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Kristen McNally - Financial Profiles

Keith Maxwell - Chairman and CEO

Mandy Bush - CFO


Justin Agnew - Robert W. Baird

Selman Akyol - Stifel Nicolaus

Marlin Midstream Partners LP (FISH) Q3 2013 Earnings Call October 31, 2013 1:00 PM ET


Good day ladies and gentlemen. Welcome to the Marlin Midstream Partners LP Third Quarter 2013 Earnings Conference Call. My name is Douglas and I will be your operator for today. At this time, all participants are in a listen-only mode. Later we will conduct a question and answer session. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes and this call will be posted on Marlin Midstream Partners’ website.

I would now like to turn the conference over to Kristen McNally of Financial Profiles, Investor Relations for Marlin Midstream Partners. Please go ahead.

Kristen McNally

Thank you for joining today to discuss Marlin Midstream Partners’ financial results for the three months ended September 20, 2013. With me today from management is W. Keith Maxwell, III Chairman and CEO, and Mandy Bush, Chief Financial Officer.

Before we begin, I would like to review Marlin Midstream safe harbor statement. During the course of today’s conference call, management may make forward-looking statements concerning Marlin’s operations, economic performance and financial conditions. These statements can be identified by the use of forward looking terminology including "may," "will," "believe," "expect," "anticipate," "estimate," "continue," or other similar words. These statements discuss future expectations, contain projections of results of operations or financial condition or include other "forward-looking" information.

Although Marlin believes that the expectations reflected in such forward-looking statements are reasonable, the Partnership can give no assurance that such expectations will be realized. These forward-looking statements involve risks and uncertainties. Such risks and uncertainties could cause actual results to differ materially from those contained in any forward looking statement. Except as required by law, Marlin undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise

With that, I would like to introduce Keith Maxwell, Chairman and CEO of Marlin Midstream Partners.

Keith Maxwell

Thank you, Kristen. I would like to welcome our unitholders and analysts to Marlin’s third quarter 2013 conference call today. For today’s call, I will make some brief opening remarks about our third quarter operation. Then our Chief Financial Officer, Mandy Bush, will provide some detail on the financial results and I will follow with some comments on our opportunities ahead of us as we take – and then take our questions.

As stated in our press release, I would like to remind participants on the call that Marlin’s financial results for the third quarter of 2013 reflect one month of operations prior to the IPO when we were a private company, plus two months of post-IPO. The pre-IPO results are primarily for the midstream natural gas segment and do not include the gathering and processing capacity agreement and the transloading capacity agreements entered into with Associated Energy Services at the close of the offering. The results of the month of August and September include both midstream segment as well as crude oil logistic segment, with three fee-based tranloading agreements at Wildcat and Big Horn, which also began at the close of the IPO. This period is indicative of our go-forward business model.

I am pleased to report that our results in the two months following the IPO exceeded our expectations. We think this is a direct reflection of both the strength and the future potential of our strategically located operating assets as well as the value of our relationship with the sponsor NuDevco and its affiliates.

In the midstream natural gas business segment, our primary assets are located in long-lived oil and gas producing regions of East Texas. We gather, process, NGL-rich natural gas streams associated with production, primarily from the Cotton Valley Sands, the Haynesville Shale, the Austin Chalk and the Eaglebine formations.

Effective the 31st, we are not benefitting from minimum volume commitments for services in transloading and gathering processes, including its 80 million a day commitment at our Panola facility by AES. In terms of drilling activity around the Panola assets, we have seen an uptick of 6% year-over-year rise in well permits through September ’13 – or September 2013. More than 250 wells were permitted in the last 12 months at Panola and for well permits by the top 5 producers, the permits increased 37% from year ago levels.

Turning to the crude oil logistics segment, our Wildcat and Big Horn facilities provide transloading services for production originating from well-established crude oil basins, such as the Uinta [ph] and Powder River Basin. These are proven producing regions with logistical bottlenecks where we provide valuable transportation services from field to railroads and ultimately to refinery and source centers. We believe these areas offer good upside for the opportunity of expansion and potential for new service offering.

With that brief segment overview, I will pause now and turn it over to Mandy Bush for her financial review. Mandy?

Mandy Bush

Thanks, Keith. To reiterate what Keith said earlier, our financial statements for the third quarter of 2013 reflect one month of pre-IPO results and two months of post-IPO result. August and September reflect post-IPO operations, which include both the midstream natural gas business segment and the crude oil logistics business segment.

I will begin with a brief overview of the full third quarter results and then I will just focus to the results for the post-IPO period. On a combined basis, for the three months ended September 30, 2013, gross margin was $12.5 million, an increase of 50% compared to gross margin of $8.3 million for the third quarter 2012. The gross margin increase is attributable to the new crude oil logistics business segment and related contract, as well as increased throughput under fixed fee gathering and processing contracts. Virtually, all of our gross margin is now generated from fee based commercial agreement, which promotes stable cash flows and minimized direct commodity price exposure.

Turning to operating expenses, with respect to our operation and maintenance expenses and general and administrative expenses, prior to the IPO, we employed all of our operational personnel and most of our general and administrative personnel directly. And therefore we incurred direct operating and general and administrative charges with respect to their compensation.

With the closing of the IPO, all of our personnel were transferred to affiliates of NuDevco. Post-IPO, we reimbursed to NuDevco for the compensation of these employees on a direct or allocated basis, depending on whether those employees spend all or only a part of their time working for us. As a result of this change, in comparison to historical amount, affiliate operation and maintenance expenses and affiliate general and administrative expenses will increase. And non-affiliate operation and maintenance expenses and non-affiliate general and administrative expenses will decrease.

Operation and maintenance expense was $4.3 million for the full third quarter of 2013 compared to $3.7 million for the third quarter of 2012. These expenses generally remain relatively stable across a broad range of throughput volumes, which was the case in the third quarter.

General and administrative expense increased to $2.5 million compared to $1 million for the third quarter of 2012. The increase is primarily due to increased costs associated with being in a publicly traded partnership. Net income for the third quarter of 2013 totaled $1.9 million. This compares to a net loss of $33,000 for the year ago period. Adjusted EBITDA for the full three months was $6.7 million.

Now shifting the focus to just the post-IPO results, which reflect the results of operations for the month of August and September of 2013. Adjusted EBITDA for the partial quarter post-IPO was $5.6 million and distributable cash flow was $5.3 million, resulting in a coverage ratio of 1.31 times for the third quarter.

Results on a pro-rated basis were higher than projected in the S1 forecast, due to lower than expected operation and maintenance expenses for our transloading segment, as well as the timing of maintenance capital spending. Interest expense net of amount capitalized was $174,000 for the two months following the IPO. It gives a reflection of the lower outstanding debt under the revolving credit facility, of which was $8.5 million outstanding at September 30, 2013. The availability on the facility can still be used to fund expansion, acquisitions and working capital requirement for operations and general partnership purposes.

Excluding drop-downs, CapEx for the second half of 2013 is primarily for the installation of our molecular sieves and pipeline connection of our Panola plant, which will expand the capacity of our Panola County processing facilities by 5%.

Finally, as a reminder, the current fourth quarter ending December 31, 2013 will represent the first full quarter of results, reflecting the key contract entered into at the close of the IPO and therefore will be fully representative of our fee based model going forward.

And that concludes our prepared remarks. I will now turn the call back to Keith for some closing comments.

Keith Maxwell

Thank you. Looking ahead, we see multiple avenues for growth and putting the right of first offer on the midstream, energy asset developed or owned by NuDevco for the next five-year period. AES has informed us should there is a need for additional transloading capacity at our Wildcat facility in addition to the need for heated tanks, we are considering opportunities for capacity expansion in Utah to accommodate this demand. The development of the crude oil tank services will allow us to expand our footprint along with the crude oil value chain, will provide much needed services for our affiliate.

As I mentioned in last quarter, NuDevco midstream had eight transloaders ready to install at viable locations, existing or new site. We cannot estimate the date at this time but we are ready to move forward as soon as we receive a go-ahead. These may eventually be dropped down into the partnership.

Finally, we are pleased to declare our first quarter cash distribution to unitholders at a pro-rated amount at $0.23 per unit for the third quarter. The distribution will be paid on November 4 and our coverage ratio of 1.31 times is well in excess of our targeted 1.1 times to support the distribution.

Thank you for your attention today. And with that, we will now open the call to questions from the analysts. Operator, please go ahead.

Question-and-Answer Session


(Operator Instructions) First question is from the line of Justin Agnew with Robert W. Baird.

Justin Agnew - Robert W. Baird

Hey, good afternoon. Could you guys talk about the $45 million letter of intent with the parent for that skid transloader and kind of the potential of the drop-down there in terms of timing and how you would finance it given the size?

Keith Maxwell

Yes, we entered into an LOI. We haven’t determined the size, or the timing of the transaction. We just entered into negotiations, and then of course, Justin, anything that we enter into will be subject to board approval. So we just started the process last week and we are on the cusp of it. Obviously we will be coming out with some more information as those negotiations proceed.

Justin Agnew - Robert W. Baird

And then on the AES side, how is that doing in terms of volume and profitability relative to your expectations at the IPO?

Keith Maxwell

Well, you know on the AES side, we don’t discuss volumes or profitability. We purposely put the contracts in the partnership to take that volatility out. So the partnership is in a position to benefit from the customers’ throughput but we don’t dive into their number.

Justin Agnew - Robert W. Baird

Understood. And then just looking at the press release, it looks like the volumes, both the [ph] asset transloading site track the MPCs, I mean is that a pretty safe assumption going forward or do you think the permitting in those areas picking will be [ph] some increases there.

Keith Maxwell

There’s two phenomenon we are seeing in East Texas around our assets. One is that the drilling activity is finally picking up. And then two is the quality of the gas that we are starting to see is a lot richer and that’s obviously correlated with producers going after oil equivalents. So and that’s – actually there is a couple projects that, that we are looking at inside the plant to add both volumetric capability as well as some additional value. But we will be forthcoming with that when we are ready with it to roll it out.


Our next question is from the line of Selman Akyol with Stifel Nicolaus.

Selman Akyol - Stifel Nicolaus

So back in August, you guys talked about a site in New Mexico. Is there any update on that?

Keith Maxwell

Yes. So what we are waiting on is that we are waiting on the railroad to give us the viability on the congestion in the area. They are doing a congestion study. So as soon as we get that back, I will be able to come back with some timing around that. But that is very, very much on our radar and part of our plan.

Selman Akyol - Stifel Nicolaus

So that is separate and second kind of opportunity you see in addition to the $45 million LOI that you --

Keith Maxwell

Yes, not related in any way shape for form.

Selman Akyol - Stifel Nicolaus

And then when do you expect that study to come back from the railroad? Do you have any idea on the timing around that?

Keith Maxwell

We don’t know yet. We’ve got an update or verbal update but I really don’t want to dive into that. I am waiting on them to give us better clarity around the congestion. So what we have done is we have actually found some additional sites that are close but in the exact same area. So we are going to give them a little bit more time to figure this out and get back to us. But if they don’t per se get this figured out and come back and bring that clarity to us, then we are prepared to move in some other spots.

Selman Akyol - Stifel Nicolaus

And then also in the press release, you said you would expect something to close by fourth quarter, is that still a good timeframe?

Keith Maxwell

I really don’t know. I would be guessing to tell you because it’s totally related – a lot of the stuff that we do in the partnership is related on third parties. And so a great example for today is there are certain things that we can do in a partnership to drive growth, to drive business activity but a lot of it depends on parties I can’t control like the railroad, producers, trucking, tank availability. There are a lot of variables that come into outcomes that we don’t control. But to the extent that we can control the pieces that we have control over, we are trying to drive that.


(Operator Instructions)

Keith Maxwell

Okay. Well, I want to thank everybody for participating in today’s call and we look forward to seeing many of you in the months ahead. Have a great day.


And ladies and gentlemen, that does conclude our conference for today. We would like to thank you for your participation. If you would like to listen to a replay of today’s conference, please dial 303-590-3030, or 800-406-7325 and enter the access code 4646051. We would like to thank you for your participation again and you may now disconnect.

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