Propane inventories are one indicator of supply and demand dynamics as they represent how much propane is in storage in various facilities across the US. More propane in storage represents a dynamic of either greater supply or lesser demand and less propane in storage represents a dynamic of either lesser supply or greater demand. Higher inventories can put downward pressure on propane prices, which is a positive for propane distributors such as AmeriGas Partners (APU), Suburban Propane Partners (SPH), and Ferrellgas Partners (FGP). Additionally, propane names can be found in the Alerian MLP ETF (AMLP).
Current propane inventories are at historic highs for this point in the season as seen in the below graph. Inventories tend to drop in the winter months as a large amount of propane is used for home heating, much of which is provided by the companies mentioned above.
The increase in inventories is largely due to an increase in propane production which has risen significantly over the past two years as seen in the chart below.
Most of the rise in propane production is a result of rapid acceleration of drilling activity in the US focused on shales which have a high natural gas liquids content (natural gas liquids are a group of hydrocarbons which includes propane). As a result of increased supply, propane inventories have risen to seasonal records which has put downward pressure on prices.
The above chart shows propane prices over the past several years, and propane prices have slid nearly 50% since 2011 highs. These high propane inventories and low propane prices are a positive for propane distributors as they generally sell propane at cost plus a margin to their customers. Customers tend to buy more propane when it is cheaper, therefore, the distributors sell more volume at lower prices and generate more earnings.
Currently, several companies are working on projects to expand propane export capacity, which could result in inventories being depleted and higher propane prices. These projects are scheduled to come online over the next several years. Holders of propane distributor stocks such as APU, FGP, and SPH may find it informative to track levels of propane inventories as a spike in propane prices would likely hurt earnings and valuation. However, altogether the current propane inventory and price environment is a positive for these companies.