Two days ago, it happened. The moment I'd been waiting months for. It was finally warm enough -- and dry enough -- to bust out the grill and cook burgers for dinner! And of course, I was out of propane. But that was easy enough to remedy: a quick trip to the neighborhood convenience store had my propane tanks filled and my grill fired up.
If you're like me, you probably use branded propane tanks from AmeriGas Partners (APU) or Blue Rhino, which is owned by Ferrellgas Partners, L.P. (FGP) (Full disclosure: Propane is propane. I use AmeriGas because it's what the local convenience store sells.) Either one will get your burgers cooked, but which one will keep your portfolio cooking along?
Let's compare these American propane industry bigwigs to see which one is likely to outperform the other.
No, I'm not talking about propane distribution -- although that's what both AmeriGas and Ferrellgas do: distribute propane as opposed to refining it. I'm talking about the quarterly distribution to unitholders that is similar to a dividend from other companies.
See, AmeriGas and Ferrellgas are both structured as master limited partnerships, or MLPs. An MLP's units are a lot like an ordinary company's shares of stock, just like its distribution is a lot like an ordinary company's dividend. But in exchange for special tax treatment from the government, an MLP is required to pay out nearly all of its net earnings as distributions to its unitholders. Each unitholder also has to do some extra paperwork come tax time, but the juicy yields from MLPs can often be worth the trouble.
Speaking of those juicy yields, AmeriGas currently has a distribution yield of about 8.8%. Ferrellgas' is even higher, at about 10.9%. You might think that means Ferrellgas wins the distribution contest. But you'd be wrong.
Ferrellgas' yield may be higher than AmeriGas', but in 2016, it slashed its annual distribution from $2.05/share to just $0.40/share thanks to some big trouble in which the company found itself. AmeriGas, on the other hand, has increased its distribution for 13 straight years (admittedly, in 2017 it was only up by $0.01 per quarter). So, even if its yield is slightly lower, AmeriGas's distribution is far more reliable, and its distribution policy more shareholder-friendly.
Weathering the weather
Although you might be most familiar with the propane you see in gas grills in the summertime, the majority of propane is used as a heating fuel during the wintertime. And a series of warm winters in 2015-2016 and 2016-2017 hurt the business of both partnerships.
Luckily, the winter of 2017-2018 was much colder, and longer, and that boosted top-line revenue for both Ferrellgas and AmeriGas. In its crucial second quarter of FY 2018 -- which spanned the period from November 1, 2017 through January 31, 2018 -- Ferrellgas' revenue from propane sales was up 35.4% year over year. AmeriGas' most recent reporting period only takes us through December 31, 2017, but it saw a smaller revenue boost of 17.8%.
That doesn't necessarily mean Ferrellgas is doing better than AmeriGas, but it's probably a result of Ferrellgas' reporting including the frigid January while AmeriGas' doesn't. Certainly, cold temperatures -- and blizzards in some regions -- lasted through March and even into mid-April this year, which should boost year-over-year revenue for both partnerships in their upcoming quarters.
But all of that top-line growth doesn't mean anything if it doesn't translate to bottom-line earnings that can be distributed to the partners. And here's where we really see a major difference between the partnerships. Despite Ferrellgas' big top-line growth, its bottom line was decimated by asset impairments, recorded losses on asset sales, and increased interest payments. That turned a year-ago $38.5 million quarterly profit into a $1.8 million quarterly loss. Meanwhile, AmeriGas was able to convert its top-line increases into a modest 13.6% year over year improvement in quarterly net earnings, from $91.9 million to $104.4 million.
Those numbers speak for themselves: AmeriGas wins this category as well.
Debt, and more
As I mentioned, Ferrellgas got itself into some big trouble when it tried to juice growth by expanding into the midstream oil and gas business. While midstream oil and gas is usually a reasonable business for an MLP, it doesn't really synchronize with propane delivery. For Ferrellgas, the foray was an unmitigated disaster, leading to the departure of its CEO, the aforementioned slashing of the dividend, and the company's current financial woes.
One of the biggest problems for Ferrellgas is that it went heavily into debt to finance the purchase of the midstream business. Its leverage ratio (total debt divided by EBITDA) is just over 13.0, which is insanely high. Now, management has used an alternate computation method to report a leverage ratio of just under 7.0, which is still very high. Either way, it's certainly much higher than the 5.5 the partnership's creditors want it to achieve by July (not gonna happen). And if it can't get that ratio down by then...it's anybody's guess what will happen, but it certainly won't be good for investors.
AmeriGas isn't in fantastic shape, either. It, too, has a highly leveraged balance sheet, with a leverage ratio of just over 5.0, and has suffered from lackluster growth. But compared to the disaster that's Ferrellgas right now, it looks like a million bucks.
Not much of a winner
Honestly, I would be very wary of buying either of these propane MLPs right now. If it's a high yield you're after, you can find plenty of oil and gas MLPs with comparable yields to Ferrellgas' or AmeriGas' that also have better growth prospects, better yield coverage, and lower debt.
That said, if you're determined to buy one of these two propane MLPs, there's really no contest: AmeriGas is on much firmer footing than its struggling competitor Ferrellgas. For me, though, I'll keep the propane in the grill and out of my portfolio.