The two most notable fossil fuel sources are oil and natural gas. Propane, a third common fossil fuel, is produced from both natural gas processing and crude-oil refining. It’s used for far more than just back yard barbecues, and more aggressive income investors should get to know the industry well.
The white container attached to gas barbecue grills is filled with liquefied propane. While it’s hard to say anything bad about that wonderful use of propane, it is hardly the only thing that the fuel source is used for. It’s also used for space heating, water heating, cooking, fireplaces, clothes drying, lighting, and heating for pools and spas. I’ve even seen refrigerators that run on propane, but not since I was a young child.
According to the Propane Education & Research Council, more than 12 million households use propane as a heat source. In addition, it has millions of users in the agricultural, commercial, industrial, and transportation areas. It may not be as well known or widely used as oil and natural gas, but there is still a big market.
Some of the biggest players in the propane space are publicly traded limited partnerships (LPs). Dividends, then, are a notable characteristic of the propane industry. While it isn’t a growth business, the big players have been able to use scale and acquisitions to their advantage.
For example, Suburban Propane Partners LP (NYSE:SPH) purchased Inergy’s propane business in 2012 as that company looked to make a shift from propane to natural gas pipelines. It was a transformational event for Intergy, as the sale allowed it to exit its historical line of business in one swift move. It was an even bigger change for Suburban Propane Partners LP (NYSE:SPH), which basically doubled in size overnight.
While there were overlapping operations, which has allowed for cost savings, Suburban Propane Partners LP (NYSE:SPH) went from serving 30 states to 41. The acquisition allowed the partnership to increase its distribution in January after holding it steady since late 2010. A much bigger player now than it was before, Suburban Propane Partners LP (NYSE:SPH) should be able to better compete and, assuming it continues to execute well, the distribution should continue to rise in the years ahead.
With an over 7.5% yield, middle of the road investors willing keep a close eye on this partnership’s progress would do well to take a look.
Bigger is Better
AmeriGas Partners, L.P. (NYSE:APU) lays claim to being the largest retail propane marketer in the country. It has about two million customers, with accounts in every state (including Hawaii and Alaska). While it isn’t double the size of Suburban Propane Partners LP (NYSE:SPH), it’s pretty close. The company’s distribution has been headed generally higher over the last decade.