Income investors have many ways to profit from America's energy boom. Whether it's oil and gas producers, oil service companies, or pipeline partnerships, high quality and high yield are abundant if one knows where to look. This article highlights a small but promising segment of the energy market -- propane -- and explains why NGL Energy Partners, AmeriGas Partners, and Ferrelgas Partners are set to enrich investors over the long term.
Propane: the new growth industry
As the above chart shows, propane exports have nearly quadrupled in the last four years. This has helped propane prices rise by about 50% and helped AmeriGas Partners, the largest propane supplier in America, raise its margins per gallon of propane by 6.8% annually over the last eight years.
| MLP | Yield | 10-Year Projected Annual Distribution Growth Rate | 10-Year Projected Annual Earnings Growth Rate | 10-Year Projected Annual Total Return |
| Ferrelgas Partners | 7.40% | 5.31% | 8.90% | 12.71% |
| AmeriGas Partners | 7.80% | 5.90% | 7.20% | 13.70% |
| NGL Energy Partners | 5.10% | 12.55% | 12% | 17.65% |
| S&P 500 | 1.90% | 9.20% |
Sources: S&P Capital IQ, Yahoo! Finance, Moneychimp.com.
Analysts are projecting a strong decade ahead for Ferrelgas Partners, AmeriGas Partners, and NGL Energy Partners for three key reasons.
First, the propane market is highly fragmented. The top four suppliers in the country only hold 32% market share, and with 5,000+ independent sellers, there is enormous potential for growth through consolidation.
For example, Ferrelgas Partners has, in recent years, acquired no fewer than 24 regional propane retailers.
In 2012, AmeriGas became the largest propane supplier in the U.S., with 2 million customers and 1.2 billion gallons in annual capacity in all 50 states, by purchasing Heritage Propane for $2.9 billion.
NGL Energy Partners IPOed in 2011 yet hasinvested $3 billion in organic growth projects and acquisitions.
The second reason for optimism about the propane industry is continuing price strength courtesy of propane exports as mentioned previously. However, the most exciting trend for investors interested in this space is diversification into non-propane industries, which offer chances to grow margins, sales, and distributions.
Propane partnerships evolving into midstream giants
In May of 2014, Ferrelgas Partners acquired frack water treatment provider Sable Environmental for $125 million. Ferrelgas Partners paid just 6.25 times 2013 EBITDA (earnings before interest, taxes, depreciation, and amortization) for the owner of five salt water recycling plants in the prolific Eagle Ford shale in southern Texas.
Fracking takes a lot of water, and water recycling plants help decrease environmental degradation, improve efficiency, and lower fracking costs.
This business is also highly profitable. For example, NGL Energy Partners has a small, but fast-growing frack water recycling business, which accounts for just 1.5% of sales yet makes up 24.4% of gross profits.
Which brings me to NGL Energy Partners, one of the least followed but most promising midstream partnerships in America.
NGL Energy Partners operates in four segments: crude oil logistics (27% gross profits), natural gas logistics (13% gross profits), water services (24.4% gross profits), and retail propane (35.3% gross profits).
What's impressive about NGL Energy Partners is that it's able to extract 59.3% of gross margins from two segments that account for just 6.7% of sales, a strong growth runway for future EBITDA, distributable cash flow (DCF), and distribution growth. For example, NGL is the fourth largest propane provider in the U.S., yet it holds just 1% market share.
Its water service business operates in the Eagle Ford shale, Niobrara shale, and Permian basin, with plans for expansion into the Bakken and Marcellus formations.
Given the fact that the Permian basin is estimated to hold 75 billion barrels of recoverable crude (estimate up 50% in the last year) and the Marcellus has increased production 15.5 times in just seven years, it's easy to see why this segment is expected to grow strongly. In fact, NGL Energy Partners is guiding for EBITDA, DCF, and distribution growth of 131%, 123%, and 200% respectively, between 2013 and 2015.
NGL Energy Partners isn't done growing or diversifying either. It recently spent $200 million to become the general partner of midstream MLP TransMontaigne Partners. The deal gives NGL Energy Partners full gp and IDRs (incentive distribution rights) as well as 20% of TransMontaigne's units.
Given the fact that TransMontaigne is expected to grow distributions at an annual compound rate of 9.8% over the next decade, this will generate strong distribution and IDR fee earnings that will help NGL Energy Partners maintain its strong growth.
NGL Revenue (Annual) data by YCharts.
In terms of distribution security, long-term income investors will be glad to know that AmeriGas Partners, Ferrelgas Partners, and NGL Energy Partners have distribution coverage ratios that are not only safe, but promise strong future distribution growth.
- AmeriGas Partners: 1.2 times
- Ferrelgas Partners: 1.2 times
- NGL Energy Partners: 1.5 times
Foolish takeaway
America's energy boom offers many ways for long-term income investors to build both income and wealth. AmeriGas Partners, Ferrelgas Partners, and NGL Energy Partners are three companies most likely to profit from a resurgent propane market. Ferrelgas Partners and NGL Energy Partners expand on this opportunity by diversifying into midstream industries, with NGL Energy Partners offering the most opportunity for growth.
