Units of limited partnership Suburban Propane Partners (NYSE:SPH) rose 20% in January, according to data provided by S&P Global Market Intelligence. That was a nice rebound after a late-2018 swoon left the propane distributor's units down by 20%. Looking back over the trailing six months, the units were actually about breakeven at the end of January.
The big driver here was market sentiment, though a winter cold snap helped as well (more on the vagaries of weather below). Investors were in a decidedly defensive stance at the end of 2018, but shifted gears in January. The big drop and recovery in Suburban Propane's units clearly display the fickle mood of the market today. The fact that the units are pretty much back where they were before investors got the jitters makes complete sense, too, since nothing really changed at the partnership.
That's good and bad. Suburban has been dealing with a highly leveraged balance sheet for a number of years following a large acquisition in 2012. The company gets paid for delivering propane, not the propane itself, so its business largely avoids the risk of commodity price swings. However, it can't avoid the impact that hot weather has on demand -- propane's largest use is for heating. Warm weather, and the corresponding reduction in demand, put material pressure on the partnership's cash flows in the years following its $1.8 billion purchase of Inergy's propane business in 2012.
Cash got so tight that Suburban was forced to trim its distribution by 33% in late 2017. The goal was to free up cash for debt repayment and to put the distribution on a more solid footing. The partnership has made good progress on both counts. It reported solid distribution coverage of 1.3 times in mid-November last year when the partnership released fiscal full-year 2018 earnings. Leverage has also improved, with its debt-to-EBITDA ratio down to around 4.5 from over 6 in mid-2016.
Propane distributors like Suburban have been dealing with material headwinds for a few years now. That goes a long way toward explaining both the distribution cut and the still-high 10% yield despite now strong distribution coverage. Investors simply aren't convinced that Suburban (and its peers) are out of the woods, even though it has made solid progress toward its stated deleveraging goals. In the end, this isn't a sector that most investors should be considering. However, for those willing to take a hands-on approach with their portfolios, a deep dive might be in order with Suburban Propane. Just be aware that even though the partnership is largely protected from fluctuating energy prices, its units can still be very volatile.