Propane prices have been rising since mid-June 2013, when they hit $0.81/gallon on June 20, 2013. As of January 10, 2014, they stood at $1.29/gallon. This has led to much better fractionation spreads for the refiners (see chart below).
This roughly 57% increase in the price of propane means more profits for many people in the propane business, especially the refiners as denoted by the chart above. A few of the fractionation companies that are seeing greater profits include: MarkWest Energy Partners LP (NYSE:MWE), Targa Resources Partners LP (NYSE:NGLS), DCP Midstream Partners LP (NYSE:DPM), and Enterprise Products Partners LP (NYSE:EPD). At least two of these companies have LPG (Liquefied Propane Gas) terminals in Texas from which they are exporting to Europe and other more expensively priced propane areas. The two companies are Targa Resources Partners LP and Enterprise Products Partners LP . Both have been profiting handsomely; and both are likely to continue to do so for many years into the future. More competition is expected to come online in late 2014 and afterwards; but there should be adequate demand for cheaper US propane from higher priced areas to soak up the products available through this extra shipping terminal capacity. The table below is a recent list of many of the existing and proposed new terminal facilities.
As readers can see Targa Resources Partners LP and Enterprise Product Partners LP are clearly in the lead in this area; and they will be the ones to benefit in 2014. Further EPD announced on October 2, 2013 that it would build a 6-6.5 million bbl/month LPG export terminal at an as yet to be determined site on the US Gulf Coast. It is projected to go into service in Q4 2015. Along with EPD's expansion project for its existing facility on the Houston Ship Channel, this project will give EPD aggregate capacity to load 15-16 million bbl/month of low-ethane propane and butane at its LPG terminals. On top of this EPD's ATEX 190,000 bpd pipeline from the Marcellus and Utica shale is projected to begin delivering ethane to the Gulf coast by Q1 2014. Many foreign customers have expressed interest in importing US ethane too; and EPD's large new terminal will have the capability to load ethane as well. EPD says the expansion is supported by contracts which extend into 2024.
The new LPG export demand is easy to see, Europeans, etc. want to buy much cheaper US propane. This is still in the ramp up phase. However, it is expected to peak soon, at least temporarily (see chart below).
This may mean that rapid growth in the companies involved may be limited after 2014-2015, at least in the near term.
What other things are driving propane demand? One thing has been the colder than normal winter we have been having. In fact it has been so cold in the last week that I have seen headlines like "Polar Vortex", which simply means the US has seen cold weather make its way down from the polar icecap. The Farmers' Almanac forecast a colder than normal winter, and so far that forecast is being exceeded. This could bode very well for propane prices in the US. Propane is used for heating, for lighting in fewer cases, and for appliances in some cases. With colder weather, more propane will be needed for heating. This should pressure prices upward at least through the winter of 2013-2014.
Another source of propane demand growth has been propane vehicle sales. These doubled in 2012 in the US from 5,000 to 10,000 according to ICF International. The lower price of propane per BTU relative to gasoline or diesel has spurred demand. There are now more than 270,000 vehicles nationwide that use propane (Department of Energy). Propane is now the third most popular fuel, behind gasoline and diesel. ICF International projects that by 2020 more than 40,000 propane powered vehicles will be sold per year in the US. A reason propane is more popular than natural gas at the current time is that the conversion cost is lower for a gasoline engine to a propane engine than for a gasoline engine to a natural gas engine. Until Detroit and others start actually making natural gas powered cars, we may continue to see propane be the alternative fuel of choice for many customers.
Another source of demand are the dehydrogenation plants that make propylene, etc. out of propane. For them propane is a feedstock. Only in their case higher propane costs are most likely negative for profits. Higher propane prices likely reduce margins that the dehydrogenation plants can make on their products. The table below lists a few of these. More are planned (see table below).
Petrologistics (NYSE:PDH) appears to currently be the main propane customer in the dehydrogenation business. However, it will soon have a lot of competition. Even with higher US prices the US propane prices are still likely to be significantly below European prices (and prices of many other areas). This means PDH should still find a good market and good profits for its products.
The graphs below from the EIA show the already lower than normal propane stocks in the US.
If the cold weather that the US has been experiencing continues, the price of propane could go up a lot by the March and April time frame. With the prediction for a colder than normal winter and the "Polar Vortex" currently, it seems likely that there will be severe drawdowns in propane stocks. In fact this last week (January 5-11, 2014) should see a significant blip downward in US propane stocks (in storage) due to the "Polar Vortex". This should mean continued good profits for the fractionation companies listed above (and many others).
The two-year charts of these companies provide some technical direction for a trade in these stocks.
The two-year chart of MarkWest Energy Partners LP is below:
The slow stochastic sub chart shows that MWE is overbought. The main chart shows that it is in a weakening uptrend. In fact the uptrend may soon become a downtrend. With a PE of 132.52 and an FPE of 41.48, MWE seems overpriced. There has even been a small amount of insider selling (1.2%) in the last six months. However, the average analysts' forecast for 2014 is for 153.10% EPS growth; but the next five years EPS growth per annum forecast is only 5.90%. The high growth in 2014 is probably real; but the sharp drop off after that probably means the stock is overpriced, and it may be better to wait for a better entry point. MWE pays a 5.1% annual dividend.
The two-year chart of Targa Resources Partners LP is below:
The slow stochastic sub chart shows that NGLS is near overbought levels. The main chart shows that it is in a weakening uptrend. In fact the uptrend may soon become a downtrend. With a PE of 83.20 and an FPE of 33.67, it seems overpriced. Yet there has been a small amount of insider buying (0.1%) in the last six months. The average analysts' forecast for 2014 is for 66.70% EPS growth; and the next five years EPS growth per annum forecast is for 30.30% growth. The high growth in 2014 is probably real; but it is likely hard to be sure the five-year number is real. With the higher long-term EPS growth estimate, NGLS is not as overpriced as MWE. However, it may still be wise to wait for a better entry point. NGLS does look like investors should keep it on their watch lists. NGLS pays a 5.7% dividend.
The two-year chart of DCP Midstream Partners LP is below:
The slow stochastic sub chart shows that DPM is overbought. The main chart shows that it has been moving sideways recently. When peers have been trending upward, DCM seems even more likely to turn downward in the near term with a sector downturn? With a PE of 23.75 and an FPE of 20.29, it does not seem as overpriced as the above stocks. There has been no insider buying; but DCM has seen good institutional buying at 17.26% from the previous quarter to the latest quarter. The average analysts' forecast for 2014 is for 33.20% EPS growth; and the next five years EPS growth per annum forecast is 19.00%. The high growth estimates and the relatively low PE and FPE multiples are a sign that DCM may be a good investment in this sector. The recent consolidation phase could be a springboard for an upward movement. However, the stock could move downward with its sector; and it may be better to wait for a better entry point. DPM pays a 5.8% annual dividend.
The two-year chart of Enterprise Products Partners LP is below:
The slow stochastic sub chart shows that EPD is neither overbought nor oversold. The main chart shows that it has been trending strongly upward. EPD may turn downward in the near term with a sector trend; but it should be much more resistant to a big downward movement. With a PE of 23.40 and an FPE of 21.60, it does not seem overpriced. There has been no insider buying; but EPD has seen a small amount of institutional buying at 1.31% from the previous quarter to the latest quarter. The average analysts' forecast for 2014 is for 6.40% EPS growth; and the next five years EPS growth per annum forecast is for 5.20% growth. The relatively low PE and FPE multiples (for its sector) are a sign that EPD may be investible; but the growth forecasts indicate that there is probably limited upside. It would probably be susceptible to a sector movement downward. After that, it would probably be a good buy. Investors may want to wait for a better entry point. EPD pays a 4.2% annual dividend.
In sum I would only consider that latter two stocks for investment at this time; and I would be very concerned about a sector move downward. Averaging in would be the only strategy that I would consider for even the latter two more reasonably priced stocks. I do like the long-term prospects of NGLS; and I would definitely keep it on my watch list. MWE has been a historically strong performer.
This article is only tended to be a review of the economic factors present in the sub-sector. If you wish to invest in any of these stocks, you should do further research. I mention only that EPD and MWE have been historically strong stocks. Of these two, EPD is much more reasonably priced at this time.
NOTE: Some of the fundamental fiscal data above is from Yahoo Finance.
Good Luck Trading.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in EPD, over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.