When we think about the energy market we tend to think about oil and natural gas. However, thanks to the shale boom other hydrocarbon commodities that are byproducts of oil and gas drilling offer compelling profit potential for investors. One of those commodities is propane, which is a natural gas liquid, or NGL. Propane isn't just the fuel of summer BBQs as it is growing increasingly important on the global export market, which provides investors with several compelling profit opportunities.
Fire up the BBQ
More than 47 million American's own a propane grill, however, the fuel is much more versatile than just for grilling. About 5% of Americans use it as a home heating fuel while many others use it to fuel major appliances like a clothes dryer, water heater or stove while others use it to keep their swimming pools warm. It is also used by the commercial, industrial and agricultural sectors with uses ranging from a vehicle fuel to a key fuel for drying crops. Overall, the propane is used to meet about 2% of the country's energy needs.
The versatility of propane has kept its demand pretty consistent leading to steady business for propane distributors like AmeriGas Partners (NYSE:APU), Ferrellgas Partners (NYSE:FGP), and Suburban Propane Partners (NYSE:SPH). Of the three AmeriGas Partners is the largest distributor of propane in the U.S. as it serves 2 million customers in 50 states through 2,100 distribution locations. The MLP also has a long history of paying distributions to investors and it currently yields 7.39%.
Ferrellgas Partners is another large propane MLP as it too serves customers in 50 states. The company is probably best know for operating the Blue Rhino brand, which is the nation's largest provider of portable tank exchanges for gas grills. It's also a high yielder as its current distribution yield is 8.2%.
Finally, Suburban Propane Partners is another large propane distributor as it serves 1.2 million customers in 41 states. Suburban, like its propane MLP peers, offers investors a very compelling distribution that's currently yielding 8%.
As three of the nation's largest propane distributors these companies offer investors the opportunity to profit from the steady propane industry in the U.S. While growth opportunities are limited these stocks make up for the lack of growth with very generous current distributions.
Exporting the excess
Despite the flexibility of propane its demand in the U.S. isn't growing all that fast. Propane supply, however, has skyrocketed in recent years as the shale boom has brought a lot of new supply to the market. This would have oversaturated the domestic market if it wasn't for the rapid increase in propane exports. In fact, as this next chart notes propane prices could have been decimated if companies like Enterprise Products Partners (NYSE:EPD) and Targa Resources Partners (NYSE: NGLS) hadn't invested to increase their export capacity. (NYSE:EPD)
As that chart points out the U.S. has become the world's propane export king due to strong production growth and increased export capacity. That export capacity will continue to increase as Enterprise Products Partners is already in the process of more than doubling its leading export capacity. By the end of this year its capacity will have grown from 7.5 million barrels per month to 16 million barrels per month. Meanwhile, Targa Resources Partners has the second largest LPG export presence on the Gulf Coast, which can be further expanded in the future. While neither is a pure play on propane exports these are the two leading propane exporters in the country and offer investors the most upside to this growing market.
Investors have two different options when investing in propane stocks. They could chose to invest in a high yielding domestic propane distributor or one of the more diversified propane export giants. The choice is really between a high current yield with limited growth or a smaller current yield that has the potential to grow in the years ahead.