Upside risk to propane prices could hurt distributors next season and beyond
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- Expanding propane export capacity and additional petchem facilities could put upward pressure on propane prices.
- Propane distributors perform better in low propane price environments as higher costs are passed on to consumers, and higher propane prices could result in demand destruction.
Propane prices have been relatively low since mid-2012, as an influx of supply has come on due to the shale boom (for more on this please see “High propane inventories weigh on propane prices, positive for propane distributors”). Currently, propane at the natural gas liquids hub at Mont Belvieu, TX trades at ~$0.94/gallon, compared to levels of $1.20-1.70/gallon through 2011 and the first part of 2012. Propane distributors, such as AmeriGas Partners (APU), Ferrellgas Partners (FGP), and Suburban Propane (SPH) benefit from low propane prices and suffer when propane prices increase. This is because propane distributors generally pass on commodity price increases to consumers while taking a relatively fixed margin from their costs. When propane prices increase, customer demand (ie. volumes) decrease, reducing earnings for distributors.
While APU, FGP, and SPH benefitted from relatively low propane prices this past winter heating season, several factors indicate that propane prices will escalate over the next several years, which would result in a long-term negative for distributors.
Firstly, while propane export capacity is currently a bottleneck, export capacity is expected to grow. Earlier this year, Enterprise Products Partners (EPD) expanded its terminal capacity by an additional 120,000 barrels per day, and Targa Resources (NGLS) announced that it would build an additional 150,000 barrels per day of capacity with phase one going into operation in 3Q13 and phase two going into operation in 3Q14. Additionally Sunoco Logistics Partners (SXL) announced in September of last year that its Mariner East project would enhance propane export capabilities at its Marcus Hook facility in eastern Pennsylvania. Vitol also announced in February of this year a joint venture to develop an LPG (liquefied petroleum gas) export terminal in Texas with capacity of up to 100,000 barrels per day to come online in 2015. Propane exports are being fueled by wide differentials between domestic propane prices and international propane prices. US propane traded at around ~$1.00/gallon differential to prices in Europe, that is, roughly half price.
As a result of increased propane exports, there is upside risk to propane prices over the next few years, which could hurt propane distributors. APU, FGP, and SPH all had disastrous earnings for the 2011-2012 winter when hit with the double whammy of both high propane prices and abnormally warm weather. Propane distributors could suffer again if propane prices see a spike, especially if combined with unseasonably balmy temperatures. Therefore, medium-to-long term upside risk to propane prices is a negative driver for APU, FGP, and SPH. ETFs containing these names include the Yorkville High Income MLP (YMLP) and the Global X MLP ETF (MLPA).