Ferrellgas Partners, L.P. (NYSE:FGP) and AmeriGas Partners, L.P. (NYSE:APU) are two of the largest propane distributors in the United States. A string of warm winters, however, has made delivery of this vital fuel a tough business -- which helps explain why these partnerships offer yields of more than 8%. Since the weather is transitory and propane isn't going away, though, it's time for income investors to get to know these propane players. Of the pair, most should favor AmeriGas. Here's why:
Tarnishing a great name
Ferrellgas has propane delivery operations that span almost the entire country. It's important to note that it doesn't get paid for the propane it delivers; it gets paid for delivering the fuel. That's a pretty steady business most of the time.
However, heating represents a significant portion of propane demand, and a string of warm winters has put a crimp in Ferrellgas' propane business.
When the company reported earnings in September, for example, CEO James Ferrell noted that "Weather for fiscal 2017 was a stunning 18% warmer than normal, and significantly affected our financial results." The partnership increased gallons sold, but only because of acquisitions it consummated during the year. Still, as far as the propane business goes, Ferrellgas has been holding its own through a tough stretch.
The problem here is the partnership's foray into the midstream oil and gas business. This diversification effort, in hindsight, has proven to be a disaster. Not only did Ferrellgas write down its investment in the space in fiscal 2016, pushing unitholder equity deep into negative territory, but Ferrellgas is still trying to pay down the debt it took on to complete the deal. To help in that effort it cut its distribution by a massive 80% after years of steady and reliable unitholder payments. Debt, however, has continued to move higher, ending fiscal 2017 up nearly 3%. The midstream business, meanwhile, is losing money.
There's nothing wrong with Ferrellgas' propane business. The problem is the struggling midstream operation and the debt overhang it's left behind. Ferrellgas is a special situation stock right now, in my eyes, making the 8.3% yield too risky for most investors even though there appears to be material upside potential in the units.
Sticking to its knitting
AmeriGas has operations in all 50 states and is the largest propane distributor in the country. In reality, however, it only offers slightly more scale, and a modestly larger footprint, than Ferrellgas. And, as you would expect, AmeriGas has faced the same weather headwinds that have affected Ferrellgas.
Recent results have been less than stellar, and even acquisitions haven't been enough to offset the decline in demand driven by warm weather, with fiscal third-quarter volumes off nearly 4% despite three acquisitions in that quarter.
But AmeriGas hasn't attempted to diversify into new areas -- it's remained focused on its propane business. And on rewarding shareholders for sticking around through the lean years. Its streak of annual increases is now up to 13 years (including 2017). The hike this year was just a penny a quarter, reflecting the difficult environment, but management is clearly showing its dedication to returning value to unitholders. If you are an income investor, AmeriGas' 8.2% yield comes with a lot less risk than Ferrellgas and its efforts to right itself after a bad investment.
That said, I don't want you to think there's no risk here. Delivering propane tends to be a fairly stable business, even though recent results have been hit by warm weather. That's led to a heavy reliance on debt in the industry to fund small but frequent acquisitions. Long-term debt makes up around 75% of AmeriGas's capital structure, and its debt to EBITDA ratio is a high 6. (Because of the unitholder deficit Ferrellgas' debt is more than 100% of its capital structure, and its debt to EBITDA ratio is over 10.)
Ultimately, AmeriGas is a highly leveraged partnership, but in an industry that makes extensive use of leverage. Really conservative investors looking to avoid debt would be better off with a midstream oil and gas partnership like Magellan Midstream Partners, L.P. (NYSE:MMP), where debt to EBITDA is just 3.4 times. The yield, at 5.2%, is a lot lower, but Magellan has a much stronger financial profile and better growth prospects.
If I had to choose
If you are looking at AmeriGas and Ferrellgas because of their high yields, I think AmeriGas is the clear winner. Warm weather is impacting both partnerships, but AmeriGas doesn't have to work itself back from a bad investment. That said, most investors would probably be better off avoiding the struggling propane space altogether, despite the fat yields that can be found. A midstream partnership like Magellan is a much safer option, even though it comes with a lower yield.