Ferrellgas Partners (FGP, Financial) is a master limited partnership whose shares are down dramatically. The company got itself into trouble by borrowing way too much to fund acquisitions and will soon cut the dividend.
The stock trades for $10.69, there are 97.1 million shares, and the market cap is $1.038 billion. I’m going to call Ferrellgas Partners a “stock” even though it’s a limited partnership.
The trailing four dividends were 51.25 cents. For most of the previous years, the dividend was $2. The dividend may get cut to about $1 a year. So the new dividend yield would be 9.35%.
The balance sheet shows $4.965 million in cash and $149.583 million in accounts receivables. The liability side shows $67.928 million in accounts payables, $165.291 million in short-term debt and $1.941 billion in long-term debt. That’s why I never bought into the whole MLP thing. How can you only have $5 million in cash and have over $2 billion in debt? That’s like owing $2 million on a home mortgage and keeping $5,000 in your bank account. What would Suze Orman say?
Moody’s recently cut the debt from B2 to B1. As often is the case, the rating agency is a day late and a dollar short.
According to my math, last year’s free cash flow was $76.809 million. Of that, $204 million was paid in dividends. How can you pay $204 million from $76.8 million? By borrowing. Net borrowings for the last three years were $171.9 million, $483 million and $197.5 million.
Like many REITs and MLPs, Ferrellgas Partners has increased shares outstanding. There were 77.57 million shares just four years ago. Shares outstanding have increased 24.63% since then. That means if you owned shares back then, your one share lost 24.63% of its power. Of course management always says that these new shares are “accretive,” meaning that they use the proceeds for the benefit of the shareholder. If you believe that all of the time, I’ve got a bridge in Brooklyn to sell you.
According to an investor presentation, Ferrellgas Partners is 75% propane and 25% midstream. Part of the business is delivering propane to customers. My parents use propane as they live in the country and do not hook up to a gas line. The midstream transports gas and energy through pipelines, trucks, rail, terminals, etc. One product that Ferrellgas Partners sells is Blue Rhino, a portable gas tank used for grilling and barbecue.
It was the Bridger acquisition that got Ferrellgas Partners into trouble. It was financed with $562.5 million in cash and 11.2 million units of stock. Part of this was funded with a $500 million offering of notes due June 15, 2023. The coupon on the notes is 6.75%. How would you like to get a 6.75% return on your entire investment portfolio for the next seven years? Not going to happen.
Founder James Ferrell has stepped up to be interim CEO, replacing Stephen Wambold. Ferrell needs to run around there like a feral dog to turn things around. If you want to get a narrative of Ferrellgas Partners, look at the company’s press releases on the website. It shows acquisitions made and the debt used to fund M&A.
What could be interesting is the debt. In a bankruptcy, the debt owners would become the owners. The problem is that even the debt trades at almost par. You don’t buy debt trading at par if you think the company is in trouble. Why is the debt trading at such a high level? With interest rates so low, money has rushed into the bonds. The debt yields 7% to 9%.
I don’t like MLPs for the following reasons. Share dilution is the biggest. If the MLP pays a 50 cents dividend, I’m happy with that in perpetuity. Don’t try and buy other divisions. It doesn’t help my one share of stock. The second is debt. The reason these MLPs always yielded such high amounts is most analysts can see that at some point, the debt will become an issue, as it did in Ferrellgas Partners’ case.
Disclosure: We do not own shares.
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