In the final week of February, leading national propane distributor Ferrellgas Partners LP (NYSE:FGP) announced that it sold a portion of its tank railcar assets held by a subsidiary in its midstream business. The gross proceeds, totaling approximately $47 million, will be used to reduce the amount of debt on a secured credit facility.
While management lauded the transaction as a "clear example of [our] commitment to debt reduction," Mr. Market didn't seem particularly impressed. I don't think investors should view it as a positive development, either. After all, the company will be taking a non-cash impairment charge of $35 million in the current quarter to reflect the loss of fair value on the tanker cars involved in the sale, which was one of the poor acquisitions made in years past in an attempt to build out operations in midstream activities.
Rather, I think the only thing the asset sale makes clear is just how much Ferrellgas Partners LP is struggling from past blunders -- and a massive debt load.
A position of weakness
The company's current nightmare began years ago. The former management team dug a huge hole by adding nearly $1 billion in debt to the balance sheet with an ill-timed foray into midstream oil and gas operations. Unfortunately, the core business (propane distribution) has struggled to generate enough cash flow to make any progress deleveraging: Ferrellgas Partners LP had a nearly identical debt level in October 2016 as it did one year later.
Now, exiting the tank railcar business isn't necessarily a bad move. CEO James Ferrell briefly mentioned that the market dynamics for rail transportation of crude oil had shifted in recent years and were no longer favorable for smaller producers such as Bridger Logistics, one of the company's midstream subsidiaries. It simply makes more sense to focus on core businesses, such as residential propane deliveries and seasonally secure recreational propane tank sales, which has the added benefit of reducing exposure to risks from the tanker market that are unnecessary for a propane-focused company.
The asset sale will have more than one immediate impact on Ferrellgas Partners LP. First, the company will take a $35 million non-cash loss on a portion of the railcars. While not ideal, that's the price to pay for cutting losses. Second, and more importantly for investors, the net proceeds from the deal will be applied to reduce the outstanding balance on a secured credit facility and save approximately $2.8 million in interest expense per year.
Ferrellgas Partners LP can certainly use all the help it can get, but Wall Street and many investors appeared to have had the same reaction to the announcement: "So what?"
That's because the propane distributor had $2.16 billion in total debt outstanding at the end of its fiscal first-quarter 2018, which ended on the last day of October 2017. That put the company's debt-to-assets ratio at 127% at the end of the period -- not good for any business, let alone one that hasn't posted a profit since 2015.
There doesn't appear to be much help on the horizon. Although lower national propane inventories, higher national propane selling prices, and colder temperatures this winter should result in a strong fiscal second-quarter 2018 earnings report when the numbers are announced on March 8, the company needs years of strong performance to clean up its balance sheet to respectable levels.
You should skip this propane stock
There's no harm in being blunt about it: Ferrellgas Partners LP is a pretty lousy investment at the moment. The company's past management team made a string of poor acquisitions to develop a midstream business that has yet to prove any worth to shareholders. Worse yet, several unusually warm winters, which appear to be the new normal, have drastically reduced annual demand for residential propane.
There are better propane stocks available on the market that have more secure distribution streams -- a pretty important consideration when investing in a master limited partnership specifically designed to return gobs of earnings to shareholders -- although after factoring in warmer average temperatures during winter, investors may want to avoid the industry altogether.
Long story short, this company's toxic balance sheet, and what's likely to be continued struggles trying to deleverage, is the simple reason I won't buy Ferrellgas Partners LP.