Martin midstream partners management needs to get its act together – martin midstream partners l.p. (nasdaq mmlp) seeking alpha gas monkey bar and grill


Martin Midstream Partners ( MMLP) management announced a quarterly earnings beat when the first quarter earnings came out. That earnings beat still produced a negative comparison in so many ways to the previous year. In fact the earnings announcement continues a multi-year string of earnings declines. Much of the long term growth hopes are pinned to a pipeline expansion project. But the other businesses and divisions need attention for the company to grow overall.

Current guidance remains a decline in EBITDA from the previous year. Distribution coverage is a projected tight 1.0. This public relations mastery connected to beating the lowered guidance was not noticed by commentators and the stock rose nicely.

Some RALLIES CAN BE EXTREMELY DANGEROUS for investors. This rally appears to carry above average risks. The first risk was that guidance was lower than the previous year. The balance sheet is highly leveraged. Plus that leverage will climb to fund the pipeline expansion project. Management’s former promise to reduce the debt-to-EBITDA ratio appears to be in tatters.

The price of the company partnership units may receive a one time boost from a pipeline rate adjustment case. But the timing of a decision and the outcome of that decision are far from certain. Management has been hopeful about the results for some time. But the final outcome of the case has been delayed for an indeterminate amount of time.

Both net income and cash flow from operating activities decreased from the previous year. The major problem is that income and cash flow has been on a steady decline for some time. The distribution and storage division appears to be the main culprit. But a lack of growth in other divisions shows a lack of management ambition to grow this partnership. The financial leverage will do shareholders no good without growth. In fact the risk of negative outcomes could climb as the lack of growth track record lengthens. The distribution was maintained for the year, but management projects a very tight 1.0 coverage of that distribution.

Some leeway in that coverage was obtained when the propane business outperformed expectations due to a colder and longer than expected winter. Still many management would have reported an increase with some favorable help like that from a portion of the business. For example, the company has a private label grease business that should be growing like gangbusters in the current oil industry environment and with the currently healthy economy.

As shown above, the investor and management favored indicators of distributable cash flow and EBITDA also declined compared to previous years. The pattern of a steady earnings decline since the oil price crash a few years back remains intact. There is a danger that decline could accelerate and offset the benefits of the pipeline expansion project.

Now management has received a covenant variance to build a pipeline expansion or extension project. This partnership was already highly leveraged. Though the current extension project is probably very profitable and highly desirable, the financial leverage is climbing.

There is clearly some hope though. This division contains the private label business. That business should easily grow in the current industry environment. Cardinal distribution also outperformed. The key is that despite the boost in this segment, overall company results declined. Cardinal distribution, for example, outperformed reduced guidance. The decline in Cardinal distribution profitability over the last few years has been breath-taking. This division, more than any other, decreases overall profitability the last few years.

Management should not never be satisfied with declining earnings and cash flow. Yet the last few years have featured both. In addition, management celebrates a reduced guidance beat. The market will put up with this declining performance for a limited period of time. The projected pipeline expansion offers some respite from the current trend. Plus there is a rate increase in process. Still the overall deterioration is disturbing. That pipeline project will primarily benefit the 12 months or so after it is completed. Then management needs to grow the rest of the businesses. This management has not found the way to grow the partnership profitably every year. Therefore it is hard to comprehend the benefits of a fairly high long term debt-to-EBITDA ratio and an even higher long term debt-to-cash flow from operations ratio.

Management actually missed guidance on the lubricant business and the onshore storage business. Though the overall business improved from the previous year, the current growth projections were missed. Management needs to push harder to either achieve established goals or make up for the missed guidance elsewhere.

The company debt leverage ratio exceeds 5.0 as calculated by the lenders. This indicates a fair amount of risk. Such leverage is not compatible with no growth long term. After the pipeline expansion comes online, the market will seek confirmation of further future growth to lower that leverage. Right now the evidence of such growth is scant. That should be scary for any investor considering investing in a leveraged partnership.

Some of the businesses are seasonal. This strong quarter provided distribution coverage of more than 1.3. That traditionally reassures the market about the distribution. But the seasonally weak second and third quarters are next. Generally the third quarter is the weakest and neither quarter usually features distribution coverage of any adequacy.

Therefore the next six months could find the market worrying a lot. The risk of a considerable downdraft in the current unit price is substantial. At some point, the Texas pipeline rate increase could be decided and provide the units with a one-time boost. The announcement also could provide management with a one-time cash windfall if the rate increase is retroactive.

However, that long term growth mindset appears to be missing. Therefore income investors wanting secure income may need to look else where. The leverage ratios combined with the projected very tight distribution coverage provide further indications that the distribution is not safe at the current time. The completion of the pipeline project may provide some (and considerable) relief from this prospect. But the long term decline in earnings and cash flow needs be reversed. Until management does that, investors should probably look elsewhere for investment returns. These units are probably only a trading vehicle based upon the rate increase case.