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What follows is a progress report on PetroLogistics (NYSE:PDH). My original article was dated October 12, 2012 and the basics stated therein need not be repeated here. New readers may want to refer to it. This report is presented in two parts: the first deals with fundamental developments as stated in the just released operating results for Q3 and the second deals with technical developments concerning the stock's price action. Operating results in Q3 were not very good. The price action of the stock was favorable from October 12 until today (October 25) when it reacted to the earnings announcement. The price is now 12.95, down from yesterday's close of 13.55. So, what do I do now?

Fundamentally, what was the problem in Q3?

The bottom line for Q3 is that the distribution to shareholders will be 21 cents, down from the stub of 26 cents paid in Q2 and far below the 45 cents that could have been distributed for all of Q2. The 21 cents distribution will be paid on November 14 to shareholders of record on November 5.

Sales revenues were $156 million, with propylene accounting for 96% of the total. Customer demand was weak at the start of the quarter but it recovered as the quarter progressed. Industry-wide propylene inventory levels in the region began increasing in June, reached a peak in August, and have declined steadily since then. That trend augurs well for propylene prices in the near-term future. Despite a generally weak demand environment the company operated at 88% of capacity versus 89% in Q2.

Propane is the company's only feedstock and it accounted for 72% of total production costs in Q3. The price of propane averaged 89.3 cents per gallon (down from 97.5 cents in Q2) and the benchmark price of polymer grade propylene was 51.3 cents per pound (down from 65.7 cents in Q2). As a result the propane-to-propylene spread was compressed at 25.9 cents per pound (down from 38 cents in Q2). However, there was some improvement in propylene pricing during September. Management expects that trend to continue and if propane prices remain at currently attractive levels there should be margin improvement in Q4.

According to a survey of five analysts who follow the company the average estimate for the Q3 distribution was 22 cents and the actual distribution declared was 21 cents (so collectively they had a pretty good fix on the company's operations). For Q4 those analysts are estimating 30 cents (with the high estimate being 38 cents and the low, 20 cents). For next year their average estimate is $1.46 with the high and low being $1.74 and $1.03, respectively. The wide disparity in their estimates is understandable given the volatile nature of commodity prices. And that volatility will be reflected in the quarterly distributions paid to shareholders which, of course, will vary from quarter to quarter. Information about the analysts' estimates is readily available on the finance section of Yahoo's website.

With the stock current price of $13.56, the average estimate of $1.46 for next year's distribution as referenced above indicates a dividend yield for the year ahead of 10.8%. The low estimate of $1.03 would indicate a dividend return of 7.5% and the high estimate of $1.74 would indicate 12.8%. A high quality MLP such Magellan Midstream Partners (NYSE:MMP) or Enterprise Products Partners (NYSE:EPD) has a stable dividend that grows steadily and it is considered a "bondable investment situation." PDH is clearly not in that category. MMP has a current dividend yield of 4.3% and EPD is 4.9%.

Investors who are seeking a steady flow of dividends may want to avoid this stock because of the volatile nature of commodity prices and the effects that such will have on the company's operating results. But more venturesome investors, especially traders and market technicians, who are willing to do the pick and shovel work involved in tracking the prices of propane and propylene to determine the company's profit margin on a real time basis and/or the price action on the stock's chart could decide that PDH is ideally suited to their style of investing. According to information available on the company's website) the formula for calculating PDH's propane-to-propylene spread is (PGP Contract Benchmark Price (cents per pound) minus 1.2*(Propane Price (cents per gallon)/4.2)). This calculation assumes that it takes approximately 1.2 pounds of propane to make 1.0 pounds of propylene and one gallon of propane weighs approximately 4.2 pounds. Information regarding commodity prices can be searched for on the internet.

Technically, what's going right with the stock?

Let's look at the chart I constructed from data in my workbook:

(click to enlarge)

The bold black line on top is price and the bold pink line below it is relative strength. (2) The dotted lines are moving averages and there is a set of those for price and a similar set for relative strength; they are used to define trends and reversals. (3) The five sets of gray parallel lines that frame the stock's price action are 22-day trading ranges and their progression shows how the trading range shifted during the 110 days charted. And (4) the four wavy blue lines that straddle relative strength are Bollinger Bands and they are used to detect overbought or oversold situations. Any one of the items listed as (2) to (4) is independent of the other two and could be considered as a valid technical indicator for making buy or sell decisions.

In the October 12 article (with the stock at 13.10) I concentrated on the stock's trading range and stated that "I bought a small position in PDH. If the price drops below $12.04 that will indicate that the trading range broke to the downside and I made a mistake; therefore I should (1) cut my losses short or (2) hold on and collect the dividend. But if it breaks $13.79 on the upside I made a good call because the trading range broke to the upside; therefore I should let my profits run while collecting the dividend."

In recent days PDH traded as high as 13.97 on an intra-day basis but its closing high was 13.77. Despite this morning's sell-off, it is still within the trading range parameters I referenced. I am still bullish on the company's fundamentals as set forth in my original article dated October 12. I am changing my recommendation to "speculative buy" from "qualified buy" (as stated in my original article) to signify that the stock is more suited to traders who have short-term goals than investors who have a buy and hold style of investing.

Since October 12 I bought stock as low as 12.82 and sold some as high as 13.85. Considering the amount of work involved and the risk taken I earned the profit I realized. The market is what it is so you have to deal with it on its own terms. To be successful as an investor you have to be willing to do a lot of work or be lucky. Thomas Edison said he found that "The harder he worked the luckier he got." That, I guess, is a harsh reality regarding the lives of us mortals who live on planet earth. Writing this article required a lot of pick and shovel work but there is some such work that I enjoy doing. I would have enjoyed writing it more if the message I had to convey contained better news. Life is a mystery to be lived and not a riddle to be solved. I can only deal with the mystery as it unfolds.

PDH is thinly traded so buyers and sellers should use "limit" not "market" orders. After the market opens, this stock is capable of making a wide price gyration that gets triggered by someone's market order when there are few bids or offers pending. From time to time I will enter a high-ball offer or a low-ball bid some 10-15 cents above or below the last trade to take advantage of a price gyration; they are unpredictable but do happen frequently. Afterwards, the price usually reverts to its pre-gyration level. Therefore, I caution buyers and sellers of the stock to use "limit" not "market" orders. It is probable that I will be placing some low-ball bids in the market in the days ahead.

Disclosure: I am long PDH. 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.

Source: A Progress Report On PetroLogistics