Image source: Ferrellgas Partners.
Ferrellgas Partners L.P. (FGP) is one of a handful of publicly traded limited partnerships that is focused on propane delivery. It's a slowly contracting industry, but the big partnerships have been able to grow just the same. And now Ferrellgas is branching out, too. But those are the backstops for just two of the reasons this partnership's units could soar. Here's a deeper dive into both, and another that's could change as quickly as... the weather.
1. Buy, buy, buy ... and buy some more
When it comes to fuel, propane is something of an afterthought. But it has a lot more uses than you might think. Sure, you cook burgers with it, but it's also used to power lifts in warehouses, dry crops, and provide heat in hard to reach locations, among other things. So there's actually a pretty solid underlying demand for the stuff. That said, alternatives have long eaten away at that demand in the U.S. market. So, at best, propane demand is stable to slowly falling.
That's why the industry, and Ferrellgas' success, has long been about acquisitions. For example, the partnership has bought over 200 companies since 1986. That's basically how it's built out a nationwide presence. Although most are small, Ferrellgas is large enough to take on bigger deals that could really change things on the top and bottom lines. So expect small deals to keep the propane business going, but watch, just in case, for a bigger one that could really push the envelope and attract investors' attention.
To give you an idea of the possibilities, competitor Suburban Propane (SPH 2.05%) basically doubled its size in one step back in 2012, when it bought Inergy's propane business. That said, it only just completed the integration process (it was a really big deal, after all), so 2016 will be the year to watch for Suburban in many ways. But to give you an example of what might be in store, the last three quarters of 2015 showed year-over-year growth in adjusted EBITDA.
There's no reason Ferrellgas couldn't do something like this in the still highly fragmented propane space. And since the top 10 players in the U.S. propane industry only control about 40% of the domestic market, there's still plenty of room for Ferrellgas, and its competitors, to keep making acquisitions from here.
2. Pipelines -- that's new
Now, historically, Ferrellgas has been a propane company, but that's changing. It recently bought a midstream company that serves the oil and natural gas sector. It was a big acquisition, too, because it now makes up about 25% of the business. But it's really just the foundation of a new growth platform.
This is important for two reasons. First, it shows that Ferrellgas can, indeed, do some large and interesting things on the acquisition front. Second, it means that the partnership isn't just a propane company anymore -- though that's how most investors continue to view it. Now, you might suggest that a bear market for oil isn't such a good time to be building a midstream business, but over the long term it might just turn out to be among the best times to pick good assets up on the cheap.
A whole new look at Ferrellgas. Image source: Ferrellgas Partners.
Assuming Ferrellgas can transfer its acquisition skills from propane to midstream, this new business could amp up growth prospects even if it looks like a potential drag today. That, in turn, would probably attract more investors to the name. It's worth noting that subsequent to adding the midstream business to the fold, Ferrellgas increased its distribution -- a first for the partnership. It wasn't a big bump, but if the increases keep coming, income investors will, eventually, take note. Who wouldn't want to own a nearly 12% distribution yield that's growing?
3. When it's cold outside
The last reason to expect Ferrellgas units to soar is more complicated: weather. Ferrellgas' revenues ebb and flow with the price of propane. But Ferrellgas makes money for delivering propane, so the company's bottom-line results are affected more by the weather, since heating is key to demand. A couple of warm winters have kept demand soft, and that's been a problem on the top and bottom lines. But low commodity prices have exacerbated the issue on the top line, even though that's not such a big deal for the partnership's bottom line. In fact, low fuel costs actually help stop customers from switching to alternatives. It's important to separate these things out.
Essentially, low commodity prices, despite the impact on revenues, are helping Ferrellgas' business. But the bottom line really needs a cold snap to boost the volume of propane Ferrellgas delivers. It's too late for this winter, but keep an eye on the weather report, because a bad winter next year could do wonders for Ferrellgas' bottom line. And it will be an even better opportunity if propane prices remain low. This odd juxtaposition is an opportunity for investors who have a grasp on what really drives Ferrellgas' propane business. The propane business looks rough right now, but it could change as quickly as, well, the weather.
A big jump in the cards?
Generally speaking, Ferrellgas has been a pretty boring, but reliable, partnership when it comes to distributions. At this point, however, it's big enough to start doing some interesting things as it continues to execute its acquisition-driven business model. But those acquisitions can now take place across two distinct businesses, both of which are out of favor right now. That means growth could come on the cheap. That said, it's important to realize that the propane side of things, still the vast majority of the business, isn't driven by commodity prices, which means a cold snap next winter could really do wonders for Ferrellgas' bottom line. Acquisitions, expansion of the midstream business, and cold weather could all lead investors to push this high-yielding LP's units higher.
