Description

MMLP 7.25% 2021 Notes

Martin Midstream Partners L.P. is an MLP that has four lines of business: NGL transportation and nat gas storage, Petroleum product storage/Terminalling, marine transportation for petroleum products and sulfur product gathering, processing, marketing and distribution.

Similar to my last write up on the bonds of NRP I am focused on the credit. In this case the 7.25% Senior Notes due 2021 priced @ 91 (YTW 16.53%) and if taken out in 12 months ~18% Return. In general the issue with MLPs is a concern around dividend growth and high leverage; I can mitigate most of these returns through the credits and benefit from most managements new found religion on debt reduction.  Similar to my NRP write up, the management team here is focused on de-levering the balance sheet as its top priority (and have mostly “walked the walk” through asset sales and distribution cuts). I will provide a brief overview of some of the segments with a general view on a build up to why I believe the bonds are covered.

Let’s first start with a brief look at the capitalization table (it isn’t all that complicated which is nice):

As you can see; the bond issue is the only real credit issue for the company to look at outside of the current revolving credit facility and if something goes wrong we are clearly the fulcrum. Its near dated maturity certainly makes it something for the company to focus on extending/refinancing.  The margin of safety here is large enough due to consistent fear in the space. I like the opportunities where a basic understanding of the assets combined with back of the envelope math and management incentives should have an investor comfortable with a double digit return.

The company has been aggressively paying down debt ,and the GP wants to keep its golden goose) Over the past 18 months MMLP has sold nearly $435mm of assets, and cut its dividend in order to retain nearly $40mm of cash annually. The company has done one major acquisition during that period but net has generated $300mm of proceeds and only lost the equivalent of $2.5mm of EBITDA (by their math).

Focusing on the divestitures and ignoring the East Texas deal, the assets were sold at an approximate 15x EBITDA, with the largest asset being sold for north of 10x; not a single asset in the analysis is being run at 10x.

It is also worth noting the company is very close to busting the covenant on its revolver (DEBT/EBITDA) @ Q3 they were sitting @ 5.1x Debt/EBITDA versus a covenant @ 5.5x but that leverage level steps down closer to 5.0x by the end of 2020. The Company is adamant they won’t trip the covenant, either way I don’t really care and frankly am happy they are close to the wire as it will keep them conservative. The company will be forced to continue to sell assets to de-lever; or face an amendment which will most likely lead to a reduction of the dividend again with the savings used towards debt reduction.

Below find a nice chart which walks through the overall segments of the Company. The Company is calling for Adjusted EBITDA of approximately $110mm in 2019E which due to weaker fertilizer markets, a Butane and NGL glut and problems with their Neches Terminal is a substantial drop from 2018 of $135mm. Of note the segment based EBITDA analysis strips out most SG&A numbers.

NGL Transportation/Nat Gas Storage

This entity is the smallest by EBITDA; its main focus is purchasing and selling Natural gas liquids. In general the majority of this EBITDA is based on trying to arb the summer winter month demand for Butane and Propane. This unit has struggled as the peak-trough has shrunk in the curve over the last several years with the general weakness of NGLs combined with a glut of NGLs waiting for new export terminals to be built. The Butane segment has particularly been obliterated however it is a relatively high free cash flow business and I would anticipate the multiples on this business in a sale should go for at least 7.0x; A sale @ 6.0x to be conservative off of the 2019E number ($17.5mm) which has come down dramatically from historical numbers. There are plenty of natural gas/oil storage businesses that have sold over the years and made their money buying in the summer and selling in the winter and in general they are highly desirable assets so @ 6.0x we should sleep well (particularly off of depressed numbers).

Value in a sale = $105mm

Terminalling & Storage:

This segment is the largest as a % of total EBITDA. This is a series of storage assets, marine terminals and pass through contracts with ties to a refinery. This asset is a bit like MIC and a bit like CLMT.  I think it is worth looking at the multiples discussed in the MIC writeup done by Rii136 in Nov 2019 to better understand value where Rii points to 10x-13x multiples with significant back-up of M&A and trading comps. MMLP assets are likely lower quality, and the point of my analysis again is to show the significant margin of safety so using 8.0x feels better (and combined with the sale of the Dunphy Terminal @ 8.0x, makes sense).  The presentation from the BAML conference in June points to about $15 mm of EBITDA in out years tied to storage so that’s $120mm of value.

Smackover Refinery – The company owns a specialized refinery and blending facility in Smackover Arkansas. This Refinery processes crude oil into finished products that include naphthenic lubricants, distillates, asphalt and other intermediates.  This process is dedicated to an affiliate of Martin Resource Management through a long-term tolling agreement based on throughput rates and a monthly reservation fee. In reality that tolling agreement helps to obfuscate the potential value (both upside or downside) and I find it difficult to think about what this could or could not be worth. The Company has over-earned recently due to a payback on capex, but they anticipate closer to $15mm going forward. Using a 8x multiple for a tolling agreement on the refinery would speak to a $120 mm value; but that is really not a reliable way to look at this as we don’t really have asset level detail. The asset itself has a 7,700 Bpd throughput ability if I compare this to other specialty deals on a BPD such as the San Antonio deal for CLMT would peg this significantly lower, closer to $20mm which is also too low as it is equal to 1.3x 2021 EBITDA earned off the tolling amount. The Agreement with the GP can be canceled on mutual consent, in the case of a bankruptcy or  can be canceled if Martin is terminated as the GP. A more realistic value on the asset is closer to $90.0 mm and equates to approximately 6.0x the tolling amount in 2021 and speaks to the strategic value to the GP combined to the risk of a possible cancellation (no tolling agreement if it was believed to be steady and long dated would trade at 6.0x unless capex was astronomical).

The Lubricant blending and storage business blends and packages lubricants, chemicals and grease for uses in agriculture and industrial products. This is the lower quality business in the segment and it is also questionable if it can be easily segregated from the Refinery. A 5.75x multiple for the business would imply $78mm of value values this the segment at an appropriately conservative multiple for what it is: a steady but commoditized business. 

Sulfur

EBITDA is depressed in the Sulfur business both due to the struggling fertilizer market (see Biffins write up on CF which while focused on nitrogen helps set the macro stage somewhat) and a service disruption at the Neches Terminal. 

The Sulfur business focuses on transporting, gathering and prilling (prepares the sulfur for dry bulk transport). The contracts while subject to annual renewals have a long tenure with customers which points to stability. 

On the pure sulfur side (ex Fertilizer)2019E EBITDA will be closer to $10.5mm however assuming a normalization of operations; $14mm of EBITDA sounds very do-able and is a bit below their 2018 numbers, and their longer term projections. Again looking at recent sales, combined with other deals done for specialty assets (such as asphalt terminals) an 8.0x multiple here should provide a margin of safety. This would equate to $112mm of value.

The Fertilizer business manufactures and sells sulfur based Fertilizers to the usual suspects of wholesale players. This is a commodity, and it has suffered due to flooding and reduction of planted corn. Using a $13.5mm EBITDA number, which is slightly higher than this year but down this year @ a 7.0x multiple for mid-cycle (company would argue this is a trough number) would add $94.5mm to the kitty.

Transportation

I just don’t like this segment. The GP sold down a large trucking business into the entity recently (MTI), the barge business is arguably a better business tied to the Jones ACT but all in all this is just a low barrier, not a huge value add business (it also happens to have substantial EBITDA unfortunately). The only good news is we really don’t have to pay much for it at all. The Company will tell you this business is going to do $33mm of EBITDA this year (how nice of MTI to grow as much as it did right into a sale).

I want to take EBITDA down a lot so I can sleep at night. Let’s look at the Marine business which they anticipate to do $14mm this year of EBITDA and assume it is an $11mm EBITDA business, this is higher than 2016/2017 but in-line with 2018. Vincent975 recently wrote up OSG (Thanks!) which is a Jones Act shipper, the writeup points to multiples ranging from 6.0x-8.5x EBITDA for comps. Let’s call it a 6.0x business as it isn’t a pure comp. That is another $66mm of value. 

You are now more than covered as per the chart below; either an equitization of the bonds or more likely a refinancing done through a small upsizing of the revolver combined with asset sales and or/some equity/preferred offering should lead to a strong return; moreover I am ignoring 100% of the value for MTI which they paid $135mm to acquire this year. The bonds may have some volatility for sure, but they are safe; and 100% the focus for management.

The Company is late to refinance these notes, and knows it, as can be seen in the BAML presentation from June 2019; they anticipated refinancing these last year. They will go current this calendar year and they certainly don’t want that. A combination of asset sales and new notes should help take these out leading to a strong absolute return for bond holders. 

Catalyst

Continued Asset Sales

Possible Dividend Cut

Refinancing