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The world burns through more than 9.2 billion gallons of propane each year, with demand projected to grow to 10.1 billion gallons per year by 2025. In the U.S. alone, 48 million households use propane to heat water, dry clothes, cook, andheat their homes. That said, thanks to the shale boom, America has more propane than we can use, which is opening up opportunities to ship it overseas.
That dynamic market gives investors two distinct opportunities to invest in the $40 billion propane industry. They have the option to collect a relatively steady income stream by investing in retail propane distributors, or a smaller current payout but more future growth by going with a large propane exporter. Here's a closer look at those two opportunities.
Retail propane distributors
Data sources: AmeriGas Partners, Ferrellgas Partners, Suburban Propane Partners. Note: Retail volumes sold during the fiscal third quarter.
AmeriGas Partners is the nation's largest retail propane marketer, serving about 2 million customers in all 50 states through about 2,000 distribution locations. While that large customer base drives recurring sales, the weather fuels propane demand and profitability. For example, last quarter, the weather was 5% colder than the prior year in AmeriGas' service area, which helped drive a 32% increase in adjusted EBITDA. Aside from the weather, three factors fuel AmeriGas Partners' growth: Cylinder exchanges, national accounts, and acquisitions. Last quarter, all three initiatives contributed, with cylinders sold up 3%, national account volumes up 3%, while the company has completed six acquisitions since the start of the year. These three drivers will be critical for the company going forward as it looks to increase its share of the retail propane market.
Ferrellgas Partners, likewise, operates in all 50 states. Further, in addition to distributing propane to retail customers, it operates midstream services for major energy companies consisting primarily of saltwater transportation and processing as well as hauling crude oil. That diversification helped offset the impact of the warmer weather on Ferrellgas' retail propane business, where an 18% increase in average temperatures drove down propane volumes and revenue. That said, as the weather normalizes, volumes and earnings should heat up and help the company maintain its lucrative payout.
Suburban Propane Partners is the smallest of the trio, currently serving 1.1 million customers via 700 locations in 41 states. That said, not only does it distribute propane, but it distributes fuel oil and other refined fuels to customers, primarily for home heating. Because of that, the weather also has a significant impact on its operations. Last quarter, for example, retail propane volumes rose 3.4% due in part to colder weather in its service areas as well as strategic acquisitions. Acquisitions will likely continue to be a primary growth driver for the company over the long term as it joins its propane MLP rivals in rolling up smaller competitors.
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International propane exporters
Data sources: Enterprise Products Partners and Targa Resources.
America is the world's largest LPG exporter, sending 250 million barrels to consumers across the globe last year. Driving those exports is energy infrastructure giant Enterprise Products Partners, which has accounted for roughly half of America's export volumes this year. The company currently has the bulk of its export capacity committed through 2019, which should provide stable income for the partnership. In addition to LPG exports, Enterprise Products Partners operates several other crucial propane assets including pipelines, storage facilities, and fractionation plants. Further, the company is building a propane dehydrogenation facility (PDH), which will consume 35,000 barrels of propane per day and turn it into a petrochemical feedstock. Most importantly, Enterprise has minimal volume risk because long-term, fee-based contracts underpin the bulk of its propane assets.
Like Enterprise Products Partners, Targa Resources is a major U.S. propane exporter. The company currently has the capacity to export more than 7 million barrels per month, but it has averaged about 5 million barrels this year. In addition to exports, the company has extensive supporting propane infrastructure, including fractionation and storage facilities as well as pipeline connectivity. Further, fee-based contracts support these assets, which eliminates Targa Resources' direct commodity price exposure.
Investors interested in propane stocks have two excellent options. Those looking for steady income can opt for the slower-growing, higher-yielding retail distributors. Meanwhile, investors looking for more growth and greater diversification beyond just propane can consider the leading propane exporters, which offer lower current yields but more long-term stability and growth potential.
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Matt DiLallo owns shares of Enterprise Products Partners. The Motley Fool recommends Enterprise Products Partners. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.