Why These Four Propane Gas Stocks Are Set to Climb in the Next Few Months

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Created on Wednesday, 25 August 2010 15:39

Written by Sara Nunnally, Editor, Smart Investing Daily

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After I read Jared's article on Monday, I realized we're in a similar boat, but heading in very different directions...

I've spent my first year here in Milwaukee renting a nice two-story house across from a county park just south of the city. It's very convenient: five minutes from downtown, 10 from Lake Michigan, and 10 from General Mitchell International Airport. (That helps out a bit when I fly into Baltimore for Taipan's think-tank meetings.)

Now I'm looking for a house, and I'm in the perfect position to buy. I don't have to sell a house in order to buy, and banks are really hurting to lend to qualified buyers. In fact, I put in an online application to Wells Fargo (WFC:NYSE) one late afternoon and got a phone call from a broker that evening, way after business hours!

But unlike Jared, I'm not looking for a penthouse in the heart of downtown.

Rather, I'm looking at old farmhouses with a decent amount of acreage for our four horses, handful of dogs, and my un-catlike cat who's even scared of the little lovebird on our kitchen table.

As soon as you get away from city services, like water, sewer and power, you're making a different kind of investment.

In fact, of all the homes I've looked at over the past couple of weeks, most were heated by oil or propane gas. With the evenings already starting to get pleasantly cool here in Wisconsin, I've got winter heating bills to look forward to.

That means I've got to start paying more attention to heating oil prices, and propane gas supplies.

What Heating Oil and Propane Gas Inventories Mean for This Winter

According to the Energy Information Administration, propane inventories jumped by 2.4 million barrels last week, as prices for propane gas fell 7.2 cents per gallon last week.

Heating oil prices fell 15.5 cents per gallon with inventory supplies for all distillate fuels climbing 1.1 million barrels to 174.2 million barrels.

And yet, these figures compare poorly (for the homeowner) to last year's statistics. Prices for propane gas were 13.5 cents lower this time last year, and prices for heating oil were 14.3 cents lower per gallon.

That said, heating oil inventories are much, much higher than they were a year ago, which might do the Northeast good this winter... So let's look at propane gas.

Propane gas inventories are well within their five-year average, however, so you can expect supplies to drop significantly between December and March. And as stocks are nearly 10 million barrels below last year's inventory, we might see a sizable pop in propane gas prices.

For the homeowner (or soon-to-be homeowner, like me), this isn't a good scenario.

For the investor, it's an opportunity:

View Larger Chart

This is a one-year chart of Suburban Propane Partners LP (SPH:NYSE), AmeriGas Partners LP (APU:NYSE), Energy Transfer Partners LP (ETP:NYSE), and FerrellGas Parners LP (FGP:NYSE) in blue, red, green and gold respectively.

Note the steady rise in the last quarter of 2009 into the winter season of 2010.

These four propane gas stocks might be preparing for another such steady climb as we head into winter. You'll see that at least three of the four have had a significant pullback, which could indicate readiness for another climb.

What and When to Play Propane Gas

Of the four stocks I've mentioned, APU performed the best last winter, narrowly edging out SPH with a gain of 16.95% versus 16.27%. That's a slim gain, and in comparing the fundamentals, these two trade pros and cons. SPH has higher quarterly revenue growth for its most recent quarter, but APU has higher gross margins. Both of these stocks have lower-than-industry-average P/E ratios, and ETP's and FGP's P/E ratios are well above 30 and 40 respectively.

SPH has the edge in liquidity, though, and has a lower debt ratio. Also APU has a large percentage of its stock held by insiders. That's a bit of a red flag...

Now you have an idea of what to play, let's look at when to play it.

As I said before, we've seen a significant pullback in both, and as we're heading into the cooler months, your starting point could be anytime between now and October, though it would be prudent to wait and see an end to the pullback before jumping in.

For SPH, that might look like a bump back above $48.54.

Getting out, though, is what we really want to talk about. Even though winter – and falling propane gas supplies – continues into March, consider taking any gains off the table in mid to late January, or early February, depending on the chart and the weather.

For the past five years running, SPH has shown significant drops during these months. In fact, if we go back to our gains comparison for last winter, we see a rise of 20.63% had the exit point been in January as opposed to the end of March.

With propane gas prices climbing more than 43% in the last quarter of 2009 and into 2010, propane companies could pack some punch for your investment portfolio this winter... Or help mitigate those heating costs if you've got a quaint century-old farmhouse on 20 acres in the Heartland.

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