Winter storms should help natural gas and propane companies (Part 2 of 2)
Weather and propane names
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 slightly milder-than-average weather, a small negative for propane companies, such as AmeriGas Partners (APU), Ferrellgas Partners (FGP), and Suburban Propane Partners (SPH). However, strong winter storms this week could help to push up propane demand. The weather throughout the winter as a whole 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. Last week, the average U.S. heating degree day figure was 160 compared to the normal heating degree day figure of 165 for corresponding weeks past. The milder 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 this week, winter storms have hit many parts of the U.S., which could positively affect propane demand and heating degree days for this week.
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 APU, FGP, and SPH for the past six years of heating seasons.
Note that 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 the graph above shows, the relationship between weather and EBITDA margins for FGP and SPH appears significant over the past six years. For APU, the relationship is less significant. However, 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. The past several weeks of colder-than-normal weather were a positive medium-term catalyst for propane names. Plus, 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.
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