A cash-crunched season

March 1, 2008 By    

With the price of oil topping $100 per barrel amid a sputtering overall economy, propane marketers and customers alike spent much of the 2007-08 winter heating season struggling to cover their costs. And while some regions saw record-setting snowfalls, bitterly cold temperatures, crippling ice storms and widespread power outages, other parts of the country experienced way too much warmth to pump appropriate amounts of propane.

 ©ISTOCKPHOTO.COM
©ISTOCKPHOTO.COM

As February drew to a close, retailers and suppliers were recounting a few bottlenecks and spot shortages here and there – but the overriding issue seems to be a crushing cash-crunch permeating throughout much of the propane industry.

Weather woes and delivery challenges aside, cash-flow problems among both marketers and consumers were dominating this winter’s flow of propane: Retailers who failed to adequately pitch budget plans or properly pre-buy to cover their margins are especially hard-hit, perhaps to the point of having to hang it up.

“It will take a big chunk out of some companies depending on what their balance sheets look like,” says consultant Marty Lerum, managing partner at Propane Resources. “I know there are some retailers out there using their credit cards because the banks won’t give them any more money.

“This is the culmination of a three-year process; the warts are finally starting to show,” Lerum observes, referring to a pronounced lack of viable marketing strategies among industry participants. “It’s not an easy, good ol’ boy business anymore. It’s a real business.” He contends that too many owners have taken a lackadaisical stance of “that’s the way my grandpa did it and the way my daddy did it, so things will work out.”

This season’s pricing pressures are burning a number of businesses, says Lerum. “It’s zapping the cash flow out of them.”

Inquiries to Propane Resources about evaluating the monetary value of an owner’s company, with the notion of selling, have tripled compared to last year, he says.

Mont Belvieu, TX Propane Spot Price FOB (Cents per Gallon)
Mont Belvieu, TX Propane Spot Price FOB (Cents per Gallon)

In Lerum’s view, about 20 percent of the industry’s businesses are effectively managed, while “30 percent are just hanging on, and the bottom 15 percent are falling apart. The good operations are moving right along and looking to buy other companies or taking up their accounts,” he says. “The multiple-state marketers are just waiting to take those people out; they’re going to have more opportunities to buy independent retailers.”

The crux of the situation is a paucity of consumer budget plans and marketer pre-buys, according to Lerum, calling such arrangements “a win-win situation.”

In preparation for this year’s winter, marketers pre-purchased 35 percent less propane than usual, Lerum reports. “They bought a lot less fixed-price propane, so they had 65 percent less protection.” As costs rose, he explains, “Their customers were exposed to all those higher prices. People want price stability, and we as an industry are not giving it to them. If the retailers had gone out and fixed the price (during the warmer months of 2007), they would have been able to give their customers some price stability.”

As consumers get hit with pricing volatility, they’re more inclined to drop propane in favor of electricity or other energy sources, Lerum says. “People have been buying electrical heating appliances and shutting off rooms – and there will be more of that,” he cautions.

As it turns out, customers are “putting on their own budget programs by buying less propane for each stop, which increases retailers’ expenses. They’re stopping them (bobtail drivers) in the middle of deliveries, saying, ‘I don’t want 400 gallons – just leave me with 150.'”

Going forward, Lerum encourages marketers to establish step-buying plans. “Divide it into five or six pieces and then go out and position that.”

For this past winter, consumer “expenditures are going to be up 24 percent if the weather and price predictions hold,” says Energy Information Administration (EIA) economist Neil Gamson, speaking prior to oil’s February rise to the $100-per-barrel mark.

The EIA’s annual household heating expense estimates are indeed higher than those from the winter of 2006-07:

Mont Belvieu, TX Propane Spot Price FOB (Cents per Gallon)
Mont Belvieu, TX Propane Spot Price FOB (Cents per Gallon)

Consumption in 2007-08 has seen an upswing as well, according to the EIA, when compared to last year’s figures:

  • Nationwide average, plus 1.2 percent
  • Northeast, plus 1.6 percent
  • Midwest, plus 2.2 percent
  • West, plus 3.1 percent
  • South, minus 1.4 percent

Delivery difficulties

Record cold and snow badgered retailers in Wisconsin and elsewhere in the Upper Midwest. “If we have a global warming issue, we certainly wouldn’t know it in Wisconsin,” says Randy Knapp, executive director of the Wisconsin Propane Gas Association.

“We’ve had trouble getting product in a timely fashion,” he reports. “Every year we battle the same problems. We need more infrastructure for propane.”

Bottlenecks had transports waiting in line at terminals, and Knapp expresses dismay at a pipeline shutdown attributed to “routine” maintenance. “They’ll run the ‘pig’ through the line to clean it – but why are they doing that in the middle of winter?”

Also, a number of retailers sold contracts to consumers but failed to back up the deals with LPG reserves and locked-in margins. In the fall, “They kept thinking the price would go down,” wreaking havoc on the bottom line. “There are some who have not done their homework; it was a big gamble,” says Knapp. “I believe we’re going to see more companies for sale and more buyouts.”

Spot Crude WTI Prices
Spot Crude WTI Prices

Whether pre-buying or spot-buying, “You get burned one way or another,” says Mike Rud, executive director of the North Dakota Propane Gas Association. Adding fuel to the fire was a scheduled pipeline shutdown set for Feb. 19 that was moved back to Feb. 24. In preparation, railcars of propane were rolled in at top dollar, “so now they’re sitting on all this expensive gas.”

An advisory issued by Darin Hunhoff, vice president of propane for CHS Inc., urged the industry to brace for the anticipated closure of the Kinder Morgan Cochin Pipeline, impacting terminals in Carrington, N.D.; Benson, Minn.; Eagle Lake, Minn.; New Hampton, Iowa; and Milford, Ind.

“During this time of potential high demand and tight supply, we recommend that all of our propane retailers keep their bulk storage and end-user tanks full to help minimize supply problems as we finish out the prime heating season,” Hunhoff suggests. “CHS has already secured spot railcars for delivery direct to customers and to our terminal in Glenwood, Minn., to help reduce the impact of this disruption.”

U.S. Crude Oil Stocks
U.S. Crude Oil Stocks

According to Hunhoff, the pipeline had been experiencing low delivery rates into its terminals for several months, in part because the pipeline currently delivers only one product. Until about a year ago, the pipeline — which transverses Canada and the Midwestern United States — transported high vapor pressure ethane, ethylene and other products in addition to propane. The pipeline was “de-rated,” resulting in the operating pressure being reduced due to safety concerns over the line’s integrity, he says.

On Nov. 1 a section of the Dixie Pipeline experienced a breach near Hattiesburg, Miss., threatening the supply of propane to eight terminals serving some 2.5 million households. The National Propane Gas Association (NPGA) and the Propane Education & Research Council (PERC) organized a series of conference telephone calls among the various state associations, their member marketers and concerned end-user customers until flow was restored two weeks later.

Wintery cascade

Snow was so deep in portions of the Great Northwest that resort operators had to shovel beneath ski lifts to ensure gliding clearance.

“We had a bumper crop of precipitation in both rain and snow,” says Dave Ezell, member/manager of CoEnergy LLC in Oregon. The rains fell on the plains, while the mountain ranges were buried in thick snow.

“The Northwest has had more snow than normal,” he reports. “The rail has had trouble keeping up with the supply; we can’t ship enough cars from Canada – for two weeks it was a problem.”

Much of the region’s clientele utilizes propane as an auxiliary heat source for an extra room or as emergency backup for power outages, Ezell says. “A lot of our demand is secondary; people have an electric heat pump.”

CoEnergy’s load has been up this year. “The temperatures have been constant, colder than usual,” Ezell continues. “We’re a growing business and we’re moving more gallons.”

Below-normal mercury readings and heavy snowfall – the most extreme since 1980 – impacted operations in the Four Corners region of Colorado, Arizona, New Mexico and Utah.

The fields of natural gas wells supplying the propane produce a large amount of residual moisture, explains David Fraley, president of Fraley & Co. Inc. “The producers don’t spend a lot of money winterizing their wells because we don’t get that cold.” Critical equipment froze, and the situation was further complicated by an explosion at a plant near Durango, Colo., that typically provides 80 percent of Fraley’s propane. It was out from November to January.

“The supply was not available to the market,” he notes, necessitating railcar shipments from Arizona and New Mexico, “which we’ve never had to do before.”

Consumption among consumers was up 15 percent to 20 percent, and Fraley was able to deliver despite logistical difficulties. “Getting gas into the driveways and tanks was a challenge for the bobtail drivers,” he reports, adding that Colorado issued a month-long hours-of-service waiver. Yet the product remained available. “We did our hedging for this winter back in January of ’07.”

Wrangling the actual gallonage was made easier through Fraley’s networking connections within the NPGA and PERC, he says. “It sure has brought to me the wisdom of being involved in the industry. It takes these types of relationships to be able to move from Plan B to Plan Z.”

Freezing rain and raging ice storms created all kinds of calamities in Oklahoma. “I’ve lived in Oklahoma all my life, and damage was as bad as I’ve ever seen,” says Richard Hess, executive director of the Oklahoma Propane Gas Association. “It was very widespread. We had refineries that had lost electricity and we had highways that were unserviceable.”

Some 500,000 homes were without electrical power for two weeks. “I sold a couple of generators,” reports Paul Laney, president of Liberty Propane in Crookson, Okla. He expects heightened demand to continue as residents rue their rugged winter experiences. “It’s certainly got people thinking about propane generators.”

Lamenting “good” weather

As per usual in the propane industry, “good” weather is deemed “bad” when applied to LPG demand.

Maryland may have hit the national news wires when polling for its presidential primary was extended for 90 minutes due to nasty conditions, but “you only get a day or two of icy weather,” notes Thomas Osina, executive director of the Mid-Atlantic Propane Gas Association. “It’s been a very warm heating season. It hasn’t been good.”

New England also captured headlines for its snow-driven blustery climate, yet aside from a few high-profile blizzards, the overall winter scene remained dismal. “If there’s one plea I’m hearing from my membership, it’s ‘find me some cold weather,'” reports Joe Rose, president-elect of the New England Propane Gas Association.

February was also discouragingly pleasant in Mississippi. “I could be in a short-sleeved shirt if I wanted to, and that isn’t good for propane sales,” laments Vernon Greenlee, president of the Mississippi Propane Gas Association.

The combination of nice weather and high propane prices has customers passing on the gas. “They’re just ordering propane as they need it and not on a regular basis,” reports Greenlee, president of Cotton Belt Liquid Gas. “They’ve gotten off of keep-full.”

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