Why winter weather is a key driver that will affect propane names
Weather is a major driver of propane distributors’ earnings
Cold winter weather is one of the major drivers of earnings for propane distributors, as the fuel is used for home heating in many areas in the U.S. As a result, cold weather is a positive indicator for propane distributors. Last week’s colder-than-average weather—and colder-than-normal weather for the past six or seven weeks—is a positive catalyst for propane companies, such as AmeriGas Partners (APU), Ferrellgas Partners (FGP), and Suburban Propane Partners (SPH).
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Heating degree days are one temperature indicator
Heating degree days measure how much colder the outside temperature is compared to room temperature. Greater heating degree days represent colder weather. Last week, the average U.S. heating degree day figure was 114 compared to the normal heating degree day figure of 102 for corresponding weeks past. The colder weather over the past week implies stronger demand for propane, which is positive for companies that distribute propane for heating use.
Weather was slightly colder than normal this week
The top graph displays heating degree days so far this winter compared to normal heating degree days. As we’ve seen, this week’s figure was 109 compared to the average of 105—which is a slight positive for the week.
Colder weather is positive for the margins of propane distributors, such as APU, SPH, and FGP. The below graphs display the correlation between heating degree days and EBITDA (earnings before interest, tax, depreciation, and amortization) margins for APU, FGP, and SPH for the past six years of heating seasons.
Note: EBITDA margins for companies are for the full fiscal year—not only the heating season. Propane companies generate the greatest proportion of EBITDA during the heating season.
As shown above, the relationship between weather and EBITDA margins for FGP and SPH appears significant over the past six years. For APU, the relationship is less significant. However, it seems for the general propane sector, weather and propane distributor margins have a relationship. Also, the Energy Information Administration (the EIA), a government agency, notes, “Propane supply and demand is subject to changes in domestic production, weather, and inventory levels, among other factors.”
So weather fluctuations are a notable data point for holders of propane companies, such as FGP, SPH, and APU. The past several weeks of colder-than-normal weather were a positive medium-term catalyst for propane names. Plus, propane companies comprise a portion of the Yorkville High Income MLP ETF, an ETF that tracks the Solactive High Income Index, which in turn tracks select MLPs.