Propane distributors profit from lower propane prices

2013.03.04 - Propane PricesEnlarge Graph

  • Propane prices fell 2.5% last week from $0.87/gallon to $0.84/gallon, which was a positive short-term driver for propane distributors.
  • Lower prices are a positive for distributors of propane as lower prices are passed on to customers who consume more at lower prices.
  • From a longer-term perspective, propane prices have remained relatively low as a record amount of propane is being produced as a result of high levels of natural gas drilling, from which natural gas liquids (such as propane) are often produced.

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 March 1, propane prices at Mont Belvieu (a major hub for natural gas liquids such as propane) fell from $0.87/gallon to $0.84/gallon (or 2.5%). This is a short-term positive for propane distributors as prices fell, and distributors pass on the savings to customers who normally consume more at lower prices.

Last week propane prices dropped, which was a positive short-term catalyst. Additionally, investors should note that propane prices are also at relatively low levels given a medium-to-long term context as seen in the above graph. 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.

Again, last week’s drop in propane prices was positive, and prices have remained relatively low through the winter heating season. However, 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.