We issued an updated research report on Ferrellgas Partners L.P. FGP. The partnership’s decision to diversify into the salt water disposal (SWD) services domain is appreciable. Its cost-reduction initiatives are helping to offset the negative impact of inconsistent weather on the demand for propane.
Ferrellgas Partners reported second-quarter fiscal 2015 adjusted earnings of $1.02 per unit, missing the Zacks Consensus Estimate of $1.10 by 7.3%. Quarterly earnings, however, increased 34.2% from 76 per unit a year ago, primarily on the back of lower cost of products sold (propane and other gas liquids sales) and a decline in operating expenses.
Weather is the swing factor for the demand for propane, which is used for several purposes, including heating homes and water, agriculture, drying clothes, and fueling gas fireplaces and barbecue grills. If the weather remains moderate during winters and dry or warm during the harvest season at Ferrellgas Partners’ service territories, propane usage would decline and its results would feel the impact.
However, Ferrellgas Partners’ strategic move to enter into the midstream business and expand the salt water disposal (SWD) services domain is commendable. The midstream business of the partnership generated adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of around $5.2 million in the first six months of fiscal 2015. The increased drilling activities in the shales will create demand for SWD services.
The acquisition-driven strategy of Ferrellgas Partners’ should be a key catalyst to its business growth. The contribution from Blue Rhino acquired in 2004 helped the partnership to offset the unfavorable impact of weather on propane demand.
In addition, Ferrellgas Partners’ presence across the U.S. puts it in an advantageous position than other small-scale propane distributors. In addition, investments in technology provide the partnership with a competitive advantage.
Ferrellgas Partners currently has a Zacks Rank #2 (Buy). Some other stocks to consider in the space are Sprague Resources LP SRLP, Western Refining, Inc. WNR and Alon USA Energy, Inc. ALJ. Both Sprague Resources and Western Refining carry a Zacks Rank #1 (Strong Buy) while Alon USA Energy, Inc. has a Zacks Rank #2.
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