Why Martin Midstream Partners’ sulfur business drives its stock

Market Realist

Key takeaways from Martin Midstream Partners' analyst meeting (Part 5 of 7)

(Continued from Part 4)

Martin Midstream Partners

MMLP markets molten sulfur using its highly specialized distribution assets to phosphate fertilizer producers and other industrial customers. The molten sulfur is processed into solid sulfur granules more suitable for export into the international markets by dry bulk vessels. The shipment of raw materials and finished products among refineries, fertilizer producers, and various regional terminals offers multiple fee opportunities for MMLP.

The company’s Stanolind and Neches terminals are dedicated to the company’s sulfur terminaling business. The Neches terminal is expected to execute the 15,000 LT Molten Storage Tank project in 2014. This will provide the necessary scope for maintenance and inspection at Stanolind. However, the molten storage capacity has remained largely uncommitted. Note that most of MMLP’s sulfur sales aren’t based on contracts, with the exceptions of a few large transactions.

The sulfur services segment accounted for ~13% of 2013 revenues and 26% of 2013 operating income. MMLP provides full-service sulfur handling, which generated EBITDA of ~$14 million in 2013. Customers include oil refiners, phosphate fertilizer producers, and other industrial consumers—primarily located in the U.S. Gulf Coast region. MMLP handles molten sulfur on contracts that are tied to sulfur indices and tend to provide stable margins. The Neches terminal handles 5,500 metric tonnes of molten, prilled, and granulated sulfur per day. MMLP’s annual fertilizer and industrial sulfur products sales have grown from approximately 62,000 tons in 1997 to approximately 273,000 tons in 2013 as a result of acquisitions and internal growth. However, as the graph above notes, total volumes of sulfur have come down 26% and 13% in 2012 and 2013, respectively, while the volume of fertilizer has remained more or less stable over the past two years. The volume reduction was primarily related to the conversion of a buy/sell contract with a major customer to a fee-based handling contract.

As the world economy recovers, analysts expect that demand for sulfur will increase, because growing economies require energy and consumption of sulfur’s derivative products. MMLP’s sulfur-based fertilizer products compete with several large fertilizer and sulfur products manufacturers. It has six fertilizer plants, sulfuric acid plants, and industrial sulfur plants with 411 thousand tons per annum of fertilizer production capacity. The relative price differential of U.S. producers with import prices is a major driver of sulfur-based products. MMLP has a competitive advantage since it manages transportation, processing, and storage needs at the same time.

The other major factor affecting the fertilizer-led sulfur market is agriculture. Recent years have seen an increase in corn acres planted in the U.S., largely driven by biofuel demand growth. According to the EIA, U.S. production of biodiesel was 135 million gallons in December 2013. This was nearly double the production of around 70 million gallons in 2011. Although corn crop production is expected to fall in 2014, the long-term fundamental of biofuel/ethanol remains strong, providing stable demand for sulfur-based fertilizer. However, any changes in weather or summer demand will affect mobilization and planting, which in turn will impact the segment’s performance.

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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