Natural gas and liquids boost Martin Midstream Partners’ growth

Market Realist

Key takeaways from Martin Midstream Partners' analyst meeting (Part 4 of 7)

(Continued from Part 3)

Martin Midstream Partners’ natural gas and natural gas liquids

The natural gas segment accounted for around 60.4% of 2013 revenues and ~30% of Martin Midstream Partners’ operating income. MMLP primarily focuses on its NGL (natural gas liquids) transportation, logistics, and marketing business, using its trucking services and underground storage facilities. The primary NGL products are butane, propane, natural gasoline, and ethane. MMLP has been able to bring stability to its margin in natural gas business through purchases of NGLs and spot sale or forward sale based on daily price index in order to reduce volatility of gas price fluctuations. The company typically enters into annual contracts with independent retail propane distributors to deliver their estimated annual volume requirements based on prevailing market prices.

MMLP has a joint venture with Energy Capital Partners and is jointly invested in Cardinal Gas Storage Partners LLC for providing storage facilities across northern Louisiana and Mississippi. Cardinal Gas storage has four assets—namely, Arcadia Gas Storage, Perryville Gas Storage, Cadeville Gas Storage, and Monroe Gas Storage. All these facilities have 76% to 100% of their volumes contracted, with terms ranging from one year to about ten years. This gives visibility to revenues and stability to cash flows.

MMLP has liquefied petroleum gas (or LPG) pressure barges, which are primarily used for product storage in NGL distribution business. The company purchases low-ethane, propane, and butane from local suppliers and is currently negotiating long-term sales agreements. Through its Corpus Christi processing facility, MMLP is positioning itself to serve the Latin American and Caribbean market. The recent spike in propane prices, which negatively affected MMLP’s product cost, is expected to reach a more normal level following the onset of spring and alleviation of interruptions in third-party lines. The basis differential—the purchase at the current market price and sale at the forward month’s price—forms the level of profitability of Cardinal Gas facility and MMLP’s marketing and trading business in general. For more on this, please read Why rising propane and butane exports affect some US energy MLPs.

The butane logistics business started in April 2012 has been the largest driver of growth for MMLP’s natural gas service business. In 2013, sales volumes for refinery butane services increased 111% and wholesale propane volume increased 55%. The significantly improved performance of butane and propane was the result of increases by refineries for butane during a colder-than-normal winter in 2013 and higher demand by propane retailers for winter sales of propane. MMLP anticipates strong demand for butane and propane by refineries and propane retailers.

MMLP uses a network of underground storage and transportation equipment owned by Martin Resource Management (MMRC) affiliates to facilitate butane marketing. MMRC owned ~19% of MMLP’s total outstanding units. In February 2013, MMLP acquired six LPG Pressure Barges with storage capacity of 16,101 barrels, which facilitates storage and transloading of NGL volumes produced in the Eagle Ford Shale area.

Normal butane is used as a petrochemical feedstock, as a blend stock for motor gasoline, and as a component in aerosol propellants. The demand for butane generally falls in summer due to lower demand in the automobile market. The Environment Protection Agency (the EPA) regulates the Reid Vapor Pressure (or RVP) of gasoline sold during the summer to reduce evaporative emissions. High levels of vaporization are desirable during the winter for gasoline-powered vehicles. So oil refineries adjust EVP seasonally to meet EPA standards.

Martin Midstream Partners (MMLP) is a limited partnership that has an integrated distribution network consisting of transportation, terminaling, and storage and midstream logistical services. Other major companies that also operate in the same sector as MMLP include Sunoco Logistics Partners (SXL), Enterprise Products Partners (EPD), Genesis Energy (GEL), and NGL Energy Partners (NGL). Some of these companies are components of the Alerian MLP ETF (AMLP).

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