I get blank stares when I discuss the "tertiary" beneficiaries of fracking: companies sitting in the right place at the right time with the right operating capabilities. Wall Street, politicians, economists -- few seem to understand the long-term implications of a huge new supply of relatively dirty oil and gas flowing from the Midwest and Canada to the Gulf. The Street is focused on the extraction companies, the steel tubing companies, even the sand companies -- but those plays are known and the run is over for now.
I like tertiary companies; call them the undiscovered country. Especially when they have yield of 9% or more.
Martin Midstream Partners (NASDAQ:MMLP) is a tertiary beneficiary of fracking and a rarity -- a growth and income stock. The current dividend yield is just shy of 9%, but that is second to a very well-managed company growing the top and bottom lines. Martin Midstream does a lot of the "unsexy" stuff in the oil and gas industry. It services natural gas fields, stores liquid hydrocarbons, extracts sulphur and sells it, and so on. For example, Martin Midstream characterizes its terminalling and storage capability as having "expertise in hard to handle materials," boring stuff from ammonia to distillates to sulfuric acids.
The company does its business around the Gulf, and that is where enormous amounts of shale oil, fracked oil and fracked gas are headed for the next 25 to 75 years. And fracked oil and gas have a lot of junk in them that needs to be cleaned up by companies like Martin Midstream.
In Q1, the company had $10.5 million, or what it calls $0.40 per limited partner, unit. Martin Midstream is, after all, an MLP (master limited partnership). This was a roughly 30% increase over the same period in 2011. Total revenues were $338 million, an increase of 19% over Q1 2011. About two-thirds of revenue comes from natural gas services. The dividend in Q1 was $0.76 a share, an annual yield at current prices of more than 9%.
- Terminalling and storage: 30%-35%
- Sulphur removal, processing, fertilizer production: 30%-35%
- Natural gas services: 20%-25%
- Marine transportation: 10%-15%
Two-thirds of the company's revenue is fee-based -- i.e., it charges fees for services independent of the price of natural gas for storage and transportation of that gas. There is very tight storage and transportation capacity for natural gas right now, and for the foreseeable future, and the low price of gas will have little if any impact on the fees charged by Martin Midstream.
At present, the terminalling and storage business is Gulf-driven; the company services companies operating in the Gulf of Mexico region. But as fracked gas heads to the Gulf in ever-increasing quantities, its business will grow. Fracked gas has a lot of junk in it -- liquids no one wants, sulphur no one wants -- and the company is sitting in the right place at the right time with facilities ringing the Gulf Coast, where much of that that fracked gas is going.
There are some other aspects of Martin Midstream's business I like. The sulphur business, which is all about cleaning up hydrocarbons, is also driven by fertilizer demand. That business is booming and will continue to do so as long as the Chinese demand more and better food, which means for a very long time.
The company is financially sophisticated and its presentation of financial data is transparent. It hedges a good deal of its exposure to hydrocarbons, and has been aggressively acquiring other outfits using debt easily serviced by cash flow. It also uses debt to expand its own operating capacity. While some analysts do not like Martin Midstream's debt load, its use of leverage has been consistent over time and has produced strong operating cash flow and net income, as well as dividend returns for shareholders now north of 9%.
The stock is down 17% off its highs due to market reaction to low natural gas prices, which is a mistake -- yes, markets make mistakes -- and the stock goes ex-dividend the first week of August. The chart says the stock sells off after it goes ex-dividend (most recently May 4) and then begins to climb.
Disclosure: I do not own MMLP, and will not own it for at least 72 hours after this article is published. I do recommend MMLP in my service, The New Normal Investor.