Description

Thesis

Ferrellgas is a mispriced, extremely convex, long duration option on the turnaround of an infrastructure-like propane distribution business. The opportunity exists because FGPRQ has been an over-levered, busted MLP for the past several years that was delisted from the NYSE over a year ago and finally filed Chapter 11 bankruptcy in January of this year. The market doesn’t understand that the company’s recently confirmed plan of reorganization gives FGRQ a new lease on life by preserving equity, de-levering the enterprise, limiting management’s ability to do dumb things and providing several catalysts for FGPRQ to re-rate. There are reasonable scenarios for the equity to be a 5-10x from here over the next 5 years and limited downside compared to today’s trading price.

Business

Ferrellgas is the second largest propane distributor in the U.S. and the owner of the Blue Rhino portable tank exchange brand. Ferrellgas has historically hedged or passed through commodity price risk to customers customers, resulting in steady ~90c/gallon gross margins. 68% of residential customers lease Ferrellgas tanks meaning the company faces no competition for these customers. Propane consumption is weather dependent and heavily seasonal, with significant demand in the winter for home heating.

Although retail propane volumes will continue to decline over time, historically volume declines have been offset by 1.) modest price increases and 2.) synergies from acquiring small independent retailers, such that earnings and unlevered cash flow generation have been approximately flat around weather fluctuations.

Industry

Propane distribution is a mature industry that has been consolidating for well over a decade. However, it continues to be highly fragmented. Despite being the second largest propane distributor in the U.S., Ferrellgas believes that it only has 6% market share. The top 3 propane distributors in the U.S. have less than 20% market share.

There are three publicly traded propane distributors other than Ferrellgas: UGI/Amerigas, Suburban Propane and Superior Plus. Suburban Propane is the only pure-play public comp. Superior Plus is in the process of divesting an unrelated business and becoming a pure-play comp. All of the comps trade in a tight range around 9.0x forward EBITDA.

Long duration private equity has taken an interest in the industry as evidenced by Pritzker Private Capital acquiring an interest in Energy Distribution Partners (link) and Brookfield making a strategic investment in Superior Plus (link).

Historically, large scale M&A in the industry has taken place at 9-11x EBITDA. In 2019, UGI acquired Amerigas minorities at 10x EBITDA in a $2.5 billion deal. In 2018, Superior Plus acquired NGL propane distribution operations for 10.5x EBITDA in a ~$1 billion deal. In 2012, Suburban Propane acquired Inergy propane distribution operations for 9x EBITDA in a ~$2 billion deal.

Restructuring

Bankruptcy has been awaiting Ferrellgas since 2015. In June 2015, Ferrellgas levered up to acquire the midstream assets known as Bridger Logistics for over $800 million. Approximately one year later, Ferrellgas wrote those assets down by 75% and sold them for scrap value. The company subsequently suspended its common unit distributions, delisted from the NYSE, missed the principal payment on its June 2020 HoldCo note maturity and finally filed a pre-packaged bankruptcy in Delaware in January 2021.

The terms of the restructuring (link) effectively provide for an amend & extend of the $357 million in principal amount of HoldCo notes where the existing common units ride through subject to some contingent dilution while also conferring certain corporate governance rights to the HoldCo notes that will also benefit the existing common units. The pre-packaged bankruptcy plan was confirmed on March 5, 2021 (docket no.  203) over the objections of a few bomb-throwing unitholders (see docket no. 151, 152) and will go effective in the coming month.

Under the terms of the plan of reorganization, Ferrellgas has 5 years to pay off the HoldCo notes (either from free cash flow, refinancing, or otherwise) before the HoldCo notes begin to dilute common unitholders. Thereafter, common unitholder dilution will occur on a negotiated schedule up to a maximum of 85% after 10 years. What is particularly interesting about this plan of reorganization is that the existing HoldCo notes are converting to a senior preferred equity type structure in the reorganized company and as a result, there will be no triggers for another bankruptcy and the existing equity/common units can be viewed as a super-levered public LBO or an extremely long-dated call option on a sale of the company.

There are approximately $2.2 billion of OpCo notes that the company is in the process of refinancing. The company is likely to save tens of millions of dollars in annual interest expense as a result of this refi due to 1.) the application of $300+ million of balance sheet cash to debt repayment, 2.) accommodating high yield new issue environment, 3.) very strong results reported on March 8th in which EBITDA was up 15% year over year.

The corporate governance rights that the HoldCo creditors negotiated for as part of the restructuring are important and valuable to common unitholders. Ferrellgas will no longer be able to conduct M&A of any meaningful size without HoldCo creditor consent. Additionally, Ferrellgas will not be able to incur additional debt without HoldCo creditor consent. As a result, Ferrellgas will be boxed in to using its free cash flow to either further de-lever, or pay distributions to equity.

This is truly a one-of-a-kind bankruptcy as not only will common units ride through despite HoldCo creditors not being cashed out at all, Ferrellgas negotiated for the contractual right to, and will retain the ability to, pay distributions to common unitholders once they exit bankruptcy prior to paying off the HoldCo creditors.

Valuation

Assuming no contingent dilution, at the current peer multiple of 9.0x EV/EBITDA, FGPRQ units are worth $3/unit. Again assuming no contingent dilution, at the median M&A multiple of 10x EV/EBITDA, FGPRQ units are worth $7/unit.

Assuming maximum contingent dilution, at the current peer multiple of 9x EV/EBITDA, FGPRQ units are worth $1/unit. Assuming maximum contingent dilution, at the median M&A multiple of 10x EV/EBITDA, FGPRQ units are worth $1.50.

As distributions to common unitholders will be permitted, applying propane distribution MLP peer SPH’s dividend yield to FGPRQ’s pro forma distribution to common unitholders, FGPRQ units are worth $1. This assumes Ferrellgas applies the maximum amount of levered FCF to paying off HoldCo creditors.

Catalyst

1.) Refinance OpCo debt with lower interest expense (next few weeks)

2.) Relist on NYSE

3.) Strong earnings in 3 months on the back of February polar vortex driving propane demand

4.) Company restarts common unit distributions

5.) Jim Ferrell (80+ years old) moves on and sells the company