The Cold Weather Christmas Present For Ferrellgas Partners L.P. Has Arrived

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About: Ferrellgas Partners L.P (FGP)
by: Long Player
Summary

The Bridger acquisition went south resulting in a writeoff of more than $600 million. Organic growth will replace the business lost and hopefully enable the company to grow.

The president resigned and was replaced by the Chairman and founder as interim president.

James Ferrell, Interim President, Chairman and Founder had $10 million in savings ready for the first quarter conference call before his first 100 days were up.

Loan covenants were amended for a little more than a year to give the company time to recover from the loss of a major customer and all the side effects.

The distribution was cut from $.5125 per unit each quarter to $.10 with the cash saved going towards debt reduction.

Ferrellgas Partners L.P. (NYSE:FGP) has had a rough time. The company posted a large loss from an acquisition that went bad and then the main propane business endured the second warm Fall in a row. Fortunately, mother nature has now turned colder which will aid the company. So the challenge will be to use this cold weather to advantage and find enough cost savings plus organic growth to recover fully. A cold winter would give the company extra business, cash flow, and the time to stabilize the business. This would begin the recovery process needed to replace the loss of a major customer.

Source: Ferrellgas Bridger Acquisition Presentation June 1, 2015

This was the major acquisition that was a cause for celebration about a year ago, and has now caused major headaches for the company. The company never disclosed that one customer represented most of the profits and much of the value. Large acquisitions can bury a company when they go wrong and it nearly happened here. The acquisition was paid using debt. Now the debt must be repaid without much help from the acquisition. What is probably going to save the company is the acquisitions shown above before this one that were successful. For this company to survive the remaining business must grow to fill the void from the loss of a major customer.

Despite the long term contracts shown above, the situation rapidly deteriorated. So when the supply agreement was basically cancelled and the company looked to the guarantors to pay, they could not pay. Accounts receivable increased by the mounting unpaid bills. Much of the acquisition became worthless. The company took a $628 million writedown which turned the partners equity negative.

The president resigned (September 28 press release) in September and was replaced by the company founder and chairman of the board. The first step the new president has done is search the company for cost savings. He was in fact able to report $10 million in savings during the conference call for the fiscal first quarter.

Since James Ferrell, Interim CEO and Chairman owns several million units personally, and the general partner company employees own about another 20% or so of the company, all of the relevant parties (total about 30% ownership of units) are firmly aligned with the interests of the shareholders. They all want to recover the value lost from this acquisition gone bad.

That is going to be quite a challenge as the debt incurred in the acquisition still must be paid. This illustrates an excellent reason why acquisitions should always be relatively small. Then if something goes wrong, recovery is far easier.

Recently, the company showed it learned from this lesson. On June 15, 2016, the company announced the acquisition of Selph's Propane. That business nicely complements the existing business, is immediately accretive and fits the mold of a few hundred small acquisitions that the company made in its history. The partnership was always known for its retail propane business. It knows this business very well. So these kind of acquisitions are very likely to be very low risk.

As it was the Chairman outlined several key parts to the recovery. First, continue to find more cost savings. Second, organically grow the remaining business parts to recover as much cash flow lost as possible. Hopefully continue organically growing all business parts after that. Last, consolidate what is left of the acquisition and put the remaining parts to work.

For now, the Chairman is adamant that no assets will be sold to reduce debt. Instead the distribution was reduced to $.10 per unit each quarter. The saved cash flow will go towards rebuilding the balance sheet. James Ferrell was adamant that the company employees, especially him, would work themselves out of this predicament. He has a goal of restoring the company "in short order". My personal bet is this turnaround is going to be very brutal, disciplined, and effective. Probably in very short order also.

Founders, especially successful founders, tend to be driven people. Reviewing the phone call transcript reveals an urgency not seen in previous calls. This is probably due to the large amount of debt that must now be serviced by the remaining company. The previous president did not appear to see the problems cropping up that would result in the loss of a major customer. It is possible that had those trends been apparent earlier enough, the acquisition would not have been made or the price of the acquisition would have been far lower. That, possibility is now "water over the dam".

Still people like James Ferrell do not make idle promises as a general rule. They do what needs to be done no matter how much effort it takes. That $10 million savings in the first quarter is a good example of the difference between many CEO's and a driven founder. The other difference is the willingness to "roll up the sleeves and get to work". He admitted up front that he needed answers and that key officers were still in the process of summarizing the situation. But the brutal honestly exhibited in the conference call is pretty rare.

James Ferrell probably knows this company better than anyone else and can get far more done in less time than much of the staff. Two senior officers resigned not long after he became interim president and that may turn out to be additional cost savings. A very experienced founder needing less senior officers is not that unusual. In addition there is some personal pride and lots of motivation as a result to saving "his" company. Not only does he not want to be associated with failure, but he will fight far harder than most to avoid it. The urgency to "right the ship" comes across in the latest conference call.

This is definitely a speculative situation. The balance sheet is not in good shape and additional business is definitely needed. Cash flow from operations in the first quarter was actually higher at $54 million vs. $41 million due to some helpful changes in operating assets and liabilities. EBITDA was down due to the Jamex settlement which was related to the loss of a major Bridger customer. The company still has to collect more than $40 million from Jamex although they are current on all accounts as of the time of the conference call.

Partners deficit is huge, but if the remaining business can grow to replace the lost major customer, then there will be time to fix the partners deficit. It will probably take a few years to recover the losses. The key is to restore the cash flow so the lenders give the company time to fix the business. The acquisition made in June was probably a good accretive first start. It is another demonstration of the back to basics attitude.

But the company has been a mainstay in the propane business for years. Now mother nature appears to be coming to the aid of the company with some unusually cold weather. That is just what this company needs. Winter has a long way to go and there can be a lot of unpredictable changes. But a cold winter would give the company some breathing room. This is one CEO who would know what do to with that extra room too. In the meantime, expect him to plan how to grow the company out of this mess without any help from mother nature. So if the help arrives it will be icing on the cake.

But with a very experienced and successful founder back at the helm of a company that he is very familiar with, this stock could be a very good speculative buy on the recovery prospects. Often management is more valuable than anything on the balance sheet and that appears to be the case with this company. The company did have to amend its covenants to stay in compliance. But the projected savings from the reduced distributions plus some modest business growth could easily result in about $400 million in cash to reduce the debt outstanding each year. That is the kind of progress a lender would want to see on nearly $2 billion in outstanding debt. The two major propane season quarters will tell investors a lot about the future of this company.

Already, the company has the key ratio of debt to EBITDA down to approximately 5.8. Getting that ratio down to 5 would be aggressive, but this founder appears to be expecting to do more than that. The chairman himself has set a goal of 4.5 or less. Then there is the "short order" part, so it will be interesting to see how this plays out. If the short order part plays out the stock could be an easy triple from the current price levels back to its old price. People like a founder do not take kindly to losses and he lost millions. Plus he was alarmed at what this did to employee retirement accounts. That is not an attitude one hears very often in this day and age. But the losses also mean that the employees will be focused on restoring the company.

One of the things causing additional debt was the need to buy back units from Jamex and associated parties when key relationships were terminated. Jamex appears to have problems related to the decline of oil business activity. So there is a real concern that an additional $40 million or so of the note receivable could be written off. But that is "small potatoes" compared to the initial re-valuation of the acquisition. This writeoff if it happens, can be easily handled by the company even in its current condition. The accounting valuation charge has in many ways limited future possible damages.

Now if the company can put the idled assets to use in excess of the writedown assumptions, then there will be more cash flow. James Ferrell has already named a person to do just that and hopefully more. One of the comments on the conference call was that this should have been done sooner. Evidently the previous president was expecting a turnaround that never happened, so the idle assets piled up. There is still a significant amount of value remaining to the acquisition and a business that can grow in the future. Supposedly the division has now been reorganized and is on task to grow the business.

The propane business was level with the previous year in the first quarter despite a still warmer fall than the year before. Part of this shows the ability difference of the founder to control costs when compared to the previous president. A fair amount of this performance was due to lower fuel costs for the truck fleet. But overall, costs appear to be watched far more closely than they were. This is still more ancillary evidence that the Interim President, Chairman, and founder knows how to save the company.

Having worked with several company founders over the years, the value of their detailed knowledge of the companies they run has no equal. Many know the whole company no matter how large it is inside and out. Then there is the "driven to succeed" factor. I had worked for one who owned a company worth a little less than $1 billion. Both he and the president could come in the door, name all the top employees at the location, and check details of the operation. There was a world of difference between them and the typical corporate officers I worked for over the years. There was a phenomenal focus on results that is rarely seen in public companies not run by a founder. Plus the long term focus of founders is just unequaled. So my suspicion is that James Ferrell will right this company "in short order" in a way that few can imagine as well as keeping his promise to employees to look out for them. Shareholders at the current price level could be very well rewarded when he succeeds.

Disclaimer: I am not an investment advisor and this is not a recommendation to buy or sell a security. Investors are recommended to read all of the company's filings and press releases as well as do their own research to determine if the company fits their own investment objectives and risk portfolios.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within 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.