<

Which energy names might see better earnings from the polar vortex?

Which energy names might see better earnings from the polar vortex? (Part 1 of 2)

Must-know: Which MLPs are benefiting from the polar vortex?

Winter and propane demand

Cold winter weather is one of the major drivers of propane distributors’ earnings, 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.

2014.01.28 - HDD PropaneEnlarge Graph

Last week had colder-than-normal weather, a positive for propane companies such as AmeriGas Partners (APU), Ferrellgas Partners (FGP), and Suburban Propane Partners (SPH). The weather throughout the winter is an important factor for earnings.

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, while less heating degree days represent milder weather. Last week, the average U.S. heating degree day figure was 234 compared to the normal heating degree day figure of 208 for corresponding weeks past. The colder-than-normal weather over the past week implies stronger demand for propane over that period, which is positive for companies that distribute propane for heating use.

Note that for the winter heating season to date, cumulative heating degree days have totaled 2,484 compared to a historical average of 2,451, making for a colder-than-normal winter so far. This is a positive for propane demand.

Propane companies’ margins are affected by weather

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 Ferrellgas Partners and Suburban Propane for the past seven years of heating seasons.

2014.01.13-Weather-vs.-FGP-Margins1Enlarge Graph
2014.01.13-Weather-vs.-SPH-Margins1Enlarge Graph
 

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 seven years. For APU, the relationship has been less significant, though this may have been affected by other factors, such as acquisitions that AmeriGas has made. Overall, it seems for the general propane sector, weather and propane distributor margins are related. 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. This winter’s colder-than-normal weather so far has been a positive medium-term catalyst for propane names. Lastly, propane companies comprise a portion of the Yorkville High Income MLP ETF (YMLP), an ETF that tracks the Solactive High Income Index, which in turn tracks select MLPs as well as the Global X MLP ETF (MLPA).

For detailed analysis of propane names and winter weather, see the Market Realist series 8 trends that could affect propane names this winter.

The Realist Discussions