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Summary

  • UPS is now a potential customer for propane suppliers like Ferrellgas and AmeriGas Partners.
  • The company's decision could convince other fleet operators to switch to propane, opening up new markets for companies like Suburban Propane Partners.
  • The TTM revenues of propane suppliers already exhibited growth before UPS announced its use of propane.

Back in March, UPS (UPS) made a game-changing move that could upset the alternative fuel landscape. The delivery giant decided to spend $70 million to purchase 1,000 propane-powered delivery trucks from Daimler AB (OTCPK:DDAIY).

This move is a game changer because it increases the credibility of propane, or liquid petroleum gas (LPG), as a vehicle fuel. Having a company as big and as visible as UPS using propane-powered vehicles demonstrates that propane can be used for something besides heating and barbecuing. Previously, the biggest users of propane-powered vehicles included Schwann's, the frozen food delivery service, which operates 5,500 LPG-powered trucks.

It also will make it easier for propane suppliers like AmeriGas Partners (NYSE:APU), Suburban Propane Partners (NYSE:SPH) and Ferrellgas Partners (NYSE:FGP) to promote the use of propane as a vehicle fuel to government and business customers.

All three of these companies currently supply what is known as fleet autogas or liquefied petroleum gas to power fleet vehicles. Their autogas efforts include:

  • Ferrell Gas provides the fuel for Schwann's delivery trucks.
  • Suburban Propane Partners lists fleet autogas among the commerical services it offers on its website.
  • AmeriGas' website lists specific programs to provide LPG for government motor pools, commercial vehicle fleets, transit buses and the taxicab and limousine industry.

Each propane-powered UPS truck will be a rolling advertisement for propane-fueled vehicles. Even if UPS does not buy propane directly from those companies, it could increase the potential market for fleet autogas.

Propane Is a Cheap Fuel

UPS is interested in propane as a vehicle fuel because it is clean-burning and cheaper than gasoline or diesel fuel, Bloomberg reported. The latest available information from the Energy Information Agency (EIA) showed that the wholesale price for a gallon of propane in the United States on March 17, 2014, ranged from $1.29 to $1.63 depending on the state.

Propane is also readily available in rural areas and other locations where natural gas is not. There is a propane dealer in almost every small town in the United States, which makes it possible to fill the tank there. Ferrellgas alone has dealerships in all 50 states.

Obviously, the UPS move could convince other large fleet operators to switch to propane-fueled vehicles, which would give propane suppliers a new source of revenue. Reuters reported that this is already happening. The school system in Cleveland has started buying propane-powered buses. Cleveland's Municipal School District decided to go with propane because refueling systems for propane buses are cheaper than those for natural gas-burning buses.

Impressive Revenue Growth in Propane

Propane's growing use by fleet operators gives propane suppliers a new revenue stream at a time when their revenue is already going up and up. AmeriGas Partners' TTM revenue has increased by nearly $2 billion since March 2012. In March 2012 AmeriGas reported a TTM revenue figure of $2.77 billion; it rose to $3.13 billion in March 2013 and $3.65 billion in March 2014. Ferrellsas' TTM revenue rose from $1.96 billion in April 2013 to $2.35 billion after a drop from $2.447 billion in April 2012. Suburban Propane Partners showed the most impressive TTM revenue growth - its number grew from $1.056 billion in March 2012 to $1.57 billion in March 2013 to $1.93 billion in March 2014.

The propane suppliers are displaying impressive revenue growth without the effect of the UPS propane fleet on the market. To be fair, some of that revenue growth is due to the cold winter, which drove up demand and propane prices. Some observers noted that propane prices increased by 37% in some markets in January.

The propane prices increased dramatically because the gas is widely used as a heating fuel in rural regions of the United States. In some parts of the U.S., such as Colorado, propane is the principal heating fuel in areas without natural gas.

That makes the propane market inherently unstable and vulnerable to the weather. Yet it also shows how vehicle fuel could provide propane suppliers with a steady revenue source. Vehicles run all year round and need fuel even if the weather is warm.

Adding vehicle fleets as customers will not only increase the propane suppliers' market, it will give them a steady, year-round revenue stream. That makes these low-priced stocks even more interesting as a valuable investment.

Source: Propane-Powered UPS Delivery Trucks Could Give A Boost To Propane Suppliers

Additional disclosure: I am long Chesapeake Energy (NYSE:CHK) and Royal Dutch Shell (NYSE:RDS.A) (NYSE:RDS.B), two companies that produce propane.