After such a tough 2016, Suburban Propane Partners (NYSE:SPH) investors hoped that this year would be better. Now that the winter months are over and the company's fiscal second-quarter results are in, it looks like 2017 could be even more challenging for the home heating fuel supplier.
Let's take a look at Suburban's most recent results, why 2017 is shaping up to be such a bad year for the company, and why its sky-high distribution could be in trouble.
By the numbers
|Metric||Q2 2017||Q1 2017||Q2 2016|
|Revenue||$450.6 million||$317.3 million||$404.1 million|
|Operating income||$102.8 million||$53.5 million||$111.2 million|
|Net income||$83.1 million||$34.5 million||$92.0 million|
|Earnings per share||$1.36||$0.57||$1.51|
One of the quick and dirty ways to gauge whether Suburban Propane will have a good quarter or not is to watch the weather. If it stays cold throughout the winter months, then chances are the company will do well. Well, this winter was another tough one, and that showed in the results. According to the National Oceanic and Atmospheric Administration, the average temperatures across all of Suburban Propane's markets in the fiscal second quarter were 15% higher than average and 2% warmer than the prior year. Let's remember that the previous year was a devastating winter for home heating businesses.
Suburban's retail propane fuel sales declined 4.8% compared to the last years' quarter. Revenue was higher because the average selling price for propane was higher, but supply costs increased just as much for the company and offset any revenue gains.
What was the most surprising about this recent earnings release was that Suburban's management elected to maintain its distribution rate of $0.855 per share. It may look like the company can cover that payment for this particular quarter, but you have to keep in mind that the home heating business is highly seasonal and the company needs to generate extra cash in the winter months to pay distributions in the off-season.
In the fiscal year 2016, Suburban didn't generate enough cash to cover all its distribution payments -- its distribution coverage ratio for 2016 was 0.6 -- and had to dip into its cash on hand to keep its payout afloat. That isn't an option this year because it burned through too much cash in 2016. So if this past winter was even worse than the prior one, it's hard to see how the company will come up with enough cash to cover its payout.
Management has made a couple of moves to help that cash situation. It has cut some costs, refinanced one of its loans at a lower rate, and negotiated a higher leverage ratio covenant on its short-term borrowings. These moves can help improve cash flow a little, but they don't look to be enough to cover the upcoming cash shortfall.
What management had to say
CEO Michael Stivala commented on the challenging weather conditions over the past couple years and how Suburban is dealing with the situation:
The propane industry as a whole has just endured an unprecedented stretch of back-to-back record warm winters. The fiscal 2017 heating season was a bit more challenging than the prior year, with four out of six months reported as record warm, and two separate three-week stretches of cold weather toward the end of each of the first and second quarters. Nonetheless, we are proud of the way our operating personnel managed through the challenges presented by this sustained warm weather trend. We remain focused on the things we can control – delivering exceptional customer satisfaction in every market we serve, driving further operating efficiencies, controlling costs and capital spending levels, managing margins in a challenging commodity price environment and executing on our customer base growth and retention initiatives. During the short bursts of cold weather that did arrive, our volumes and earnings responded as expected, which is a testament to the strength and readiness of our platform.
What a Fool believes
It's hard to see any possibility where Suburban can maintain its current distribution. The only likely path I can foresee where it keeps its payout is if smaller players in the home heating sector go out of business and Suburban can expand its operating footprint for pennies on the dollar. There is no guarantee that will happen, though, so investing based on that thesis is highly risky.
Today, shares of Suburban Propane Partners have a distribution yield of 14.4%. That's the equivalent of Wall Street screaming, "Cut your payout before you get in financial trouble" to Suburban's management. If I were a betting man, I would say a distribution cut is imminent. Until that happens, investors should stay away from Suburban Propane Partners' stock.