The Powerful Play In Propane (APU, EPD, NGLS, SPH, FGP, SXL)

By Aaron Levitt | September 02, 2014 AAA

The recent freezing temperatures have pushed up prices for a variety of fuel sources as consumers try and heat their homes during one of the coldest winters on record. While increasing natural gas prices and funds like the United States Natural Gas ETF (NYSE:UNG) have garnered much of investor’s attention, plenty of other fuels have seen since their prices increase as well.

Perhaps none as dramatic as propane.

Prices for the fuel have surged over the last few weeks with no end in sight. And what’s more, is those price increases are expected to continue well into the future. For investors, the money play in could be in the natural gas byproduct.

Big Looming Shortages

For most Americans, propane is often overlooked except when we fire-up our grills. However, for the 14 million households that rely on it for heating/cooking as well as the 80% of American farms that use the fuel to sanitize the soil from weeds and dry crops, the recent price action in propane is cause for concern. As the frigid cold weather has gripped the nation, propane prices have surged 252% since mid-January. 

The reason? Despite rising production, supplies of propane here at home are actually decreasing due to exports.  

Propane is produced as a byproduct of either natural gas liquid (NGLs) or crude oil processing. And with producers like Range Resources (NYSE:RRC) tapping America’s shale reserves in spades, production of NGLs and propane have actually expanded. However, the rub is unlike natural gas- which is for the most part un-exportable- propane can be sent overseas as liquefied propane gas (LPG) with ease. And with less than ideal storage facilities here at home, exports of LPG have quadrupled over the last three years. 

And it’s only going to get worse.

Plans are in the works to continue sending more propane out of the country via pipeline and on tanker ships. Recent expansion upgrades at Sunoco Logistics Partners (NYSE:SXL) Marcus Hook terminal will have the capacity to ship a million gallons of propane per day. Meanwhile, pipeline player Kinder Morgan (NYSE:KMI) plans of reversing the flow of its 1,900-mile Cochin pipeline. That’ll send about 70,000 barrels worth of propane back into Canada rather come into the U.S. 

All of this combined with rising agriculture and heating demand has pushed inventories down over 50% versus historic norms. Making higher prices a more common occurrence going forward. Meaning there’s plenty of potential profits for investors willing to dabble in the propane world. 

Making A Propane Power Play

Given propane’s longer term dwindling supplies- courtesy of exports coupled with generally stable and rising demand, investors may want to give the sector a go. Those higher prices will ultimately benefit the producers and sellers of the fuel.   

On the production side, investors may want to look at Enterprise Products Partners (NYSE:EPD). While the midstream energy master limited partnership has assets spanning the entire fossil fuel realm, it is the largest producer of propane in the country. Already, EPD exports much of its own production. But it has plans to expand that production even further. That will lead to higher margins as prices rise. Likewise, both Targa Resources Partners LP (NASDAQ: NGLS) and DCP Midstream Partners (NYSE:DPM) –which have significant propane processing capacity could be big winners as well on the margin front. Those margins will ultimately provide some extra cash for the trio’s 4%-plus dividend yields.

On the distribution side, king-pin AmeriGas Partners (NYSE:APU) should be given the nod. The firm is the largest distributor of the fuel- reaching nearly 2 million customers. APU’s size has been an advantage over rivals Suburban Propane (NYSE:SPH) and Ferrellgas (NYSE:FGP) in gaining supplies of the fuel during the winter’s shortages. The firm’s large size as well as its huge logistics network- of 360 transport trucks, over 350 railcars, and 28 propane terminals- have allowed it to secure more propane for domestic use that was originally bound for export. Meanwhile, that size helps keep its own margins quite fat and strengthen its 8% dividend yield. 

The Bottom Line    

While traditionally not a glamorous business, propane processing and distribution is quickly turning into a major growth sector. Rising demand and exports are fueling higher prices and margins. For investors, the time could be right to bet on the sector. 

Dislcosure - At the time of writing, the author did not own shares of any company mentioned in this article.

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