Fellow InvestorPlace Contributor, Will Ashworth recently told readers about the delicious opportunities for investors in the burger business, suggesting numerous plays to capitalize on Americans’ meaty love affair, from sit-down burger-builder Red Robin Gourmet Burgers (NASDAQ:RRGB) to patty-flipper McDonald’s (NYSE:MCD).
However, that affinity for burgers doesn’t stop at the corner dinner or fast food joint. With the sun starting to shine and temperatures rising, that means grilling season is just around the corner.
And that, my friends, means propane.
More Than Just Grillin’ Fuel
Propane — a byproduct of natural gas production and oil refining — often is overlooked as an energy source by consumers and investors alike … except when we fire up our grills. However, propane continues to gain a following among consumers because of its many uses beyond just outdoor barbeques.
First, propane’s high octane rating and other properties make it perfect for spark-ignited internal combustion engines. As such, roughly 2% of the propane in the country is used as a transportation fuel. Various forklifts, light-duty and even heavy-duty fleet vehicles (think buses) have turned to the gas as a way to extend engine life and cut costs. More than 10 million buses, cars and trucks worldwide run on the liquefied gas.
However, propane truly shines on the home front.
Propane’s main uses include home and water heating as well as being the primary cooking fuel for roughly 4% of Americans. Ironically, many rural areas — including some of the nation’s hotspots for hydraulic fracturing — aren’t connected to main natural gas lines and commonly rely on propane as their primary residential energy source.
That extends to many farmers as well. Nearly 80% of American farms use the fuel to power equipment, dry crops and sanitize soil.
Overall, according to the Propane Education and Research Council, propane accounts for nearly 4% of United States energy usage, and more than 12 million households use the fuel as a heat source.
While that might seem like a small number — especially when you consider how many consumers use natural gas or coal — the propane industry does have a few aces up its sleeve. In this case, we’re talking about a Buffett-style economic moat.
The suppliers — not the end consumers — own the tanks and related pipes/values stored on the customers’ property. This allows only the owner/supplier to fill the tank. The switching costs and property/infrastructure damage to remove the storage tank outweigh the few dollars of savings. In addition, propane distributors are not regulated like a utility or certain pipeline assets. Suppliers charge a fixed markup on each gallon sold. While that causes revenues to fluctuate, gross profits generally hold steady.
As such, many of the propane players are structured as juicy master limited partnerships.
Making Hank Hill Proud
Given the continued steady use of fuel across our nation, investors might want to give the propane supplier MLPs a spot in their portfolio.
A prime pick is AmeriGas Partners (NYSE:APU). With 2 million customers across every state, the company is the largest retail propane marketer in the country. More importantly, it continues to get bigger via key acquisitions.
Much of the propane market is driven by smaller independent regional players. AmeriGas is seeking to end that reign by continuously adding these “mom & pop” firms to its umbrella. Since the 1980s, APU has engaged in roughly 160 buyouts, and its acquisition of Heritage Propane was a big one. Management at AmeriGas estimates that the purchase gave it a full 15% of the propane market.
That market share has allowed APU to grow its distribution steadily. The latest moved juiced its quarterly distribution by 5% and gives the firm a healthy 7.4% yield.
For those looking for a more robust payout — and for those OK with taking on additional risk — then Ferrellgas Partners (NYSE:FGP) could be for you. Odds are that if you own a gas grill, you’re a customer of Ferrellgas. Its Blue Rhino subsidiary is the largest tank exchange network in the country. In addition to Blue Rhino, the company is the second largest distributor of propane and serves nearly 1 million customers across all 50 states, in addition to owning assets in Puerto Rico.
Like AmeriGas, that size has allowed FGP to pay a hefty distribution — to the tune of a 9.7% yield. But here is where the risk comes in.
Some analysts estimate that the partnership often times pays out more in distributions that it can sustain. Given that fear, FGP trades at slight discount to APU because the distribution could be cut “at any moment.” That pending cut hasn’t happen for roughly 10 years now — although FGP hasn’t grown its distribution, either. So Ferrell gas is a riskier way to play with America’s energy pie … but not a bad one by any stretch.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities, but he did have a new Blue Rhino tank just waiting to be used for fajitas.