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Why this winter has been positive for propane distributor MLPs

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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.

2014.01.21-Normal Winter vs. Winter 2013-2014, Weekly v2

Last week had warmer-than-normal weather, a negative 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

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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 169 compared to the normal heating degree day figure of 209 for corresponding weeks past. The milder-than-normal weather over the past week implies weaker demand for propane over that period, which is negative for companies that distribute propane for heating use. However, propane prices increased last week as the market traded on reports of upcoming cold weather.

Note that for the winter heating season to date, cumulative heating degree days have totaled 2,250 compared to a historical average of 2,243, 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 Margins2014.01.13-Weather vs. SPH Margins

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.

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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).

To learn more about natural gas prices and see how they affect agricultural stocks, see Did natural gas prices of $4.00 per MMBtu cause TNH’s recent fall?

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