The news for propane has not been very kind as of late. With an unseasonably mild winter in the United States, companies like AmeriGas Partners LP (APU) and Inergy LP (NRGY) have been hammered. APU announced Q1 earnings on January 25, of $.55 per share - down 43% from the same period a year ago. For a picture of what that looks like in actual dollars the company earned $74.9 million during that same period last year - this year it was $42.5 million. Inergy did not fair much better when on January 27, its shares fell 24% to close at their lowest level since the company went public back in 2001.
Propane companies make much of their profit in the colder winter months when demand for the fuel is higher. The propane market is sustained by demand in the Midwest (36% of all households) and the South (34% of all households), where many households rely on the fuel rather than Natural Gas, Electricity or Heating Oil for their warmth. However, with an unseasonably warm winter the normal demand has just not been there. Although we went into the Winter with relatively low propane inventories (according to the U.S. EIA Winter Fuels Conference) those inventories have not really been depleted as we enter February, due to the warmer-than-predicted temperatures (the U.S. EIA predicted a Winter that would be 2% warmer than last year and built that into its assumptions). The U.S. EIA uses NOAA's definition of "Winter," which is December -February. Unless we experience a significant, rapid and sustained drop in temperatures, and assuming that deliveries will be able to be made if such an event occurs, it looks like a terrible year for propane is all but a certainty.
So with the smell of smoke how does one head for the exits and make something on the way out? Ferrellgas Partners LP (FGP) distributes propane and equipment to roughly one million customers ranging from residential, agricultural and commercial throughout all 50 states, D.C., and Puerto Rico. The company spent the second-half of 2011 buying up smaller outfits - in July FGP purchased Williams Panhandle Propane, in September the company purchased Economy Propane, Inc., in October it purchased Federal Petroleum and in November it bought Polar Gas Company and Welch Propane. Most recently, January 5, Ferrellgas announced that it had acquired Grande Valley Gas Inc. of Texas. With the spending spree that the company has been on it has increased its Debt to EBITDA ratio to an alarming 6:1. Twelve days after its acquisition of Grande Valley Gas Inc. FGP announced it had laid off about 30 people (10% of its corporate workforce) from its Kansas City HQ. The company claimed it was "painful to see good people go" but that it had "identified ways to do things more efficiently." One has to question the reasoning of "efficiency" here. The unintended message being sent to the market by eliminating 30 positions in the name of efficiency is one that begs the question - is the company in such a state of panic that it is looking for cost savings anywhere it can?
By the close of the market on Friday (Jan. 27) the stock was off a touch over 5% while the larger energy sector was off 0.37%. Additionally, last week saw much higher than usual trading volumes in the stock. FGP has a 3-month average volume of 264,660 shares per day, in comparison the past 10 days have seen average volume shoot to 539,062 shares per day.
The play that I like most here is going short FGP. The company announces its next quarterly earnings on March 5, and considering that we are entering the month of February and temperatures are forecast to remain relatively warm in the regions that predominantly rely on propane for heating, coupled with FGPs frightening income statement, recent spending spree, and the trouble its better capitalized competitors are having, selling the stock short definitely warrants some consideration. There is still time to position on this one as the company moves closer to its next quarterly earnings report - and by the looks of things it is not going to be pretty.