Citi Cuts Ferrellgas Partners To Sell Amid High Leverage Concerns

Ferrellgas Partners, L.P. FGP has high leverage and low coverage at yearend FY16. With “little room to maneuver,” the company may “ultimately be forced” to cut its distribution, Citi’s Faisel Khan said in a report. He downgraded the rating on Ferrellgas Partners from Neutral to Sell, while reducing the price target to $14 per unit.

High Leverage

Ferrellgas Partners has spent more than $1 billion on its midstream diversification strategy over the past ~2 years. A third of this has been via new equity. The water disposal and crude logistics assets acquired by the company were expected to generate ~$125 million in EBITDA, but now seem to be on-track to generating only ~$55 million or less, analyst Khan mentioned.

With the midstream diversification strategy having exerted significant pressure on Ferrellgas Partners’ balance sheet, the company’s overall leverage metric “appears to be at/near its 5.5x covenant level and we estimate distribution coverage to be ~1.0x for the foreseeable future, assuming more normalized weather patterns.”

Equity Concerns

Ferrellgas Partners could turn towards an equity issuance to fix its balance sheet quickly. Khan pointed out, however, that the additional units would take coverage below 1.0x. “Barring a colder than normal winter helping to keep coverage above 1.0x, we believe FGP would ultimately be forced to cut its distribution.”

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