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Weather Is a Mean-Reverting Phenomenon

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March 19, 2012 – Comments (1)

As I've said a number of times before, weather patterns can exhibit a lot of fluctuation from year to year, but they typically revert to the mean. To that end, I believe investors have oversold the stocks of Compass Minerals, AmeriGas Partners and natural gas stocks. You can, and I do, buy the idea that the weather's trend over time is going to trend warmer. However, that trend will take some time to materialize. If the entire U.S. gets warm enough that we have little snow, then we'll have much, much bigger things to worry about. 

Compass sells highway deicing salt and sulphate of potash. The stock has been between $40 and $90 in the past few years. Right now it's at $70 and change, and I think investors should consider the stock. Again. Compass has been up on potash prices, and down on potash prices and warm weather. But, as I said, I think that the trend for weather is still going to have a lot of snow in the Midwest and Northeast. That benefits Compass. The fertilizer segment is some very nice gravy, and there also, the long-term trend for fertilizer prices is up. Compass isn't as attractive as it would be in the $60s, but I did re-open a small position in the low $70s. The firm pays a 2.77 percent yield. While it hasn't shown a serious commitment to consistently increasing their dividend, I think they can and will eventually pay a larger one.

AmeriGas Partners is an MLP which sells propane tanks to retail users. People use propane to heat residences and businesses. Obviously, since it's been warm, there has been less heating going on, so AmeriGas stock has dropped about 15 percent in the last two weeks, and the stock yields 7.7 percent. The thing, though, is that this is a profitable business. APU covers its distribution well with cash flow, and despite being in what you might think is a commodity business, it has exhibited a certain degree of pricing power. Most of their customers rent their tanks, they don't own them. To switch to another distributor, they would have to pay, and in fact they'd have to get AmeriGas to swap tanks with the new provider. In addition, natural gas has often been unavailable in the rural areas that AmeriGas mainly serves. I think the company can grow its distribution by at least inflation, and in fact the company has managed about 5 percent annually over the years.

Speaking of natural gas, warm weather has depressed prices because it's reduced demand for gas for heating stuff. That's affected producers like Ultra Petroleum (which is mainly a natural gas producer despite its name). But low prices are, I think, unsustainable. And Ultra is one of the lowest cost producers and it hasn't over-levered itself like Chesapeake Energy did. I have a small position in Ultra - I think that both potential return and risk are high. If gas prices revert to a reasonable level, Ultra's stock, like many E&P stocks, will take off. But the timing for that is uncertain, and things are more uncertain than for Compass and AmeriGas - for both those companies, prices aren't as depressed. Ultra does hedge but doesn't have any beyond 2012. So, I have a small position in Ultra, and that's my only E&P position. E&P firms, even the low cost ones like Ultra, have inherent risks, and I want to limit my exposure substantially.

1 Comments – Post Your Own

#1) On March 19, 2012 at 8:58 AM, constructive (99.97) wrote:

Have you looked at PSE?  Also low-cost, and they have much more of their production hedged compared to UPL. 

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