Martin Midstream Partners L.P. (MMLP) Q4 2014 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Martin Midstream Fourth Quarter 2014 Earnings Conference Call. At this time all participants are in a listen-only mode. Later we'll have a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I'd now like to turn the call over to Mr. Bob Bondurant, CFO. Please go ahead.

Thank you, Nicholas. Let everyone know who is on the call today. We have Ruben Martin, our President and Chief Executive Officer; Joe McCreery, our Vice President of Finance and also our Head of Investor Relations; and Wes Martin, our VP of Corporate Development. Before we get started with the financial and operational results for the fourth quarter, I need to make this disclaimer. Certain statements made during this conference call may be forward-looking statements relating to financial forecasts, future performance, and our ability to make distributions to unit holders. We report our financial results in accordance with Generally Accepted Accounting Principles, and use certain non-GAAP financial measures within the meanings of the SEC Regulation G, such as distributed cash flow, or DCF; and earnings before interest, taxes, depreciation, and amortization, or EBITDA; and we also use adjusted EBITDA. We use these measures because we believe it provides users of our financial information with meaningful comparisons between current results and prior reported results, and it can be a meaningful measure of the Partnership's cash available to pay distributions. Now we also included in our press release issued yesterday a reconciliation of EBITDA, adjusted EBITDA, and distributable cash flow to the most comparable GAAP financial measure. Our earnings press release is available at our website, www.martinmidstream.com. Now as I address our performance for the fourth quarter, I will do it from the perspective of continuing operations. As most you know, earlier this month, we sold our six inland NGL floating storage barges for $41.25 million, realizing a gain of approximately $1.5 million on the sale of these assets in the first quarter of 2015. These six barges support the NGL product purchases and sales in the Corpus Christi area. This business, while utilizing these six NGL barges as floating storage carry both commodity price risk and margin risk. For 2014, this business had a negative EBITDA of $3.8 million. As a result of this sale, we were able to de-lever the partnership by paying down a revolver and at the same time, we were able to eliminate a negative cash flow business within our natural gas services segment. As a result, there was a significant positive effect on both the numerator and denominator of our bank leverage covenant calculation as our pro forma leverage was 4.67 times at year end. Now I would like to discuss our fourth quarter performance from continuing operations relative to the third quarter and also discuss our performance for the year. For the fourth quarter, we had adjusted EBITDA of $42.6 million compared to $34.6 million in the third quarter. For the year we had adjusted EBITDA of $149 million, compared to $135.5 million in 2013. Our distributable cash flow from continuing operations for the fourth quarter was $33.5 million, a distribution coverage of 1.14 times based on our distribution of $29.4 million paid out in the fourth quarter. For the year, our DCF coverage from continuing operations was 0.97 times based on our total of 2014 distributions of $97.4 million. Now I would like to discuss our fourth quarter performance compared to the third quarter. In our natural gas segment, natural gas services segment I might say our fourth quarter EBITDA from continuing operations, which is defined as operating income plus depreciation and amortization, but excluding any gain or loss on sale of assets was $17.9 million compared to $10 million in the third quarter. Cardinal Gas Storage's EBITDA in the fourth quarter was $12.7 million, compared to $2.3 million in the third. As you know, we acquired a 100% of Cardinal at the end of August, so our third quarter performance only had September results for Cardinal. Offsetting this increase was a decrease in our margin base NGL Logistics business, which is composed of all natural gas liquids products including wholesale propane and refinery grade butane. Our cash flow for NGL Logistics business was $5.3 million in the fourth quarter, compared to $7.8 million in the third quarter. Although our volume was up 23%, primarily due to the refinery butane blending season, our overall NGL margins were down 44%. This margin compression was primarily driven by the decline in location differentials, which occurred in the fourth quarter. Even though our cash flow declined primarily due to margin erosion driven by reduced location differentials, our hedges that were in place to protect our inventory price risk worked effectively during the quarter and for the year, our cash flow from our natural gas services business excluding the NGL floating storage business was $43.7 million, compared to $28.9 million in 2013. The year-over-year increase was primarily driven by our acquisition of the remaining interest in Cardinal Gas Storage in late August of 2014. Now looking toward 2015, we will experience increased cash flow from owning a 100% of Cardinal Gas Storage for the full year. Also we believe our margin based NGL Logistics business should experience increased cash flow as a result of our new rail terminal being constructed at our NGL underground storage facility in Arcadia, Louisiana. This rail terminal will give us the ability to broaden our refinery customer base to an expanded geographical scale and will increase the volume handled in our refinery grade butane logistics business and give us the potential ability to optimize locations differentials. In addition to the cash flow generated in our natural gas services segment, we received a $2 million distribution from our West Texas LPG pipeline joint venture in the fourth quarter and we received $2.6 million from this JV for the year. Looking forward to 2015 we anticipate we will receive $9 million in distributions from this investment. Now in our terminalling segment, our fourth quarter EBITDA was $12.3 million compared to $15.5 million in the third quarter. The fee based portion of our terminalling segment cash flow increased $0.3 million to $12.9 million. This fee based portion includes our specialty terminals, shore based terminals and the cross refinery, all of which continued to generate stable cash flow over time. Offsetting this was a decrease of $3.5 million in cash flow in our Lubricant Packaging business. Our Lubricant Packaging business experienced reduced volume sales as our customer base implemented a strategy of destocking their inventory in the fourth quarter as base oil pricing fell significantly throughout the quarter, effectively following crude oil pricing. As a result, our lubricant sales volume fell 36%. This sales volume decline also negatively impacted our packaging production rates and the corresponding absorption of fixed manufacturing cost and the inventory cost. We also had reduced margins on the sales we did make, as overall demand for package lubricants was reduced due to customer destocking efforts. Now for the year, cash flow for our terminalling segment was $64.3 million, compared to $66.3 million in 2013. The fee-based portion of our terminalling segment had an increase in cash flow of $5 million, primarily driven by the performance of our Corpus Christi crude terminal. This crude terminal had a 51% increase in volume year-over-year. Offsetting this increase was a decline in our lubricants packaging business of $7 million in 2014 when compared to 2013. Now looking toward 2015, we're forecasting a slight increase in EBITDA from our fee-based terminals and a significant increase in our lubricant packaging business year-over-year. Our packaged lubricant sales volume has been recovering in the first quarter of this year when compared to the fourth quarter of 2014 and we've also made significant improvements in the cost structure of this business. Both of these improvements will drive this projected EBITDA increase in our Lubricant Packaging business. Now moving to our Sulfur Services segment, our EBITDA was $6 million in the fourth quarter, compared to $5.4 million in the third quarter. On the pure sulfur side of the business, EBITDA was $4.5 million in the fourth quarter, a slight increase over the $4.3 million realized in the third quarter. Our fertilizer EBITDA was $1.5 million in the fourth quarter compared to $1.1 million in the third quarter. This increase was primarily driven by increased seasonal sales volume in the fourth quarter when compared to the third. Now for the year, our Sulfur Services segment EBITDA was $33.8 million in '14 compared to $34 million in '13. The pure sulfur side of the business had EBITDA of $17.6 million compared to $14.3 million in 2013. This increase was primarily driven by a 13% increase in gross margin per ton year-over-year and stronger cash flow from our California prilling operations. Our fertilizer EBITDA was $16.2 million in 2014 compared to $19.7 million in '13. This decrease for the year was primarily driven by a 24% decrease in gross margins per ton. This gross margin decline was the result of weaker agricultural commodity pricing primarily corn, in 2014 compared to '13. This weaker agricultural commodity pricing caused decreased fertilizer demand, which in turn drove weaker fertilizer margins. Now looking towards '15, we feel there might be some downward pressure in our sulfur services cash flow, primarily driven by currently anticipated weaker agricultural commodity prices. However, this anticipates downward pressure on this segment's cash flow should not be significant when compared to 2014. In our marine transportation segment, we had EBITDA of $6.4 million in the fourth quarter, compared to $6.3 million in the third quarter. We continue to realize almost full utilization of our marine assets in the fourth quarter as we did in the third quarter. For the year, EBITDA for our marine transportation segment was $18 million in '14 compared to $18.8 million in '13. This slight decline was a result of having our entire offshore fleet going to dry dock repair during the first six months of the year. Looking towards 2015, we're forecasting an improvement in marine transportation EBITDA when compared to 2014 as we do not anticipate any significant offshore dry dockings to occur. Also we have two new inland asphalt barges being placed into service early this year. The significant majority of capital dollars for these two barges was spent in 2014. Finally, our unallocated SG&A cost for $4.5 million for both the third and fourth quarter was $18.7 million for the full year in 2014. Including in this cost for the year was $0.08 million of non-cash unit grant compensation. So true unallocated SG&A cash cost were $17.9 million. Looking towards 2015, our unallocated SG&A cash cost should be approximately the same as 2014. We continue to hold a $15 million no receivable due from Martin Energy Trading, our affiliate of our general partner. This investment will generate $2.3 million in interest income in 2015. Our maintenance capital expenditures and turnaround cost for the fourth quarter were $1.3 million and $18.5 million for the year. For the year, this was higher than normal due to a large refinery turnaround and the dry-docking of our entire offshore barge fleet. Looking towards 2015, we're currently forecasting approximately $14 million to $15 million of maintenance capital expenditures including a small refinery turnaround in the first quarter. So to summarize, we believe our adjusted EBITDA of $149 million realized in 2014 will increase significantly in 2015. This will primarily be driven by a full year of cash flow from our Cardinal Gas Storage investment and our West Texas LPG pipeline joint venture along with sales volume and margin improvements in our lubricant packaging business, increased offshore utilization and our marine transportation business and more opportunities provided by our new rail terminal in our NGL Logistics businesses slightly offsetting this EBITDA growth to be a decrease in cash flow from our sulfur services businesses. Now I’d like to turn the call over to Joe McCreery, who will speak to the refinery-centric nature of our business and also speak on our liquidity and capital resources.

Thanks Bob. I'll start with our normal walk-through of the debt components of our balance sheet and our bank ratios. Then I'll discuss the partnership's outlook and our ability to navigate through this commodity price cycle. On December 31, 2014, the partnership had total long-term funded debt of approximately $902 million. This consist of $402 million of senior unsecured notes and $500 million drawn under $900 million revolving credit facility. Thus the partnership's available liquidity under the revolving credit facility at yearend was $400 million. For the fourth quarter ended 2014, our bank compliant leverage ratios defined as senior secured indebtedness to adjusted EBITDA and total indebtedness to adjusted EBITDA were 2.49 times and 4.67 times respectively. Additionally, our bank compliant interest coverage ratio, as defined by adjusted EBITDA to consolidated interest expense was 3.56 times. For this non-GAAP calculations again I note that when we calculate our bank compliant ratios, we're required to include the pro forma impact of our discontinued operations, in this case our NGL floating storage asset divesture as if the sale of those assets took place during the previous four quarter period. Looking at the balance sheet to the same pro forma wins, our total debt to total capitalization at 12/31/14, was approximately 63.9%, a slight improvement compared to the quarter ended September 30, 2014, again primarily a result of the pro forma effect of the sale of the NGL floating storage assets. In all, at December 31, 2014, the partnership was in full compliance with all banking covenants financial or otherwise. Now reconciling our current revolver balance to the quarter ended December 31, 2014, the outstanding amount today is $490 million and thus the partnership has available liquidity currently of $410 million under its credit facility. This lower current revolver balance is attributed to working capital reductions associated with lower inventories in our NGL businesses and again the impact of our floating storage asset sale. Our capital raises were minimal during the fourth quarter. Based on market conditions, we utilized our ATM program on only one trading day, generating net proceeds of approximately $600,000. For the year ended 2014, net proceeds from the ATM program were approximately $21.1 million. This is below our planned usage for the year, primarily due to a lack of activity during the third and fourth quarters. Now I’d like to expand upon the comments Ruban made in our press release last night. Since the last time we were together on the phone at the end of the third quarter, the energy world has materially changed. We’re all aware of the significant drop in commodity prices of oil, natural gas and associated products, but what does that mean for Martin and more specifically, if a period of sustained weakness continues, what is the long term prognosis for distribution security in our distribution growth. First let me say we believe our businesses have a large degree of staying power. The majority of our 2015 projected cash flow over 70% which includes many of the contracts we have with MRMC, we categorize internally as either refinery or agricultural related. This includes most of our terminalling and storage and marine transportation segments and certain aspects of our natural gas and software services segments. These activities are largely removed from the well head and the risks associated with oil and gas production. As we've said in the past, MMLP has essentially no direct commodity exposure. Further where we have indirect exposure, this is best categorized as volumetric risk, where volumetric risk is prevalent, our cash flow is supported by contractual minimum throughput levels with our customers in most cases. One exception however is our 20% interest in the West Texas LPG pipeline, which I'll discuss momentarily, but now let's zoom in even closer to our volumetric risk and look at the specific cash flows from our Corpus Christi crude terminal our marine shore basis and our 20% interest in the West Texas LPG pipeline. Dissecting these assets individually better demonstrates our true sensitivity and resilience to commodity prices. First at Corpus Christi, as you're aware we're under a long term contract with a major integrated oil company who aggregates Eagle Ford crude oil production. At the terminal point of harvest pipeline using our storage capabilities we transfer crude oil under waterborne vessels for transport to the refinery. Our contract calls for minimum throughput at the terminal of 85,000 barrels per day. As we announced last night, our throughput for the year ended 2014 averaged approximately 164,000 barrels per day and our current run rate to this point in 2015 is approximately 175,000 barrels more than double the minimum contracted level. We believe given the production costs advantages of Eagle Ford Shale we will continue to operate well above the minimum levels and have forecasted 2015 cash flow accordingly. Next with respect to our marine shore based terminals, since 2010 as the U.S. Gulf of Mexico exploration and production has slowly recovered post BP Macondo disaster, we have been reliant upon the minimum throughput levels with our counter party MRMC. Our shore base is dependent on deep water offshore ENP activity as a primary driver. Although rig counts have steadily improved over the last several years, long lead time, large scale deepwater projects have a level of inelasticity regardless of current commodity prices. We have forecasted the minimum contracted throughput levels for the shore based terminals again in 2015. This is to say we see no negative impact to our cash flows in the current environment. And finally with respect to our 20% interest in West Texas LPG pipeline, although a common carrier with limited actual contracted throughput, we believe the West Texas LPG pipeline system to be one of the lowest cost providers of natural gas liquids transport out of the Permian Basin. For this reason, we believe this asset has a distinct competitive advantage and again a level of staying power through the current pricing cycle. We believe this also to be one of the primary reasons that pipeline has operated at or near capacity for the last several years. Further to the point, discussions with our joint venture partner ONEOK Partners, L.P. are currently centered around expanding the capacity of the system given this competitive rate structure and favorable footprint. So for the reasons I just articulated, we believe MMLP is well positioned to weather the current market conditions. As we've seen our partnership hold up well through similar cycles in the past, we believe this same will be true in the current environment. Now let's talk about growth. There is no question that growth in our sector in MMLP will be somewhat curtailed. A few of our larger previously discussed projects have been placed in the backburner internally pending further dialogue with our customers. This includes expansion ideas like the additional tankage at the Corpus Christi terminal. That said, we may be relegated to smaller capital projects this year. Currently we have approximately $65 million in growth capital expenditures approved in our 2015 budget. This figure excludes any projects centered around the West Texas LPG pipeline, which will likely start later this calendar year. So when all said and done, we believe our 2015 capital spending could exceed what was currently budgeted and approved. And finally a commercial sorts this morning, we would like to welcome all of you to our 2015 Annual Analyst and Investor Day. Our meeting and presentation will take place on Tuesday, March 24 at the Houstonian Hotel in Houston, Texas. All detailed in a simple registration form can be completed on our website again at www.martinmidstream.com and exchanged for your registration and you attendance. I promise you that Ruben will buy your lunch. So that concludes the prepared remarks today. Nicholas, we would like to open the lines for Q&A.

[Operator Instructions] And our first question comes from the line Gabe Moreen with Bank of America/Merrill Lynch. Your line is now open, please proceed with your question.

Hey good morning, everyone. Question on I guess distribution policy and I know you don't necessarily give explicit distribution policy, but is it given the frustration around I guess the unit price performance, is it fair to say you don’t think increase in the distribution until your unit price acts a little better is going to happen and I guess given the coverage -- but that’s despite the coverage improvement and the fact that you probably could increase the distribution a bit if you wanted to?

Yeah, I think a couple of things Gabe, one is although we haven’t been incredibly transparent with our policy, I think by and large we’re looking for kind of 1.15 times on a quarterly basis. We were basically there on a discontinued ops adjusted level for the fourth quarter, but nonetheless, we held that for this quarter. As you've seen in the past, we’ve done incremental kind of quarter cent increases. And we’re not sure the market is giving us full credit for those it's kind of hard to tell. So for this quarter, we decided not to increase the distribution, just let it play out. But nonetheless, I think we’re focused on growing the distribution. As you know, we’ve been over time probably relegated to a 3% plus or minus distribution growth entity and I think that metric is kind of where we envision ourselves again for 2015.

Got it. Thanks and then turning to I guess opening the floor to whatever comments you kind of want to make around how anything you’re looking out with your general partner might play into 2015. And I hate to ask a generic dropdown question, but I’m wondering what the latest is in terms of discussions with your general partner?

Sure Gabe, this is Wes…

[Indiscernible] general partner, sorry excuse me.

Yeah, no problem. Look I think, first of all I think in 2014 that was a pretty good year for us on the acquisitions front. We closed two relatively large acquisitions in our 20% WTLPG interest and then also the remaining interest in Cardinal, which is a total of $500 million deals plus or minus that we did in the first nine months of 2014. So we were pretty busy on the deal front. That said in 2015 I think it’s safe to say that we’re going to refocus some of our efforts here internally within Martin and Alinda as well regarding the potential for dropdowns. And as usual, I don’t want to speak for the Alinda team, but I think that both Martin and Alinda are on the same page in those efforts and I know that’s sort of a generic answer to your question. But in terms of timing or definitives on those, we’re not there yet, but I think both partners are refocused on those efforts on trying to move the ball forward on that front in '15.

Got it. Thanks Wes. And just last one from me on the potential expansion of West Texas LPG, can you just talk about kind of latest discussions and I guess also on that expansion, do you guys think, you’ll be taking volume risk without or would you strictly adhere to take or pay?

Yeah so, this is Wes again, I think and specific to ONEOK obviously they closed their deal in the fourth quarter of last year. I think their efforts primarily have been focused on transitioning, getting the systems in-house in place. So, we haven’t had explicit detailed conversations with those guys at this point. With respect to the full plans I can tell you that what they’re going out to the market and what they've said and I think they reaffirmed this past conference call that they just recently had earlier this week was $500 million of CapEx for their 80% interest and looking to over time sort of blend their multiple down into the six to eight times range. So if you grossed up that $500 million this is again, we haven’t had very specific conversations with these guys yet, but that could mean $100 million plus or minus of CapEx for us in the out years call it some maybe in '15, but probably more focused on '16 and '17. So that’s a little bit more specific, but I think in terms of the expansion case, again we haven’t had a chance to sit down with those guys and really get their feel for it. But I do know that in general if you follow their press releases and their public commentary, they do have some plans and we do have some plans as well in terms of looking at expansion on that line.

Great, thanks Wes.

[Operator Instructions] And our next question comes from the line of T.J. Schultz with RBC Capital. Your line is now open. Please proceed with your question.

Hey guys, good morning. On the lubricant business, so I guess you’re down, it sounds like about $7 million in 2014 year-over-year. And now sounds like you think you can get a pretty significant increase in 2015. So just wanted to see if you could expand a little bit on that business what gives you kind of line of sight to get that rebound this year? If it’s just customers that have fully destocked at this point, just trying to get a little bit more info there?

Yeah, this is Bob. I’ll take that. We have like I said in my comments we have seen the demand for volume pickup. It’s not all the way back to the levels that was pre-energy price collapse, but it is recovering, but because we felt like there could be a softer kind of sight on the sales volume side we have done things on the production front as far as cutting cost. We had one production facility that we converted to just a distribution facility. So we cut out fixed cost related to that production line. So it’s going to be a combination of sales volume improvement year-over-year and also cost reduction improvement year-over-year and our forecast is currently showing we should tend to recover to where we were in 2013.

Okay. Thanks. The marine segment when are the two inland asphalt vessels entering service? And if you can give me any kind of or try to quantify the impact from those?

Yeah, one is online now, it’s been blended in with another asphalt toe and the other one is coming online I believe sometime late this first quarter.

Into March right.

Into March, I don’t have the specific barge rates, but about 8500 a day kind of rate is typical on the sum of both barges for the tow.

Okay. And just lastly [for interest] [ph] on the balance sheet maybe if you could frame 2015 CapEx plan seem manageable it sounds like we should see some cash flow improvement in the business. So as we think about current leverage, do you think current -- the cash flow improvement this year and the ATM would be enough to get leverage where you wanted. How, or if you're thinking about further asset sales that may make sense just any general thoughts on the balance sheet?

Sure, this is Joe, T.J. where I think we are, we’re a little elevated from where we want to be, we're going to stick to our kind of transparent goal to the market with 4.5 times being our target and obviously we’re slightly ahead of that about 20 basis point. So we’re doing some balance sheet improvement. I think you’re right. With respect to the manageable level of CapEx, it’s currently forecasted. We can probably limp home and maybe utilize the ATM little bit. So we don’t have any near-term equity plans. I think from our perspective, we’re just going to let it sort of play out and see if we opportunistically find an opportunity from an M&A perspective or a larger growth project enters the equation and then I think we'll address the capital raise at that time, but I think for now, we’re probably okay.

Okay. And then asphalt sales, is that’s just a one-off or is that -- are you looking at anything else there?

Yeah I would categorise that as a one-off right. I think as Bob alluded to, that was a benefit from both the numerator and denominator perspective to have an asset that was losing cash flow I think we did a prudent thing to secure that.

Okay. Thanks make sense. Appreciate it.

[Operator Instructions] And pardon me speakers. It looks like we have no further questions in the queue.

Well we thank everybody for being on the call today and we realize there’s been a lot of changes in this business and since the fourth quarter with energy prices and so forth and so our growth is we still have that diversified portfolio. And so we don’t see our growth stopping, but it will slow down like a lot of other people have been talking about. We see ourselves as insulated from commodity type exposures. We’re evaluating every business that we have and looking at what we do have on that commodity business. But we’ve been through the tougher times when we see some of the other companies. So we don’t feel like we've got a lot of exposure at all to commodity. The partnership we do a lot of business with a lot of refineries so, we believe that’s a good staying power and along with our diversity. So I've seen these cycles before. We've all been through these cycles before. I've seen it high and I've seen it low and we know how to handle this situation. But again we appreciate everybody's time and please join us for Investor Day on March 24. We always have some really good goodies to hand out at that one after lunch. So we appreciate everybody's interest in our company. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. And you may all disconnect. Have a good day everyone.