Will Propane Stocks Finally Bounce Back in 2013?

Will Propane Stocks Finally Bounce Back in 2013?

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It has been a rough environment for propane stocks over the past two years. Beginning in 2011 the industry started to see stocks fall at alarming rates. Some analysts believe the pullback was just a sign that markets were predicting the fall of propane prices that ended up occurring 2012. Regardless, both propane stocks and propane prices have seen steep declines over the past couple of years. There are a number of factors that have cause the pullback in the industry. Now the question for investors is: will these propane stocks finally rally back in 2013?

The Plunge of Propane Prices

2012 saw a significant decline in propane prices. The most recent report by the U.S. Energy Information Administration (EIA) showed residential propane price to be $2.41 per gallon, down 45 cents, or -15.7%, from the same period a year ago. Meanwhile, wholesale propane price was 91 cents per gallon, down 44 cents, or -32.6%, from the same period a year ago. Analysts have suggested that reasons for a drop in propane prices include the warmer than average winters that North America has experienced thus resulting in lowered demand by consumers for heating. On top of the diminishing demand, increased production of propane has resulted in excessive inventories. When a product has limited demand and excess supply, economic theory dictates prices will therefore decrease.

Propane Pullback

Since propane prices have been on the decline, it is only logical that companies that are tied to the production, distribution, and marketing of the gas also have faced hard times over the past couple of years. The propane stocks started to see the pullback in 2011, ahead of the drop in actual propane prices. This suggests that the market predicted the subsequent fall in prices. These companies have been boosting production resulting in the previously mention increased inventories. Furthermore, insufficient infrastructure for exportation of the product to consumers abroad has also placed pressure on domestic propane producers. The industry has been facing struggles in a variety of different areas, all adding to the contribution of the plunge of stock prices.

A few examples of propane company stocks that have experienced troubling perforances include:

  • AmeriGas Partners, L.P. (APU): down -15.70% year-to-date and down -20.71% since January 2011
  • Inergy, L.P. (NRGY): down -26.78% year-to-date and down -54.43% since January 2011
  • Suburban Propane Partners LP (SPH): down -19.32% year-to-date. -31.52% since January 2011

2013 and Beyond

Looking to 2013, analysts believe that propane prices will be back on the rise. Certain sources have indicated that while supply of propane should increase in 2013, the demand for propane both domestically and abroad will outpace supply and thus edge prices upward. Though analysts might believe a rise in propane price is in store for the future, it could take some time for this to actually be evident in the propane market. A good signal of a potential rise in propane prices, and therefore investor confidence, would be the bounce back of propane stocks in 2013 ahead of any price increases. Sometimes the stock market is an indicator to that external metrics will soon change. It is a sort of chicken or the egg situation when it comes to the cause and effect of stock prices and propane prices. This bounce back could put investors in a good position to cash in on the comeback of these potentially undervalued stocks.

However, another contributing factor to the potential bounce back of propane stocks in the new year is the effect taxes might play on oil and corporate taxes going forward. With the current uncertainty of tax rates on various areas of the economy, it is hard to tell how the market, and the propane market specifically, will be affected going forward.

The Bottom Line

Investing in the propane market may seem to be a bit volatile, but that is the case when it comes to investing in commodity based industries. By examining a few indicators it can put investors in a prime position to succeed in playing the propane stocks in regards to potential attractive capital gains and relatively high dividend yields. Investors just need to be aware that though it seems like propane stocks will be on the rise in 2013 many factors can change the direction of a commodity based industry swiftly and easily. Paying attention to these factors can result in tremendous gains and an avoidance of losses.

Be sure to visit our complete recommended list of the Best Dividend Stocks, as well as a detailed explanation of our ratings system here.

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