The brutally cold weather of the last several weeks might not have given you the warm and fuzzies inside, but it was exactly what propane distributors needed. Especially Ferrellgas Partners (FGP).
It struggled in 2016 and 2017, with its midstream business hemorrhaging cash and its prized propane business sidelined by unusually warm winter weather. It may have encountered an existential crisis if forced to endure similar headwinds in 2018. But the recent arctic blast promises to deliver a shot of adrenaline into the company's turnaround campaign.
Does the near certainty of a solid performance in the current quarter make Ferrellgas Partners a buy in 2018?
A strong start for propane
You probably don't need any reminders of how cold it's been lately, but laws were suspended in some states so propane trucks could make deliveries in recent weeks. That's how cold it was. Making matters worse, Uncle Sam's run-in with sub-zero weather occurred after propane prices began creeping up and national inventory falling. Expect both trends to have worsened after the cold spells are reflected in the data.
Residential propane prices were 11% higher on the first day of 2018 compared to one year ago according to data from the EIA. Wholesale prices were 30% higher, and the nation's inventory 19% lower in the same comparison periods.
When it comes to distributing propane, volumes, not prices, are king. That's because propane prices are usually relatively stable, even during cold winter months, since companies purchase their stocks during the summer months. That said, Ferrellgas Partners should achieve one its best winters in several years in terms of both volume and prices when it releases fiscal second-quarter 2018 (the period from the first day of November to the end of January) results sometime in April.
The strong start to the year for propane is exactly what the company needed, but it's likely not enough on its own to erase two years of misery. Luckily, the midstream business could be on the cusp of riding a wave of momentum.
One of the leading reasons Ferrellgas Partners decided to jump into midstream operations was the fact that crude oil transportation was relatively insulated from seasonality, unlike the propane business. Whether it's January or June, major oil-producing regions are still pumping dinosaur sauce out of the ground, and the company would be there to haul it to its next destination.
While that's all true, collapsing crude oil prices and the loss of a key customer made the logistics business a lot more difficult. But with energy prices at multi-year highs and American crude oil production expected to hit record highs this year, that could change in 2018.
The company showed some minor signs of improvement during its fiscal first-quarter 2018 (the period up to the end of October 2017). The midstream segment posted a 12% bump in revenue compared to the year-ago period, thanks to an 8% year-over-year increase in short haul delivery volumes. By focusing on higher value routes, Ferrellgas Partners improved the gross profit in its crude oil and other logistics sub-segment from just 34% in the first quarter of 2017 to 63% in the most recent quarter. Not bad.
The midstream business could improve significantly in the months and year ahead on crude oil prices' near-term highs, matching levels last seen in 2015. Ironically, that was also the last time the company seemed to have its head firmly above water.
I have to admit that Ferrellgas Partners' prospects became much rosier in the last month after I last wrote about it. Nonetheless, the prior CEO dug a pretty big hole -- and he was digging for over two years. That won't be rectified in a single quarter, not even if fiscal second-quarter 2018 delivers surprisingly good results, although it could hint that the propane leader is finally regaining its footing.
Given that, I would still sit on the sidelines with this stock. The next update from management will be key to gauging how Ferrellgas Partners will fare in 2018 and just how much more work is needed to reach its balance sheet and cash flow goals.