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After strong results for Q2 2022, Martin Midstream Partners (NASDAQ:MMLP) failed to meet expectations in Q3 2022. Combined with lowered expectations for Q4 2022, this has resulted in Martin reducing its full year adjusted EBITDA guidance by approximately $12 million (at guidance midpoint) from what it expected after Q2 2022. This is still a fair bit better than its original 2022 guidance though.
Martin faces some challenges as it needs to extend its credit facility and deal with its note maturities (February 2024 and February 2025) while having relatively high leverage and a high interest rate environment. If it can successfully refinance its debt, I believe its common units could be worth close to $7 per unit, over double its current unit price. This is similar to what I thought about Martin before, with the value of its new electronic level sulfuric acid joint venture helping to offset the impact of weaker near-term cash flow expectations.
Guidance Changes
Martin has had challenges trying to forecast its business performance during 2022 amidst volatile commodity prices. It initially guided for adjusted EBITDA in the $100 million to $110 million range for 2022, then increased that guidance during each of the next two quarters.
| $ Millions | Low | High |
| Initial Guidance | $100 | $110 |
| Q1 2022 Revision | $110 | $120 |
| Q2 2022 Revision | $126 | $135 |
| Q3 2022 Revision | $116 | $121 |
Despite the recent negative revision to its guidance, Martin still expects its 2022 adjusted EBITDA to be above the high-end of its initial guidance range. and slightly better than its revised guidance from Q1 2022.
Martin now expects around $32 million in adjusted free cash flow for 2022 (range of $29 million to $34 million), including around negative $7 million in free cash flow during the second half of 2022.
Debt Situation
With $32 million in adjusted free cash flow for 2022, Martin would be able to reduce its net debt to around $469 million by the end of 2022. This would be leverage of approximately 4.0x. This includes the proceeds from its $5.25 million Stockton sulfur terminal sale.
Martin is attempting to amend and extend its credit facility, which currently matures in August 2023. It also intends on addressing its 2024 notes around the same time or soon after it deals with its credit facility.
The higher interest rate environment now complicates refinancing efforts, although its second-lien notes due 2025 are still trading close to par at 98 cents on the dollar and yielding around 12.5% to maturity. Thus I’d expect Martin to be able to refinance its debt, but it may end up with slightly higher interest costs and its interest costs are already substantial.
Martin also intends to invest around $20 million in growth capex in its electronic level sulfuric acid joint venture. This may result in Martin only reducing its net debt by a modest amount in 2023. I am now assuming that Martin ends up with around $450 million to $455 million in net debt by the end of 2023, which would be leverage of approximately 3.8x.
Valuation And Distribution
I continue to believe that Martin’s common units could be worth close to $7 per unit. After its electronic level sulfuric acid facility starts up (expected for Q1 2024) it may be able to generate around $120 million in adjusted EBITDA in a typical year. Keeping an EV to adjusted EBITDA multiple would make it worth $720 million, less the projected $450 million to $455 million in net debt at the end of 2023.
Martin may be able to generate close to $1 per unit in distributable cash flow in that longer-term scenario, although it needs to get its leverage below 3.75x and deal with its credit facility maturity and note maturities before it can consider increasing its distribution. Debt reduction is likely to be an ongoing theme for Martin as well.
Conclusion
Martin Midstream’s 2H 2022 results are expected to be significantly worse than its 1H 2022 results as it grapples with the effect of volatile commodity prices. Overall, Martin’s 2022 results are still expected to be around $13.5 million better than its original adjusted EBITDA guidance though.
Martin has some tricky debt issues to work though, and can be considered a high-risk, high-reward company. If it successfully deals with its debt issues, it may be worth over double its current unit price. The electronic level sulfuric acid joint venture also adds to Martin’s long-term value, but will add to Martin’s near-term debt levels.
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