Author: Joelle Harms

The 2014 State of the GNSS Industry Report reveals the results of our annual survey of GNSS professionals, covering the state of their business, the economic climate for GNSS products and services, driving market factors, the government’s role in funding and regulating, budgets devoted to R&D, the effects of jamming, and the “Issue of the Year.” Click here to download the 2014 State of the Industry Survey, sponsored by NovAtel, Trimble, and u-blox.

By Kevin Yanik

A new era of propane production has arrived, but will U.S. retailers adapt their businesses or allow market forces to dictate their future?

Shale gas production is at an all-time high, global demand for the U.S. product is feverish, and markets are developing that can strengthen our footing in the world energy sector for years to come.

A golden age for propane production is under way in the United States, and based solely on the sheer volume being produced domestically, specifically from natural gas plants, an argument can be made that now should also be a golden age for those delivering propane.

It’s not, though. Yes, propane production is up. But consumption is down here in the U.S., which is a net exporter of propane for the first time since the U.S. Energy Information Administration (EIA) began tracking exports in 1973.

More domestically produced propane is available now than at any point in U.S. history, yet gallon consumption in the residential and commercial markets – the backbone of the U.S. industry – has trended downward. Markets such as autogas are emerging to potentially make up for lost gallons, but the gains being made in secondary markets aren’t yet making up for losses in traditional markets.

So what gives?

“If you’re a retailer in the Midwest, the Pacific Northwest or the Gulf Coast and all of these market forces are going on around you, you have to be wondering what is going on with your business,” says Bob Myers, an industry consultant who spent 25 years with Petrolane, in a phone interview. “Unless you do something about it, market forces are going to continue to dictate your business.”

But are U.S. retailers willing to adapt amid changing market dynamics? Or is the status quo a sufficient retailer goal for the foreseeable future? These are questions we explored this fall with a number of propane retailers, who took our annual State of the Industry survey and offered feedback about their businesses and the impact of the market dynamics around them.

Signs of growth and decline

Although the market dynamics are changing rapidly, retailers tell us their propane delivery businesses have been relatively successful over the last 12 months. In fact, the retailers we surveyed rated their success this year, on average, as a 7.97 on a scale of 1 to 10.

Regionally, Midwest retailers rated their 2014 success the highest (8.23) on a 1-to-10 scale, even despite the supply and infrastructure issues faced there last winter. New England retailers (7.18) rated their success the lowest among the seven U.S. regions we surveyed (see Figure 1).

These success figures simply reflect how propane retailers say they’re doing. What are propane retailers doing to grow their businesses and, in turn, the industry? We asked retailers a few growth-related questions, including how many employees they’ve added, how many bobtails they’ve purchased and how many tanks they’ve set in the last 12 months.

About one-third of retailers tell us they have the same number of employees today as they did a year ago, and only a handful of retailers say they have fewer employees today than they did one year ago. More than half of retailers say they’ve added between one and five employees in that span, and nearly 10 percent report hiring six or more people in 2014.

Retailers’ hiring plans for 2015 are similar to the plans they made for this year. About 43 percent plan to have the same number of employees by the end of next year as they do now, and more than half plan to add between one and five employees to their operations.

Still, a number of propane retailers tell us that hiring the right people for available jobs is a challenge. For example, a few retailers say they’re struggling to find capable drivers. But the struggle hasn’t stopped a significant number of retailers from adding bobtails.

According to our data, 38 percent of retailers added between one and five bobtails this year and 39 percent plan to add between one and five bobtails in 2015.

Another measuring stick of growth is tank setting (see Figure 6). The retailers we surveyed set a varying number of tanks in the last 12 months. Twenty-five percent say they set between 100 and 199 tanks; 21 percent set between 50 and 99 tanks; and 22 percent set between 10 and 49 tanks.

Some retailers set even more tanks this year. Nearly one in five set between 200 and 499 tanks, and about 7 percent set at least 500 tanks.

Others were not as successful. Three percent didn’t set a single tank in 2014. A handful of others set fewer than 10 this year.

Yet another growth indicator is whether or not retailers expanded the geographic territory in which they deliver propane. According to our data, slightly more than half of all retailers expanded their sales territories.

But how did retailers expand? Slightly more than half say they expanded their businesses into new propane markets, while 13 percent of retailers expanded through energy conversions.

The primary way retailers say they expanded was to take their propane competitors’ customers. Sixty-eight percent of retailers expanded that way. Sixteen percent grew their businesses through acquisitions.

These figures reflect growth for individual businesses, but are they indicative of true industry growth?

“There’s a lack of new housing on propane,” says a Midwest farm co-op representative in our survey. “We were in continuous growth mode for years. That has slowed, so marketers are fighting each other for the leftovers, while natural gas and electricity are killing us.”

Competitive threats

The continued rise of competitive energies such as natural gas and electricity is troubling for the industry. A greater concern retailers expressed to us through our survey, though, is their own propane security.

What’s particularly troubling to them is that propane is plentiful within the United States, yet they feel they’re struggling to secure it for their own delivery needs.

“We have become a greedy industry,” says a Midwest independent retailer in our survey. “U.S. consumers must be first before shipping outside of the U.S. Our supply and demand has gotten out of hand. I hesitate to say this, but our industry needs to be regulated by Congress.”

A number of retailers have similar feelings about exports. In fact, about two-thirds of retailers tell us they’re in favor of propane exports, but only when domestic supply is sufficient. Fourteen percent say they are not at all in favor of exporting propane, while about one in five retailers say they are totally in favor of exports and the notion of free-market enterprise.

In addition, our survey results show that the type of operation – MLP, independent retailer or farm co-op – doesn’t make a difference in how retailers feel about propane exports. The majority wants to secure their own propane first – even if that doesn’t necessarily make business sense for those producing propane.

“Quit exporting fuel to other countries, creating imaginary shortages and driving the cost up on our fuel,” says a Rocky Mountain independent retailer in our survey.

Are propane exports a real problem, though? Myers begs to differ.

“This industry really shouldn’t care how much [companies] export,” Myers says. “What we should care about is getting enough storage. When the storage is full going into the winter, let the exports take place. We’re moaning about the fact that we don’t want these exports, but then you have to ask where are the strategic reserves that you really need? Adequate storage ensures supply for the customers, and it also takes volatility out of the pricing – two essentials needed to grow an autogas market.”

U.S. propane reserves don’t have to be monumental in size, Myers adds. They simply need to be sufficient to get the U.S. industry through winters and help to eliminate peaks in demand.

“Exports are going to happen,” Myers says. “There’s a market for them. There’s billions of dollars being spent to get them out of here, and people are making long-term contracts predicated on that.”

Export markets aren’t the only ones affecting U.S. supply. Petrochemical companies in the United States and internationally are buying propane to convert it into propylene, a common building block used in the manufacture of plastics and other products, as part of a dehydrogenation process. The good news for propane retailers is that petrochemical companies in general are demanding less propane (and more ethane) this year than in recent years, according to industry consulting firm Cost Management Solutions.

Still, the combination of petrochemical demand and the increasing demand for U.S. propane around the world raises a question about U.S. propane retailers, whose businesses are more seasonally based: If petrochemical companies and international customers prove to be more viable outlets for propane, where does that leave retailers in the supply equation? And what prices will retailers have to pay?

Unless retailers present producers with more year-round business, securing propane may become an even greater challenge.

“The producers sell most of their product to the petrochemical market,” Myers says. “Retailers want to sign contracts that say they’ll take it when they need it and if the price is right. But producers have the export market now, too. If retailers don’t like the price, producers are going to look to the petchems. If the petchems don’t like it, there are people around the world who may take it.”

Planning for the future

So how do propane retailers secure the future of their businesses? Unfortunately for them, no silver bullet exists to solve the industry’s problems. But a couple of obvious starts are to develop markets that can grow gallons and build infrastructure that can move the nation’s surplus supply to areas where it’s needed.

As mentioned previously, more than half of U.S. retailers say they grew their business within the last year by expanding into new markets. The motor fuels market is one that offers tremendous potential for growth, but how many retailers are truly taking action on autogas?

“Autogas could save us,” says an independent Midwest retailer, in our survey.

Another Midwest retailer – this one a farm co-op representative – agrees about the need for new propane markets.

“When I first got into this industry, most houses in the country were using propane or heating oil for heat, and the average customer used around 1,200 gallons of propane per year,” says the Midwest farm co-op rep. “Since then, not only have heat pumps cut into our base tremendously, but because of improvements in appliances and building practices, our average customer now only uses about 700 gallons per year. We are trying to not only survive on fewer customers, but the ones we do have are using almost half as much as before.”

In addition, a number of existing propane customers are coming off a winter in which their prices spiked. Retailers say pricing concerns, as well as their ability to effectively deliver during the winter months, may drive customers to other forms of energy.

In some cases, customers have already taken action.

“If you take someone who’s building a new home, they’re going to decide how they’re going to heat it,” says Keith Volker, energy division manager at Midwest Farmers Cooperative in Elmwood, Neb., in a phone interview. “If they don’t have access to natural gas, their choices are electric or propane. At the high prices we had last winter, that may sway the new homeowner to go electric.”

The heating market is critical to just about every propane retailer, and maintaining, if not developing, market share versus other energy forms in that area is a must. Infrastructure development, albeit through terminals, pipelines, rail facilities, regional storage caverns or other forms, is also a must for the U.S. market to secure its place in the future.

Storage and summer fill

Last winter served as a reminder to a number of retailers about the importance of their own storage. Some retailers made bold moves, adding bulk storage to better secure loads for this winter. But the majority of retailers we surveyed did not take action on the storage front.

In fact, 70 percent of retailers did nothing to address their storage infrastructure. Thirty percent did, however, add bulk storage. And one in five retailers added at least 30,000 gallons of bulk storage.

“We added more storage and we tried to increase awareness to our customers about the importance of contracting and summer-fill programs,” says a Midwest farm co-op representative.

This retailer wasn’t the only one to do more with a summer-fill program this past year. Two of every three retailers tell us they increased their summer-fill program over last year. In addition, retailers were active this year switching will-call customers to keep-full contracts following last winter.

According to our data, half of all retailers switched at least 5 percent of their will-call customers to keep-full contracts. In addition, 36 percent of all retailers switched at least 10 percent of will calls to keep fulls. Their action should increase their supply security this winter and for winters to come.

“Not just this year but every year we work at getting everyone we can on keep-full [contracts],” says Jeff Manthei, energy marketing and sales manager at West Central FS Inc., in a phone interview. “We manage their inventory; they don’t manage us with a phone call. It’s very ineffective and inefficient if we run at the ring of a phone.”

Contracts aren’t the only things changing in the propane industry. Change is all around us, from the elimination of key pipelines and the rise of electricity to the emergence of autogas and the increase in shale gas production. In many cases, there’s no avoiding this change. But are you willing to embrace it and adapt your businesses?

“I’ve been in the industry 18 years, and I’ve never seen anything like this last year as far as getting ready for a winter,” says Joe Stariha, co-president and CFO of Minnesota-based Como Oil & Propane. “I don’t think we ever put this much work into getting ready for a winter.”