2015-16 State of the Industry

December 10, 2015 By    
Photo: iStock.com/Palto

Photo: iStock.com/Palto

Propane continues to flow downstream from big tanks to smaller tanks as it has throughout the history of the commercialized industry. But as propane retailers go about their daily routines of moving fuel from one place to the next, the dynamics of the industry are changing.

Supply is as plentiful as ever, having surpassed the 104-million-barrel mark well after fall’s crop drying season. Prices at Mont Belvieu are as sustainably low as they’ve been in 13 years, having slipped below 50 cents per gallon at the very end of 2014. Pricing was at or below that threshold for 26 consecutive weeks through the second week of November 2015.

Retailers have newer market opportunities to vet for their businesses, as well. Propane autogas is the obvious opportunity, and although a number of retailers have yet to sell one autogas-specific gallon, many see the potential to grow significant gallons for their businesses.

Click to enlarge.

Click to enlarge.

“I would hope autogas is going to continue in a positive path and that a large part of our gallons will be toward fleets and other autogas opportunities,” says Todd Lawrence, general manager of Farmers Cooperative in Live Oak, Fla.

The gallon-growth opportunities stretch beyond autogas, too.

“We’re at a watershed moment in our industry – one we have not seen at all in our history,” says Mark Zimora, director of U.S. operations at Energy Distribution Partners. “[We have] abundant supply and an opportunity to grow demand. [We have] some new products and innovations with autogas, irrigation pumps and technology for water heating for the residential sector. It’s really an encouraging time for low wholesale pricing [and] margins that seem to be holding in the marketplace.”

Indeed, the industry has a lot going for itself, but traditional concerns remain. Increasing government regulation, spiking insurance costs, expanding natural gas pipelines and cutthroat competition are some of what retailers cite as keeping them up at night. Retailer complacency is another concern propane stakeholders express.

So although the propane industry is undergoing significant changes, some things remain relatively the same.

“The industry is 30 years behind because human beings tend to get comfortable in business at some point,” says Ofelio Martinez, director of sales at Florida Propane Exchange in Miami. “Everyone in our industry is older and comfortable.”

This year’s State of the Industry report explores these types of concerns, as well as the opportunities ahead for retailers. Can the coming years turn into the industry’s most glorious? Or will retailers squander opportunities to capitalize on ample supply and historically low prices along with the chance to build industry-changing markets?

Applications galore

The propane industry has made tremendous strides in the school bus market. Photo: Kevin Yanik

The propane industry has made tremendous strides in the school bus market. Photo: Kevin Yanik

Opportunities are aplenty. Fleet vehicles, generators, irrigation engines, lawn mowers, school buses and tankless water heaters are some of the latest applications to generate new or renewed interest.

According to a survey LP Gas conducted for the State of the Industry report that elicited about 100 responses, retailers believe fleet vehicles and school buses in particular present the greatest opportunities to achieve gallon growth among the applications listed.

In fact, 66 percent of retailers believe fleet vehicles are a real opportunity to grow gallons for the industry, while 54 percent see school buses, as a specific type of fleet, in the same light.

Retailers entering the autogas market and offering services to potential fleet customers must first look at their own vehicles, says Dave Bertelsen, national propane product manager at Matheson, headquartered in Basking Ridge, N.J.

“We as an industry need to start running propane vehicles,” Bertelsen says. “If we’re going to be out selling autogas, we ought to be using it.”

Not everyone is convinced autogas is the future, though. Nearly one in three retailers LP Gas surveyed say they do not expect autogas to become a traditional market for the industry, much like the residential, commercial, industrial and agricultural markets. Twenty-two percent aren’t sure autogas will become a traditional propane market. Nearly half (46 percent), however, expect autogas to become part of the industry norm.

Propane-fueled irrigation pumps offer another gallon-growth opportunity. Photo: Propane Education & Research Council

Propane-fueled irrigation pumps offer another gallon-growth opportunity. Photo: Propane Education & Research Council

Tim Lease, energy division manager at Premier Cooperative in Mt. Horeb, Wis., is one retailer who expects autogas to become part of the norm. After all, autogas is a key business component at his company.

“We used to rely on home heat to grow our business,” Lease says. “Now, we’re relying on getting business from companies. I think autogas is going to increase our gallons overall, and it’s going to take out the valley we see in the summer months.”

Retailers are enthusiastic about other industry gallon-growth opportunities, albeit at a lesser rate. About one in three retailers say tankless water heaters are a real growth opportunity for the industry. Retailers are less confident about generators (30 percent), lawn mowers (26 percent) and irrigation engines (25 percent) for industry gallon growth.

Most retailers are convinced at least one new or renewed application exists for which the industry can grow gallons.

Some retailers are forming partnerships with homebuilders to grow residential gallons. Photo: iStock.com/Justin Horrocks

Some retailers are forming partnerships with homebuilders to grow residential gallons. Photo: iStock.com/Justin Horrocks

“The potential for these new markets is going to be big,” says Brian Powers, president of Indiantown Gas in Indiantown, Fla., who has worked in the industry for 26 years. “We have reinvented the wheel. Now, we have to apply the inventions we’ve come up with.”

Of course, some retailers are selling gallons into new or renewed applications already. Three in four retailers tell LP Gas they sell gallons for generator and tankless water heater use, respectively. Twenty-nine percent say they sell propane for use with fleet vehicles and school buses, respectively, and 17 percent actively sell for lawn mower use.

Fewer retailers are selling propane for irrigation engine use (14 percent), but that particular opportunity, geographical in nature, presents an opportunity to upsell farmers or present them with a new propane application.

“We’ve got to get to know [farmers] because we do a lot with them,” says Billy McPhillips, co-owner of Country Side Propane in Plant City, Fla., and Bradenton Propane in Bradenton, Fla. “They’ve got water heating for their migrant workers; forklifts for their businesses; they heat to wash their fruit. I think we need to get in their associations and get in their industry. I think you’ve got to show them how they can use propane.”

Residential resurgence

Retailers can grow their businesses by showing customers the many ways to use propane. Photo: Digital Dispatcher

Retailers can grow their businesses by showing customers the many ways to use propane. Photo: Digital Dispatcher

In addition to agriculture, a number of retailers are intensifying their efforts within the residential heating sector. Residential construction has steadily risen each year since 2011, according to FMI, an investment banking and management-consulting firm. The firm expects single-family construction to end 2015 at 9 percent growth and for multifamily housing to realize 11 percent growth this year.

Not all of those new homes are propane homes, of course. But some retailers have made strides in recent years partnering with builders and creating additional opportunities to sell propane.

“The builders are the bread and butter for us on the residential side,” says Randy Sams, owner of Sams Gas in Orlando, Fla. “It spawns growth from there.”

Revere Gas has had new success in the residential market, as well.

“Our most success has been with the 45-and-older clientele building homes and putting in gas backups with a heat pump,” says Carlton Revere, president of the Hartfield, Va., company. “Rarely is there any straight gas heat installed anymore; it’s all heat pump.”

Revere admits that today’s heat pumps are more efficient, reducing the number of gallons retailers can sell per application. But other applications have emerged to replace lost gallons, he says.

Heating demand drives residential gallon sales, but newer opportunities have emerged in the residential space. Photo: Kevin Yanik

Heating demand drives residential gallon sales, but newer opportunities have emerged in the residential space. Photo: Kevin Yanik

“We probably have grown a little bit more on the water heating side than the heating market,” Revere says. “The tankless [water heater] technology is superior to where it was 20 years ago. Also, all of the efficiency standards have come up with electric, so you have a lot more options with that type of approach.

“If you get your foot in the door with a tankless [water heater] or a fireplace, it’s bolting on those other products that really helps,” he adds.

Upselling to existing customers is essential to achieving growth, says Kara Tucker, who handles business development at Koppy’s Propane in Williamstown, Pa.

“One thing we do that’s beneficial is we have partnerships with HVAC companies,” she says. “They refer business to us and vice versa.”

Natural gas still stands in propane’s path to a significant number of new residential gallons, but propane retailers are nevertheless finding growth opportunities.

“Natural gas has been and will continue to be our enemy,” Zimora says. “They’re subsidizing the growth in their pipelines, putting money on their existing rate holders. It’s an unfair advantage but one that’s been there for a while. Combating natural gas is probably at the forefront as a threat.”

Gallons can be had, either in the residential market or elsewhere. Retailers who want those gallons simply must make the efforts to capture them.

“Every independent businessperson who started a propane business that’s in the second or third generation wants to see the business expand and grow,” Zimora says. “But it has become more competitive and more difficult to grow in the recent past. Maybe that has gotten us a little complacent that we can’t grow our gallons.”

Pricing concerns

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Click to enlarge.

As friendly as wholesale propane prices were in 2015, some retailers say the industry is missing an opportunity to achieve higher retail profit margins based on the low prices for which it’s selling propane.

“They’re not willing to accept this new margin paradigm we’re in,” Zimora says. “That would enhance their value, whether it’s an enterprise value that they keep in their family or, if it’s an exit time, it’s going to build something on top of what they do now.

“If they were comfortable with a certain margin three years ago, they could have that margin plus ‘X’ now.”

Low pricing isn’t the only dynamic retailers cite as a pricing-specific problem. High pricing is also an issue in certain parts of the United States, and competitors in these areas are concerned that gouging is giving the industry a black eye.

“The price some retailers are putting out there is bad for the industry,” says Trent Nagata, senior director of commercial sales development at Superior Plus Energy Services, headquartered in Rochester, N.Y. “We talk about customer preservation, but you have people who are so frustrated with the cost of propane that they’ve moved to alternative fuels. I think we’ve taken the residential customer for granted.”

According to Nagata, some Northeast prices are set 20 to 30 percent higher than competitors. The gouging approach stems from a mindset that customers have nowhere else to turn in their area for propane, he adds.

“I’ve heard concerns from smaller local players in the last couple of years,” Nagata says. “We are creating our own frustration for our customers because of how we’re managing the business. We’re almost our own worst enemy.”

Recent pricing swings have also hurt the industry, Revere says.

“Ample supply is good and it’s a story to tell because consumers have seen wild swings in per-gallon pricing over the last 10 years,” he says. “Consumers have certainly felt it. They’re a lot more hesitant about diving in because of those wild swings.”
Consumers shouldn’t have to be hesitant, though, because now is one of the best times in recent memory for their local supplier to buy wholesale propane and offer it at stable pricing.

“What a great time to be in propane,” Powers says. “I don’t care what you’re selling. If it’s at a [13]-year price low, you’re going to have an easier time selling it.”

Brandon Hewett, owner of J&J Gas Service in Mayo, Fla., agrees that now is a great time to be a propane retailer.

“What excites me about the propane industry is the current price per gallon and the new appliances that are energy efficient, along with the new equipment coming on board,” Hewett says. “There are some growth opportunities for us for the future.”

About the Author:

Kevin Yanik is the senior editor of LP Gas Magazine. Contact him at kyanik@northcoastmedia.net or 216-706-3724.

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