Star Group, L.P. (SGU) is a full-service provider specializing in the sale of home heating products and services to residential and commercial customers. The company has a rich history spanning over seven decades, during which it has grown to become the nation’s largest retail distributor of home heating oil based on sales volume.
Business Overview and History
Star Group was founded in the 1990s as a full-service provider specializing in the sale of home heating and air conditioning products and services to residential and commercial customers. The company’s initial focus was on providing home heating oil, propane, and other petroleum products to heat homes and buildings. As the business evolved, Star Group expanded its offerings to include installation and maintenance services for heating and air conditioning equipment, catering to both its existing customer base and new clients outside of its core home heating oil and propane business.
In the early 2000s, the company faced significant challenges due to volatility in wholesale product prices, which impacted customer demand and profitability. To address these issues, Star Group implemented strategies to better manage its commodity price risk, including the use of hedging instruments. Simultaneously, the company diversified its product and service offerings, expanding into areas such as motor fuels and equipment services to reduce its reliance on a single revenue stream.
During the late 2000s and 2010s, Star Group adopted a growth strategy centered on strategic acquisitions. The company made several purchases of regional home heating oil and propane distributors, allowing it to expand its presence in the Northeast and Mid-Atlantic regions of the United States. These acquisitions not only increased Star Group’s customer base and geographic reach but also provided opportunities for cross-selling various products and services to a broader clientele.
Despite facing ongoing challenges such as customer attrition, unpredictable weather patterns, and competition from alternative heating sources, Star Group has maintained its position as one of the largest retail distributors of home heating oil in the United States. The company’s continued focus on operational efficiency, customer service, and strategic growth has enabled it to navigate the industry’s fluctuations and maintain its commitment to serving both residential and commercial customers.
As of June 30, 2024, Star Group served approximately 397,400 full-service residential and commercial home heating oil and propane customers, as well as 60,300 customers on a delivery-only basis. The company also provides services to approximately 20,800 natural gas and other heating system customers under service contracts.
Financials and Key Metrics
In the fiscal year ended September 30, 2023, Star Group reported total revenue of $1.95 billion and net income of $31.95 million, or $0.81 per diluted share. The company’s operating cash flow and free cash flow for the same period were $123.66 million and $114.65 million, respectively.
For the nine months ended June 30, 2024, the company’s total revenue decreased by 11.6% to $1.30 billion, primarily due to a decline in average selling prices. Net income increased by 36.1% to $70.31 million, and adjusted EBITDA rose by 10.1% to $141.30 million.
Financials
Star Group’s financial position remains strong, with a debt-to-capital ratio of 27.7% as of June 30, 2024. The company’s current ratio and quick ratio stood at 0.74 and 0.61, respectively, indicating a stable liquidity position. The debt-to-equity ratio was 0.38 as of June 30, 2024.
For the most recent quarter (Q3 2024), Star Group reported revenue of $331.64 million, up 10.5% year-over-year. The company reported a net loss of $10.94 million, an improvement from a net loss of $23.91 million in Q3 2023. Operating cash flow was $77.55 million, down from $116.55 million in Q3 2023, while free cash flow was $75.96 million, down from $115.07 million in the prior year quarter.
The increase in revenue was driven by a 25.3% increase in home heating oil and propane volume sold, partially offset by an 8.3% decrease in motor fuel and other petroleum product volume. Gross profit increased 37.2% due to the higher volumes and improved per-gallon margins for home heating oil and propane. However, operating expenses increased, leading to the net loss, though this was an improvement from the prior year period.
Liquidity
The company’s liquidity position is further supported by its operating cash flow and free cash flow, which were $123.66 million and $114.65 million, respectively, for the fiscal year ended September 30, 2023. As of June 30, 2024, Star Group had $45.70 million in cash and a $400 million revolving credit facility, with $201 million available.
Operational Highlights and Challenges
One of Star Group’s key operational highlights has been its ability to navigate the volatile energy market, particularly the fluctuations in wholesale product costs. The company utilizes a variety of hedging strategies, including the use of weather hedge contracts, to mitigate the impact of price volatility on its profitability.
During the nine months ended June 30, 2024, Star Group recorded a benefit of $7.5 million under its weather hedge contracts, compared to a $12.5 million benefit in the prior-year period. This decrease was primarily due to warmer-than-normal temperatures experienced during the hedge period.
The company has also been proactive in managing its customer attrition rates, which have remained relatively stable. For the twelve months ended June 30, 2024, the company’s net customer attrition rate was 3.1%, compared to 3.6% in the prior-year period.
In recent years, Star Group has faced challenges related to the ongoing transition towards alternative heating sources, such as natural gas and electricity. The company estimates that it lost approximately 1.1% of its home heating oil and propane accounts to these conversions during the nine months ended June 30, 2024, compared to 1.3% in the prior-year period.
Acquisitions and Growth Strategies
Star Group has a history of strategic acquisitions, which have played a key role in the company’s growth and expansion. During the nine months ended June 30, 2024, the company acquired one propane and three heating oil businesses for a total purchase price of approximately $22.6 million.
Going forward, the company continues to maintain an active pipeline of acquisition opportunities, leveraging its strong balance sheet and operational expertise to expand its customer base and geographic reach. Star Group’s management has indicated that it will remain disciplined in its acquisition strategy, focusing on targets that align with the company’s long-term growth objectives.
In addition to acquisitions, Star Group is also exploring opportunities to diversify its product and service offerings, with a particular focus on expanding its HVAC equipment installation and maintenance business. This initiative is intended to provide additional revenue streams and enhance the company’s value proposition to its existing customer base.
Most recently, Star Group announced it has entered into a definitive agreement to acquire a fuel dealer that is expected to add approximately 19 million gallons of heating oil annually. This acquisition represents the company’s fifth in the current fiscal year, further demonstrating its commitment to growth through strategic acquisitions.
Product Segments and Financial Metrics
Star Group operates primarily in two segments: Petroleum Products and Installations and Services.
The Petroleum Products segment is the primary driver of Star Group’s business, accounting for the majority of the company’s sales. This segment includes the sale of home heating oil, propane, and other petroleum products such as motor fuels. For the three months ended June 30, 2024, product sales in the Petroleum Products segment increased by 11.4% to $249.00 million, compared to $223.56 million in the prior year period. This was driven by a 25.3% increase in retail volume of home heating oil and propane sold to 37.70 million gallons, up from 30.10 million gallons in the prior year quarter.
Home heating oil and propane sales made up $155.16 million, or 62.4%, of total product sales in the Petroleum Products segment for the three-month period. The remaining $93.84 million, or 37.6%, came from the sale of other petroleum products such as motor fuels. Gross profit for the Petroleum Products segment increased by 37.2% to $74.70 million, compared to $54.50 million in the prior year quarter. On a per gallon basis, home heating oil and propane margins increased by 17.3% to $1.70 per gallon, up from $1.45 per gallon in the prior year period.
The Installations and Services segment provides installation and maintenance services for heating and air conditioning equipment. For the three months ended June 30, 2024, installation and service revenue increased by 7.9% to $82.64 million, up from $76.56 million in the prior year quarter. Gross profit from installations and services increased by 35.0% to $13.50 million, compared to $10.00 million in the prior year period. The increase was driven by higher installation sales as well as improved profitability in both the installation and service businesses.
Industry Trends and Market Position
Star Group operates primarily in the Northeast and Mid-Atlantic regions of the United States. The home heating oil and propane distribution industry has seen moderate growth in recent years, with a compound annual growth rate (CAGR) of around 3-4% over the past 5 years. However, the industry faces headwinds from factors like customer conservation, conversions to natural gas and electric heating, and volatility in wholesale fuel prices.
Despite these challenges, Star Group has maintained its position as the nation’s largest retail distributor of home heating oil. The company’s diversified product offerings, which include propane, gasoline, and diesel fuel, as well as heating and air conditioning equipment installation and service, have helped it navigate the changing landscape of the energy industry.
Recent Performance and Outlook
For the first 9 months of fiscal year 2024, Star Group reported that home heating oil and propane volume declined by 2% to 235 million gallons, as the additional volume from acquisitions was more than offset by net customer attrition. However, product gross profit increased by 4% to $426 million, driven by higher home heating oil and propane margins. Adjusted EBITDA increased by $13 million to $141 million, as the expansion of per gallon margins and improvement in service/installation profitability offset the reduction in base business volume and lower weather hedge benefit.
Risks and Challenges
Like any energy distributor, Star Group is exposed to various risks, including volatility in wholesale product costs, supply chain disruptions, and the potential for increased customer attrition due to the ongoing transition towards alternative heating sources.
The company’s reliance on a significant portion of its revenue from price-protected customers also exposes it to the risk of higher-than-expected fuel consumption, which could result in increased hedging costs and reduced profit margins.
Additionally, Star Group faces competition from other energy providers, both regional and national, which could put pressure on the company’s market share and pricing power.
Conclusion
Star Group, L.P. (SGU) is a well-established player in the home energy distribution market, with a diversified product and service offering and a strong foothold in the Northeast and Mid-Atlantic regions. The company’s ability to navigate the volatile energy market, manage customer attrition, and pursue strategic acquisitions have been key drivers of its success.
While the company faces various risks and challenges, its experienced management team, solid financial position, and focus on operational efficiency position it well to continue its growth trajectory. The recent acquisition announcements and improved financial performance demonstrate Star Group’s commitment to expansion and adaptation in a changing energy landscape. As Star Group navigates the evolving energy market, investors will closely monitor the company’s ability to capitalize on emerging opportunities and maintain its leading position in the industry.
Disclaimer: This article is for informational purposes only. It does not constitute financial, legal, or other types of advice. While every effort has been made to ensure the accuracy of the information presented here, the author and the publisher do not make any guarantees about the completeness, reliability, and accuracy of this information.