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We downgrade our recommendation on Ferrellgas Partners L.P. (FGP - Analyst Report) to Neutral from Outperform due to a highly competitive propane distribution business environment, reliance on few propane suppliers, seasonal variance in the demand for propane and higher degree of competition from other energy sources.

We know that Ferrellgas is dependent on a few principal propane suppliers, which increase the risk of interruption in supply and transportation. If one of the suppliers fails to provide the required propane in time, then its operations might get hampered. Subsequently, this will negatively affect the partnership’s operational as well as financial results.

Weather conditions have a significant impact on the demand for propane. This makes the partnership’s financial performance vulnerable to warm winters and unfavorable weather in the grilling season. Warmer-than-normal temperatures during winter or dry or warm weather during the harvest season would result in reduced propane usage, while significantly impacting the partnership’s propane sales.  

In addition, we know Ferrellgas faces strong competition from other types of fuels, including oil and natural gas. Some of these are less costly than the equivalent value of propane and are threat to future propane demand. If people consume more oil and natural gas, then the performance graph of the partnership will be affected negatively.

Despite dealing with the negatives of Ferrellgas, we have identified a few strong growth catalysts, which are expected to provide impetus to the partnership’s future performance. These are the partnership’s steady inorganic growth strategy, solid liquidity position and continuous cost-reduction program.  

Ferrellgas Partners L.P. currently has a short-term Zacks #3 Rank (Hold rating).

Overland Park, Kansas-based Ferrellgas Partners L.P. is a leading distributor of propane gas solutions and related equipment in the U.S. The partnership provides propane services to residential, industrial, portable tank exchange, agricultural and wholesale customers. The partnership competes with Energy Transfer Partners L.P. (ETP - Analyst Report).

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