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Marlin Midstream Partners LP (NASDAQ:FISH)

Q2 2014 Earnings Conference Call

July 31, 2014 01:00 PM ET

Executives

Kristen Papke - Investor Relations

Keith Maxwell - Chairman and Chief Executive Officer

Mandy Bush - Chief Financial Officer

Analysts

Ethan Bellamy - Robert W. Baird

Selman Akyol - Stifel

Operator

Good day. And welcome to the Marlin Midstream Partners Second Quarter 2014 Earnings Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Ms. Kristen Papke. Please go ahead.

Kristen Papke

Thank you for joining us today to discuss Marlin Midstream Partners’ financial results for the three months ended June 30, 2014. With me today from management is Chairman and CEO, Keith Maxwell, and Chief Financial Officer, Mandy Bush.

Before we begin, I’d 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'd like to welcome our unit holders and analysts to Marlin’s second quarter 2014 conference call today. We will make some opening remarks about our operating results and opportunities ahead and then our Chief Financial Officer, Mandy Bush will provide some details on the financial results. We will conclude with questions from our analysts.

During the second quarter the partnership again achieved outstanding financial results. We exceeded our expectations in gross margin, adjusted EBITDA and distributable cash flow. The Panola plants operating at their optimal operating capacity and continued performance that are translating sides for the key drivers on our outstanding quarter. For the fourth consecutive quarters since our IPO a year ago we have significantly over achieved our target ratio of 1.1 times coverage. We are very pleased with the conservative nature of our coverage ratio that resulted in our second consecutive quarter of increased distributions for our unit holders.

We increased the second quarter distribution by 1.4% to $0.36 per unit for the second quarter or $1.44 on our annualized basis. Affective starting August 1, 2014 Anadarko has elected to change their minimum volume commitment from 80,000 per day to 40,000 per day on one of their Panola County contracts. AES has indicated because of its belief and the drilling activity in the area, it will increase its cash processing commitment.

We are pleased to announce that we have entered into a definitive agreement with one of our sponsor subsidiaries, NuDevco Midstream Development LLC for our first dropdown, which we called the New Mexico transferring facility situated in Sandoval County, New Mexico. We are extremely excited about this acquisition as it represents our first dropdown transaction as well marks our entry into the New Mexico market.

We expect the East New Mexico Transloading Facility to generate approximately $1.4 million in annual distributable cash flow. The facility has been acquired for a purchase price of approximately (audio gap) in cash and 25% in Marlin common shares. Our sponsors accepted the purchase price at a discount to the current market multiples to ensure that this initial transaction is substantially accretive to the partnership. The transfer of the transloading facility to partnership will be effective August 1, 2014.

As we proceed in the second half of the year we continue to evaluate potential transactions from our sponsor and focus on operating cost in our continuing efforts to target the 8% to 10% annual growth in our EBITDA. Thank you for your attention and with that I’ll turn the call over to Mandy Bush for her financial review. Mandy?

Mandy Bush

Thanks, Keith. On a combined basis for the three months ended June 30, 2014 gross margin was $15.2 million approximately doubled the gross margin of $7.6 million for the second quarter of 2013. The gross margin increase is attributable to the new crude oil logistics business segment as well as new gas gathering and processing contract entered into with AES at the closing of our IPO.

Turning to operating expenses. Operations and maintenance expense increase to $4 million for the second quarter of 2014 compared to $3.7 million for the second quarter of 2013. This was due to non-cash equity based compensation expense as $92,000, in crude logistic expense of $467,000. Those costs were partially offset by a decrease in maintenance expenses during the three month ended June 30, 2014.

General and administrative expense increased to $2 million for the second quarter of 2014 compared to $1.3 million for the second quarter of 2013. The increase was primarily due to equity based compensation expense of $130,000 as low as cost associated with being a publically traded partnership. Net income for the second quarter of 2014 totaled $6.3 million, this compares to a net loss of $1.2 million for the second quarter of 2013.

Adjusted EBITDA for the second quarter of 2014 was $9 million and distributable cash flow was $8.6 million resulting in a coverage ratio of over 1.3 times. Interest expense net of amount capitalized was $182,000 for the second quarter of 2014 down from $1.4 million in the same quarter last year, due to our lower outstanding debt post IPO. As of June 30, 2014 we had $6 million drawn on our $50 million credit facility. For the second quarter of 2014 we incurred a $175,000 for maintenance capital expenditures and $780,000 for expense in capital expenditures for various pipeline projects.

That concludes my prepared remarks. Operator we are now ready to take questions from our analysts.

Question-and-Answer Session

Operator

(Operator Instructions) We’ll take our first question from Ethan Bellamy from Robert W. Baird.

Ethan Bellamy - Robert W. Baird

With respect to the dropdown transaction, could you talk about the volume metric commitment, the utilization in the contract lines?

Keith Maxwell

So it looks a lot like our other contracts, almost for [indiscernible] in the structure. So it’s three year in term the rates are the same, the reason that the size is smaller is there is a little constraint on the capacity. So instead of being able to transload it at same rate as their other sites, there is a limitation -- a volume limitation. We’re working on getting that lifted and if we do the partnership will benefit. That will be a windfall to the partnership.

Ethan Bellamy - Robert W. Baird

Thanks Keith. With respect to our forward modeling of M&A, is this size and this multiple, the timing and the times since the IPO kind of -- is that a good benchmark for us to go forward in terms of how you’re growing…

Keith Maxwell

Yes, I purposely or we, I should say, we purposely wanted to create, especially on our first dropdown a really high accretive dropdown. So the multiple might change slightly depending on what the circumstances are. But yes, we’re going to try to stay true to the structure of taking the volatility out of the contracts and point as much predictability and distributable cash flows we can to the partnership. So that'll stay consistent.

Ethan Bellamy - Robert W. Baird

Okay. Could you talk about the competitive demand mix at Carthage and what the relationship with Anadarko looks like going forward?

Keith Maxwell

So, it’s very vibrant right now, there are several new initiatives going on that are technology driven. A lot of our volumes in the second quarter are direct results of that new technology coming in, the completion techniques that are now coming in the East Texas and making different sets of economic factors that maybe weren’t there in the years past. We’re now seeing that in the area, so that’s having an effect on the volumes. But again it is East Texas and you do have to compete for the volumes, so it is vibrant. But again we’re happy with what we see out there, obviously we had record volumes in the second quarter which is why we’re bullish about the prospects going forward, but it is East Texas there are competitive forces out there. So yes, we have to stay on our fees and keys.

Ethan Bellamy - Robert W. Baird

Okay. Last one, congrats on getting the spark IPO done. I know it’s technically unrelated, but should we, should fish investors do that as the positive in terms of your capital availability elsewhere to potentially create new dropdowns? Is that the right way to think about that?

Keith Maxwell

Yes, I mean that’s a really good point, unrelated to this call, but to your point the General Partner and the Holding Co, are above these entities and so that additional liquidity is going to be another source of build out capital for our rail operations for our transloading. There is some tanks that were in the permitting process on, so all those types of capital out ways, we just recently bought some trucks in the GP subsidiary. So there’s a lot of things going on at the development company and the money coming out of the IPO funding couldn’t come at a better time because obviously that’s what we’re outlaying it on.

Ethan Bellamy - Robert W. Baird

Great to hear. Thanks and congrats on a good quarter.

Operator

And we’ll take our next question from Selman Akyol from Stifel.

Selman Akyol - Stifel

Can you talk a little bit I guess on your maintenance capital expenditure, I mean they seem to be down, I know the first quarter was an improvement and then it’s maybe down for perhaps smoothly again this quarter, wondering about a run rate as well as is there anything special going on there?

Mandy Bush

No, this was an unusual quarter, we had some timing delays on some maintenance projects. So you'll see maintenance capital pick up just to outlook trend in the future quarters. I expect that this was definitely a onetime unusual quarter from the maintenance capital perspective.

Selman Akyol - Stifel

Good. And then are you seeing increased demand for the kind of crude you’re handling, the waxy crudes?

Keith Maxwell

We are seeing new interest coming from non-traditional markets. So we’re getting inquiries now from a different segment of the market and even I would even tell you last year and obviously AES is the recipient of that development around those additional markets. But the feedback that we get from our affiliate is that there is a wider acceptance for the capability to run the crude side. I think that’s what you’re wanting some color on.

Selman Akyol - Stifel

Right. And so ultimately you’re seeing increased demand?

Keith Maxwell

Yes, we are.

Operator

(Operator Instructions) And it appears we have no further questions.

Keith Maxwell

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

Operator

And once again ladies and gentlemen that does conclude today’s conference. We appreciate your participation today.

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