Higher margins on 14% of NRGY's storage business will have a heck of a time helping the low and possibly declining margins on the 86% of NRGY's propane business. The March 2011 financial report from NRGY mentions conservation, switching to alternative fuels and lower cost providers as eating into NRGY's propane volumes. More telling is the statement that lower prices for propane may not bring the volumes back. This is a long term turnaround but I would expect many glitches along the way.
Just had an interesting anecdotal from a friend who said in the Northeast businesses are switching from oil to propane. I asked why not natural gas, and he said because these businesses are scattered away from access to natural gas lines. I'm guessing that small businesses (who are struggling in this political climate) may increase their use of propane both to cut costs of oil and also as (IF?) business improves.
Yes, but margins are much higher on the midstream. Propane margins are thin. So even though the propane revenues are high, the overall contribution is only about 10% higher than midstream (say 55% vs 45%).
Think of it like a gas station, where a $3.50/gal price only nets the gas station $.15/gal in profit.
This is really simple. You have pipelines that move nat gas or petroleum thousands of miles and generate fees from the system.
Retail propane has a classic retail distribution system that is labor intensive, capital intensive and inefficient in the sense that you are delivering to one residence at a time. My brother can tell you about the inefficiencies as he lives one block from being hooked up into his city's system for utility.
Even ETP comments on the problems they are having with their retail propane margins almost every quarter and refuse to sell their retail propane because of income tax issues.
Its just a lousy inefficient business model for en masse distribution of gas.
Then, to make matters worse, some of the amounts paid by consolidators over the past few years have been too much. The proof is the lack of distribution growth. Two of the propane MLPs haven't raised distributions in years.
If you pull up NRGY and SPH on Google Finance and hit YTD you will see that SPH and NRGY have been heavily correlated until the last few days when NRGY tanked on the Citi downgrade. SPH is the blue chip of the group, but I wonder if they are next to feel some selling pressure.
NRGY is a great company!! Great management and drive. They will figure out a way to keep it strong!!! Citibank and the rest are nothing more than market manipulators, trying to get the price down so they can get in!!!!