Chris Paryse on Ferrellgas's big conversion $FGPR

Summary

• Ferrellgas ($FGPR) just completed the Class B conversion that defined its post-bankruptcy capital structure, and timing mattered enormously. The Bs—old HoldCo debt converted at emergence—were entitled to $357M of dividends before converting to As at a ratio that worsened with time: they converted at 5x (1.3M Bs into 6.5M As), it would have stepped to 6x within 20 days, and 25x by March 2031. Against just under 5M pre-existing A units, “20 days could have resulted in 15% more shares”—and the free float roughly doubles. Walker also flags that this is a smaller MLP with additional tax risks; the podcast is not investment or tax advice.
• Chris Paryse’s base case: ~$330–340M EBITDA, ~$110M bond interest, $65–70M preferred coupon, leaving ~$85–90M of free cash flow on a stock at $23 with ~11.4M units. He expects a year of rebuilding cash and lowering leverage around the preferred’s 7x covenant (leverage is estimated at ~6.8x through the pref at July fiscal year-end), then a reinstated dividend around “this time next year”—at 50% payout that’s ~$3.70–3.80/unit, and “a 10% dividend yield on that… you’re talking about a high 30s stock.”
• The preferred is the hidden landmine and the hidden lever. It’s $700M face but takeout requires a 12.25% IRR—roughly $117M above face, or “$820–825M” of effective face—with the coupon stepping from 8.9% to 9.7% on March 31 and a 7x covenant that blocks A-unit dividends. Ares probably owns roughly 40% of the preferreds. Paryse sees a delevering deal, probably involving Ares and PIMCO/PGIM, such as equity or convertible issuance to retire a chunk of the prefs, as a nearer-term catalyst.
• Andrew Walker’s pushback: how much of this is just a skinny equity stub on a 6.8x-levered structure rather than an undervalued EV? The business trades ~7.5x through the equity versus closest comp Suburban at a little over 9x; Paryse concedes the torque is real but argues “there’s more to the story”—when “the market cap is less than your EBITDA” with no imminent bankruptcy catalyst, “those are generally pretty interesting options as long as you think the business isn’t in complete decline.”
• The long-term thesis is consolidation of a very fragmented market. Players #5 through #20 do 60–300M gallons (versus Ferrellgas’s ~800M) with EBITDA of maybe $25–125M each; buying $50–100M of EBITDA over three years with a reflated equity currency, getting leverage toward Superior’s 4–4.5x, and re-rating from a ~10% to a 6.5% dividend yield is how a $40 stock “could go to a $75 stock in three years.”
• Near-term catalysts stack up: the conversion is executed, a Nasdaq uplisting is likely “by this summer,” IR is ramping, and a dividend announcement is hoped for in the $3–5/unit range next year. Liquidity is the constraint—11 shares traded during the recording, ~5,000/day on average—though Paryse doesn’t expect a volume flood from the Bs since holders are concentrated in PIMCO/PGIM and, based on an unconfirmed belief, Ares.
• Governance is the soft spot both flag: thin insider ownership, a founder-controlled GP, and a company that already went bankrupt once on bad acquisitions. Jim Ferrell owns ~5%, while the ESOP held 23% pre-dilution from shares he gifted employees in the 1990s. He controls the GP and appoints the board; the GP is believed removable with 2/3 of the A units. New phantom A-unit grants in the last 6–9 months partially address alignment, but Walker’s worry about waking up to a value-destroying deal stands.

Deep dive

1. A post-reorg propane #2 with a Blue Rhino moat and a bankruptcy scar

• Ferrellgas is the second-largest US propane distributor at roughly 8% share of a very fragmented industry—residential and commercial heating, forklift fuel, agricultural crop drying, autogas—plus the Blue Rhino tank-exchange business where it holds over 50% market share. Most of the business is weather-driven heating, not the grill tanks people recognize. Walker flags that it is a smaller MLP with additional tax risks.
• At emergence, the company had an undrawn ABL, high-yield bonds totaling just under $1.5B, a $700M preferred, and the complicated Class A/Class B structure. The backstory is “absolutely classic,” per Walker: it levered up into oil- and energy-storage acquisitions that were “a disaster,” went bankrupt in 2020, and emerged in 2021 with founder Jim Ferrell coming out of retirement to run it through the process. Unusually, the equity traveled through the bankruptcy.
• Paryse’s origin on the name: he tracks post-reorg equities from a distressed-credit background, and the tell was a board member appointed by PIMCO, described as a large asset manager from Prudential Asset Management and represented by Carney Haug, who used to work for Brigade Capital Management, “buying stock shortly after emergence”—“it kind of flipped the switch with me.”

2. The Class B conversion: doubled float, and 20 days from 15% more dilution

• The Bs were $357M of old HoldCo debt converted into units entitled to $357M of dividend payments, with a dilution factor that grew the longer payback took. They’ve now been paid in full and converted at 5x: 1.3M Bs into 6.5M As, against just under 5M pre-existing A units.
• Walker’s stress on the timing: if payoff slipped past month-end the ratio stepped to 6x—12.8M total units instead of 11.4M—and the draconian case was 25x by March 2031. “Just 20 days could have resulted in 15% more shares.”
• The Bs are largely held by PIMCO/PGIM; the transcript uses both names for this holder. Its board representative has been closely involved since emergence, and pro forma it is not inconceivable that the holder owns roughly 50% of the company. Paryse can’t confirm but believes Ares holds a significant chunk of the Bs as well—which is why he expects little immediate selling volume from the conversion: “those guys are in it.”

3. Free cash flow math, the 7x covenant, and the path to a dividend

• The engine: ~$330–340M EBITDA (roughly $315M in very warm winters and $350M in very cold ones; the Midwest/East benefit this year was partially offset by warm West Coast weather), a little under $110M of cash bond interest, and $65–70M on the preferred, netting ~$85–90M of free cash flow. Leverage through the pref should sit around 6.8x by the July fiscal year-end.
• The preferred’s true size matters: $700M face, coupon stepping from 8.9% to 9.7% on March 31, but takeout requires a 12.25% IRR—“probably around $117M or so” if taken out today—so ~$820–825M effective face, the number both Paryse and the company use in leverage. It also carries a 7x covenant blocking dividends to the A units. Ares probably owns roughly 40% of the preferreds.
• Hence the sequencing: after the $107M final B payment and a $37.5M January Eddystone litigation payment, Paryse expects 12 months of cash rebuilding, then a reinstated dividend “maybe this time next year.” At a 50% payout that’s ~$3.70–3.80 per unit; “if you’re talking about like a 10% dividend yield on that, just given the leverage, you’re talking about a high 30s stock.” Walker’s gray-hair addendum: dividends shouldn’t create value in theory, but “they pay a $4-per-share dividend, this stock is not going to trade at $20. There’s just no effing way.”

4. Walker’s stub-equity pushback and the catalyst ladder

• Walker’s challenge: with industry buyouts historically at 8–9x and the stock at ~7.5x through the equity (Suburban, the closest comp, trades a little over 9x), how much of the thesis is just “a really skinny equity stub on a big capital structure”—the classic “worth 10x, trading at 9.9x, I’m going to make 500x” trade? At 8.5x EBITDA, the leverage implies a $45–50 stock.
• Paryse owns the torque but rejects the framing as complete: “when the market cap is less than your EBITDA… there’s no imminent catalyst for bankruptcy… those are generally pretty interesting options as long as you think the business isn’t in complete decline.”
• The catalyst path beyond conversion: a likely Nasdaq uplisting “by this summer,” off the pink sheets, plus a new IR push. Walker notes the $2.5B debt stack already draws coverage—JPMorgan covers the bonds—so a bank or two picking up the equity isn’t far-fetched. The A holders to date have been “stranded retail holders who’ve dribbled it out”—half “probably didn’t even realize they own it”—and a listed, dividend-paying MLP can bring retail and institutional MLP buyers back. Yet Walker is “a little surprised the stock hasn’t responded better” to avoiding the 6x step-up; liquidity may explain it—11 shares had traded that day.

5. M&A as the real endgame: equity currency, pref swaps, and a $75 case

• Paryse’s long-term value creation runs through consolidation of the fragmented market: players #5–#20 do 60–300M gallons (Ferrellgas does ~800M) with EBITDA of roughly $25–125M each—route-density synergies and weather diversification on offer. Competitors aren’t chasing it: AmeriGas “has their issues” under UGI, Suburban pivoted to renewable natural gas, and Superior is delevering. “Ferrellgas is the one larger player right now that wants to do this.”
• The delevering mechanics both speakers riff on: reflate the As to the $40s–50s, then use equity as currency for acquisitions from older mom-and-pop operators, or use equity/equity-linked financing to take out preferreds, or find opportunistic credit investors. The illustrative “4% convertible at 35” is discussed by Walker and Paryse; it could retire a chunk of prefs and remove the 7x covenant concern. Paryse would even defend issuing at $30: dilution per unit, but a higher payout ratio at an 8% yield “is a $40 stock still,” and faster. Walker’s laughing caveat: recent convert issuance history has been “very good for the buyers of the converts, but not so great for the company.”
• The full arc, hedged as stated: leverage toward Superior’s 4–4.5x, yield compression from ~10% to ~6.5%, $40–50 in 12–18 months, and “it wouldn’t shock me to see this stock in the 60–75 dollar range” beyond that, deal-dependent.

6. Sticky tanks, hedged commodity, and the governance question marks

• The residential moat, in Walker’s analogy: 70% of customers lease their tank from Ferrellgas, so switching means paying to remove it—“a rougher version of the old satellite TV argument,” except “this is a big old propane tank.” Residential is ~30% of volumes, and ~9% of US households heat with propane. It is a zero-growth to slow-decline business, offset by tank-exchange retailer signups and autogas, especially propane buses; the company also provides backup generation for data centers—prompting Walker’s joke that “Ferrellgas is an AI play.”
• On the commodity risk that has wrecked distributors before: fixed-price customer contracts are hedged out immediately, everything else is passed through, and they’ve been pushing price to cull unprofitable off-route will-call customers. “They’re not really taking any propane price risk”—and Paryse says the roughly five years he’s followed it bear that out.
• Governance is the honest weak point: thin board ownership—Ferrell ~5%, ESOP 23% pre-dilution from his 1990s gift to employees—only recently addressed by phantom A-unit grants to all board members. Ferrell owns the GP and appoints the board; it is believed removable with 2/3 of the A units. On whether the GP takes incentive fees, Walker recalls none in the 10-K, while Paryse concedes “that’s something I’d need to double check.” To Walker’s private-equity-plus-ESOP take-private idea, Paryse demurs: “I’m not sure Jim Ferrell would necessarily go for it… I don’t think he wants to give up control” to Ares or PIMCO/PGIM.