Martin Midstream Partners (NASDAQ: MMLP) reported excellent Q2 2022 results, allowing it to increase its full-year adjusted EBITDA guidance to a range of $126 million to $135 million. This matched my previous expectations, where I thought Martin would break the high end of his earlier guidance range of $110 million to $120 million for Adjusted EBITDA in 2022.
Martin’s strong performance in 2022 and significant unit price decline since April has changed my perspective on its common units. I am now bullish on Martin’s common stock from a valuation perspective, although significant risks remain due to its upcoming debt maturities.
Q2 2022 performance
Martin delivered very strong results in the second quarter of 2022, with adjusted EBITDA of $38.4 million beating the upper end of its guidance range for the quarter by $13.4 million. Martin also increased its Q3 2022 Adjusted EBITDA guidance (mid-term) by $4 million, although it reduced its Q4 2022 Adjusted EBITDA guidance by $2.5 million.
Much of Martin’s strong performance in the first half of 2022 can be attributed to its fertilizer business, which recorded strong margins due to the war in ukraine. This segment generated $21.8 million of Adjusted EBITDA during the first half of 2022. The fertilizer business, however, is seasonal and has less of an impact in the second half, contributing to expectations of lower Adjusted EBITDA in the second semester. Additionally, Martin expects its Q4 2022 butane margins to be lower than its Q4 2021 butane margins.
Overall, I think Martin will eventually hit the top half of his revised adjusted EBITDA forecast of $126 million to $135 million for 2022.
Reaching the top half of its revised adjusted EBITDA guidance could allow Martin to reduce its credit facility debt to approximately $110 million by the end of 2022. It would also give it net debt of $455 million. dollars, a leverage effect of approximately 3.4x.
If Adjusted EBITDA falls back to more typical levels (such as $115 million) in 2023, Martin could end up with around $420 million in net debt at the end of 2023. This would put his leverage at 3, 65x.
Martin has debt maturity challenges to resolve over the next few years. Martin’s credit facility matures in August 2023, and it also has note maturities in 2024 and 2025.
Of note is its $291 million in 11.5% subordinated notes due 2025. These notes traded at or above par from early 2021 to mid-2022. However, those ratings fell to around 90 cents on the dollar in mid-July before bouncing back to 97 cents on the dollar now. There doesn’t appear to be a company-specific reason for the drop in price of these bonds, but it may reflect some concern about the possibility of a recession.
Second-tier tickets will likely be the biggest challenge for Martin due to his relatively large size. Martin’s estimated value is greater than his debt (estimated value at 1.6x projected net debt at end-2023), but economic conditions will likely influence the success of debt refinancing.
Notes on assessment
A 6.0 x EV multiple to Adjusted EBITDA would make Martin worth $690 million, assuming Adjusted EBITDA of $115 million per year over the longer term. Subtracting $420 million in net debt (2023 year-end projection) would leave $270 million in value for its common units, or about $6.95 per unit in value based on its current number of units.
This assumes that Martin can manage his short-term debt maturities without dilution. There is a risk that Martin will end up issuing more units or issuing warrants as part of its debt refinancing plans. In the event of a significant economic downturn, Martin would also be at risk of being restructured.
Martin Midstream’s results for the first half of 2022 were quite strong, pushing its full-year guidance to a range of $126 million to $135 million for adjusted EBITDA. If economic conditions hold reasonably well, Martin should be able to meet future debt maturities without dilution. This is a scenario where his common shares could be worth close to $7 per share.
However, if economic conditions deteriorate, there is a risk of dilution (or even restructuring depending on the extent of the economic deterioration) as Martin attempts to meet his debt maturities.