Since we final coated Ferrellgas Companions, L.P. (OTCPK:FGPR), the corporate has paid one other $50 million towards repaying its Class B items. So far, it has paid $100 million of its $357 million authentic Class B stability. FGPR at present has to pay $257 million to Class B unitholders earlier than March 30, 2026, to keep away from vital dilution to its publicly-traded Class A items that might happen from the conversion of its Class B items to Class A items.
Fiscal First Quarter Outcomes: Good Financially, Mediocre Operationally
The funding case for FGPR’s Class A items revolves across the firm’s means to keep up secure operations and generate sufficient money movement to satisfy its Class B obligation whereas remaining in compliance with its monetary covenants.
FGPR’s first quarter monetary outcomes for the three months ending October 31, 2022 have been an enchancment over earlier years’ outcomes. Most significantly, for the Class A items, the outcomes have been ok to maintain FGPR comfortably in compliance with all its debt and most popular unit covenants.
Working outcomes in the course of the quarter weren’t as sturdy. They mirror FGPR’s pivot away from wholesale propane gross sales and towards retail in an total market that has shrunk within the low-single-digit % over the previous few years.
FGPR’s Money Circulate Problem
FGPR will likely be challenged to generate sufficient money to fulfill its $257 million Class B obligation over the subsequent few years. The desk under reveals that the first supply for its $50 million Class B funds in Q1 2022 and This autumn 2022 was the money it had readily available after it emerged from chapter in April 2021. Discover the money drawdowns that occurred in these quarters within the high row of the next desk. The $50 million redemption funds are highlighted within the Whole Distributions row.
By the tip of October, FGPR had solely $55.3 million readily available, $15 million of which it generated from drawing on its revolving credit score facility and from asset gross sales.
To place the magnitude of FGPR’s money movement problem in perspective, take into account that over the previous twelve months, the corporate solely generated $11 million of free money movement earlier than having to pay $63 million of most popular distributions. And that was in an excellent yr, the place adjusted EBITDA was 7% increased than fiscal 2021 and greater than 20% increased than fiscal years 2018-2020.
FGPR should keep vital liquidity to fund its $16 million of quarterly most popular distributions in its seasonally slower quarters in the course of the summer season. It additionally wants vital money readily available to fund dealer margin deposits, as was the case within the first quarter. We do not see its money stability dropping a lot under $50 million, so it may possibly keep a ample buffer of liquidity.
FGPR’s monetary flexibility is additional restricted by the indentures governing its senior notes, credit score facility, and most popular items. Nonetheless, as issues stand as we speak, it ought to have little bother assembly its 2.5 instances EBITDA curiosity protection ratio, in addition to the 4.75 instances most leverage ratio stipulated by its credit score facility.
Wanting a number of years out, an extra problem comes from FGPR’s $650 million debt maturity in 2026. Nonetheless, so long as the corporate can hold its leverage ratio round as we speak’s 4.0 instances EBITDA, it ought to have little bother refinancing, although probably at the next price than the present 5.375% rate of interest it pays on its senior notes.
FGPR’s money movement challenges are the principle cause why its Class A items commerce at a low 6 instances EV/EBITDA a number of. The items are pricing within the large dilution that might happen if the corporate fails to generate $257 million by 2026 to satisfy its Class B obligation. The items are additionally buying and selling low sufficient to make it prohibitively costly to situation Class A items for the aim of paying the Class B obligation.
Clearly, every thing has to go proper for FGPR to pay its remaining Class B obligation. Sadly, administration has failed to debate the matter with public Class A unitholders on its quarterly earnings convention calls. Administration’s solely public feedback thus far on the Class B unit scenario have been made on its December 2021 earnings convention name. The excerpt under demonstrates how opaque administration is towards public unitholders.
Supply: BamSEC, Ferrellgas Companions, L.P. Earnings Convention Name Transcript, Dec. 17, 2021.
Nonetheless, administration is little question motivated to repay the Class B items. FGPR’s Chairman and CEO, James Ferrell, and the entities he controls personal 28.1% of Class A items, whereas public unitholders personal 71.7% of Class A items.
One other glimmer of sunshine comes from insider purchases of Class A items. Carney Hawks, the FGPR board member who was elected by the Class B unitholders throughout chapter proceedings, bought 16,011 items at $9.92 per unit on October 4, 2022 for $158,829. Earlier than this buy, he had bought 28,989 items at $16.32 per unit in June 2021 for $473,204. These purchases look like a vote of confidence in administration’s means to disastrous dilution.
Our valuation assumes that FGPR’s adjusted EBITDA runs at $320 million by 2026 whereas its debt stability stays unchanged. It assumes a conversion ratio of 5-to-1 for the Class B items and in addition assumes FGPR points an extra 2 million Class A items so as to facilitate Class B funds. Utilizing these assumptions, our valuation implies FGPR items have almost 700% upside if the corporate can resolve its Class B obligation earlier than 2026.
FGPR would have a better time assembly its Class B obligation if it may maintain the $340 million of adjusted EBITDA generated in fiscal yr 2022. Doing so would permit it to attract $200 million on its credit score facility to fund Class B funds, assuming its debt stability stays flat at present ranges. Nonetheless, such a traditionally excessive adjusted EBITDA and flat debt stability are two assumptions we’re not comfy making given the volatility inherent in FGPR’s enterprise.
Whereas the scenario stays precarious for FGPR’s Class A items, we proceed to see a low likelihood of a excessive return a number of years out. Till the corporate makes vital progress making certain the security of its Class A items, FGPR’s unit worth is more likely to languish. In spite of everything, its items have attributes that may all however guarantee they continue to be uncared for. For one, the corporate is an MLP, so its fairness is out of favor out of the gate. However take into account additional that FGPR emerged from chapter in early 2021, its items have a small market cap of $270 million, they usually commerce on the OTC Pink Market with just about no analyst protection. If FGPR’s fortunes turned for the higher, it may take some time for the market to understand the upside potential of its Class A items.
In the interim, we keep our “Promote” ranking on FGPR fairness as a result of the prospects for restating the Class A distribution are just about nil, whereas the items proceed to own excessive threat of everlasting capital loss. However we’ll proceed to watch developments. If the massive upside turns into a extra seemingly prospect, we’d flip bullish and alter our ranking accordingly.
Editor’s Word: This text discusses a number of securities that don’t commerce on a serious U.S. change. Please concentrate on the dangers related to these shares.