MMLP=Martin Midstream: Sale Of WTLPG A Positive
Jul. 27, 2018 2:20 AM ET|23 comments | About: Martin Midstream Partners L.P. (MMLP), OKE
Michael Boyd
Long/short equity, contrarian, medium-term horizon, mid-cap
MARKETPLACEIndustrial Insights
(8,128 followers)
Summary
Martin Midstream announced the sale of WTLPG to majority partner ONEOK for $195mm, booking a $60mm gain versus what it paid a few years ago.
The struggling high yield firm will lose just $8.5mm in expected EBITDA, receiving a cash infusion it can use to delever its balance sheet.
Given the 5% interest rate on the Revolver, this will be cash flow neutral while delevering the balance sheet materially.
I think fair value here is ~$16-17/share. I'm reticent to pull the trigger just yet - solid work on refinancing could improve outlook.
This idea was discussed in more depth with members of my private investing community, Industrial Insights.
One of the big question marks in my original research on Martin Midstream (MMLP) revolved around the West Texas LPG (“WTLPG”) pipeline. This 2,600 mile common carrier system was set to have a 110kbpd lateral extension run into the Delaware basin, alongside supporting infrastructure. Construction was set to begin sometime this year. This project was set to cost the company just $40mm – perhaps small potatoes to many investors, but the lack of free cash flow after the distribution and basically no access to capital markets raised substantial questions on how this would be funded by the end of 1H 2018. Just forgoing the project was not an option, as because it was a minority owner, Martin Midstream was at the mercy of ONEOK (OKE) who controlled capital allocation decisions for the pipeline.
This all eased earlier this week. ONEOK agreed to buy out Martin Midstream, its sole minority partner, in the West Texas LPG pipeline system for $195mm. The pipeline is natural gas liquids (“NGL”) centric, pulling away NGL from the Permian Basin to Mont Belvieu. Mont Belvieu has more than 2mmbl/d of fractionation capacity – the largest concentration of such assets in the world. This has been a growth area, as the ramp in NGL production from major onshore shale growth areas (SCOOP/STACK, Permian) – available capacity is very tight. Enterprise Product Partners (EPP) controls more than one third of the fractionation capacity there. For emphasis on the bullishness on this area of the market, see Jim Teague from Enterprise Product Partners on the Q1 conference call:
We're also in the process of commissioning our ninth fractionator at Mont Belvieu which is scheduled to be fully operational this quarter. Obviously, fractionation capacity is in high demand and is a key component in our value chain.
I think that context is necessary, given Martin Midstream only expected $8.5mm in proportionate EBITDA contribution from its stake in WTLPG. Put another way, ONEOK paid 23x expected 2018 expected EBITDA. This was a great deal for Martin Midstream, as the company is giving up very little in the way of cash flow in exchange for funding it needs to shore up its balance sheet. It also was a profitable venture, given management only paid $135mm for its stake in this asset in May of 2014 from Atlas Pipeline. Clearly the economics of the WTLPG have changed materially over the past several years as the Permian Basin has taken off, but overall I view this as a great transaction for both parties. ONEOK gets full control of an asset it views as a growth asset for years to come, and Martin Midstream gets to shed assets at triple its current consolidated trading multiple. It also gets to dodge any headaches associated with navigating rate increases; both Martin Midstream and ONEOK recently expressed disappointment in the Texas Railroad Commission decision to not allow higher market rates on this pipeline just a few months ago.
Martin Midstream will still deal with tight coverage on its distribution this year, largely due to weakness in ammonium sulfate. The company booked a one-time write-down of $3.9mm during the recently reported quarter due to mis-estimation of the amount of inventory they carried.
The majority of the decrease was related to a one-time write-down of $3.9 million of our bulk ammonium sulfate inventory at our Plainview warehouse. At the end of Q2, we contracted with a third party to use 3D measurement technology at this bulk inventory location to measure inventory, resulting in this write-down. Going forward, this new measurement system will be done at every quarter end to get a more accurate count of bulk inventory.
I found this highly unusual, given ammonium sulfate generally gets priced in the $100-120/ton range in pure wholesale form. That is a lot of product to go missing, even if this is a buildup of many years of miscalculation and slippage. Analysts unfortunately did not try to dig into this more on the conference call. Perhaps the issue is solved, but it does point to potential problems regarding to reported asset valuations across the business.
Those issues notwithstanding, expect a lot of focus on cleaning up the capital structure in the coming months. $373mm in 7.25% Senior Notes due February 2021 become callable in six months (CUSIP 573334AD1) and perhaps more importantly, Martin Midstream will have to renegotiate its Revolving Credit Facility due March 2020 ($459mm outstanding). Given the bonds still trade incrementally below par, it does not appear there is a lot of coverage there. While I maintain my call that there is only limited upside to the shares given the lack of mobility, I do think those Senior Notes do look attractive for the high yield bond investors out there. While distribution on the common stock is thin, there is quite a bit of fixed charge coverage on those notes. Terrible credit ratings notwithstanding (Caa1 from Moody’s, B- from S&P), I think those bonds are attractive.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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