Seeking Alpha
Long/short equity, value, REITs, macro
Profile| Send Message|
( followers)  

In much the same way as natural gas prices have fallen in the last year, propane prices have fallen too, due largely to the unseasonably warm winter and spring of 2011-2012 in the US. Suburban Propane Partners LP (NYSE:SPH) has seen its stock price fall from $58.75 on January 26, 2011 to a low of $34.80 on June 4,2012 ( a 40.8% drop). It has rebounded a bit since then to a close of $39.61 on September 20, 2012 (still a 32.6% drop). The price of both natural gas and propane have relatively paralleled the stock move. Propane prices have fallen from near $1.62/gal. in mid 2011 to a low of $0.71/gal. in early June 2012. They have since risen as high as $0.99/gal., and they are currently at $0.89/gal. The trend does seem to be more likely upward at this point.

There are several factors that may help propane prices rise in the near future. First and foremost is the early forecast for an el Nino winter (colder than normal temperatures) for North America in 2012-2013. This should do a lot to pull down the excess stored propane levels. Lower stored propane levels should in turn tend to buoy propane prices. The likely concurrent moves in natural gas prices should help to further buoy propane prices, as propane can always be left in natural gas.

The recent QE actions of the Fed will tend to push commodities prices upward. If the "QE Infinity" pumpers have their way, this may be a lot. On top of the above two items (QE3 and el Nino), the long term outlook for propane prices looks promising. At least two companies, Enterprise Products Partners (NYSE:EPD) and Targa Resources Partners (NYSE:NGLS), have announced plans to expand propane export facilities. EPD's 3.5 million barrels per month expansion is scheduled to go online in Q4 2012. Targa Resources Partners has a new propane export expansion of 5,000+ barrels/hour (about 3.6 million barrels/month) due to go online in Q3 2013. NGLS is also expanding its fractionation capability. These projects should increase demand, which should lead to increased prices. Further they will have a positive psychological effect on the market if they are economically successful, which many think they will be. Occidental Petroleum (NYSE:OXY) recently purchased property near Corpus Christi, Texas from the local port authority. The company has announced plans to build a 75,000 barrels/day raw mix fractionator and export terminal at the location. Vitol subsidiary, Coastal Caverns, has announced interest in building an export facility. Probable export targets are South America, Central America, and Europe. After the Panama Canal expansion is completed (2014E), many expect Asian countries will become a large target market. When this happens, it will likely engender still more export expansions.

Longer term with the movement of US crackers away from naphtha to NGLs feedstocks such as ethane and propane, less propylene is being produced. In 2005 US crackers produced 13B lbs. of propylene. In 2012 crackers are expected to produce only 7.6B lbs. of propylene (down 5.4B lbs.). This has led to extremely tight supplies of propylene. This in turn has led to many companies planning new propane dehydrogenation (PDH) plants (propylene producing plants). As these plants come online they will spur demand for propane. EPD plans to build a 750,000 tonne/year PDH plant. It will process 35,000 bpd of propane. This is expected to begin production by Q3 2015.To put this in perspective, total US propane production is about 350,000 bpd of propane (June 2012). Dow Chemical company (NYSE:DOW) plans to build a 750,000 tonne/year plant at its Freeport complex in Texas. DOW plans to build yet another PDH plant at a site yet to be determined. Formosa Plastics plans to build a 600,000 tonne/year plant at its Point Comfort site in Texas. These plants will join the sole US PDH plant currently operating, PetroLogistic's 544,000 tonne/year plant. Others are interested; but many are scared of EPD, which has an outstanding track record and great access to propane. If these first entries to this market do well, others are sure to follow. These plants will increase the demand for propane as they come online in future years.

Suburban Propane Partners may not be supplying these factories. However, their extra demand for propane will tend to push propane prices upward, which should help SPH. The following chart from Bentek Energy (an NGLs market expert) shows how the oversupplied 2012 propane market is forecast to come more into balance in future years.

(click to enlarge)

If you look carefully, you can see that the oversupply of propane in 2012 is forecast to become under supply in both 2013 and 2014. This should buoy propane prices. SPH engages in retail marketing and distribution of propane, fuel oil, and refined fuels. It will do better with higher propane prices, if only due to higher sales volumes.

The above improvements in the propane market are bullish in themselves for SPH. However, SPH has also just acquired Inergy Propane LLC for approximately $1.8B. The combination of SPH and Inergy is expected to generate approximately $50 million in annual synergies once fully integrated. The combined companies are expected to have enhanced growth prospects, enhanced cash flows, and a greater distributable cash flow. The annualized distribution is expected to be increased to an annualized $3.50 (8.61%) per Common Unit beginning at the end of SPH's Q1 2013, which ends December 29. 2012. The Motley Fool calls SPH a classic value play engendered by an unseasonably warm winter in 2011-2012. Largely as a result of the acquisition of Inergy and the "undoing" of the unusually warm winter negative fundamental factors with a colder el Nino winter for 2012-2013, the average analysts' EPS growth estimate for 2013 is 301.40%. If growth even approximates this, the stock price should go up. The FPE of SPH is 14.67, which is quite reasonable for this great dividend payer. You have to love a big dividend payer with good stock price upside potential.

The two year chart of SPH provides some technical direction for this trade.

(click to enlarge)

The slow stochastic sub chart for SPH is near overbought levels. The main chart shows that SPH has been in a strong downtrend. SPH is giving strong signs that it will soon break out of this downtrend. SPH hit a low of $34.80 on June 4, 2012. It hit another higher low on August 9, 2012 at $36.85. This is often a sign of a bottom. When the fundamentals agree with a technical bottom signal, the odds of a significant up move are high. When the company also pays an 8.6% dividend, it is easier to buy into a bullish thesis. SPH is a buy. However, the overall market is overbought, and SPH is near overbought levels short term. This means the overall market is due for a retracement even in the face of the Fed "QE Infinity" that the pumping pundits are touting. Averaging in is a good strategy, but SPH is a buy.

Note: Some of the above fundamental fiscal data is from Yahoo Finance.

Good Luck Trading.

Source: Play A Propane Turnaround With 8.6% Dividend Payer Suburban Propane Partners