Ferrellgas Buys Propane Assets

Ferrellgas Partners (FGP - Analyst Report) has recently acquired propane operations in the south-central U.S. market. The transaction will add around 5,000 customers to Ferrellgas’ existing customer base. Ferrellgas presently serves nearly 1 million customers spanning in all 50 states, the District of Columbia and Puerto Rico.
 
The deal is in line with Ferrellgas’ organic growth strategy. Ferrellgas management sees the acquisition as a strengthening factor for the partnership’s presence in the rapidly growing south-central U.S. market. It also foresees the deal to be immediately accretive to the partnership's earnings. However, Ferrellgas did not reveal the seller and financial terms of the transaction.
 
In recent years, Ferrellgas has made progress in improving operating efficiencies, which should result in cost savings. We see Ferrellgas realizing strong gross margins this fiscal since the weakness in commodity has struck the wholesale propane prices to a larger extent than the residential or retail prices.
 
Moreover, initial signs of capital market recovery become visible – credit spreads have started contracting and a number of large equity offerings have recently been priced. This should help in lowering the distribution yields of master limited partnerships (MLP), therefore increasing the unit price.
 
Ferrellgas closed up 13 cents at $8.15 on Monday’s trade, providing an annualized distribution yield of 11.1%. We reiterate our Hold recommendation for the partnership.

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