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.

Related Articles
  1. Economics

    India: Why it Might Pay to Be Bullish Right Now

    Many investors are bullish on India for all the right reasons. Does it present an investing opportunity?
  2. Products and Investments

    There's a Reason They're Called Junk Bonds

    The closing of Third Avenue Managemet's Focused Credit Fund is a warning to investors and advisors. Beware the junk.
  3. Mutual Funds & ETFs

    Top 3 PIMCO Funds for Retirement Diversification in 2016

    Explore analyses of the top three PIMCO funds for 2016 and learn how these funds can be used to create a diversified retirement portfolio.
  4. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  5. Mutual Funds & ETFs

    The 5 Best T. Rowe Price Funds for the Income Seeker in 2016 (TROW)

    Find out which T. Rowe Price mutual funds to use to create a diversified income portfolio for current income, income growth and capital preservation.
  6. Investing Basics

    Building My Portfolio with BlackRock ETFs and Mutual Funds (ITOT, IXUS)

    Find out how to construct the ideal investment portfolio utilizing BlackRock's tools, resources and its popular low-cost exchange-traded funds (ETFs).
  7. Mutual Funds & ETFs

    Top 3 Thornburg Funds for Retirement Diversification in 2016

    Learn about the Thornburg family of mutual funds and the top three funds that you should consider for retirement diversification in 2016.
  8. Mutual Funds & ETFs

    Top 3 Artisan Funds for Retirement Diversification in 2016

    Learn about Artisan Partners, its history of outperformance compared to its competitors and which three funds to consider for retirement diversification.
  9. Products and Investments

    SRI Funds and Your 401(k): What You Need to Know

    Socially responsible, green and impact investing options are now DoL-approved for 401(k) plans. Here's what investors should know.
  10. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
RELATED FAQS
  1. Should mutual funds be subject to more regulation?

    Mutual funds, when compared to other types of pooled investments such as hedge funds, have very strict regulations. In fact, ... Read Full Answer >>
  2. Do ETFs pay capital gains?

    Exchange-traded funds (ETFs) can generate capital gains that are transferred to shareholders, typically once a year, triggering ... Read Full Answer >>
  3. How do real estate hedge funds work?

    A hedge fund is a type of investment vehicle and business structure that aggregates capital from multiple investors and invests ... Read Full Answer >>
  4. Are Vanguard ETFs commission-free?

    While some Vanguard exchange-traded funds (ETFs) are available commission-free from third-party brokers, a large portion ... Read Full Answer >>
  5. Do Vanguard ETFs require a minimum investment?

    Vanguard completely waives any U.S. dollar minimum amounts to buy its exchange-traded funds (ETFs), and the minimum ETF investment ... Read Full Answer >>
  6. Can mutual fund expense ratios be negative?

    Mutual fund expense ratios cannot be negative. An expense ratio is the sum total of all fees charged by an asset management ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center