Is This Double-Digit Yield Too Good to Be True?
Most people have never heard of Martin Midstream Partners L.P. (NASDAQ:MMLP), but the partnership offers one of the biggest payouts in the current stock market.
As the name suggests, Martin Midstream Partners is in the midstream energy business. Headquartered in Kilgore, Texas, the master limited partnership (MLP) provides petroleum products and byproducts storage, transportation, and distribution services. It operates through four main business segments: “Natural Gas Services,” “Terminalling & Storage,” “Sulfur Services,” and “Marine Transportation.”
Right now, a company paying a five-percent dividend would proudly call itself a high-yield stock. Martin Midstream Partners, on the other hand, has a quarterly distribution rate of $0.50 per unit. At the current stock price, that translates to a jaw-dropping annual yield of 15.3%.
However, we know that ultra-high yielders can be risky. In particular, if a company cannot make enough money to cover its dividend, it may cut its payout at some point down the road. And when that happens, not only will shareholders see their dividend income drop, but the stock could also take a hit. In this day and age, few things disappoint market participants more than a dividend cut from a double-digit yielder.
So the big question now is, does Martin Midstream Partners make enough money to cover its distributions? Well, if you use the results from the partnership’s most recent earnings report, the answer would be quite disappointing.
Martin Midstream Partners L.P.: Is the Distribution Safe?
Martin Midstream Partners announced its second-quarter results last month. Like most MLPs, the partnership reports something called distributable cash flow. This metric can tell investors whether an MLP generated enough cash flow to fund its quarterly distribution.
For the quarter, Martin Midstream Partners generated $11.0 million in distributable cash flow. That led to a distribution coverage ratio of 0.56 times. In other words, the cash generated by the partnership was not enough for it to meet its distribution obligations. (Source: “Martin Midstream Partners Reports 2018 Second Quarter Financial Results,” Martin Midstream Partners L.P., July 25, 2018.)
However, note that MMLP was selling its 20% stake in the West Texas LPG Pipeline Limited Partnership for $195.0 million. After taking into account the transaction, the partnership’s pro-forma distribution coverage ratio for the first six months of 2018 came in at 1.01 times. At the same time, management is maintaining their full-year distribution coverage ratio guidance of 1.00 times.
Moreover, things weren’t always as bad as the second quarter. For instance, in the first quarter of 2018, Martin Midstream Partners generated $26.7 million in distributable cash flow while paying $19.6 million in actual cash distributions. Therefore, it actually achieved a solid distribution coverage ratio of 1.36 times for the quarter. (Source: “Martin Midstream Partners Reports 2018 First Quarter Financial Results,” Martin Midstream Partners L.P., April 25, 2018.)
And if you look a bit further back, you’ll see that the partnership generated $91.1 million in distributable cash flow in 2017. Given its total cash distribution of $76.9 million for the year, MMLP’s distribution coverage ratio came in at 1.18 times, which left some room for error. (Source: “Martin Midstream Partners Reports 2017 Fourth Quarter Financial Results,” Martin Midstream Partners L.P., February 14, 2018.)
MMLP Stock: Running a Fee-Based Business
As I mentioned earlier, Martin Midstream Partners focuses on providing midstream services. Rather than drilling new wells, the partnership makes money primarily from fee-based contracts. For instance, in its Natural Gas Services segment, MMLP’s fee-based natural gas storage contracts have a weighted average life of approximately three years. And in Sulfur Services, the partnership has fee-based, multi-year take-or-pay contracts for its prilling assets.
At MMLP’s latest investor presentation, management said that, for full-year 2018, approximately 61% of the partnership’s adjusted earnings before interest, tax, depreciation, and amortization (EBITDA) would come from fee-based operations. (Source: “2018 MLPA MLP & Energy Infrastructure Conference,” Martin Midstream Partners L.P., May 23, 2018.)
As we have seen from the recent oil price downturn, running a fee-based business is one of the few ways for an energy company to limit its exposure to commodity price volatility. By conducting most of its business through fee-based contracts, Martin Midstream Partners is well positioned to make money through thick and thin.
The Bottom Line on Martin Midstream Partners L.P.
At the end of the day, I wouldn’t call MMLP stock a slam dunk. As a risk-averse income investor, I would like to see a distribution coverage ratio of greater than one. And the partnership’s most recent financial results simply did not leave a wide enough margin of safety.
But Martin Midstream Partners does have a solid business model in place. If the partnership can improve its distribution coverage, its double-digit yield would be worth considering.