Martin Midstream (NASDAQ:MMLP) announced guidance for 2018. The EBITDA of $156.1 million for fiscal year 2018 is virtually even with the EBITDA of fiscal year 2017 of $156.2 million. Worse the projected distribution coverage of 1.00 would be below market expectations. EBITDA earnings peaked back in 2015 at $188.3 million. Since that time, every single year has been lower than the year before. Even if this year is insignificantly lower than the previous year, the lack of an earnings turnaround is troubling.
Management does expect to finance the $40 million pipeline expansion with debt. This additional leverage is probably proper because this project is expected to be extremely profitable. 2019 should reap the benefits of this expansion. The rate adjustment before the Texas railroad commission would also benefit shareholders. These two could be particularly material to shareholders.
But the deterioration of other divisions is very troubling. The cardinal storage unit is projected to earn about $8 million less EBITDA than the year before. Butane earnings are also scheduled to decline. There is nearly a $10 million EBITDA decline that is not offset by growing businesses in this segment.
Far more troubling is the Smackover Refinery and related businesses. The refinery margins is projected to decline $1.5 million. Yet the private label and related businesses have not increased enough to enable the whole group to grow earnings. Private label businesses tend to be related to the economy. Right now there is a great economy. Therefore that businesses should be rapidly expanding.
Sulfur services has had some banner years. But management only projects a $0.5 million increase in profits. The fertilizer business in particular services a market with a lot of small no-name manufacturers. The brand names in the fertilizer business hardly control the industry. The industry is competitve. But management should be growing this business. The same goes for the rest of the sulfur business.
The marine segment of the company has been a weak spot for some years. Management has downsized the division to minimize underperformance. That is definitely a start. But growing niches have not been found. Therefore the division is left to depend upon a general economic recovery.
The net result of all this maneuvering is basically a prayer that results do not deteriorate so much across the board that the potential of a retroactive rate increase in the pipeline case and the pipeline expansion is diminished or even eliminated. Clearly this management is not showing the drive necessary to run a very diversified business. Shareholders need to evaluate the company prospects accordingly. This will be the fourth straight year of no growth. Even for a midstream company that is a very unusual outcome.
This company is fairly leveraged too. Debt to EBITDA is more than 5. The distributions were cut a little while back to enable management to pay down debt and reduce leverage. Now, however, that distribution coverage sits at 1 again. Admittedly the pipeline expansion project should solve the problem next year. The rate case resolution might solve the problem this year. But dependence upon a single event could be very risky. What is missing here is long term guidance for steady growth in good and bad times.
This management has made a great presentation with a lot of painstaking detail. Now they need to fill the market in on the growth prospects. Otherwise there is a very real danger that the financial leverage will not work to the advantage of the shareholders. Both the pipeline expansion and the rate case resolution could provide an immediate stock price "pop". But long term solutions are needed to assure financial stability and distribution growth. Until then, this stock is no longer all that safe for income accounts.
The second and third quarters are traditionally weak quarters. There may be no reason for the limited partner units to recover in the fall unless a more detailed long term growth plan is laid out for shareholders. Management has had plenty of time to recover from the 2015 industry downturn. That recovery appears to be delayed even more now. Maybe shareholders will get tired of waiting and look elsewhere as a result. Generally financial leverage demands both growth and immediate corrective action. Both of those strategies appear to be lacking in the long term.
Disclaimer: I am not an investment advisor and this article is not meant to be a recommendation of the purchase or sale of stock. Investors are advised to review all company documents, and press releases to see if the company fits their own investment qualifications.
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