The extremely cold weather thus far this winter has had customers scrambling for short supplies of natural gas, fuel oil, and propane. Last week the Energy Information Administration (EIA) reported that propane and heating oil fuels hit record US average prices for the week. Propane prices have skyrocketed to $4.01 per gallon, while heating oil reached $4.18/gal. 


The culprit is low propane stocks, but as you may guess from the graph there are some broader changes underway in the propane markets. A year ago propane supplies were in good shape, above the five-year average. But this year a combination of a wet corn crop that required unusually large volumes of propane for drying, cold weather and robust exports have resulted in a perfect storm. Since mid-December propane stocks have been below the bottom of the five-year range, and falling fast.

This has led to some questions about whether this may signal an opportunity for MLPs that specialize in propane. There are four that I will highlight, but first a word of caution. The surge in propane prices is temporary. Propane prices will decline as soon as the extraordinary weather-related demand eases up, so there won’t be a long-lasting impact. Further, it isn’t a given that everyone along the propane supply chain will benefit from higher prices.

Having said that, the propane market itself is shifting in a way I expect the natural gas market to shift in coming years. New propane supplies have certainly come online with the surge of natural gas production in the US, but that is starting to be impacted by exports of propane and propylene (which is made from propane) that are now reaching record levels.

The four propane-focused MLPs are AmeriGas Partners (NYSE: APU), Suburban Propane Partners (NYSE: SPH), NGL Energy Partners (NYSE: NGL), and Ferrellgas Partners (NYSE: FGP).

AmeriGas is the country’s largest retail propane marketer, serving some 2.3 million customers in all 50 states from approximately 2,100 distribution locations. In addition to distributing propane, the partnership sells, installs and services propane heaters and other related appliances.

Suburban Propane markets and distributes propane, fuel oil and refined fuels, and also markets natural gas and electricity in deregulated markets. The partnership serves approximately 750,000 residential and commercial customers through some 300 locations in 30 states (primarily on the east and west coasts).

NGL Energy Partners operates in three segments: retail propane; wholesale supply and marketing; and midstream. The retail propane business sells propane to end users, while the wholesale supply and marketing business supplies propane and other natural gas liquids (NGLs) and provides related storage. The midstream business takes delivery of propane from pipelines or trucks at propane terminals and transfers the fuel to third-party transport trucks.

Ferrellgas Partners distributes propane and related equipment and supplies to approximately one million residential, industrial/commercial, portable tank exchange, agricultural, wholesale and other customers in all 50 states, the District of Columbia and Puerto Rico. Its propane distribution business consists of transporting propane purchased from third parties to propane distribution locations and then to customers’ premises or to portable propane tanks delivered to nationwide and local retailers.

Over the past 12 months the group has had mixed results. Unit prices appreciated less than 10 percent for APU and SPH, while FGP and NGL gained 30.3 percent and 36.9 percent respectively. The latter two have also surged since mid-December, while APU and SPH have actually declined slightly since then.

Because NGL Energy Partners is involved in more of the supply chain than the others, it stands to capture more of the value from surging propane prices. Its midstream business is well-positioned to benefit from growing propane exports. But, as a result NGL unit prices trade at a premium to its competitors:

Keep in mind that skyrocketing propane prices don’t necessarily benefit everyone in the supply chain. Remember, the reason prices are rising is that propane is currently in short supply. A propane marketer/distributor that can’t get enough product to sell may enjoy high margins, but the sale volumes may prove insufficient to provide a significant earnings boost.

Nevertheless, a longer-term opportunity is developing in the propane market, even though propane distributors aren’t ideally positioned to benefit from growing propane exports. Rather look to propane producers and partnerships that provide propane logistics services to be the primary beneficiaries in the years ahead. NGL Energy Partners is the one partnership of the four highlighted that comes closest to fitting that description, and unsurprisingly it has had the largest price appreciation over the past year.

(Follow Robert Rapier on Twitter, LinkedIn, or Facebook.)

Portfolio Update

Cold Comfort for Alliance

Alliance Holdings (Nasdaq: AHGP) reported strong results Jan. 28 thanks to the performance of its operating affiliate Alliance Resource Partners (Nasdaq: ARLP). ARLP’s increased production volumes and diminished costs helped it to an 18 percent gain in EBITDA for the year.

“The coal industry continues to face challenges as coal stockpiles are above normal,” CEO Joseph Craft said on the Jan. 28 conference call. But he noted that the cold winter has spurred power demand and spiked natural gas prices, predicting that these factors “will reduce the inventory overhang sooner than expected.”

Management is counting on steady coal prices and lower costs to drive ARLP’s EBITDA to a range of $660 million to $760 million this year. The midpoint would represent a 3.5 percent increase from 2013. But that includes a drain of $30 million or so for investment in a new highly efficient mine that’s expected to become accretive to cash flow sometime next year. The coal industry’s low-cost producer, Alliance enjoys additional downside protection from the fact that 87 percent of its expected 2014 production is already been committed and priced.

Investors liked what they heard enough to bid up the unit price 15 percent over the next three sessions to a three-month high (though spiking natgas prices surely helped, since natgas is coal’s primary competitor as power plant fuel.) Coincidentally, we’re back in the black on this July pick.

AHGP declared a quarterly cash distribution of 82.75 cents per unit, for an annualized payout of $3.31 per unit. This represents an 11.8 percent increase over the distribution for the fourth quarter of 2012. At the Jan. 30 closing price of $61.46, AHGP offered an annualized yield of 5.4 percent based on the latest payout.

ARLP’s balance sheet remains solid with debt-to-EBITDA at 1.27 times, liquidity at approximately $519.4 million, and a healthy distribution coverage ratio of 1.59. AHGP’s receipts from ARLP, the sole source of its distributions, increased 2.4 percent from the prior quarter, and this year’s payout to unitholders should  extend the streak of double-digit gains even as ARLP completes its investment in the new low-cost mine. The improving economy and firmer natural gas prices promise additional upside. Buy AHGP below $68.

— Thomas Scarlett

Stock Talk

We encourage you to engage with our analysts and your fellow subscribers on our website. To ask a question or post a comment related to a particular article, please do so in the Stock Talk field at the bottom of that article.

Or, to ask a general question, please go to the main Stock Talk page found under the Resources menu for each publication.