Propane Trade Heating Up
The winter of 2014 was one of the coldest in many years in the U.S. Propane, which is used to heat homes, schools, and businesses across many regions of the country, was in short supply. After nearly two of years of relatively stable propane prices, the price rose more than 50% from late 2013 to early 2014:
Source: Energy Information Administration (EIA)
Since that cold winter of 2013-14, the U.S. has experienced two relatively mild winters. Propane production — a byproduct of the U.S. shale gas boom — continued the steady rise that started in 2009. Demand for propane did grow over the past two years, but with the mild winters the demand still wasn’t sufficient to keep up with supply growth. The net result was that the price of propane declined during most of 2014, which also coincided with the steep drop in oil prices.
The Master Limited Partnership Association (MLPA) lists four MLPs engaged primarily in propane sales and distribution. They are AmeriGas Partners (NYSE: APU), Suburban Propane Partners (NYSE: SPH), NGL Energy Partners (NYSE: NGL), and Ferrellgas Partners (NYSE: FGP).
NGL Energy Partners operates in three segments: retail propane, wholesale supply and marketing, and midstream. The retail propane business sells propane to end users, while the wholesale supply and marketing business supplies propane and other natural gas liquids (NGLs) and provides related storage. The midstream business takes delivery of propane from pipelines or trucks at propane terminals and transfers the fuel to third-party transport trucks. Notably, NGL Energy Partners also has significant non-propane businesses like crude oil logistics and a refined products and renewables segment.
The other three MLPs are more specifically focused on propane. AmeriGas is the country’s largest retail propane marketer, serving some 2.3 million customers in all 50 states from approximately 2,100 distribution locations. In addition to distributing propane, the partnership sells, installs and services propane heaters and other related appliances.
Suburban Propane distributes propane, fuel oil and refined fuels, and also markets natural gas and electricity in deregulated markets. The partnership serves approximately 750,000 residential and commercial customers through some 300 locations in 30 states (primarily on the east and west coasts).
Ferrellgas Partners distributes propane and related equipment and supplies to approximately 1 million customers in all 50 states, the District of Columbia and Puerto Rico. Its propane distribution business consists of transporting propane purchased from third parties to propane distribution locations and then to customers’ premises, or to portable propane tanks delivered to nationwide and local retailers.
If we look back at the performance of these four MLPs over the past two years, it isn’t surprising that they are all down given the weakness in propane prices:
Yet propane prices have strengthened in recent months. In fact, the recent propane spot price of $0.53/gallon is nearly at the 52-week high ($0.56/gallon), and is about 80% higher than the lows seen in January. This is reflected in the performance so far this year of the propane MLPs. If we look at just the year-to-date performance, a different picture emerges:
The worst performer of the group, Ferrellgas Partners, is up 20.6% year-to-date. Notably, we did place one of these four MLPs on the Best Buy list for MLP Profits on Jan. 19 (see Eight You Can’t Hate), as well as the Best Buy list in The Energy Strategist on Jan. 21 (see Crude Realities Intrude).
Here is a current snapshot of some of the important metrics for these partnerships:
- EV = Enterprise value as of June 1 in billions
- EBITDA = Earnings before interest, tax, depreciation and amortization for the trailing 12 months (TTM) in millions
- Debt = Net debt at the end of the most recent fiscal quarter
- FCF = Free cash flow for the TTM in millions
- CR = Current ratio, current assets divided by current liabilities for the previous quarter
- Yield = Percent annualized yield based on the most recent quarterly distribution
NGL has been the biggest underperformer of the group, which shouldn’t be surprising considering the high level of debt and the negative free cash flow over the past year. Amerigas looks to be the most undervalued of the group based on these metrics, while Suburban Propane Partners has seen the biggest year-to-date gain, rising by more than 42%.
We believe there is still value in this space, albeit less now given the recent sharp rise. To find out which of these MLPs are still worth buying, consider joining us at MLP Profits.