If you'd told me that I'd still be happily grilling out in mid-October this year -- as opposed to huddling as close to the grill as possible for warmth while the burgers cook -- I wouldn't have believed you. But the lingering summer heat has kept my grill (and the propane tanks that power it) busy for much longer than I would have expected.
I use propane tanks from AmeriGas Partners (NYSE:APU) because that's what my local convenience store sells, but many outdoor cooks use Blue Rhino, which is owned by Ferrellgas Partners, L.P. (NYSE:FGP). There's no difference between them when it comes to getting your burgers browned or your ribs crispy -- propane is propane, after all, regardless of who's selling it -- but there are big differences in the two companies from an investor's standpoint.
Here's which of these propane suppliers is the better buy.
Coming back to haunt you
Sometimes one wrong move can come back to haunt a company, and that's exactly what has happened with Ferrellgas Partners. Propane distribution -- which is the primary business of both Ferrellgas and AmeriGas -- is a pretty boring but reasonably stable business. While propane tanks for gas grills provide some income during the summer months, the big money comes during the winter, when demand for propane for heaters and heating systems drives heavy distribution.
In early 2014, Ferrellgas decided to shake things up a bit and acquire some midstream -- transportation and storage -- assets. With energy prices sky high, it seemed like a potentially lucrative investment, despite the fact that the company had no experience in the midstream space.
Energy investors know what happened next: the oil price crash of 2014, which caused demand to dry up. This was followed by the departure of one of the unit's only remaining major customers, the exit of the CEO, a massive asset writedown, and a distribution cut of some 80%.
Ferrellgas has done its best to try to stop the bleeding. Founder Jim Ferrell has resumed leadership of the company as chairman, interim CEO, and president. He's managed to unload the problematic midstream assets -- although he had to do so at fire-sale prices -- and is focusing once again on growing the core propane business. But he has a tough road ahead of him.
The big one
In spite of all its troubles, Ferrellgas has somehow managed to muddle on for the last two years, despite a slowly declining stock price that dropped from more than $20/share three years ago to less than $3/share in September.
But in late September, the company reported its Q4 2018 and full-year earnings, and its already-decimated share price took a massive hit:
The stock's 40% drop wasn't primarily because it missed earnings forecasts -- which it did, badly -- or because revenues declined year over year -- although they did, by nearly 20% -- but because of this quote from Ferrell:
We have been transparent with the market that our basket in the MLP bond indenture, which has allowed us to pay distributions to date, is now exhausted. A distribution payment we made to unitholders a couple of weeks ago on September 14 will be our last one -- for a while, anyway -- if we do not find an acceptable solution to the MLP bond covenant. [emphasis mine]
As is the case with many master limited partnerships (MLPs), Ferrellgas' and AmeriGas' hefty distribution payments -- which resemble dividend payments -- are a major reason (if not the primary reason) for investors to take a stake in the company. Prior to its suspension, Ferrellgas was offering a double-digit yield, higher than AmeriGas' current 9.4% yield and much higher than that of other energy MLPs whose fundamentals are stronger.
It's possible Ferrellgas could reinstate its distribution if -- in the words of Ferrell -- it can "find an acceptable solution to the MLP bond covenant," but there's no indication of what that solution might be. The partnership's market cap has now dropped so low (to $166.1 million, compared to its enterprise value of $2.2 billion) that raising money through an equity offering doesn't seem possible. Its total amount of existing long-term debt is almost equal to its enterprise value at $2.17 billion, and its debt-to-EBITDA ratio is north of 200 (compared to AmeriGas' 4.8), so more debt isn't going to come easily...or cheaply.
Unless we have an incredibly long, harsh winter, Ferrellgas' best bet is probably being sold to a competitor.
So far, we've been focusing on Ferrellgas, and it should be pretty clear by now that unless AmeriGas is actually in bankruptcy, it's probably going to be the better buy.
In fact, AmeriGas is in much better shape than its smaller competitor...although that's not saying much. AmeriGas' earnings have declined by 21.5% over the last five years, and revenue was particularly hard hit during the mild winters of 2015–16 and 2016–17 (although the surprise "polar vortex" cold snap in April 2018 was helpful). The recent spate of mild winters has been bad for all propane distributors, even those who
A debt ratio of 4.8 times EBITDA is nothing to brag about, but at least it's down from almost 6 times EBITDA. However, it isn't low enough to save AmeriGas' debt from junk ratings of Ba2/BB from the ratings agencies. There are plenty of other MLPs in the marketplace with superior fundamentals and better prospects than AmeriGas.
And the winner is...
...not much of a surprise. AmeriGas clearly "wins," if you can call it that, thanks to Ferrellgas' near-complete collapse. But I don't think you could call it a buy unless you're absolutely convinced that this winter is going to be incredibly long and harsh, which nobody knows for certain. And even then, do you really want to make a long-term bet on this industry based on a single winter's forecast? There's no sign that the trend toward milder winters is going to reverse.
As for me, the only way I'll be investing in propane is to put a canister of it under the grill.