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Why higher propane price volatility is a risk to distributors

Ingrid Pan, CFA

8 trends that could affect propane names this winter (Part 3 of 9)

(Continued from Part 2)

Current volatility in propane prices is higher than last heating season

Currently, propane prices are experiencing more volatility than they were during the winter heating season from late 2012 to early 2013. The standard deviation of propane prices (as priced at Mont Belvieu) was ~$0.11 per gallon for the last three months (ending September 6). In comparison, the standard deviation of propane prices for the three months ended March 31, 2013, was ~$0.04 per gallon. The standard deviation of propane prices for the three months ended ~$0.08 per gallon. Higher volatility presents greater risk of sudden upward price movements.

Plus, as we’ve seen, Targa Resources (NGLS) is bringing on further propane export capacity in October, which could increase the risk of sudden upward price action this heating season.

Sudden upward price movements can’t pass on right away to customers

In addition to higher propane prices in general, sudden sharp upward movements in propane prices could eat into distributors’ earnings. This is because in some cases, the increased cost to the distributor can’t pass on to customers right away. For example, Ferrellgas noted in its most recent 10-K (earnings report), ”We believe the effect of this significant increase in the average wholesale market price of propane in the first half of fiscal 2012 caused a decrease in sales volumes and a decrease in gross margin per gallon during the first half of fiscal 2012. In this period of increasing prices, we believe customers conserved and purchased less propane and it was more difficult to maintain gross margins as our ability to increase sales price per gallon did not keep up with the corresponding increase in product prices.”

However, note that the converse is true, where the reverse trend of sharply declining prices can also result in greater margins, as it takes time for distributors to pass on the price decreases to customers.

Continue to Part 4

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