Why colder-than-normal winter should be positive for propane names

Market Realist

Why weather affects natural gas and propane names (Part 2 of 2)

(Continued from Part 1)

Winter and propane demand

Cold winter weather is one of the major drivers of earnings for propane distributors, as the fuel is used for home heating in many areas in the U.S. As a result, cold weather is a positive indicator for propane distributors.

Last week had milder-than-normal weather, a negative for propane companies, such as AmeriGas Partners (APU), Ferrellgas Partners (FGP), and Suburban Propane Partners (SPH). The weather throughout the winter will be an important factor for earnings.
 
Heating degree days are one temperature indicator

Heating degree days measure how much colder the outside temperature is compared to room temperature. Greater heating degree days represent colder weather, while less heating degree days represent milder weather. Last week, the average U.S. heating degree day figure was 180 compared to the normal heating degree day figure of 199 for corresponding weeks past. The milder-than-normal weather over the past week implies weaker demand for propane over that period, which is negative for companies that distribute propane for heating use.

However, note that for the winter heating season to date, cumulative heating degree days have totaled 1,635 compared to 1,621, making for a colder-than-normal winter so far. This is a positive for propane demand.

Propane companies’ margins are affected by weather

Colder weather is positive for the margins of propane distributors, such as APU, SPH, and FGP. The below graphs display the correlation between heating degree days and EBITDA (earnings before interest, tax, depreciation, and amortization) margins for Ferrellgas and Suburban Propane for the past seven years of heating seasons.

Note: EBITDA margins for companies are for the full fiscal year—not only the heating season. Propane companies generate the greatest proportion of EBITDA during the heating season.

As shown above, the relationship between weather and EBITDA margins for FGP and SPH appears significant over the past seven years. For APU, the relationship has been less significant (almost zero correlation over the past seven years), though this may have been affected by other factors such as acquisitions that AmeriGas has made. Overall, it seems for the general propane sector, weather and propane distributor margins have a relationship. Also, the Energy Information Administration (the EIA), a government agency, notes, “Propane supply and demand is subject to changes in domestic production, weather, and inventory levels, among other factors.”

So weather fluctuations are a notable data point for holders of propane companies, such as FGP, SPH, and APU. This winter’s colder-than-normal weather so far has been a positive medium-term catalyst for propane names. Lastly, propane companies comprise a portion of the Yorkville High Income MLP ETF (YMLP), an ETF that tracks the Solactive High Income Index, which in turn tracks select MLPs as well as the Global X MLP ETF (MLPA).

Browse this series on Market Realist:

View Comments (0)