This week, Durig Capital looks at one of the top propane companies in the United States. Ferrellgas (NYSE:FGP) is the second largest propane retailer and distributor in the country. Through a combination of acquisitions and colder winter weather, the company has posted solid numbers for its third quarter (ending April 30, 2019).
- Gallons of propane sold grew by 7% over the same period in 2018.
- The number of retail customers also grew by 4% year-over-year.
- Operating income was up 36% in the third quarter.
- EBITDA also grew by 11% over the third quarter 2018.
Since Jim Ferrell returned to the CEO role almost three years ago, Ferrellgas has returned to its core business – sales and distribution of propane and growth by acquisition. Since Durig Capital’s last review of Ferrellgas in April 2018, the company has acquired six additional, regional propane distributors, which has likely contributed to the company’s increase in customer count and gallons sold. Jim Ferrell also personally owns more than 4.7 million shares of the company’s stock, giving him a personal interest in ensuring the company’s success. Ferrellgas’ 2020 and 2021 bonds are both trading at a discount currently, the 2020 bond more so than the 2021 bond. This has translated to a monster 44% yield-to-maturity on the company’s 2020 bond and a still competitive yield-to-maturity of over 13% on the 2021 bond. With the company’s improving third quarter results, Durig Capital has reviewed both the 2020 and 2021 maturity bonds for additional weighting in its Fixed Income 2 (FX2) High Yield Managed Income Portfolio, the aggregated performance of which is shown below.
Update on Ferrellgas
Ferrellgas has continued to grow via acquisition. Since Durig Capital’s last review in April 2018, the company has acquired six additional, regional propane distributors.
These acquisitions have been immediately accretive to the company and Ferrellgas’ latest quarterly results show some of the growth realized from these acquisitions. Here are some of the highlights from the three months ending April 30, 2019 (Q3 FY 2019).
- The number of retail customers improved to 705,605 for the quarter compared to 679,678 a year ago, an increase of 4%.
- Gallons of propane sold for the quarter were 264,082 in 2019 as compared to 246,304 in the same period in 2018, an increase of 7%.
- Tank exchange sale locations now exceed 54,300, up 600 locations from last quarter and 6 percent compared to prior year.
- Operating income for the third quarter was $69.8 million as compared to third quarter 2018 of $51.3 million, an increase of 36%.
- EBITDA for the third quarter was $85.4 million versus $76.7 million a year ago.
Ferrellgas attributed some of its third quarter increases to weather. For the three months ending April 30, 2019, the more highly concentrated geographic areas served by the company were approximately 6% colder than normal and approximately 1% colder than the prior year.
Earlier this year, Jim Ferrell, interim CEO commented on the company’s performance. “We continue to pursue our strategy to invest in the growth of the business and are achieving success faster than anticipated. We are committed to growing market share organically and through acquisitions.”
Vested Interest in Ferrellgas’ Success
Ferrellgas has an experienced and knowledgeable management team, headed by Jim Ferrell, the company’s founder. Jim has been involved with the company in various executive capacities since 1965. Most recently, the Ferrellgas’ board returned him to the CEO position in September 2016. Since that time, he has brought Ferrellgas back to its roots, focusing on the sale and distribution of propane, as well as growth through the acquisition of smaller, regional propane distributors. Although he technically is still operating as the Interim CEO, Jim Ferrell has a vested interest in seeing the company succeed. Although Ferrellgas is a publicly traded company, a significant amount of its stock is owned by Jim Ferrell. At last record, he directly or beneficially owned over 4.7 million shares of Ferrellgas stock. In addition to this, the company’s employees indirectly own over 22.8 million shares through an employee stock ownership plan.
About the Issuer
Ferrellgas is a leading U.S. distributor of propane and propane related equipment. The company is based in Liberty, Missouri and currently employs over 4,000 people nationwide. In Ferrellgas’ 80-year history, the company has grown primarily through acquisitions, purchasing nearly 300 businesses. 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.
Top Propane Companies
When most people think of propane, they think of summertime barbecues or maybe even portable cook stoves. But propane has many uses beyond outdoor cooking. Many farmers use propane to power various types of farm equipment. Propane is also essential in crop drying, fruit ripening, flame cultivation, space and water heating as well as food refrigeration. There are also millions of families across the U.S. that use propane every day for water heaters, furnaces and generators. Amongst the rural areas of the country, there is usually a geographic monopoly in propane distribution, with usually only one distributor in any given rural area. Ferrellgas has capitalized on this fact, acquiring smaller, regional propane distributors who are interested in selling their operations. This acquisition strategy has made Ferrellgas the second largest propane retailer and distributor in the country. Here are the top 10 propane companies based on the number of gallons sold in 2018.
Interest Coverage and Liquidity
For a bondholder, interest coverage is a measure of the bond issuer’s current capacity to service its existing debt. In addition, healthy liquidity levels can help support the company’s variable revenues from quarter to quarter. For its most recent quarter, Ferrellgas had operating income of $64.8 million, with interest expense of $44.2 million. This results in an interest coverage ratio of 1.5x. In terms of liquidity, as of April 30, 2019, the company had total liquidity of $292.3 million, consisting of $45.4 million in cash and $246.9 million of secured credit.
The risk for bondholders is twofold. First, can the company continue to perform, generating sufficient revenues and cash flow to fund operations. Second, can it position itself to address the upcoming June 2020 maturity of the company’s subordinated bond. The growth in the number of customers as well as the increase in the volume of propane sold are certainly a move in the right direction. The suspension of the dividend last year is hopefully giving the company additional breathing room to begin to address its level of long-term debt. The next few quarters will be key to determining how the company intends to address the 2020 bond maturity.
Currently, the 2020 maturity bond is deeply discounted, with a yield-to-maturity above 40%.
The May 2021 maturity, although also discounted, is still yielding a very enticing 12%.
Ferrellgas has over $2 billion in long-term debt. The company’s metrics appear to be improving.
Ferrellgas’ revenues are tied to seasonal temperature changes. During the colder winter months, there is an increase in demand for propane for heating both residential and commercial buildings. Because of this, the company generates higher revenues during its second and third fiscal quarters (which occur during the peak winter months). In order to level out its revenue streams throughout the year, Ferrellgas relies on its portable tank exchange propane sales via its Blue Rhino division. Sales of portable propane tanks provides increased operating revenues during the first and fourth fiscal quarters due to its counter-seasonal business activities.
Key Differences Between the 2020 and 2021 Maturities
Because we have reviewed both the June 2020 and May 2021 bonds of Ferrellgas, we wanted to point out some differences between the two.
The subordinated bond maturing in June of 2020 is yielding about 44% to maturity and could produce some oversized returns for investors willing to take on higher levels of default risk. This bond also matures about 11 months earlier than the longer bond we are reviewing. Ferrellgas has total liquidity of almost $292.3 M at the time of this writing, so with this bond issue being $280 M face outstanding, the company could potentially draw on their secured credit facility to repay some of this issue. Another potential option they could exercise is to extend the bonds and allow themselves more time to better their position for repayment.
The May 2021 bond is discounted much less than the shorter maturity bond, and in our opinion, is the more conservative option, at just over 13% YTM. That said, this bond issue is much larger at $500 M face value outstanding, and if Ferrellgas chooses to draw on their secured credit facility to aid in repaying the June 2020 maturity bond, the company could face challenges down the road as this bond nears its maturity.
In general, bond prices rise when interest rates fall and vice versa. This effect tends to be more pronounced for lower couponed, longer-term debt instruments. Any fixed income security sold or redeemed prior to maturity may be subject to a gain or loss. Higher yielding bonds typically have lower credit ratings, if any, and therefore involve higher degrees of risk and may not be suitable for all investors.
Summary and Conclusion
Ferrellgas has gone back to its core business in the past few years – propane distribution and growth by acquisition. It appears to be working as the company has shown healthy increases in both customer count and gallons of propane sold in the third quarter. With Jim Ferrell still at the helm, he has a very personal interest in ensuring the success and longevity of the company. Ferrellgas’ 2020 and 2021 bonds are both trading at a discount and the yields are outstanding, at 44% and over 13%, respectively. For investors willing to endure additional risk, the 2020 bonds could contribute to increased portfolio returns. The roughly 13.25% yield-to-maturity on the 2021 bonds is also very competitive. In light of Ferrellgas’ improving results, Durig Capital has reviewed both the 2020 and 2021 maturity bonds for additional weighting in its Fixed Income 2 (FX2) High Yield Managed Income Portfolio, shown above.
Issuer: Ferrellgas Partners LP
Ratings: Ca / CC
Yield to Maturity: ~44.0%
Issuer: Ferrellgas Partners LP
Ratings: Caa2 / CCC-
Yield to Maturity: ~13.25%
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Durig Capital provides investors with a specialized, transparent fiduciary service at a very low cost. Our FX2 (Discretionary Management) Portfolio over time has greatly outperformed our FX1 (Non-discretionary) Portfolio, giving significantly higher (at times double) the returns of FX1. Our professional service enables access to a broad spectrum of bond, high yields, and lower price points that are often found in less efficient markets, but not evidenced in many bond services. Most of our client accounts are custodied in their own name at TD Ameritrade Institutional, a large discount service provider that is SPIC insured, or at Interactive Brokers. We have now started offering our highly successful FX2 service to clients of other Registered Investment Advisors through segregated accounts at TD Ameritrade. Please ask us to learn how this might work for you and your current advisor.
Disclosure: Durig Capital and certain clients may hold positions in Ferrellgas’ 2020 or 2021 bonds.
Disclaimer: 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. The high yield strategies presented in this review by Durig Capital may not be suitable for all investors. This is not investment advice from Durig Capital, nor a specific recommendation to buy or sell securities. If you have any questions or concerns about its suitability for your personal investment, you should seek specific investment advice from a registered professional before making an investment decision.
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