It Burns Clean

There is a fuel that is clean burning, in plentiful supply in the U.S., and growing in popularity as a vehicle fuel.

If you barbecue, you probably own one of the small, minion-looking cylinders for your grill.

We’re talking about propane, the often overlooked by product of oil and gas production.

Only about 5% of homes use propane for heating and cooking. In the Midwest and Northwestern U.S. However, ten times that amount – about fifty million Americans – use it in some capacity.

As a fuel, it offers many benefits. It burns clean, like methane. Where methane is one carbon atom and four hydrogen atoms, propane is three carbon atoms and eight hydrogen atoms. When it is combusted, it produces water and carbon dioxide. It doesn’t produce any pollutants like sulfur or nitrogen compounds.

That’s what makes propane a better heating choice than oil or coal.

And the U.S. is flush with propane. Classified as a “hydrocarbon gas liquid” (HGL), it comes from both natural gas production and oil refining. You can see what I mean in the chart below:

With oil production in the U.S. currently at all time highs, propane production soared as well:

U.S. HGL production doubled from 2012 to 2022. Produced as a byproduct, it’s an incredibly valuable fuel source. Some facts about propane:

• It takes less propane energy than electricity to run the same appliance.
• Propane is harmless in the environment – it doesn’t cause toxic spills and is harmless if leaked.
• Propane furnaces can be up to 95% efficient. Oil furnaces run between 84% and 90%.
• Tankless propane water heaters achieve 98% efficiency. Electric hot water heaters account for 18% of a home’s electricity consumption.
• Ninety percent of propane comes from U.S. sources.

As a fuel source, propane is an excellent choice. Especially in areas where you can’t run natural gas pipelines, such as rural areas or highly developed areas.

This month, we found a propane utility that serves its communities, has an excellent reputation, and will pay us over 7% per year in dividends.

That’s a winning combination in today’s market.

Suburban Propane Partners is a Great Way to Play Propane

Suburban Propane Partners, L.P. (NYSE: SPH) is a $1.13 billion utility founded in 1928.

It delivers propane to a national customer base.

Suburban Propane Partners became a master limited partnership in 1996.

From the company’s website:

The company is a nationwide marketer and distributor of propane, fuel oil and refined fuels, as well as marketing natural gas and electricity in deregulated markets. With more than 3,300 full-time employees, Suburban Propane maintains business operations in forty-one states, providing dependable service to approximately 1 million residential, commercial, industrial and agricultural customers through approximately 700 locations.

As a utility, it distributes some of its profits to shareholders. In this case, it should pay us $1.30 per share per year. That works out to a dividend yield of more than 7.2%.

Suburban Propane had retail propane sales of 396.4 million gallons in fiscal 2023. It’s one of the largest retail marketers of propane in the United States. That should protect the dividend.

As you can see, the company has strong, stable financial results. The interesting thing about this company is its efficiency. It converts about 10% of its revenue to free cash flow (FCF). FCF is the money the company generates free and clear after all accounting. Ten percent is amazing for a utility. The company trades for roughly 8.8 times free cash flow.

The company’s financials support expanding its business, which is currently going on.

Suburban Propane has a growth strategy built on the clean attributes of propane. The company invests in renewable energy projects through its wholly owned subsidiary, Suburban Renewable Energy, LLC.

Propane is one of the best bridge fuels to support the transition from coal and oil to renewables.

In addition, it can be produced as green biogas. The company’s long-term growth plan centers around adding capacity with low carbon sources.

For example, the company acquired a renewable natural gas production facility in Stanfield Arizona. It includes a connection to an interstate pipeline, a food-waste facility in Columbus, Ohio, and manure rights to 55,000 dairy cattle.

The company also continues to grow through acquisition of traditional propane services. It acquired a propane business in the upper Northwestern United States.

The company has a strong runway for growth through consolidation. Additionally, its free cash flow demonstrates that it can support its dividend going forward.

Our risk here is any reduction in dividends.

The company’s MLP status attracts investors that want yield. A reduction in dividends will cause investors to sell the stock. Fortunately, that does not appear to be a substantial risk.

Action to Take: Buy Suburban Propane Partners (NYSE: SPH).

Today, Suburban Propane Partners offers us an excellent investment opportunity. The company’s financials are strong. Its price to free cash flow is quite low. Our risk of the company cutting its dividends is also quite low.

This means we can buy the company and collect our 7%+ per year.

For the Good,

The Mangrove Investor Team