‘Average’ Winter Weather Squeezes Margins, Cash Flow

March 1, 2005 By    

As January rolled into February, propane marketers nationwide were hoping for a prolonged cold spell to bolster what’s being called an average heating season with fewer gallons pumped and lower margins earned.

 Propane Stocks (Million Barrels)
Propane Stocks (Million Barrels)

“It’s been a very ho-hum winter,” says Michael Schwartje, vice president at ConocoPhillips.

Unlike last year, there were neither major bottlenecks nor price spikes and supply shortages. “It’s run smoothly – no crises,” he says. “Volume movements are slightly down. As always, we’d like to see more volume.”

“I think ho-hum would fit our category too,” says Bill Van Hoy, executive director of the Texas Propane Gas Association. Because the Lone Star State is so large, differing regions and companies tend to reap varying results, but the overall season is being tagged as average.

“We had one winter storm here that was short and sweet – the day before Christmas – but it didn’t sustain,” Van Hoy reports.

 Heating Degree Day (HDD) Statistics
Heating Degree Day (HDD) Statistics

“It’s not a gangbusters winter and it’s not a blowout winter; it’s just an average winter,” says David Field, executive vice president of the Ohio Propane Gas Association.

Throughout the 2004-05 heating season, newspaper and television accounts described all types of meteorological mayhem across the United States. Yet these short-lived calamities failed to hit the longer-term low temperatures that drive propane sales volumes.

“We had bouts of cold weather, but it didn’t stick around. You need sustained cold weather,” says David Hinton, a petroleum industry analyst with the U.S. Department of Energy’s Energy Information Administration.

“It’s been a very lackluster winter,” he says, noting that this season’s propane drawdown is roughly equal to last year’s.

The mild weather has kept supply in line with demand; imports were steady during the warmer months and this season lacked the 2003-04 trouble spots that prompted pricing spikes.

From September 2004 to January 2005, the domestic propane drawdown was 28.1 million barrels, compared to the 28.9 million barrels consumed during the same period a year ago. January’s 13.6 million-barrel stockdraw fell slightly short of the 14.5 million-barrel, five-year average.

“We had a very strong late stockfill last fall that put inventories in a good position,” Hinton says. “Stocks are in real good shape among all regions, and stocks are in good shape for the next seasonal stock-build.”

Hinton estimates that the nation will have an above-average stock of 35 billion barrels as spring hits. “It will help put downward pressure on pricing,” he says.

According to Energy and Environmental Analysis Inc., in early February the national average wholesale price of propane stood at 81.1 cents per gallon, which was 9.2 cents more than last year’s figure. Residential pricing was at $1.72 per gallon, up almost 19 cents from 2004. The average American home’s propane heating bill was 20 percent higher than last year.

Although other home heating sources were also more expensive this season, over time this hurts the propane industry as it competes for furnace fuel applications, observes consultant Gordon Regan of Propane Partners.

“Some people may say, ‘I’m tired of propane’s pricing being so volatile,'” he says, noting that propane marketers can expect some existing clients to seek bargains being offered by competitors. “Customers coming out of winter may start shopping, especially if they own the tank.”

Neil Gamson, an EIA economist, says the price of crude oil coupled with supply and demand issues tends to dictate domestic pricing structures. Just 26 percent of American propane demand falls into the residential category; 41 percent goes to the petrochemical industry, 17 percent is commercial, 8 percent goes to agriculture and 6 percent is used for industrial applications.

Gamson says a sustained February or March freeze could considerably heat up this year’s tepid propane marketplace.

“Extremely cold weather can eat up a lot of propane in a short period of time,” he says.

More variables

Crude oil hit record highs this season, topping $55 a barrel in October 2004 compared to $40 last April. A barrel of crude was selling for $47 in early February. EIA’s most-recent Short-Term Energy Outlook report predicts that crude’s cost will be “well above” the $40 mark through 2006, hovering around $45 per barrel for most of this year.

Gamson notes that this can all change based on world events, American fuel usage rates and a host of other factors.

Predicting exactly when propane’s cost will reach its yearly bottom remains a tough call, although industry experts advise, as always, that propane marketers should be stocking up in the spring or summer to get the best pricing.

“People are going to wait and see which direction the market’s going in,” says supplier Mike Tracey, vice president of marketing for SEA-3 terminals in Portsmouth, N.H.

He’s reluctant to take on the role of soothsayer, but he believes propane marketers should consider themselves quite fortunate if crude’s price dips to $40 a barrel.

“There are a lot more variables now than we’ve looked at in the past,” Tracey says. “We are a global economy and it’s [driven by] supply and demand.”

The impact of OPEC, the Organization of Petroleum Exporting Countries, is just one piece of the puzzle. China’s burgeoning industrialization is thirsting for 20 percent more oil than it imported in 2003. (China’s demand for 6 million barrels a day is second only to this country’s 20.1 million barrel-a-day rate.)

Currently, the United States has 250 fewer refineries than at the end of World War II. Motor vehicle and chemical plant demands play huge roles, as might be expected, plus there can be unforeseen circumstances aggravated by overseas insurrections, pipeline sabotage and natural disasters.

Weather, of course, always plays an important role in the domestic supply and demand equation. According to forecasters at the National Aeronautics and Space Administration, a weak El Nino ocean current is expected to make 2005 even warmer than 1998, which was far hotter than any year in the entire preceding century.

During last year’s chaotic heating season, SEA-3 had to meet accelerated propane demand by buying it from ships sailing the high seas; this year there were no spot buys.

“It’s been kind of slow,” Tracey says. “We had some high points and low points . It hasn’t been one of those barn-burners like the past two years.”

Through January, Europe and Asia were experiencing warmer-than-usual temperatures, and this could create a global propane surplus. The United States may become the proverbial dumping ground for propane that previously went overseas based on this country’s ability to store large amounts, says consultant Ron Gist, senior principal with Purvin and Gertz.

“Water-borne imports were extremely high last summer,” says Gist, and that could repeat this year.

However, the nation’s hefty storage capacity is lacking at a critical level – that of the propane marketer, according to Gist.

The charted shape of American storage capacity looks like a weightlifter’s dumbbell: high on the supplier and end-user levels, yet low in the middle where the propane dealers reside.

Gist recommends marketers invest in more onsite storage capacity. “Beefing up the infrastructure would be a good idea,” he says.

This year’s weather was warmer than the 30-year average, says Gist, and propane’s rise in price had many households taking a conservative approach to their heating needs.

“It has encouraged people to buy only minimum amounts,” says Gist. “Instead of buying 300 or 400 gallons, people only want 100 gallons to get them through the winter. Demand was fairly low – we talked to retailers and they confirmed it. This is one of the years where we have larger-than-usual inventories.”

Gist also says that pent-up demand could present a positive boost for propane, but so far that has not become apparent.

“The crude oil prices could be a factor in all these theories here,” he says.

Lower volumes

In the Northeast, most companies propane volumes are down, says Denis Gagne, executive vice president of the Propane Association of New England.

During this year’s heating season, news accounts have consistently detailed nasty snowfalls sweeping through the region, yet propane demand remains off the mark pending a hoped-for late blast of bone-chilling temperatures.

“You can have a lot of snow, but it might not be a cold winter,” says Gagne, who is also vice president of wholesale at Eastern Propane & Oil in Rochester, N.H.

“It’s not going as good as we would like it to go,” he says. While pricing has started its seasonal slide, Gagne would like to enjoy more volume.

“In cold weather we’re selling more product and generating more margins. You’re selling more product with the same infrastructure, and the bottom line looks better,” he explains.

Increased operational costs have hit hard throughout the industry as insurance, labor and other bills continue to rise.

“They have all these things going up except the bottom line,” says Thomas C. Osina, executive director of the Mid-Atlantic Propane Gas Association. While gallonage may be down for the heating season, retailers didn’t put as much wear and tear on the equipment either, he notes.

Pursuing non-heating applications such as home appliances, forklifts and commercial accounts can be helpful in times of under-performing weather conditions, Osina observes.

“Those who developed year-long load programs will be doing better this year,” he says.

Gagne says that lower cash flows will put a damper on equipment purchases such as bobtails and tanks. “It’s probably going to be a more conservative year,” he says.

A few New England propane marketers did fare better than others, according to Gagne.

“Some operations work very efficiently,” he says. “In a mild season they don’t bring on the extra drivers.”

Mixed bag

Maneuvering around wholesale vs. retail propane costs can be delicate in a competitive marketplace.

“It’s a mixed bag,” Gagne says. “(Price fluctuations) depend on the company’s pricing. Some companies are very aggressive [when it comes to adjusting their rates]; others drag their feet.”

Moving the pricing upward too quickly can bring negative results.

“You want a long-term relationship with your customers, so you don’t want to charge too much,” says Gagne.

Volume has remained steady for Ultramar in Montpelier, Vt.

“We had two weeks that were 20 degrees below zero,” says representative Christy Lindley. “These two weeks we were very busy,” she says, but an early February rainfall seemed to sum up an unpredictable Vermont winter.

“Even though it’s been mild, I don’t see a decrease [in sales]. Everyone’s been saying that,” she says.

Business at Star Gas in Swansea, Mass. is “pretty good” this year, according to manager Bob Leene, who credits advance planning.

“We were up to date with our deliveries before the cold weather hit,” he says. “We’ve been down at least 10 percent in degree days.”

“We had some trucking issues in the Northeast,” says D.D. Alexander, president of Global Gas Inc. in Englewood, Colo. The company serves a 21-state marketplace from Wyoming eastward to the Atlantic coastline.

“It gets back to hours of service,” she says of the regulations that restrict a driver’s time behind the wheel. “It was too little, too late. They missed the boat.”

Nine states were granted hours of service exemptions of varying durations this season, according to the National Propane Gas Association: New York (twice), Pennsylvania, Connecticut (twice), Massachusetts, Rhode Island, New Jersey, Delaware, Maryland and Minnesota.

“There are so many regulations now for the drivers that they say, ‘I’m not doing this anymore – I’ll find a different kind of work,'” says Alexander. “I know people who have rigs that are parked because they can’t find drivers.”

With this year’s mild weather, Alexander predicts “slim pickings for the equipment people because cash flow will be very tight. Industry-wide it will affect people’s buying.”

“Our inventories are 20 percent to 22 percent higher than normal; we’ll come out of the winter with above-average inventories,” Alexander says.

“Inventory has been the big picture. It will give us a buying opportunity, but we don’t know when. This might be one of those years where people buy in bits and pieces [depending on what happens with the price of crude oil].”

A bottleneck raised its head in the upper central regions of the United States when several terminals (Carrington, New Hampton, Mankato and Benson) were temporarily shut down in December due to a leak in the Dome/Cochin pipeline, which comes down from Canada.

According to British Petroleum, the 1,800-mile line’s owner, a release of propane occurred during a maintenance procedure 30 miles south of Fargo, N.D. Home evacuations and a road closure ensued, and excess propane was flared off from a portion of the pipeline that had to be isolated for repairs. It was back online within days, but the propane flow was slowed, complicated by other petroleum products that share the facility.

The Benson, Minn. terminal stoppage was especially troublesome.

“Drivers had to drive further to get product,” says Roger W. Leider, executive director of the Minnesota Propane Gas Association.

A 10-day HOS exemption was granted to speed things along.

Wimpy weather

“It’s been a little wimpy again,” Leider says in sizing up the region’s overall heating season.

Despite periods of near-record lows – such as the 54 degrees below zero at Embarrass, Minn., in January – the region overall is off by 400 to 500 degree days.

“Most of our members count on a good, cold winter to bring in the volume,” Leider says. “We can make up a lot of cold weather in February or March, and it’s a long way until spring, but we’d rather have the cold weather in the winter – not the spring.”

“It’s been a good year for me,” says Gary Germann, owner of Gary’s Propane in Gillette, Wyo. “We had one really good cold spell – way below normal.”

“I have 90,000 gallons of storage, so I can miss some peaks [in pricing and supply],” Germann says. “I think we can all benefit from more storage.”

Big Sky Country had just two weeks of suitably cold weather, according to Gene Corne at Northwest Propane in Kalispell, Mont. He also is president of the Rocky Mountain Propane Association.

“Basically it’s been warm up here in Montana,” he says. “We’re down by about 400,000 gallons for the year.”

Reduced volumes and cash flow have combined with high steel prices to crimp added investments, Corne observes.

“It limits our growth potential. It limits our ability to go out and by new equipment,” he says. “We’ll be buying a lot less [propane] moving into the spring.”

“This has been a really tough winter for some independents in the West and the Rocky Mountains,” says an executive with a large multi-state propane retailer. “The price of propane has affected margins while operational costs keep going up.”

“In the Rockies, we’re off about 5 percent in degree days,” he says. “It’s been a little warmer than we’d like it to be.”

Feeling the heat

A bountiful fall harvest reaped healthy propane sales across the plains, according to Debra Grooms, executive director of the Iowa Propane Gas Association.

“We had a good drying season for a change,” she says. “I haven’t heard any complaints, so I guess that’s good.”

In the Land of Lincoln, they’re feeling the heat of being down 1,000 degree days from 2002-03 and 700 degrees off from last season, says Rhonda Turner, executive director of the Illinois Propane Gas Association.

“That does not make for happy propane marketers,” she says.

“We just are not having the cold weather that we would like,” says Turner. “You’re going to the purchase of less tanks because of the slow winter and the high price of steel.”

Along the Gulf Coast, they long for the excitement of last season’s logistical challenges.

“Those are the good problems you want to have,” says Randy Hayden, executive director of the Louisiana Propane Gas Association. “Our members are not busy enough that they want to cancel meetings; it’s not a good sign that they can make the winter meetings.”

An association staffer’s usually reliable podiatry predictions were off the mark, Hayden remarks.

“Her corns told her it was going to be a rough winter, but they were wrong,” he says. “We’re hoping that the groundhog was right [and chilly temperatures will close out the season.]”

“Mother Nature has not been cooperative for us here in the South East – my dealers are unhappy,” says Jenni McKeen, executive director of the Georgia Propane Gas Association.

She foresees financial repercussions on several fronts.

“Some of these guys are getting to retirement age and they may decide to sell their businesses,” she says. “Some of them may not re-affiliate with the association because of this reduced cash flow.”

Anticipated equipment purchases could be shifted into park.

“They’ll probably make an older bobtail run a little bit longer,” McKeen says.

Chuck Brandon, director of the NPGA’s Southeastern district, has a more positive view on the equipment buying issue as he prepares for the April 2-5 international exhibition and trade show in Atlanta.

“We have some of our current exhibitors who have expanded their booths, and that’s usually a good sign,” he says. “That’s usually a good barometer for us [that the industry retains a positive outlook].”

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