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Better Buy: Tellurian vs. Suburban Propane Partners

When you sit down to compare two similar, well-established companies, it's pretty straightforward. Check out their financials, their industry, and their prospects moving forward, and you should have no trouble picking a winner.

Unfortunately, these are not those companies.

Besides the fact that they're both in the gas industry -- and the liquid gas industry, to boot -- propane delivery master limited partnership (MLP) Suburban Propane Partners (NYSE: SPH) and fledgling liquefied natural gas (LNG) producer and exporter Tellurian (NASDAQ: TELL) are about as different as two companies can be. But let's take a closer look anyway and see which one looks like the better buy now.

Investors should be aware of the risks associated with Suburban Propane and Tellurian. Image source: Getty Images.

It ain't what it used to be

Perhaps the first thing investors notice about Suburban Propane is its 10.8% yield. Even in the world of high-yielding MLPs, that's a standout. But yields usually don't get that high unless investors have concerns about the underlying business. That's true about Suburban Propane.

Because Suburban is just a delivery company, it doesn't make money if propane or heating oil prices go up. It makes money instead on the volume of propane or heating oil it delivers. Since the vast majority of these fuels are used for heating buildings in the wintertime, colder winters are better for Suburban's business model.

As you might be able to guess from your local weather forecast, this year's winter has been unseasonably mild. And the National Oceanic and Atmospheric Association (NOAA) is predicting it's going to be a warmer-than-average winter, especially in New England, the South, and the West Coast. The northern Great Plains and northern Midwest are the only regions of the country likely to experience an "average" winter this year.

Care to guess where the bulk of Suburban's business is? That's right: New England, the South, and the West Coast. Want to know where it doesn't have any operations? Exactly: the northern Great Plains and half the northern Midwest.

During the mild winters of 2015-16 and 2016-17, Suburban's earnings and stock price suffered, to the point that the partnership had to slash its dividend by nearly one-third in 2017. The next two winters weren't as mild, and Suburban has managed to maintain a coverage ratio of better than 1.2 for its newly lowered distribution, suggesting it might be able to maintain that payout. But with a debt-to-EBITDA ratio of 5.6 -- high even in the notoriously debt-heavy energy infrastructure industry -- if it comes to a choice between a distribution cut and taking on more debt, investors should anticipate being on the losing end.

Meanwhile, with a share price that's nearly been cut in half over the last five years, and warmer winters becoming the norm, there's not much to suggest that Suburban is a long-term winner.

The last piece of the puzzle

While Suburban has been struggling with warmer winters, the up-and-coming Tellurian has been struggling to get itself up and running.

Tellurian's key project, a liquefied natural gas pipeline and export terminal combo called Driftwood LNG, won't be complete until 2023 under even the most optimistic scenario. But if the company can't get enough partners to sign on for portions of the project's capacity, it won't ever be complete at all!

In order to move ahead with the project, Tellurian needs commitments for 10 million metric tons per annum (mtpa) of Driftwood LNG. Right now, it has a commitment from French energy giant Total and a memorandum of understanding with India's Petronet for six mtpa. That means it just needs another four mtpa more to officially greenlight the project. Most of the other work -- including securing regulatory approvals and hiring an engineering and construction firm -- has already been done. Once that last piece of the puzzle drops into place, the company's share price could take off.

It's taken CEO Meg Gentle longer than expected to get this stage of the process wrapped up, although she did tease in a recent interview that there may be a deal in the works with an unnamed partner for that remaining four mtpa. But even if and when such a deal is signed, there's plenty that could go wrong in the next three years that could derail the company's plans. However, Tellurian boasts a seasoned management team with a lot of industry experience, and the potential rewards are compelling: my colleague Jason Hall estimates shares could be worth as much as $80 in five years ... more than ten times today's price.

Of course, right now, Tellurian is little more than a business plan, which means it's not for the risk-averse.

And the winner is ...

Which of these gas companies is the better buy for you depends on what you're looking for in an investment.

If you're a dividend investor, clearly Suburban Propane, despite its problems, is going to be the better buy, considering Tellurian pays no dividend at all. But you should remember that the company has already shown its willingness to cut the distribution if necessary. As warmer winters take their toll, the current high coverage ratio may not be enough to save this double-digit yield. There are other more reliable dividend payers to consider.

As long as you have a high tolerance for risk, Tellurian looks like the better buy for all but the most dividend-focused investors. It has done a good job so far of implementing its ambitious plans, and the potential rewards seem to be much higher than at Suburban Propane.

Conservative investors, on the other hand, should look elsewhere in the sector.

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John Bromels has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.


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