustainable and whether related-party charges and the unresolved indemnity matter changed materially.