This week, Durig Capital takes another look at a company that provides essential heating to many rural households across the U.S. Durig Capital first reviewed Ferrellgas in September 2015 and again in September 2016, May 2017 and most recently in August 2017. Jim Ferrell, the company’s namesake, who returned to run the company in September 2016, continues to methodically refocus the company on its core businesses, while streamlining the relatively new oil and gas midstream services division. Ferrellgas’ latest quarterly results shows solid progress:
- 26% increase in net earnings as compared to the prior year period.
- Propane sales volumes increased 16% year-over-year.
- Adjusted EBITDA was up 15% as compared to the prior year quarter.
- Since January 1st, the company has reduced debt by $150 million.
- Interest coverage for the latest quarter came in at 1.5x.
The past winter season was 12% colder than the previous year, which certainly helped Ferrellgas’ financial results. However, management looks to be laser-focused on getting rid of non-core assets, reducing debt and increasing sales volumes. Propane is still a much needed commodity in many parts of the country. Ferrellgas’ 2020 bonds, couponed at 8.625%, continue to sell at a discount, with a yield-to-maturity of about 11%. Considering the company’s most recent successful quarter, these bonds have been marked for additional weighting in Durig Capital’s Fixed Income 2 (FX2) managed income portfolio, the most recent aggregated performance of which is displayed below.
Update Since Durig Capital’s Last Review
Durig Capital last reviewed Ferrellgas in August 2017. In early March, the company released its financial results for Q2 FY 2018. The company registered solid gains in its most recent quarter including:
- Adjusted EBITDA increased 15% year-over-year, growing from$105.0 million to $120.6 million.
- Net of non-cash charges, Ferrellgas’ net earnings increased 26% over Q2 2017, totaling $47.3 million.
- Propane sales volumes for Q2 increased by 42.3 million gallons or 16% over the previous year period.
- Gross profit for the quarter also increased, up almost 12% compared to the prior year period ($264.4 million versus $236.5 million).
- Since January 1, 2018, Ferrellgas has reduced its outstanding debt / letters of credit by $150 million, primarily though the effects of asset sales (see the section on “Bridger” further down) as well as stronger performance.
Ferrellgas has an experienced and knowledgeable management team, headed by Jim Ferrell, the company’s founder. In addition to this, this past winter was 12% colder than the previous year, which definitely worked in the company’s favor.
Bridger Energy Sale and Debt Reduction
A few years ago, Ferrellgas entered the oil and gas midstream services sector with the purchase of Sable Environmental. In 2015, it acquired Bridger Logistics, increasing its presence in midstream services. Since that time, Ferrellgas has written down a large impairment charge related to Bridger, and most recently, Ferrellgas made the decision to sell Bridger Energy, a subsidiary of Bridger Logistics. In addition to this, it also recently completed the sale of 1,072 railcars from Bridger’s Rail Services. These transactions have helped Ferrellgas to improve its balance sheet. Since January 1, 2018, the company’s outstanding debt and letters of credit on its credit facility have been reduced by approximately $150 million. On an annualized basis, the interest expense savings associated with this debt reduction will be approximately $4.5 million.
Related to these transactions, Ferrellgas’ leverage ratio has also decreased, down from 7.57x at the end of the first quarter to 6.96x at the end of the second quarter. This reflects the company’s successful efforts to de-lever as well as increase its adjusted EBITDA.
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 4,000 people nationwide. In Ferrellgas’ 80-year history, the company has grown primarily through acquisitions, purchasing more than 240 businesses. The company also provides oil and gas midstream services to major energy companies in the United States through its two midstream segments, Sable Environmental (acquired in May 2014) and Bridger Logistics (acquired June 2015). 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.
The Propane Industry
Ferrellgas is one of the largest propane distributors in the United States, with operations in all 50 states. Propane has a wide range of uses beyond just backyard grilling and portable cook stoves. Farmers use propane to power many types of farm equipment. It is an essential fuel for crop drying, flame cultivation, fruit ripening, space and water heating and food refrigeration. Also, millions of families nationwide also use propane daily for furnaces, water heaters, generators, etc. In rural areas of the country, propane distribution 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.
(Source: LPGasMagazine.com- partial list of Top 50 Propane Retailers)
Interest coverage is of particular interest for a company’s bondholders as it indicates the company’s ability to pay bond interest when payments come due. For its latest reported quarterly results (for the three months ended January 31, 2018), Ferrellgas had operating income of $65.5 million (without non-cash Depreciation and Amortization expense). The company’s interest expense for the quarter was $42.7 million for interest coverage of 1.5x.
Ferrellgas has also continued to pay its unitholders a quarterly distribution. The company recently declared a Q2 cash distribution of $0.10 per common unit. While these distributions do not affect bondholders, bondholders should be encouraged as this dividend level provides an extra cash cushion in the event the company experiences quarterly volatility in its cash flows.
The default risk for bondholders is whether Ferrellgas can continue to improve its balance sheet (debt reductions) along with growing its core business as well as its midstream services. The company has made some strategic decisions with its recent sales of Bridger Energy as well as a large amount of rail cars from Bridger Rail services. These transactions helped decrease Ferrellgas’ debt, save on annual interest expense and improve its leverage ratio. The colder weather of the past winter certainly helped Ferrellgas’ bottom line. In addition, the company is also diligently working to expand its Blue Rhino tank exchange business due to it being less seasonal by acquiring smaller, more regional suppliers to expand the company footprint. Given these factors, the excellent ~11% yield-to-maturity on Ferrellgas’ June 2020 bonds appears to outweigh the risks identified.
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.
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
Jim Ferrell, Ferrellgas’ founder, continues to do great things at the company that bears his name. He has refocused his team and this is evident in the company’s latest quarterly revenue growth as well as growth in the volume of propane gas sold. Getting rid of non-core assets has provided cash to pay down debt and reduce leverage. For investors who can appreciate the essential service provided by Ferrellgas, these bonds make a fantastic portfolio addition. We have marked these bonds for additional weighting in our Fixed Income 2 (FX2) managed income portfolio, the most recent aggregated benchmark performance of which is displayed above
Issuer: Ferrellgas Partners LP
Ratings: — / CCC
Yield to Maturity: ~11.0%
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Disclosure: Durig Capital and certain clients may hold positions in Ferrellgas’ 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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