As a result of significantly higher natural gas prices in 2022, UGI Corporation (NYSE:UGI) adjusted net income increased from $583 million in 2021 to $671 million in 2022. However, due to warmer-than-normal temperatures and higher-than-expected gas storage in the United States and Europe, natural gas prices dropped. On one hand, I expect UGI's propane and LPG revenues to grow in the long term. On the other hand, I expect its revenues in the midstream & and marketing segment and utilities segment in 2023 to be lower than in 2022. The stock is a hold.
Quarterly results
In the three months ended 31 December 2022, UGI Corporation has made significant progress in renewable energy projects, investing over $450 million in New York and South Dakota. These projects are expected to produce approximately $560 million cubic feet of RNG annually by 2024. The company has announced that these renewable projects may support financial commitments of delivering 6-10% EPS growth and 4% dividend growth in the long-term. Despite significantly warmer weather in Europe, the CEO noted that colder weather in the US helped to offset its effects. UGI International saw a decline in EBIT due to warmer weather and European energy conservation efforts, while the utilities segment experienced an increase in EBIT due to higher gas rates and core market volume. In the three months ended December 31, UGI Corporation generated $2759 million in total revenue, a 3% increase compared to the same period last year. Additionally, adjusted net income attributed to UGI Corporation was $246 million in Q1 2023, a 22% increase from $201 million in Q1 2022.
"We had a solid start to fiscal 2023 with robust performance from our natural gas businesses and from the growth investments that we have made in recent years, despite the impact of high inflation," the CEO commented.
The market outlook
AmeriGas propane revenues decreased slightly from $778 million in the three months ended 31 December 2021 to $766 million in the three months ended 31 December 2022, driven by a lower volume of retail and wholesale propane sales and lower propane prices. Figure 1 shows that in the last three months of 2022, U.S. propane residential prices were lower than in the last three months of 2021. It also shows that propane residential prices in the first three months of 2023 are lower than the first three months of 2022; however, higher than in the last three months of 2022. According to EIA's short-term energy outlook, U.S. propane production is expected to increase from 1.86 million barrels per day in 2022 to 1.93 mb/d in 2023 and 2.00 mb/d in 2024. EIA expects U.S. propane production in Q1 2023 to be higher than in 4Q 2022 and Q1 2021. Also, EIA estimates that U.S. propane consumption in Q1 2023 is higher than in 4Q 2022; however, lower than in Q1 2022. On the other hand, U.S. propane export in Q1 2023 is estimated to be significantly higher than in Q1 2022, and also, higher than in 4Q 2022 (see Figure 2). It is worth noting that AmeriGas's total inventories decreased from $224 million on 31 December 2021 and 30 September 2022, to $182 million on 31 December 2022. Figure 2 shows that U.S. propane inventories in Q1 2023 are estimated to be significantly lower than in 4Q 2022.
Figure 1 - Weekly U.S. propane residential price ($/gallon)
Figure 2 - U.S. propane production, consumption, and export
UGI International revenues dropped from $1052 million in the three months ended 31 December 2021 to $879 million in the three months ended 31 December 2022, driven by lower retail and wholesale LPG revenues (as a result of warmer than normal temperatures in Europe). Due to the warmer weather in Q1 2023 compared to Q1 2022, I expect UGI International revenues in the three months ended 31 March 2023 to be lower than in the same period last year. However, the long-term market outlook for UGI international is strong. According to Expert Market Research, the rising use of LPG as an alternative fuel in the transportation industry (as a result of growing concerns regarding g rapid climate change in Europe) is driving the growth of the LPG market in Europe. It expects the Europe LPG market to grow at a CAGR of 5.8% from 2023 to 2028.
Furthermore, as a result of very mild temperatures that reduced demand for heating, EIA expects U.S. natural gas consumption in Q1 2023 to be 5% lower than in Q1 2022. The Henry Hub natural gas price is estimated to be $2.81 per thousand cubic feet in Q1 2023, compared to $5.76 in 4Q 2022 and $4.48 in Q1 2022 (see Figure 3). Also, in the second quarter of 2022, Henry Hub natural gas price is estimated to be $2.87 per thousand cubic feet, compared with $7.77 in 2Q 2022. Thus, I expect UGI's 1H 2023 revenues in the midstream & marketing segment and the utilities segment to be considerably lower than in 1H 2022.
Figure 3 - U.S. energy prices
UGI performance outlook
In this section, I have analyzed the cash and capital structures of the company to provide a better understanding of its financial situation. During the fiscal second quarter of 2022, UGI experienced a significant increase in cash generation, reaching $718 million from $334 million in the previous quarter. This boost was mainly due to geopolitical factors affecting Europe. However, the company's cash balance gradually declined and reached $317 million in the fiscal first quarter of 2023. Additionally, UGI's net debt increased by 9% year over year, compared to its level of $6,784 million in fiscal Q1 2022. Furthermore, UGI's equity level decreased by 14% to $5,188 million in fiscal Q1 2023 from $6,074 million in the previous quarter and is significantly lower than its debt level. Overall, UGI Corporation's capital structure has weakened over the past few quarters; however, it may improve once their new projects are completed in the future and production increases (see Figure 4).
Figure 4 - UGI's capital structure (in millions)
Moreover, the financial structure of the company reveals a concerning trend as UGI experienced two consecutive positive cash operations in the fiscal second and third quarters of 2022, but subsequently suffered negative operating cash flow and free cash flows. Specifically, the operating cash flow plummeted from $448 million in fiscal 3Q 2022 to $(132) million and $(240) million in fiscal 4Q 2022 and Q1 2023, respectively. Additionally, despite a reduced amount of capital expenditure, UGI recorded $(450) million of free cash flow in the fiscal first quarter of 2023. Despite these challenges, it is important to note that UGI has recently acquired companies such as Mountaineer, UGI Moraine East and Pennant which will bolster its natural gas earnings potential over the long term(see Figure 5).
Figure 5 - UGI's cash structure (in millions)
In this section, I present leverage ratios to demonstrate UGI Corporation's credit ratings. In the energy sector, monitoring a company's debt levels is crucial for investors to assess its performance outlook. As the industry requires significant capital investments, high debt levels may hinder a company's ability to purchase new equipment or meet other obligations. Therefore, I have included specific leverage ratios to evaluate UGI's financial health. UGI's debt-to-EBIT ratio in recent quarters indicates the likelihood of defaulting on issued debt. As energy companies often carry substantial debt on their balance sheets, this ratio can help determine how many years of EBIT would be necessary for UGI to repay its debt. It is evident that the company's debt-to-EBIT ratio increased by over 30% in the fiscal first quarter of 2023 compared to its level of 10.31 in fiscal Q1 2022. Additionally, its net debt-to-equity level rose by 12%, reaching 1.43 in the fiscal first quarter of 2023 from its level of 1.27 in the fiscal first quarter of 2022 (see Figure 6).
Figure 6 - UGI's leverage ratios
Summary
In the past six months, UGI's stock price fluctuated in the range of about $30 to $40, and now, it is almost about $35 per share. The propane and LPG market outlook imply that UGI's AmeriGas and UGI International revenues have the potential to increase in 2023. On the other hand, the dropped natural gas prices are expected to hurt UGI's midstream & marketing and utilities revenues. Also based on UGI's capital structure, leverage ratios, and cash structure, the stock is not attractive to buy; however, it is not financially distressed either. The stock is a hold.
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As a fundamental stock market analyst, I mostly use real-market data to estimate stocks' intrinsic value. I evaluate dividend stocks using Comparative Company Analysis and Dividend Discount Model methods. I also use statistical analysis to make projections on variables related to the market to turn my observations into numbers.
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