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At a time where investors are looking harder and harder for a decent yield on and investment, the sight of Ferrellgas Partners' (FGP) 10.1% yield seems almost too good to be true. After seeing so many other master limited partnership structured companies cut their payouts recently, it's perfectly natural to approach that yield with a dose of skepticism. If Ferrellgas' yield has piqued your interest, one great place to start your research is to check out the company's most recent results and conference call to see what management is thinking for the future. With that in mind, here are four of the most revealing quotes from Ferrellgas' most recent quarterly results and why they matter for the company's future.
Having a hard time beating the heat
In the propane business, the largest determining factor for a company's success is the weather. Residential and commercial heating is Ferrellgas' bread-and-butter business. Most of us experienced the warmer winter this past year but CEO Stephen Wambold put some numbers to it to make sure everyone knew haw bad it really was:
As many of you know and obviously felt, we continue to experience record temperatures across the country in our Q3. This is a trend we have experienced all year. Overall temperatures were 18% warmer than normal and 21% warmer than last year. In addition, continued pricing pressure in the commodities market, including crude oil prices, have persisted, driving down volumes and resulting in project delays and cancellations. Like many in our industry, we've been impacted by the confluence of these factors.
With such an increase in temperatures, it led to lower heating needs and lower propane volumes across Ferrellgas' markets. There were some commodity price fluctuations, but Ferrellgas' business as a distributor and retailer of propane means the company is slightly insulated from the full impact of commodity prices.
Spreading its wings
Last year, Ferrellgas made a pretty transformative acquisition by acquiring Bridger, a oil and gas midstream company that mostly focuses on truck and rail transport as well as storage terminals. This is the first time that Ferrellgas has branched away from the propane business, but it may not be the last. According to Wambold, the company is on the prowl to expand both businesses via acquisitions:
Cost control remains a top priority, but we're also focused on enhancing value for unitholders by driving profitable growth. To that end, we continue to examine both organic and external opportunities in both propane and midstream to accelerate growth and further diversify the company.
This could be a good move for the company as it makes it less of a season-dependent business. The way for it to work, though, is that management cannot overspend on acquisitions.
Righting the cash flow ship
The recent Bridger acquisition and the warm winter led to a pretty big hit to Ferrellgas Partners' cash flows. On a trailing-12-month basis, the company's distributable cash flow hasn't covered its payout. This is always a major red flag for MLP investors, but CFO Alan Heitmann wanted to reassure investors that this is a temporary thing:
We expect our DCF coverage to rebound to more than 1x by the end of 2016 as we continue to execute against our strategic plan. We remain confident that we have the initiatives in place to create value for all Ferrellgas unitholders.
Since the business is so seasonal, and results from the past couple quarters have generated excess cash flow, we can probably give Ferrellgas the benefit of the doubt for a quarter or two. If it can't improve those distribution metrics, though, then it may be time to consider other options.
Smoothing out results
The Bridger acquisition is one method in which Ferrellgas is diversifying and smoothing out its quarterly results, but the company is pulling other levers as well, such as the expansion of its retail propane sales through tank exchanges and branded sales such as Blue Rhino. According to Executive Vice President of Ferrellgas and President of Blue Rhino Tod Brown, results from these efforts are starting to pay off:
[T]he third fiscal quarter marks the beginning of the outdoor barbecue season and our selling season at Blue Rhino. That being said, the persistence of unfavorable weather across the United States, specifically cooler, wetter weather in the Northeast and the wetter weather pattern that persists in the Southwest, resulted in slightly lower volumes relative to the same period last year. We experienced a volume decline of just over 2%, but we note that overall volume versus prior year through the third quarter was relatively flat. Importantly, Blue Rhino's business model is focused on distributing propane across a variety of classes of trade and across all 50 states, which helps us to mitigate the impact of unfavorable conditions. This is underscored by our recent success in the grocery segment, where we have undertaken initiatives, including engaging in a number of customized shopper marketing programs to drive sales results. What we saw as a result of these programs was a nice uptick in our comp store sales growth in the grocery category during this past quarter.
If Ferrellgas can get larger contributions from these other markets, it will take some pressure off of the residential and commercial delivery business delivering the bulk of the company's results for the year in a little more than a quarter. That could go a long way in allowing the company to maintaining better cash flow metrics and even possibly lead to increasing distributions over time.
