Martin Midstream Partners LP (MMLP) 2014 Q4 法說會逐字稿

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 will 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 would now like to turn the call over to Mr. Bob Bondurant, CFO. Please go ahead.

Thank you, Nicholas. We'll let everyone know who's on the call today. We have Ruben Martin, our President and Chief Executive Officer; Joe McCreery, our VP of Finance and also our Head of Investor Relations; and Wes Martin, our VP of Corporate Development. Before we get started with 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 meaning of the SEC Regulation G such as Distributable 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.

We also included the 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. As I address our performance for the fourth quarter, I will do it from the perspective of continuing operations. As most of you know, earlier this month we sold our sixth inland NGL floating storage barges for $41.25 million realizing a gain of $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, carried 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 resolver 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 we?d like to discuss the 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 2014 distributions of $97.4 million. Now, I would like to discuss our fourth quarter performance compare 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 100% of Cardinal at the end of August so the 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 the 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.

For the year our cash flow from 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. Looking toward 2015, we will experience increased cash flow from owning 100% of Cardinal Gas Storage for the full year. Also, we believe our margin based NGL logistics business should experience increased cash flow result of the 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 the refinery grade butane logistics business and give us the potential ability to optimize location differentials. In addition to the cash flow generated in our natural gas services segment we received a $2 million distribution from our West Texas LBG 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.

On the terminalling segment, our fourth quarter EBITDA was $12.3 million compared $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 continue 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 de-stocking 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 costs into inventory costs.

We also had reduced margins on the sales we did make as overall demand for packaged lubricants was reduced due to customer de-stocking efforts. 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. Looking toward 2015, we are forecasting a slight increase in EBITDA from our fee-based terminals and a significant increase in our lubricant packaging business year-over-year.

Our package lubricant sales volume has been recovering in the first quarter of this year when compared to the fourth quarter of 2014. And we have 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, 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.

For the year our sulfur services segment EBITDA was $33.8 million in 2014 compared to $34 million in 2013. 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 the California prilling operations. Our fertilizer EBITDA was $16.2 million in 2014 compared to $19.7 million in 2013. This decrease for the year was primarily driven by a 24% decrease in gross margin per ton. This gross margin decline was the result of weaker agricultural commodity pricing, primarily corn, in 2014 compared to 2013.

This weaker agricultural commodity pricing caused decreased fertilizer demand, which in turn drove weaker fertilizer margins. Looking towards 2015, we feel there might be downward pressure in the sulfur services cash flow primarily driven by currently anticipated weaker agricultural commodity prices. However, this anticipated downward pressure on this segments 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 yard.

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 2014 compared to $18.8 million in 2013. This slight decline was the result of having our entire offshore fleet going to dry dock repair during the first six months of the year. Looking toward 2015, we are forecasting an improvement in marine transportation EBITDA when compared to 2014, as we do not anticipate any significant offshore drydocks 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 costs were $4.5 million for both the third and fourth quarter, and was $18.7 million for the full year in 2014. Including in this cost for the year was $0.8 million of non-cash unit grant compensation.

So true unallocated SG&A cash costs were $17.9 million. Looking toward 2015, our unallocated SG&A cash costs should be approximately the same as 2014. We continue to hold a $15 million note receivable due for 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 turn around costs 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 larger refinery turn around and dry docking of our entire off shore barge fleet.

Looking towards 2015, we are currently forecasting approximately $14 million to $15 million of maintenance capital expenditures including a small refinery turn around in the first quarter.

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 the Cardinal Gas Storage investment and West Texas LPG pipeline joint venture along with sales volume and margin improvement in our lubricant packaging business, increased offshore utilization in our marine transportation business and more opportunities provided by our new rail terminal in our NGL logistics business.

Slightly offsetting this EBITDA growth should be a decrease in cash flow from our sulfur services business. Now, I would like to turn the call over 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 will start with our normal walk through of the debt components of the balance sheet and our bank ratios and 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 $902 million. This consisted of $402 million of senior unsecured notes and $500 million drawn on our $900 million revolving credit facility. Thus, the partnership?s available liquidity under the revolving credit facility at year end was $400 million.

For the fourth quarter ended 2014, our bank compliant leverage rations 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 these non-GAAP calculations, again I note that when we calculate our bank compliant ratios we are required to include the pro forma impact of our discontinued operations, in this case our NGL floating storage asset divestiture, as if the sale of those assets took place during the previous four quarter period.

Looking at the balance sheet through the same pro forma lens, 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 was below our planned usage for year, primarily due to a lack of activity during the third and fourth quarters. Now, I would like to expand upon the comments Ruben made in the 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 are 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 and 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 the natural gas and sulfur services segments. These activities are largely removed from the wellhead 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 will discuss momentarily. Now, let's zoom in closer to the volumetric risk and look at the specific cash flows from the Corpus Christi crude terminal, our marine shore bases and our 20% interest in the West Texas LPG pipeline. Dissecting the assets individually better demonstrates our true sensitivity and resilience to commodity prices.

First, at Corpus Christi, as you are aware, we are under a long-term contract with a major integrated oil company who aggregates Eagle Ford crude oil production. At the terminal point of the Harvest pipeline using our storage capabilities we transload crude oil on to 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 cost advantages of the 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 US Gulf of Mexico exploration and production has slowly recovered, post-BP Macondo disaster, we have been reliant upon the minimum throughput levels with our counterparty, MRMC.

Our shore bases depend on deep water off shore E&P activity as a primary driver. Although rig counts have steadily improved over last several years, long lead time, large-scale deep water 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 the 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 a level of staying power through the current pricing cycle. We believe this also to be one of the primary reasons the pipeline has operated at or near capacity for the last several years. Further to the point, discussions with our joint venture partners, ONEOK Partners LP, are currently centered around expanding the capacity of the system given its competitive rate structure and favorable footprint.

For the reasons I have 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 on the back burner 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 would likely start later this calendar year. When all is said and done, we believe our 2015 capital spending could exceed what is currently budgeted and approved.

And finally a commercial of sorts this morning; we would like to welcome all of you to the 2015 annual analyst and investor day. Our meeting and presentation will take place on Tuesday, March 24th, at the Houstonian Hotel in Houston, Texas. All details and a simple registration form can be completed on the website at www.martinmidstream.com. In exchange for your registration and attendance, I promise you that Ruben will buy your lunch.

That concludes the prepared remarks today. Nicholas, we would like to open the lines for Q&A.

(Operator Instructions). Our first question comes from the line of Gabe Moreen with Bank of America Merrill Lynch. Your line is open. Please proceed with the question.

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

I think a couple of things, Gabe. One is, although we haven't been incredibly transparent with the policy, I think by and large we are looking for a 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 pat for this quarter. As you have seen in the past we have done incremental kind of quarter cent increases and we are 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 and let it play out. Nonetheless, I think we are focused on growing the distribution. As you know, we have 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 want to make around how anything you are look at with the general partner might play into 2015? And I hate to ask the generic drop down question but I'm wondering what the latest is in terms of discussions with your general partner? Or, part owner of general partner, excuse me.

No problem. In 2014 that was a good year for us on the acquisitions front. We closed two relatively large acquisitions and our 20% WTLPG interest and then, also, the remaining interest in Cardinal which was a total of $500 million of deals plus or minus that we did in the first nine months of 2014. We were pretty busy on the deal front. That said, in 2015 I think it is safe to say we are going to refocus some of our efforts here internally within Martin and at Alinda as well regarding the potential for drop downs.

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. I know that is a generic answer to your question but in terms of timing or definitives on those we are not there yet but I think both partners are refocusing those efforts on trying to move the ball forward on that front in 2015.

Got it. Thanks, Wes. And last one for me on the potential expansion at West Texas LPG, can you talk about the latest discussions? And also on the expansion, do you guys think you would be taking volume risk with that or would you strictly adhere to take-or-pay?

This is Wes again. I think specific to ONEOK, obviously they closed the deal in the fourth quarter of last year. I think their efforts primarily have been focused on transitioning and getting the systems in house and 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 what they are going out in the market and what they have 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 6 to 8 times range.

If you grossed up the $500 million, and this again, we haven't had the 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 2015 but probably more focused on 2016 and 2017. So that is 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 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). Our next question comes from the line of TJ Schultz with RBC Capital. Your line is now open. Please proceed with your question.

Hi, guys. Good morning. Out on the lubricant business so I guess you are down 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 the line of sight to get the rebound this year? If it is just customers that have fully destocked at this point? Just trying to get a little bit more info there.

This is Bob. I will take that. Like I said in my comments, we have seen the demand for volume pick up. 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 side on the sales volume side we have done things on the production front as far as cutting costs. We had one production facility that we converted to just a distribution facility. We cut out a fixed cost related to that production line. So it is 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 could try to quantify the impact from those?

Yeah, one is online now and has been blended in with another asphalt tow and the other is coming on, I believe, sometime late this first quarter.

End of March.

End of March. I don't have the specific barge rates, but about $8,500 a day kind of rate is typical on the sum of both barges. For the tow.

Lastly, if we could touch on the balance sheet? Maybe if you could frame 2015 CapEx plans seem manageable, sounds like we should see some cash flow improvement in the business. As we think about current leverage do you think the cash flow improvement this year in the ATM would be enough to get leverage where you want it or if you are thinking about further asset sales may make sense? Just need general thoughts on the balance sheet.

This is Joe. I think we are little elevated from where we want to be. We will stick it our kind of transparent goal to the market with 4.5 times being our target. And obviously we are slightly ahead of that. About 20 basis points. So we do need some balance sheet improvement. I think you are right with respect to the manageable level of CapEx that is currently forecasted. We probably limp home and maybe utilize the ATM a little bit. We don't have any near-term equity plans. I think from our perspective we?re just going to let this 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 then I think we will address the capital rates at that time. I think for now we are probably okay.

Okay and then asset sales was that just a one off, or are you looking at anything else there?

I would categorize that as a one off. As Bob alluded to that was a benefit from the numerator and denominator perspective to have an asset that was losing cash flow. I think we did the prudent thing and took care of that.

Okay. Thanks. Makes sense. Appreciate it.

Thank you. (Operator Instructions). It looks like we have no further questions in the queue.

Well, we thank everybody for being on the call today. And you know we realize there has been a lot of changes in this business 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 exposure. We are evaluating every business that we have and looking at what we could have on that commodity business but we have been through the tougher times when we see some of the other companies, so we don't feel like we have 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 is a good staying power along with our diversity. I have seen these cycles before. We have all been through these cycles before. I have seen it high and I have seen it low and we know how to handle this situation.

Again, We appreciate everybody's time. Please join us for investor day on March 24. We always have some really good goodies to hand out at that one after lunch. 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.