On Dec 23, 2015, we issued an updated research report on Ferrellgas Partners LP FGP. The partnership’s earnings tend to fluctuate as the use of propane varies with weather patterns. However, investments to expand midstream operations, the Bridger Logistics acquisition and organic growth projects will support its long-term business strategy.
The partnership’s loss in the first quarter of fiscal 2016 was wider than the Zacks Consensus Estimate, while total revenues surpassed it, primarily due to a higher contribution from its midstream operations.
In the fiscal first quarter, total propane sales volume declined 13.2% year over year to 161.5 million gallons due to lower wholesale and retail sales. Sales decreased due to warmer temperature throughout the fiscal first quarter in most of the highly concentrated geographic areas it serves.
As fluctuating demand for propane and low propane prices are narrowing margins for retailers, Ferrellgas intends to shift to an EBITDA mix of 50% propane and 50% midstream by the end of fiscal 2018 from the current mix of 70% propane and 30% midstream. The partnership further expanded its midstream business through the acquisition of Bridger Logistics, LLC for nearly $822.5 million.
Acquisitions have driven Ferrellgas Partners’ performance over the years. Recently, the partnership completed the acquisition of Missouri-based propane retailer Gasco Energy Supply. The acquisition is expected to be immediately accretive to Ferrellgas’ earnings. Gasco is a supplier of fuel for residential, commercial and agricultural uses in the Ozark region.
However, the highly competitive nature of the propane distribution business may have an adverse impact on sales volumes and/or operational results. Profitability is affected by the degree of competition to a large extent. Low barriers to entry and competitive pricing possibilities are major concerns for the partnership.
Ferrellgas Partners currently has a Zacks Rank #3 (Hold). Some better-ranked stocks in the same space are Alon USA Partners, LP ALDW and Northern Tier Energy LP NTI, sporting a Zacks Rank #1 (Strong Buy) and Sunoco LP SUN, carrying a Zacks Rank #2 (Buy).
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