Lower propane prices positive for propane distributors
Propane distributors such as AmeriGas Partners (APU), Ferrellgas Partners (FGP), and Suburban Propane Partners (SPH) can see reduced demand from their customers when propane prices rise. This is because propane distributors generally pass on increases in the cost of propane to customers and when prices rise, customers try to conserve their use of propane. Therefore, propane prices are a key indicator to track for propane distributors as prices can ultimately affect earnings.
For the week ended February 22, propane prices at Mont Belvieu (a major hub for natural gas liquids such as propane) were flat at $0.88/gallon. This is a short-term neutral for propane distributors as prices were unchanged. However, when prices increase customers will demand less, therefore less propane is sold and profits are reduced. The inverse is also true that when prices decrease, customers will consume more, therefore more propane is sold and profits increase.
Last week propane prices were flat, however investors should note that propane prices are still at relatively low levels given a medium-to-long term context. The above graph shows propane prices over the past several years.
Propane had traditionally tracked crude oil directionally, which was one of the drivers for the run up in prices from early 2009 to late 2011. Last winter was particularly hard for propane distributors as a combination of high prices and warm weather squeezed margins. Since last winter, propane prices have fallen off significantly as a flurry of domestic oil and natural gas drilling has produced a surfeit of natural gas liquids (NGLs) such as propane. The increase in supply of some of these NGLs, such as ethane and propane, could not readily be absorbed by the market, which contributed to the price drop in propane. Additionally, as a consequence, the correlation between propane and crude oil has weakened somewhat.
The largest publicly traded propane distributor, AmeriGas (APU), noted on its fiscal 1Q13 earnings call on January 31, “There are several reasons for our fine performance this quarter. Among them are… the low-cost propane prices in the US which helped margins as well as the overall competitiveness of propane as a fuel.” Comments by APU’s management confirms that this winter season’s lower propane prices are a positive for the propane distributors.
While the current price environment is generally benign for propane distributors such as SPH, FGP, and APU, upward price movements could negatively affect earnings, especially a sudden and significant movement upward. Therefore, investors with propane stocks may want to monitor propane prices as they can be a significant indicator of earnings results. Propane companies also comprise a portion of the Alerian MLP ETF (AMLP), a capitalization-weighted ETF of 50 energy MLPs.
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