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Monday, January 27, 2014 | Issue #2215
Supplies of This Gas Are Dangerously Low
David Fessler, Energy and Infrastructure Strategist, The Oxford Club
|  January may go down in history as the coldest month this century, according to some reports. The frigid weather gripping much of the country has produced a supply crisis for a gas that millions of Americans rely on to heat their homes.
But it's not the gas you're thinking of.
Yes, natural gas prices are spiking, but the bigger crisis is in propane, which heats 14 million households. Right now, propane supplies are dangerously low. Prices have surged 252% since January 14.
I'm going to tell you three ways that investors can take advantage of this situation.
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Unlike natural gas, propane is usually stored and transported in liquid form. There are only two strategic storage locations for liquefied propane gas (LPG) in the United States (in Kansas and Texas).
More than 80 million barrels of propane can be stored at the two locations. It's then shipped via truck, rail or pipeline to other parts of the United States, where it is stored locally.
Propane is produced as a byproduct of either natural gas liquid or crude oil processing, so its supply is not easily adjusted.
The recent spate of snowstorms is hampering deliveries of LPG. And stocks are at extremely low levels. Eighteen states have declared "propane states of emergency."
Delivery companies are prioritizing LPG distribution to customers with the lowest supplies.
Roy Willis, CEO of the Propane Education and Research Council, commented on the current propane emergency in an article in MoneyNews: "There are no strategic stockpiles around the country like there are for crude oil. It's all in the private sector. Getting that replenished is a logistical challenge and that's what we're facing now."
Last week propane reserves were down to 10.2 million barrels, according to the Energy Information Administration (EIA). That's lowest January level in at least 20 years.
As a result, prices for propane have soared. According to the EIA, last week a gallon of LPG in the Midwest averaged $2.39, up 37% from last winter. But that's the average; spot prices recently have been much higher. For example, a gallon coming out of the storage facility in Kansas was going for as much as $4.71 on Friday.
Current inventories can supply U.S. households for as few as 10 days, compared with 42 days last year. Deliveries from Alberta through the Cochin pipeline were shut down for much of December due to unscheduled maintenance.
Next Winter Could Be Worse
The 1,900-mile Cochin pipeline, owned by Kinder Morgan Inc. (NYSE: KMI), is a key source of propane supply. It normally delivers 70,000 barrels per day from Alberta to the Midwest.
However, right now the Cochin is running at only 50,000 barrels per day. There's not enough supply coming from Western Canada to fill it. What's worse, Kinder Morgan plans to reverse the direction of the pipeline by next winter, at which point it won't supply propane at all.
The nation's largest propane producer, Enterprise Products Partners L.P. (NYSE: EPD), already exports much of what it produces. And like Kinder Morgan, Enterprise plans to reverse its own 16-inch pipeline that currently carries propane to the Midwest.
How to Play It
The propane emergency is certainly a bad situation for those who depend on it for heating and cooking. But investors have a number of ways to profit.
Several master limited partnerships (MLPs) operating in the propane sector could be well-positioned to capitalize on the price spikes.
Enterprise Products Partners L.P. has a $60.4 billion market cap. Its current yield is 4.33%. Suburban Propane Partners L.P. (NYSE: SPH), a nationwide distributor and marketer of propane, has a $2 billion market cap and pays a healthy 7.87% dividend. And Ferrellgas Partners L.P. (NYSE: FGP), also a distributor, has a market cap of $1.89 billion and pays a hefty 8.39% dividend.
Producers and distributors alike should benefit from continued above-normal demand for propane.
Good investing,
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