Key analysis: The most important trends in propane right now (Part 4 of 7)
A tough winter?
The lower-than-normal propane inventories and volatility in prices may make the next leg of winter tough for propane distributors such as AmeriGas Partners (APU), Suburban Propane (SPH), and Ferrellgas Partners (FGP) despite colder-than-normal weather. (To see why cold weather helps propane distributors, see Propane demand increases amid frigid temperatures.)
Propane prices have experienced higher volatility recently.
AmeriGas reaffirmed prior EBITDA guidance for the year, despite having strong performance for the first quarter of its fiscal year (three months ended December 31, 2013) and beating consensus estimates. Meanwhile, Suburban Propane missed consensus estimates. Ferrellgas will report results for the quarter ended January 31, 2014 in early March. (For more on the recent earnings releases of these names, see AmeriGas Partners and Suburban Propane fiscal 1Q14 earnings analysis.) APU’s reluctance to change guidance and SPH’s miss suggest that several trends this winter could ultimately erode earnings despite the cold weather that’s usually bullish for distributors.
Propane supply constraints could affect distributors’ operations and earnings
A lack of adequate propane supply has been a major concern for many propane distributors. APU noted on its latest earnings call that this heating season represents “the most challenging supply period in many years.”
- “As we approached the end of December, we, along with the industry began to see some indications of tightening supply, rising wholesale prices and patchy logistics issues, particularly in the Mid-Continent region. The colder-than-average temperatures have persisted into the early part of the second (fiscal) quarter in most parts of the country, and the supply and logistics challenges, as well as the rising price environment had intensified.”
One issue that supply tightness has caused is volatility in propane prices, which can make it challenging to pass on price increases to customers (as we discussed in the prior article in this series). Plus, the supply shortage has obliged some companies to ration out propane supplies and hampered their ability to acquire new customers. The shortage has also affected operating costs.
Suburban Propane stated on its latest earnings call:
- “With the supply situation the way it is right now… we’re not as aggressive as we would normally be in bringing in new customers at this stage because we’re more focused on taking care of our existing customer base… Our field personnel are doing a wonderful job in rationing product where they have to, to make sure that we’re giving our customer base, as I mentioned, an acceptable level of service as we go through this difficult period of time… Now unfortunately, one also has to realize that when you get into that rationing mindset, your operating costs tend to drift a little higher. So that obviously will have a bit of an impact as we look back on the first six months of this fiscal year.”
Larger companies are better equipped to deal with supply shortages
From Market Realist’s perspective, the companies best equipped to deal with these issues are those with larger scale, such as AmeriGas, the largest propane distributor in the space. The company noted on its latest earnings call:
- “AmeriGas is experiencing supply issues just like everyone else in the industry. However, unlike many of our competitors, we have an internal fleet of over 360 transport trucks, over 350 railcars, and 28 propane terminals. Our operations and supply logistics groups have taken extraordinary measures to secure and delivery propane to our residential and commercial customers by repositioning these critical transportation and distribution assets into the areas most in need of propane. This is another area where can demonstrate the advantages of the large scale of our new AmeriGas. In addition, we have secured over 20 million gallons from non-traditional sources including the capture of export-bound product to help ensure our customers stay in fuel. Although cost rose quickly during the quarter and in fact continue to do so, margins were up slightly and in line with our expectations as we continue to actively manage costs in this challenging environment.”
The larger scale of a company like APU provides better buying and negotiating power, such as the ability to secure propane supplies that would have otherwise been bound for export markets.
To read about the important trends and data that investors will likely be watching, please continue to the next part of this series.
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