The midstream industry, those companies responsible for carting oil and gas to and fro, is known among dividend investors for its high-yielding investment opportunities. Many of these businesses are structured as master limited partnerships (or MLPs), a designation that requires the entity to pass its earnings through to its partners, which is where the high yields come from. The company I'm looking at today is Martin Midstream Partners (NASDAQ:MMLP). It boasts an 8.9% yield and an annualized distribution of $3.08 per unit.
The story behind the yield
Martin Midstream is an MLP based in Kilgore, Texas. Things are going quite well for the company right now. Operating income in 2012 came in at $73.84 million, a significant increase from 2011's $47.35 million. At the center of its business are four distinct operating segments:
- Terminals and storage
- Natural gas services
- Sulfur services
- Marine transportation services
We are accustomed to think of midstream players as pipeline operators, but many companies in the industry make a great deal of money from energy-related businesses outside of pipelines. Kinder Morgan Energy Partners (UNKNOWN:KMP.DL) has its terminals and CO2 business; Enbridge (NYSE:ENB) has wind and solar, etc.
From an earnings perspective, Martin's sulfur business is its most lucrative, generating $12.5 million in net income in the fourth quarter of 2012 and $41.9 million for the full year. Its marine transportation segment is the weakest, generating a loss of $612,000 in the same quarter, though it was profitable for the full year, generating $6.75 million over the course of 12 months. I expect both of these segments to do well in the future so let's take a closer look.
If there is anyone in the world who would equate the smell of rotten eggs with cash money, they most certainly work at Martin Midstream. The company processes and distributes sulfur produced by Gulf Coast oil refineries. Most of it winds up in fertilizer or industrial chemicals. Martin has six sulfur-based fertilizer plants and one emulsified sulfur blending plant. It also has four sulfur prillers, which are facilities that form molten sulfur into pellets. The combined capacity of these plants is about 5,000 tons per day.
Sulfur sales have grown from 62,000 tons in 1997 to 306,000 tons in 2012. Earnings for this segment have really taken off in the last few years, climbing from $15.7 million in 2009 to $37.2 million in 2012. This trend should continue if the U.S. petrochemical industry grows the way many think it will over the course of the next few years. As it is, domestic and foreign demand for sulfur remains high.
Marine Transportation Services
Martin Midstream's marine transportation services segment has seen better days. EBITDA has declined since reaching $22.7 million in 2010.
The partnership operates 54 inland marine tank barges, 29 inland marine push-boats, four offshore tank barges, and four offshore tugboats. It transports asphalt, fuel oil, gasoline, sulfur, and other bulk liquids around the Gulf Coast, East Coast, and the U.S. inland waterway system, which includes the Mississippi River. Martin is also active in the Caribbean, Central America, and South America .
The partnership recently engaged in two strategic deals to boost this segment. At the beginning of January, Martin Midstream announced it was acquiring Talen's Marine & Fuel for about $47.4 million. The deal gives Martin 10 more marine terminals on the Gulf Coast as well as fueling barges and tug boats. When it was announced, the CEO of Martin Midstream's general partner offered us this, "We expect stable and growing through-put throughout our entire marine terminal system as current forecasts show favorable activity in the Gulf of Mexico." We'll get to that favorable activity in just a minute.
The second recent deal was announced just last week, when the partnership announced it would acquire six liquefied petroleum gas pressure barges and two commercial push boats from Florida Marine Transporters for $50.8 million. Martin picked up these assets to increase its ability to handle natural gas liquids. It has its sights set squarely on the Eagle Ford shale, where NGL production is growing by leaps and bounds.
The growth of the Eagle Ford, and domestic energy production in general, is in fact driving favorable activity in the Gulf of Mexico. Refined petroleum exports are up, and crude oil -- or slightly refined crude oil -- supplies are being moved via boat or barge all over the Gulf, up the Mississippi River, and even around to the East Coast and Canada.
Earlier this year, Valero (NYSE:VLO) received special permission to export crude to one of its refineries in Canada. This is the exact sort of activity that should boost Martin's marine segment, and these two acquisitions put the partnership in an excellent position to exploit the macro trend.
Martin Midstream has generated a 12% total return over the last 12 months, but I think its best days are ahead. The partnership boasts an extremely high yield, but does not raise its distribution every quarter. That sort of fiscal responsibility is refreshing, but so is knowing that -- unlike industry peer Energy Transfer Partners -- ultimately the dividend will climb. While I like the future outlook for the sulfur and marine transportation services segments, management also has high hopes for the terminals and storage business, based on the booming activity on the Gulf Coast. Martin Midstream's commitment to pursuing fee-based revenue in a high-activity region like the Eagle Ford Shale means that we may see another distribution increase sooner rather than later.