Propane retailer Ferrellgas Partners L.P. (NYSE:FGP - News) continues to expand its operation via acquisition. The latest addition, the fifth one this fiscal, is the Edinburg, Texas based Rio Grande Valley Gas, Inc. This expands the partnership’s reach in the propane markets.
This acquisition is expected to be immediately accretive to earnings and will expand Ferrellgas’ customer base by 2,500 customers. Ferrellgas has strategically planned this acquisition, as it will expand its footprint in the Rio Grande Valley, the fast growing propane market of the border area.
In October 2011, the partnership acquired Federal Petroleum Company, which has operations in Weslasco and Brownsville. The latest acquisition supplements the partnership’s existing position and helps it to solidify its operation in Rio Grande Valley, Texas. Besides, in November 2010, the partnership acquired northeast Texas based Welch Propane, which boosted Ferrellgas’ customer base by 5,000.
The partnership generally funds acquisitions from its cash balance and its capital resources. Along with that the partnership also made a shelf registration for periodic sale of up to $250.0 million in common units to fund acquisitions. As of November 30, 2011, the partnership had $228.6 million available under this shelf agreement.
Ferrellgas continues to grow through acquisition and has completed 235 acquisitions till date. Despite its proneness for such deals, seamless mergers also run a high risk of failure. The end results may be dilutive to earnings of the partnership leading to financial liability.
Ferrellgas has reported a loss per unit in the first quarter of fiscal 2012. Additionally, increasing competition in the propane business, dependence on unpredictable weather condition for demand growth, and higher debt levels pose threats to the partnership’s acquisition-driven growth strategy. We presently provide a long-term Underperform recommendation on the stock, which coincides with the Zacks #5 Rank, equivalent to a short-term Strong Sell rating.
Overland Park, Kansas-based Ferrellgas Partners L.P. is a leading distributor of propane and equipment in the U.S. The partnership provides propane services to residential, industrial, Portable Tank Exchange, agricultural and wholesale customers. The major competitors of the partnership are AmeriGas Partners L.P. (NYSE:APU - News), Energy Transfer Partners L.P. (NYSE:ETP - News) and Suburban Propane Partners L.P. (NYSE:SPH - News).
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