Supplies of Propane Gas Are Dangerously Low, And Next Winter Could Be Worse [Enterprise Products Partners L.P., Kinder Morgan Inc]

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January 30, 2014 12:51pm NYSE:BOIL NYSE:GASL

naturalgas600X300: 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.

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 LP(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,

by David Fessler, Energy and Infrastructure Strategist, The Oxford Club

Investment U provides cutting-edge research and strategic financial recommendations for all levels of investors through its morning publication Investment U Daily and its related publications.

Related ETFs:

(BOIL) ProShares Ultra DJ-UBS Natural Gas ETF 

Description:ProShares Ultra DJ-UBS Natural Gas is an exchange-traded fund incorporated in the USA. The Fund will seek daily investment results that correspond to twice (200%) the performance of the Dow Jones-UBS Natural Gas Sub-Index.

(GASL) Direxion Daily Natural Gas Related Bull 3x Shares ETF   

Description:Direxion Daily Natural Gas Related Bull 3X Shares is an exchange-traded fund incorporated in the USA. The Fund’s objective is daily investment results of 300% of the performance of the ISE Revere Natural Gas Index.

(NAGS) Teucrium Natural Gas Fund ETF   

Description:Teucrium Natural Gas Fund is an exchange-traded fund incorporated in the USA. The investment objective of the Fund is to have the daily changes in percentage terms of the Fund’s NAV per Share reflect the daily changes in percentage terms of a weighted average of the closing settlement prices for four natural gas futures contracts traded on NYMEX.

(UNG) USCommodity Natural Gas Fund LP ETF    

Description:United States Natural Gas Fund LP is a Delaware limited partnership incorporated in the USA. The Fund’s objective is to have changes in percentage terms of its unit’s net asset value reflect the changes of the price of Natural Gas delivered to Henry Hub Louisiana as measured by changes in percentage terms of the price of the Natural Gas futures contract on the NYMEX.

(UNL) USCommodity 12 Month Natural Gas Fund LP ETF  

Description:United States 12 Month Natural Gas Fund LP is an exchange traded fund incorporated in the USA. The Fund’s objective is to have changes in percentage terms of its unit’s net asset value reflect changes of the price of Natural Gas delivered to Henry Hub Louisiana as measured by changes in %age terms of the price of an avg of the next 12 month’s Natural Gas futures contracts on NYMEX.


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