The two most notable fossil fuel sources are oil and natural gas. Propane, a third common fossil fuel, is produced from both natural gas processing and crude-oil refining. It’s used for far more than just back yard barbecues, and more aggressive income investors should get to know the industry well.
The Barbecue
The white container attached to gas barbecue grills is filled with liquefied propane. While it’s hard to say anything bad about that wonderful use of propane, it is hardly the only thing that the fuel source is used for. It’s also used for space heating, water heating, cooking, fireplaces, clothes drying, lighting, and heating for pools and spas. I’ve even seen refrigerators that run on propane, but not since I was a young child.
According to the Propane Education & Research Council, more than 12 million households use propane as a heat source. In addition, it has millions of users in the agricultural, commercial, industrial, and transportation areas. It may not be as well known or widely used as oil and natural gas, but there is still a big market.
Limited Partners
Some of the biggest players in the propane space are publicly traded limited partnerships (LPs). Dividends, then, are a notable characteristic of the propane industry. While it isn’t a growth business, the big players have been able to use scale and acquisitions to their advantage.
For example, Suburban Propane Partners LP (NYSE:SPH) purchased Inergy’s propane business in 2012 as that company looked to make a shift from propane to natural gas pipelines. It was a transformational event for Intergy, as the sale allowed it to exit its historical line of business in one swift move. It was an even bigger change for Suburban Propane Partners LP (NYSE:SPH), which basically doubled in size overnight.
While there were overlapping operations, which has allowed for cost savings, Suburban Propane Partners LP (NYSE:SPH) went from serving 30 states to 41. The acquisition allowed the partnership to increase its distribution in January after holding it steady since late 2010. A much bigger player now than it was before, Suburban Propane Partners LP (NYSE:SPH) should be able to better compete and, assuming it continues to execute well, the distribution should continue to rise in the years ahead.
With an over 7.5% yield, middle of the road investors willing keep a close eye on this partnership’s progress would do well to take a look.
Bigger is Better
AmeriGas Partners, L.P. (NYSE:APU) lays claim to being the largest retail propane marketer in the country. It has about two million customers, with accounts in every state (including Hawaii and Alaska). While it isn’t double the size of Suburban Propane Partners LP (NYSE:SPH), it’s pretty close. The company’s distribution has been headed generally higher over the last decade.
Its big 2012 purchase was Heritage Propane. Management believes that it has a 15% market share of the propane market after the merger. While the top three players control about 30% of the market, the rest are smaller participants. This makes them ripe for acquisition by the industry’s largest companies.
On that score, AmeriGas Partners, L.P. (NYSE:APU) has made over 160 acquisitions since 1982. With its scale, it is well positioned to be a key industry consolidator. It offers a 7.2% yield, making it appealing for most investors.
Number Two…
AmeriGas Partners, L.P. (NYSE:APU) is the largest propane distributor, Suburban is the third largest. Number two is Ferrellgas Partners, L.P. (NYSE:FGP). The company serves around a million customers across all 50 states. The partnership has an over 10% dividend yield. Only aggressive investors should consider Ferrellgas Partners, L.P. (NYSE:FGP).
The problem is that the partnership often pays out more to unit holders than industry watchers believe it is sustainably capable of. So, there is a constant fear that the disbursement will be cut. While the distribution hasn’t grown, it hasn’t been cut either. So, for ten years Ferrellgas Partners, L.P. (NYSE:FGP) has been paying an annual distribution of $2 per unit despite what anyone says it can or can’t pay.
More aggressive investors willing to bet the company maintains its static distribution through thick and thin should take a look at this hefty yielding partnership. Don’t look here for distribution growth, however.
A Common Problem
The big issue facing all of these companies is a shrinking customer base. That’s a big long-term issue, but for large industry consolidators, any impact is likely years away. That makes these high yielders worth a look for income starved investors.
The article Propane Picks: The Other Fossil Fuel originally appeared on Fool.com is written by Reuben Brewer.
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