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MMLP Martin Midstream Partners

Participants
Sharon Taylor VP & CFO
Robert D. Bondurant President and CEO
Randall L. Tauscher EVP and COO
Patrick Fitzgerald Baird
Call transcript
Operator

Ladies and gentlemen, thank you for standing by. And welcome to the MMLP Fourth Quarter 2020 Earnings Call. At this time, all participants’ lines are in a listen-only mode [Operator Instructions]. Please be advised that today's conference is being recorded [Operator Instructions]. I would now like to hand the conference over to your speaker today, Sharon Taylor, Chief Financial Officer. Thank you. Please go ahead.

Sharon Taylor

Thank you, and good morning, everyone. I am joined by Bob Bondurant, President and CEO; Randy Tauscher, Chief Operating Officer; David Cannon, Controller and Danny Kevin, Director of FP&A Before we get started with our comments, I'll remind you that management may be making forward-looking statements as defined by the SEC. Such statements are based on our current judgments regarding the factors that could impact the future performance of Martin, including facts and assumptions related to the impact of the COVID-19 pandemic, but actual outcomes could be materially different.

You should review the risk factors and other information discussed in our SEC filings and form your own opinions about Martin's future performance.

We will discuss non-GAAP financial measures on today’s call. Please refer to the table and our earnings press release posted in the Investor Relations section of our website to find information regarding those non-GAAP financial measures, including a reconciliation of historical non-GAAP financial measures referenced in today's call to their corresponding GAAP measures. And now I will turn it over to Bob Bondurant.

Robert D. Bondurant

First, I'd like to comment on last week's weather event in Texas and the impact it may have on our business in the first quarter. Generally, I'm very optimistic about the first quarter, but know this weather event will have some negative financial impact to our Q1 cash flow. This currently is hard to quantify, but will impact us financially in our land transportation segment due to iced roads and downtime from our refinery customers.

Additionally, I want to commend our employees for their can-do attitude of working to see that our assets operated as best as they could during this weather event, focusing on safety and the health of all of our affected employees. Job well done to all.

Now I want to start off by acknowledging that fourth quarter cash flow did not meet our internal forecast. The lower performance was primarily in two areas, one expected and one unexpected.

We expected reduced cash flow performance in marine transportation due to the impact of the COVID-19 pandemic on refinery utilization. But the other significant negative impact to our cash flow was in our butane logistics business, which was not expected when we had our last earnings call in October. Primarily as a result of the weakness in these two areas, our fourth quarter adjusted EBITDA was $17.4 million compared to $35.5 million in the fourth quarter of 2019.

For the year, our adjusted EBITDA was $94.9 million, compared to $108.3 million in 2019, primarily due to the negative impact of COVID-19 on refinery utilization and on the overall U.S. economy.

Let me begin the discussion by focusing on our natural gas services business.

For the fourth quarter this segment had adjusted EBITDA of $2 million, compared to $11.4 million a year ago. The significant majority of that difference was in our butane logistics business. And the most significant portion of this miss occurred in December. Three things happened in December that converged to negatively impact our butane logistics business. Number one, there were significant backwardation in the market. Number two, this caused refineries to slow their butane purchases in hopes of getting a much cheaper price in January compared to December. And number three, the reduced amount of butane volume we sold to our refinery customers because of this backwardation meant there was not enough physical sales volume to cover our existing hedge position.

Now let me describe these three points in more detail. In the month of December, price for normal butane began at $0.80 per gallon and moved to a $1.14 per gallon by the end of the month. This rising price would normally be good for us because of our inventory in storage.

However, the January futures price was significantly backdated to the December market price. The December, January backwardation began a month at $0.12 per gallon and grew to $0.33 per gallon by the end of the month. And the backwardation for the entire month averaged $0.17 per gallon. Because of this, our refinery customers made a decision to buy significant pure butane barrels than normal in December, and move those purchases to January and February. Because of their decision, the buy and sold out of storage in December, was only 33% of the historical average sold to our refinery customers in December.

Additionally, we had hedged 73% of our historical December inventory sales volume. Because we only sold 33% of normal December volume, we did not have enough physical sales at higher market prices to cover our hedge loss position. Since the butane market rose significantly in December, we realized hedge losses of $5.8 million, of which $4.1 million had no physical corresponding sales, negatively impacting our December and total fourth quarter butane logistics cash flow. Including the $4.1 million of hedge losses that had no corresponding physical sales, the impact of selling only 33% of normal December volume impacted our butane books by approximately $5 million in December.

Now looking towards the first quarter of 2021, which we will complete the sales season of normal butane to our refinery customers.

We are extremely optimistic about a significant increase in cash flow when compared to the fourth quarter. Three things have happened so far this quarter.

First of all, the Mont Belvieu price of butane for January averaged $0.88 per gallon, and the price for February has so far averaged over $0.94 per gallon. We do have some hedges in place that are at significantly higher prices than our fourth quarter hedge prices. But unlike the fourth quarter, we feel very confident our physical volume sold will be greater than our hedge volume. Because we currently believe the first quarter butane cash flow will be strong as a result of current heavy refinery volume demand and despite our weak fourth quarter cash flow, the anticipated cash flow for butane logistics over the entire sales season of October through March should in total, be what we internally forecasted for the fourth quarter of 2020 plus the first quarter of 2021.

However, unlike our original internal forecast, the significant majority of the actual butane cash flow will be realized in the first quarter of 2021 instead of the fourth quarter of 2020.

Now I'd like to discuss the two business segments that have been primarily negatively affected by the COVID-19 pandemic through reduced refinery utilization.

The first is our transportation segment.

Our total adjusted EBITDA in the transportation segment was $1.7 million in the fourth quarter compared to $9.1 million a year ago.

Our land transportation had adjusted EBITDA of $3 million in the fourth quarter, compared to $4.7 million a year ago, as our mileage was down 13% and our daily load count was down 11% in the fourth quarter compared to a year ago. Fundamentally, this decrease in mileage and load count was driven by reduced refinery [ph] utilization, which to average 77% this fourth quarter compared to 91% in last year's fourth quarter.

Additionally, the lack of butane demand from storage to refineries in the fourth quarter due to price backwardation also had negatively impacted our load count.

Our marine transportation business has been severely impacted by COVID-19 and its impact on refinery utilization. We had negative adjusted EBITDA of $1.3 million in the fourth quarter, compared to positive $4.4 million a year ago.

Our third party utilization was only 41% in the fourth quarter, compared to 98% a year ago as a result of COVID-19 and its negative impact on refinery utilization.

As a result, we have taken steps to eliminate some of our fixed costs by releasing underutilized leased vessels and optimizing our owned assets.

Looking toward the first quarter of 2021, in our land transportation business, we are expecting and have been experiencing a slight increase in our daily load count compared to the fourth quarter. Therefore, subject to last week's weather event, we believe we will see an improved cash flow and land transportation in the first quarter compared to the fourth.

Turning to marine transportation, although the utilization of our fleet of dirty inland [ph] barges is improving, the outlook for marine transportation in Q1 continues to be weak.

Our fleet of clean tugs remain out of service.

We have recently seen some interest in spot charges for these clean tugs.

Now as refinery utilization slowly improves, we feel our clean barge fleet will begin to be placed back into service.

Looking forward we believe due to the COVID-19 vaccine rollout, we should see improved refinery utilization beginning in early summer. This should increase demand for both our land and marine transportation services.

The second segment that has been negatively impacted by COVID through reduced refinery utilization was our sulfur services segment.

Although total sulfur services segment adjusted EBITDA was $7.4 million in the fourth quarter, for both 2020 and 2019, the mix between the pure sulfur side of the business and our fertilizer business varied significantly. In our pure sulfur side of the segment, adjusted EBITDA was $2.4 million in the fourth quarter compared to $3.9 million a year ago. This decline was primarily driven by the business interruption proceeds of $1.2 million we received last year in the fourth quarter. Also our daily sulfur volume into our Boma terminal facilities was 5% lower than the fourth quarter a year ago.

Looking toward the first quarter, subject to last week's weather event, we are forecasting a slight improvement of sulfur volumes into our Boma facilities because of slightly increasing refinery utilization.

On the positive side of our sulfur services segment, our fertilizer business had adjusted EBITDA of $5 million in the fourth quarter compared to $3.5 million a year ago. Fertilizer sales volume was up 44% in the fourth quarter compared to last year, as agriculture commodity prices, particularly corn are higher this year. At the end of 2020, corn was $4.84 per bushel compared to $4.11 per bushel a year ago. We feel based on forecasted corn acres to be planted, that the first quarter cash flow performance from our fertilizer business will be quite strong. And we look for an exceptional overall year from this group.

Finally our terminal and storage segment, which has had minimal impact of cash flow from the COVID-19 pandemic, primarily due to long-term fixed fee contracts, was our largest cash flow provider in the fourth quarter as adjusted EBITDA was $10.6 million compared to $11.5 million a year ago. The decline between quarters can be attributed to our shore-based terminal business as its adjusted EBITDA was $0.1 million in the fourth quarter compared to $1 million a year ago. This reduction in cash flow was a result of soft Gulf of Mexico drilling activity, which was driven by weaker oil prices throughout 2020. This has negatively impacted shore-based terminal revenue due to reduced volume throughput and reduced throughput rates from a year ago.

While looking toward the first quarter, we should see similar cash flows in our Terminalling segment, when compared to the fourth quarter due to the long-term fixed fee contracts that support this business segment. I will now turn the call back over to Sharon to discuss our balance sheet, capital resources and our 2021 guidance.

Sharon Taylor

Thanks, Bob. I have just a few brief comments on balance sheet metrics, liquidity and capital allocation before I move to our 2021 guidance. At year-end, the total of our long-term debt outstanding was $526 million. That consisted of $148 million drawn on our $300 million revolving credit facility, $3 million in capital leases and $375 million of $1.5 million and second lien notes due 2024 and 2025, respectively.

We also had $29 million of short-term senior unsecured notes that mature this February, which we redeemed using revolver availability.

During the quarter we repaid $57 million of revolver outstanding. Of that amount approximately $22 million was from proceeds related to the sale of our Mega Lubricants assets in late December.

However, our adjusted leverage ratio increased quarter-over-quarter as our trailing four quarter EBITDA now contains a majority of quarters, where earnings have been negatively impacted by the COVID-19 pandemic.

So while debt has been reduced, so has EBITDA and as a result, leverage increased to 5.36 times. Further, we expect the leverage to remain elevated until we enter the second half of 2021 and then begin to lower as the economy recovers, and the quarters where EBITDA was impacted by COVID are no longer a component of the leverage calculation. And regarding the other piece of the equation debt levels, our priority remains to optimize the utilization of our assets, increasing free cash flow, which will be used to reduce debt and strengthen the balance sheet.

For the fourth quarter, our distributable cash flow was $0.8 million and approximately $40 million for full year 2020.

As a reminder, our revolving credit facility covenants mandate that our distribution not be increased from the current $0.02 annually until our leverage drops below 3.75 times.

Turning to capital expenditures, in the fourth quarter we spent roughly $3.1 million in maintenance CapEx and $1.7 million in gross CapEx, bringing our 2020 totals to $11.6 million for maintenance, and $10.8 million for growth. And while growth CapEx is in the middle of our guidance range maintenance CapEx was below the range by 17%. The majority of that will be carried over to 2021 as we spend the capital to ensure the safety and reliability of our assets.

Now I'll speak to 2021 guidance, which you can find on Page 6 of the slide deck link in press release, or going to the investor relations section of our website under events and presentations.

For now, we will continue to issue guidance in an annual range but intend to provide greater detail into each business segment as soon as the economy begins to recover, and we return to pre-COVID normal.

For 2021, we expect EBITDA to range between $95 million and $102 million, maintenance capital expenditures of between $17 million and $19 million. And that estimate does include a turnaround at our Smackover Refinery.

We expect growth CapEx of between $4 million and $5 million, leading to distributable cash flow of $29 million to $34 million and adjusted free cash flow of $22 million to $26 million.

Our assumptions for 2021 guidance begin with the premise that with wider distribution of the vaccine, we will see refined product demand increase as we enter the second half of the year, driving refinery utilization to pre-COVID norms. We view both the butane and the fertilizer businesses positively.

As you heard Bob say earlier, butane sales have been strong so far in the first quarter of 2021 with butane prices rising since year end. And our fertilizer outlook is bolstered by rising prices across the board, as global levels of corn supply are tightening. Specific to our fertilizer assets, corn yields were down last year, so the corn stockpile is dwindling, while corn prices and forecasted acres for corn planting are rising in 2021, all of which creates tailwind for that business.

On the other hand, we view the marine transportation business to be extremely challenging as refinery utilization rates have tested the inland marine market. And we see that continuing until utilization rates improve to historically normal levels. This concludes our prepared remarks for this morning, and I will now turn the call back to the operator for Q&A.

Operator

Thank you. [Operator Instructions] Your first question comes from Selman Akyol with Stifel. Please go ahead.

Unidentified Analyst

Hi guys, this is Will on for Selman. Hope all is going well, following the weather in Texas, and Bob congrats on officially stepping into the new role.

First question is just around guidance. Besides, you guys specifically mentioned vaccine distribution, the economy continuing to open, can you share any other meaningful drivers that could put you toward the high end or opposite -- the low end of the range?

Robert D. Bondurant

Well, I'll comment first and open up to others if they would like to comment.

I think as we saw in the fourth quarter, there is variability in our butane business.

And so that that is sometimes a bit hard to predict. And if we have a more normal -- to a better than normal butane here, compared to historical I think we'll be at the high end of the range.

The other will be when does marine really kind of kick in cash flowing, does it really begin in the second quarter, the third quarter, our vision is more in the third quarter, more in the summer range.

So to the extent that can improve, and there is a little bit of hope there and I'll just leave it at that, that it could improve quicker. That would be the other driver to be at the higher end of the range.

I think everybody’s shaking their head in agreement with me.

So those are the two areas probably.

Unidentified Analyst

Okay, that's helpful. Can you guys share just where you are percentage wise in terms of your hedge volumes for '21?

Robert D. Bondurant

Yeah, for '21, Randy, do have that kind of figured, I think what we're going to sell versus what's left on our hedges?

Randall L. Tauscher

Yeah, we didn't have many hedges in January, and the price settled in January at $0.88.

So January, looks like that's going to be a very strong month. We do have quite a few hedges on in February, anticipated sales, somewhere around 60% to 70% of our anticipated sales.

We have hedge, but we put those hedges on, primarily in January, the prices had already moved up. Because we had removed our February hedges that we had earlier in the year at a much lower price.

Unidentified Analyst

Got it, okay. And then last question, how do you guys view your portfolio going forward? Are there any more non-core type assets that you guys may try to capitalize or monetize on?

Sharon Taylor

Yes.

So we are still looking as you know to delever our balance sheet as quickly as possible.

So to the extent that we do have a non-core asset that we receive a good multiple for, we are still looking at opportunities like that.

Unidentified Analyst

Okay. And then any specific -- within any specific segment, that you guys might be looking toward spinning off?

Robert D. Bondurant

Just anything that's not directly related to refinery services. We really made a push toward moving our company that way.

So if it isn't directly tied to refinery services, those would be more apt to be considered.

Unidentified Analyst

All right, thank you very much. Have a good day.

Robert D. Bondurant

Thank you.

Sharon Taylor

Thank you.

Operator

[Operator Instructions] Your next question comes from Patrick Fitzgerald with Baird. Please go ahead.

Patrick Fitzgerald

Hi, guys. How much -- just a clarification, how much is Mega Lubricants, how much EBITDA was in that 2020 numbers.

Sharon Taylor

So for 2020, we actually had guided around $1.1 million, just for the Mega Lubricant assets. That came in at about $315,000. I do want to quantify that -- or clarify that a piece of our mega lubricants business resides within our land transportation and our marine transportation.

So that number that I gave you did not include that piece.

Patrick Fitzgerald

Okay, so you sold that $315,000 in EBITDA this year for $21 million roughly.

Robert D. Bondurant

It would be higher because of because the cash flow that was thrown off in the Marine business and the MTR, not Martin transport trucking business. There's roughly $3 million of EBITDA that we sold, on historical [multiple speakers].

Patrick Fitzgerald

Okay. And then some of that was inventory, right?

Robert D. Bondurant

Yes. Of the sales proceeds, I think it was roughly a little over $3 million of inventory. Am I right?

Sharon Taylor

Yes.

Patrick Fitzgerald

Okay. All right. And then, are there any other -- previous caller asked a similar question. But are there any other deleveraging asset sales that could potentially help you with you're getting somewhat tight on your maintenance covenants, especially after the third quarter of this year? So I guess, is anything like that on the horizon? And how do you plan to deal with that if refinery utilization isn't quite as robust as you have modeled out here?

Sharon Taylor

For the first part of your question, we are having ongoing discussions related to asset sales that will help with the deleveraging process and we really don't want to get into more detail around that. To your second question, we have a very supportive Bank Group.

As we move through the first quarter, and see how butane sales go as far as moving from fourth quarter to first quarter, as we deal with this winter event. And then as we look to the vaccinations being rolled out quicker and the economy recovering faster, we're monitoring those covenant levels and we would address it with our bank if we believe we need to do that.

Patrick Fitzgerald

Okay. Thank you for that. And then, just -- I’ll have to go back through the call to try to understand the explanation on the butane business in the fourth quarter. But I guess one thing I kind of took away was maybe unhedged. It would have been $10 million higher in the fourth quarter. Is that fair?

Robert D. Bondurant

That's probably pretty close. It will probably high single digits higher if we wouldn’t have had hedges in the fourth quarter. The one thing that impacted our fourth quarter this year different than the years was the volumes were much lower and sales in the fourth quarter this year relative to previous fourth quarters. But high single digits is approximately is what we would have been unhedged. That's correct.

Patrick Fitzgerald

Okay. All right, thanks a lot.

Sharon Taylor

Thank you.

Operator

There are no further questions at this time. I will now turn the call back to Bob Bondurant, President and CEO, for closing remarks.

Robert D. Bondurant

Thank you and thanks to everyone for your participation today. To reemphasize, our near-term goal continues to be reducing our debt to a target level of 3.75 times our annual cash flow by using free cash flow to execute this strategy. Subsequent to the winter event of last week, we feel very optimistic about our first quarter cash flows, especially in our butane and fertilizer businesses.

Now, I would like to take a moment to make a comment about the coming energy transition strategy from hydrocarbons to renewables. I believe this transition will be over a very long period of time. And I also believe our geographic footprint and the long-term relationships we have serving some of the largest and most sophisticated refineries in the world positions our company well for the future.

Here at Martin, we are and will continue to be committed to excelling in safety and environmental stewardship through operational excellence. In the coming year, we intend to speak more to the internal priorities and strategies that govern sustainability within our organization and the communities we work in and around. Thank you again. This concludes my remarks.

Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for participating.

You may now disconnect.