Natural gas prices may be low, but that is good news for strong companies that have the means and the methods to expand their business in quiet times, observes Roger Conrad of Utility Forecaster.
Extremely mild winter weather, natural gas competition, volatile feedstock prices, and rising transportation costs have made propane distribution a tough business. A series of sector mergers, however, is rapidly shifting those economics in a positive direction.
Income Portfolio Aggressive Holding AmeriGas Partners (APU) is shaping up as a major beneficiary. Earlier this year, the master limited partnership became the industry’s biggest player by acquiring the assets of Heritage Propane. The Heritage deal stretched its network to more than 1,200 locations in 50 states serving 2 million-plus customers.
It also added a powerful partner in Heritage’s former owner Energy Transfer Partners (ETP), which now owns 32% of the partnership. Another 26% is owned by UGI (UGI), which remains the sole general partner. That’s a lot of will and financial way to keep AmeriGas raising quarterly distributions 5% a year going forward.
Fiscal 2012 third-quarter (ended June 30) results also supported that goal, as management raised its full-year cash flow forecast to $620 million to $660 million ($6.68 to $7.11 per unit) despite seasonal weakness.
Winter demand remains pivotal for propane profits. But scale will benefit AmeriGas’ results by increasing margin on gallons sold as well as from market-share expansion. And there are still further opportunities for growth from acquisitions.
The result should be a sharp improvement in distribution coverage in fiscal 2013, which will include two full quarters with the Heritage assets. That in turn should push the unit price back toward $50, as worries about dividend safety fade.
In the meantime AmeriGas, which is yielding nearly 8%, is a buy up to $45.