Billions to Be Made In Heating Oil

There are few certainties in life. Like death and taxes. As a result, there’s always going to be a demand for morticians and CPAs. Funny thing is there aren’t many of them… so, when you uncover a business that profits from life’s certainties you want to jump all over it.

That’s why we’re kicking off the New Year with a business focused on another of life’s certainties – the weather.

While day to day and hour to hour you might never know if you’re getting rain, shine or fog… but longer term we’re all familiar with the seasons.

We know winter is cold and it’s followed by spring, summer fall… then winter again!

With winter we get cold weather, rain, snow, sleet, and ice. And you know what that means? People are trying to keep warm!

And lucky for us there’s an entire industry focused on providing heating oil to homes and small businesses. Consider this…

As of 2009 there were roughly 113.6 million homes in the United States. And according to the most recent Energy Department survey 12.5 million are heated by oil and propane.

Now many of these homes are found in the northeast, and they’re often in rural areas, where natural gas isn’t available.

Amazingly, 83% of U.S. households that use heating oil are in these regions.

So it’s no surprise the demand for heating oil has a big cycle. People use a lot of the stuff in the winter… and not so much in the summer!

But if you live in a home heated by heating oil, there’s a certainty in your life… you must buy heating oil… and a lot of it.

So who profits from this constant demand? Companies like…

 

STAR GAS PARTNERS (SGU)
Star Gas Partners supplies heating oil and propane to 407,000 customers. They operate in the North East and Mid-Atlantic regions of the U.S. With a customer base like that, it’s no surprise that Star Gas is the largest retail distributor of heating oil in the country.

The company also provides installation and maintenance services for heating and air conditioning units.

Star Gas has expanded their business to include additional home maintenance services. They now provide security, plumbing, and some electric utility products.

The company also sells and delivers gasoline and diesel to some customers.

Approximately 79% of SGU’s revenue comes from the sale of heating oil and propane. Another 13% is derived from their installation, repair and home services business. The remaining 8% is from sale of other petroleum products.

The company utilizes approximately 30 different brand names in the various regions they cover. Many were small businesses they acquired.

Now consider these exciting facts…

Of the vast majority of SGU’s heating oil customers, 97% are residential. On average they received 340 gallons per delivery. And in a typical year the company makes four to six deliveries per customer.

Winter is a big factor in Star Gas’ stable revenue stream. Approximately 97% of those full service customers are on auto-schedule contracts. As long as winter comes and goes, heating oil sales will continue… automatically.

 

THE COMPANY’S BUSINESS STRATEGY
Star Gas’ basic strategy is the same as most companies. Increase operating profits and cash flow with conservative management of operating resources. And growing and retaining their customer base.

In an industry like heating oil that’s not always a simple feat. In each of the last three fiscal years they have lost 1.2% to 1.6% of their customers. Not to other heating oil distributors, but to natural gas.

That doesn’t mean the company can’t grow its customer base. They just grow it through acquisition instead of advertising!

For example in October SGU purchased John Ray and Sons. The Albany based oil, propane and diesel distributor serves 10,000 customers in their area.

In August the company acquired Southern Propane Services based in South Carolina. This company has the added bonus of expanding SGU’s geographic footprint considerably.

They also acquired a heating oil company servicing 1,900 customers in Long Island’s Suffolk County. With estimated additional demand of two million gallons a year.

The beauty of this is most of these customers are sticky… in other words once they start ordering heating oil from a company, they’re not likely to stop.

It also gives the company a nice diversified base of customers to sell other services… like maintenance and repair, air conditioning, plumbing, and even home security services.

 

STAR GAS’ FINANCIALS
Star Gas’ fiscal year ends on September 31, and their annual numbers were released on December 7, 2011.

The company recorded sales of $1.6 billion. That’s up over 30% from $1.2 billion in 2010. Not bad for a little company!

Revenue from SGU’s installation and service segment was up 7% to $198.4 million.

In 2011 SGU sold 355.6 million gallons of heating oil. Their overall volume of sales by gallons increased 14.6% year-over-year.

They bought the heating oil at an average price of $2.63 a gallon wholesale. They then sold it to customers at an average price of $3.54 a gallon.

Obviously, there’s a close correlation between the company’s margins and the wholesale price of heating oil.

Star Gas had a nice margin of $0.912 a gallon… A slight decrease from last year’s margins of $0.916 a gallon.

Now net income is down a bit from $28.3 million in 2010 to $24.3 million in 2011. Still, not a bad profit for the company and its shareholders.

Looking at the balance sheet, the company’s on solid footing. They have net assets of $626.1 million, including $86.7 million of cash!

 

ANALYSIS OF SGU’S STOCK

 

 

 

 

Chart courtesy of stockcharts.com

 

It doesn’t take a rocket scientist to see Star Gas’ stock is set up for a nice run.

As you can see after climbing in the early part of 2011, the stock has slid a bit giving us a great entry point.

Remember, SGU works with one of life’s certainties… winter. Come hell or high water, people need heating oil, and SGU stands ready to meet that need… and make a nice profit too.