Wednesday, November 30, 2016

How Secure is Ferrellgas Partners'18-Percent Yield?

One might infer that the market has already discounted Ferrellgas Partners (FGP-$5.55) reported $628.8 million asset write-down of its disastrous 2015 acquisition of Bridger Logistics (a provider of integrated crude oil midstream services), given the 70% slide in the propane provider's share price. Ergo, income seeking investors might be tempted to buy some shares yielding a juicy 18% (assuming – as suggested by management – that the annual distribution after a rate reduction from $2.05 will be approximately $1.00 per common unit). 

FGP has been successful in modifying its loan-covenant leverage ratio from 5.50x to 5.95x through December 2017. Predicted cash flow shortfalls, however, suggests that the company will likely need to reduce expenses and debt in coming quarters. Going forward, management believes that the amendments to its secured credit facility, when taken together with other debt reduction initiatives and securitization of accounts receivable, will be sufficient to meet required capital expenditure, working capital and letter of credit requirements. 

Buried in FGP’s regulatory filings, however, is the following red flag to unit-holders: “Our secured credit facility, publicly-held debt and accounts receivable securitization facility contain several financial tests and covenants (such as the leverage ratio and a fixed-charge ratio of less than 1.75x) restricting our ability to pay distributions.” 

Under existing covenants, FGP is limited in future borrowings to just $8.1 million Given a net debt ($2.16 billion) to adjusted EBITDA ratio of 6.1x and anemic propane sales, FGP could find it more difficult to satisfy its debt service obligations – which means that even that targeted $1.00 distribution could be illusory. In other words, “Buyer Beware!” 

Editor David J Phillips does not hold a financial interest in any stocks mentioned in this article. The 10Q Detective has a Full Disclosure Policy. 

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