Can This Propane Play Beat Out the Natural Gas Revolution?

Suburban Propane Partners (SPH 2.05%) will release its quarterly report on Thursday, and the propane master limited partnership has seen its stock rise in value over the course of 2013. Even though the boom in natural gas has gotten more attention from investors, Suburban Propane and rivals AmeriGas Partners (APU) and Ferrellgas Partners (FGP) have all done reasonably well this year and boast attractive payouts to their stockholders. Yet without being in the energy spotlight, can propane outpace natural gas going forward?

The propane industry is generally seen as a backwater in energy, with most companies with higher growth aspirations seeking to exit the market. Inergy's sale of its propane business to Suburban last year was intended to enable Inergy to boost its midstream business. For Suburban, the deal represented a chance to raise its profile in the propane industry and boost its potential profits. The big question for Suburban is how AmeriGas and Ferrellgas might affect that strategy. Let's take an early look at what's been happening with Suburban Propane over the past quarter and what we're likely to see in its report.

Stats on Suburban Propane

Source: Yahoo! Finance.

How can Suburban Propane ignite earnings growth?
Analysts have become less excited about Suburban Propane's earnings prospects in recent months, cutting the company's full fiscal-year projections both for the just-ended fiscal 2013 and for next year. The MLP unit price has still climbed a bit, rising 2% since mid-August.

Suburban Propane continued its string of earnings disappointments in August, when it announced results from the quarter ending in June that fell short of what investors had hoped to see. The quarters ending in June and September are traditionally tough periods seasonally for Suburban, AmeriGas, and Ferrellgas, as propane use rises dramatically during the winter months for home-heating purposes. Suburban CEO Michael Dunn said that cold weather during the spring months helped improve results, but the company still posted a much wider net loss than it had the previous year.

Yet to a large extent, the key for Suburban Propane, as well as AmeriGas and Ferrellgas, is whether propane prices will remain low enough to drive demand. In general, propane prices have stayed in line with natural-gas prices, which should help prevent Suburban Propane and its rivals from losing as much business to natural-gas furnace conversions as the home heating-oil industry has seen.

Meanwhile, dividend distributions make Suburban and its fellow propane MLPs look attractive. Suburban Propane's 7.5% yield is actually stingier than AmeriGas Partners' 7.7% dividend and Ferrellgas' 8.5% payout. But it's important to remember that these companies pay out larger amounts in distributions than they get in taxable income, making their earnings payout ratios look dangerously large despite the fact that all three companies have had good track records in keeping their distributions stable -- or in Suburban and AmeriGas' cases, growing.

In the Suburban Propane earnings report, pay less attention to seasonally weak backward-looking figures and focus instead on the company's future prospects. In a still-fragmented industry, Suburban needs to keep swallowing small local operators in order to boost its scale and maximize its potential over the competition. That will be the best way Suburban can prove itself as a viable alternative to natural-gas utilities.

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