This week’s bond review focuses on a propane distributor who has recently added revenues through acquisition in the midstream oil and gas sector. Ferrellgas Partners LP (FGP) is one of the nation’s largest propane distributors, and although propane is its core revenue generator, within the last 14 months it has acquired two companies that provide services to the midstream oil and gas industry. These strategic acquisitions have not only begun to provide diversified revenue sources, but the most recent acquisition of Bridger Logistics has been immediately accretive, resulting in the first-ever quarterly dividend increase for the shareholders of this MLP. Its last reported fiscal year showed a solid 21% increase in total revenues over the previous year, and between FY 2012-2014, adjusted EBITDA increased nearly 50%. In spite of oil having fallen from over $100 / barrel to its most recent price of $40 / barrel, Ferrellgas has continued to grow. Couponed at 8.65% and priced slightly over par, we think these relatively short 58 month bonds give income investors excellent cash flow and a healthy yield of about 8% with a company that continues to grow revenues and market share. Therefore, we have targeted these Ferrellgas Partner bonds for addition to our global high-yield managed income portfolios, FX1 and FX2.
The Propane Industry
Presently, the propane industry is made up of a few big players and many smaller players, mostly small, regional suppliers. Today, Ferrellgas comes in as the second largest propane distributor in the United States, with operations in all 50 states. Propane has a wide range of uses beyond what most people consider – backyard grilling and portable cook stoves. More than 660,000 farmers use propane for irrigation pumps, grain dryers, standby generators and other farm equipment. It is an essential fuel for crop drying, flame cultivation, fruit ripening, space and water heating and food refrigeration. In addition to this, more than 9 million families nationwide use propane daily for furnaces, water heaters, cooktops, outdoor grills, fireplaces, generators, and other appliances. Business owners across the country are also choosing this clean-burning fuel for bus, taxi, delivery, and other fleets to minimize air pollution in metropolitan areas. Ferrellgas has built an extensive distribution network that serves all of these consumer segments.
About the Issuer
Ferrellgas is a leading U.S. distributor of propane and propane related equipment. The company is based in Overland Park, KS and currently employs nearly 4000 people nationwide. The company also provides oil and gas midstream services to major energy companies in the United States. The company’s core operations of providing and distributing propane serves the industrial / commercial, portable tank exchange, agricultural, wholesale and other customers in all 50 states, the District of Columbia and Puerto Rico. The company also generates sales from portable tank exchanges, nationally branded under the name Blue Rhino, through a network of independent and partnership-owned distribution outlets. Its residential and agricultural customers generally live in rural areas, whereas its industrial/ commercial and tank exchange customers generally reside in more urban areas.
In May 2014, Ferrellgas began to diversify its revenue sources with the acquisition of Sable Environmental, a service provider to the midstream oil and gas industry. They followed this with an additional diversifying acquisition in June 2015 when they acquired Texas-based Bridger Logistics, another provider of integrated crude oil midstream services.
Growth in the Midst of an Energy Downturn
As the energy industry, specifically oil and gas, has continued to suffer unprecedented decline, Ferrellgas has blazed ahead, confident in its ability to gain a larger foothold in the propane industry as well as within the midstream oil and gas sector. In rural areas of the country, propane distribution, by nature, is usually a geographic monopoly, meaning there is usually only one distributor in an extended rural area. Ferrellgas has used this to its advantage, actively acquiring and continuing to solicit regional propane suppliers / distributors who might be interested in selling their operations. This strategy has paid off, making Ferrellgas the second largest propane distributor in the nation with a market share of 9%. With approximately 68% of the propane market currently made up of independent retailers, Ferrellgas has an excellent opportunity for continued growth through industry consolidation.
Two of its Ferrellgas’ recent acquisitions have provided additional diversification in its revenue generating segments. The acquisition of Sable Environmental in May 2014, gave Ferrellgas new inroads into the midstream oil and gas industry. Sable Environmental provides salt water disposal services throughout Eagle Ford Shale in Texas. More exciting is Ferrellgas’ June 2015 acquisition of Bridger Logistics, which provides end-to-end crude oil logistics from the wellhead to end markets across North America. The Bridger acquisition is expected to be immediately accretive for Ferrellgas, adding an additional $100 million in annual EBITDA, an increase of a third over current levels.
Ferrellgas has registered impressive increases in both revenue growth and adjusted EBITDA. For fiscal year 2014 (ending 7/31/2014), the company had consolidated revenues of $2.405 billion. This represented an outstanding 21% increase over FY 2013’s consolidated revenues of $1.975 billion. Adjusted EBITDA has also shown robust growth. Between FY 2012 and FY 2014, adjusted EBITDA increased nearly 50%, growing from $193.1 million to $288.1 million.
For fiscal year 2014, Ferrellgas had operating income of $144.4 million and interest expense of $86.5 million for an interest coverage ratio of 1.67x. In its most recent reported quarterly results (ended 4/20/2015), Ferrellgas had operating income of $60.4 million and interest expense of $23.5 million for an interest coverage ratio of 2.57x. While the variations in the interest coverage ratio might seem unusual, it should be noted that Ferrellgas’ revenues peak during its fiscal second and third quarters due to the large amount of propane used for heating purposes in both residential and commercial buildings. Also worth noting in reference to its interest coverage ratio, in June 2015, Ferrellgas placed $500 M in bonds at 6.75% to help finance the Bridger Logistics acquisition. While this will add approximately $34 million in annual interest expense, as mentioned previously, the Bridger acquisition will also have an immediate accretive effect on EBITDA.
Other notable balance sheet figures at of its last quarterly report: the company had cash on hand as of 4/30/2015 of $7.4 million. Property, plant and equipment were valued at $614.2 million.
It is also worth mentioning that Ferrellgas recently increased the quarterly dividend paid to its shareholders by 2.5%, the first increase in the company’s history. This brings the company’s current distribution rate to around 9%. The increase coincided with the recent Bridger acquisition, leading one to conclude that this acquisition will support further company growth and dividend growth. This increase should encourage bondholders as this dividend level provides and extra cash cushion in the event the company experiences quarterly volatility in its cash flows.
The default risk is Ferrellgas ability to perform. The company has made excellent progress in diversifying its revenue sources through the recent acquisitions of Sable Environmental and Bridger Logistics, with the Bridger Logistics acquisition being immediately accretive to Ferrellgas through the addition of $100 million in annual EBITDA. It is also extremely encouraging that the company has just recently boosted its quarterly distribution to its shareholders by 2.5%, the first such increase in the company’s history. With Ferrellgas’ continued search and hunger for growth through accretive acquisitions, the company is well positioned to take advantage of consolidation within the propane industry and additions to its newly formed midstream services division.
Ferrellgas’ revenue stream from the sale and distribution of propane varies throughout the year due to seasonal temperature changes. There is increased demand during the winter months (for heating residential and commercial buildings). As a result, the company’s revenues are higher during the second and third fiscal quarters (which occur during peak winter months). One of the ways Ferrellgas levels these revenues during other times of the year is through its portable tank exchange propane sales through its Blue Rhino division. These sales provide increased operating profits during the company’s first and fourth fiscal quarters due its counter-seasonal business activities.
As with other commodities, Ferrellgas is exposed to price fluctuation in the price of propane, its main revenue generator. Although prices have decreased over the past twelve months, somewhat mirroring that of oil and gas, the effects for Ferrellgas have been positive. Margins have increased significantly in the past few quarters due to the lower cost of propane. For example, the cost of propane in Q2 FY 2015 was 40% less year-over-year. On an ongoing basis, the company uses risk management activities, such as the use of financial derivative instruments, to hedge its exposure to price fluctuations.
These 8% yielding, short-term bonds have similar yields and maturities to other bond issues recently reviewed on Bond-Yields.com, such as the 7.62% Rent-A-Center, the 7.83% PHI, and 9.18% Parker Drilling bonds.
Summary and Conclusion
Ferrellgas has grown handsomely due to its many acquisitions. The company’s recent decision to begin diversifying outside its core propane business had already begun to benefit the company and its shareholders, illustrated by its recent, first-ever, quarterly distribution increase. These 8.625% couponed bonds, with a relatively short 58-month maturity, have a current yield to worst call (in under 3 years) of about 8%, which is over 5x the current 5-year US Treasury yield of 1.49%. Although these bonds are currently selling at a slight premium of about 101.5, the yield is very attractive for income investors, and we have therefore marked these bonds for addition to our global high-income managed Fixed-Income1.com and Fixed-Income2.com portfolios.
Issuer: FerrellGas Partners LP
Yield to Worst Call: ~8.0% (@100 on 6/15/2018)
Yield to Maturity: ~8.23%
Disclosure: Some Durig Capital clients may currently own Ferrellgas Partner LP’s 2020 bonds.
Please note that all yield and price indications are shown from the time of our research. Our reports are never an offer to buy or sell any security. We are not a broker/dealer, and reports are intended for distribution to our clients. As a result of our institutional association, we frequently obtain better yield/price executions for our clients than is initially indicated in our reports. We welcome inquiries from other advisors that may also be interested in our work and the possibilities of achieving higher yields for retail clients.
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