Oil drillers are taking it on the chin; so are natural gas drillers. But propane retailers love low commodity prices, which is why you might want to take a look at high-yielding Suburban Propane (NYSE: SPH) and Ferrellgas Partners (NYSE: FGP).
The other fuel
Propane, largely a byproduct of oil and gas drilling and refining, is kind of an unloved fuel in the world. As the U.S. supply of oil and gas has increased, so, too, has the supply of propane. You probably know that gas grills use propane, but it's far more useful than that. For example, the fuel is used to heat buildings and homes, dry crops, and to power vehicles like forklifts. These aren't giant markets, but they are important and reliable ones.
Propane isn't a growth business. In fact, it's in slow decline as some customers switch to alternative energy sources, including electricity and renewables. This is why big players like Suburban Propane and Ferrellgas have long used acquisitions to keep their businesses growing. Ferrellgas, for example, has made more than 230 acquisitions in its roughly 75-year corporate history.
The interesting thing is that these propane players are middlemen, so the price of propane, which is low right now, doesn't have the same impact as low prices for oil and gas have on drillers. In fact, propane prices largely get passed along to consumers, which makes the top-line less meaningful for propane sellers.
But here's the interesting thing, Energy Select Sector SPDR ETF, which tracks the oil and gas sector, is down roughly 19% so far this year. Suburban Propane is down 37% while Ferrellgas is down nearly 10%--less notable, but still a meaningful drop. Both have clearly taken a ride down with falling oil and gas prices even though they aren't as affected by the decline.
Here's the math on that. Suburban Propane's top line fell around 25% in fiscal 2015, led by lower propane prices, but the bottom line only fell around 10%. And the bottom-line drop was more an issue of warm weather leading to a nearly 10% drop in the amount of propane sold.
Ferrellgas, which was affected by the same trends, explained in its fiscal 2015 press release that, "Propane margin cents per gallon benefited from wholesale commodity prices that were 43% lower than the prior year." It also said, "Strong margin cents per gallon and lower operating expenses helped minimize the effect of warmer temperatures in the more highly concentrated geographic areas we serve."
Compare Ferrellgas' statements to what oil giant Chevron (NYSE:CVX) is saying. According to the oil major's CEO John Watson: "Third quarter earnings were down substantially from a year ago. While downstream earnings remained strong, lower overall earnings reflected weaker market prices for both crude oil and natural gas, which depressed upstream profitability." The company's U.S. oil and gas business earned nearly $1 billion in the third quarter of 2014, but fell to a roughly $600 million loss in the same period this year.
The positive side of cheap
In other words, low commodity prices are bad for some energy companies -- but they aren't bad for propane distributors. They are actually a good thing, which makes the steep drop in Suburban and the smaller drop in Ferrellgas something worth looking into. Neither Ferrellgas nor Suburban can control the weather, so fiscal 2015 was tough on that score. Clearly, however, you can't blame low propane prices, which helped offset some of the hit from the volume drop. But there's a bigger silver lining here.
While Ferrellgas COO Boyd McGathey explained during the company's earnings call that heating consumption isn't affected by low propane prices, he noted that, "So where we see that's really given us an uplift is in attracting new customers." In addition to new customers, though, current customers are more likely to stick around if there's less benefit to switching. In the end, Suburban Propane and Ferrellgas actually benefit from lower commodity prices in more than one way.
Big misunderstood yields?
Suburban Propane has a distribution yield of more than 11%, and Ferrellgas's yield is more than 10%. But despite the weather impact, both made enough money to cover their distributions to unit holders in their just-ended fiscal years. Ferrellgas, for example, had "excess" distributable cash flow of around $20 million dollars over and above the $165 million it paid out. Low prices may make the top line look bad, but it isn't impacting this pair's ability to pay unit holders.
If you're looking at the energy space and interested in dividends, you might want to take a moment to get to know these two limited partnerships. The high yields aren't as risky as they look, and the energy market's downturn isn't the negative that it may at first seem to be.