Executive Summary / Key Takeaways
- Star Group, L.P. is leveraging a robust acquisition strategy and focused operational efficiency initiatives to drive growth and enhance profitability in the fragmented Northeast and Mid-Atlantic home energy distribution market.
- Recent performance, particularly in the first half of fiscal 2025, demonstrates the impact of these strategies, with significant increases in volume, gross profit, and Adjusted EBITDA, benefiting from colder weather compared to the prior year and contributions from recent acquisitions totaling $126.5 million since February 2024.
- While lacking a unique, proprietary core technology moat, the company utilizes financial tools like weather hedges to mitigate significant operational risks and is focused on internal initiatives to improve productivity and expand its HVAC service offerings.
- The competitive landscape is characterized by larger players like AmeriGas and Suburban Propane, as well as the ongoing threat of conversions to natural gas and electricity, requiring SGU to differentiate through service quality and strategic market penetration via acquisitions.
- Supported by a recently refinanced credit facility, the company maintains ample liquidity to fund its acquisition pipeline, capital expenditures, and a growing distribution, signaling confidence in its cash flow generation despite inherent weather and commodity price volatility risks.
Setting the Scene: Star Group's Position in the Home Energy Market
Star Group, L.P. (NYSE:SGU) operates as a prominent full-service provider in the home energy distribution and services sector, primarily serving residential and commercial customers across the Northeast and Mid-Atlantic United States. The company specializes in the sale of home heating oil and propane, offering both full-service and delivery-only options. Supplementing its core fuel business, SGU provides installation, maintenance, and repair services for heating and air conditioning equipment, including service contracts for systems using natural gas and other energy sources. This integrated service model is a key aspect of its market positioning, aiming to build customer loyalty and provide diversified revenue streams beyond volatile commodity sales. SGU believes it holds the position of the nation's largest retail distributor of home heating oil by volume, a testament to its scale and presence in its operating region.
The market in which SGU operates is characterized by fragmentation, seasonality, and exposure to volatile commodity prices and weather patterns. Key direct competitors include larger publicly traded entities such as AmeriGas Partners LP (TICKER:APU), Suburban Propane Partners LP (TICKER:SPH), and Superior Plus Corp. (TICKER:SPB), alongside numerous smaller regional and local players. Competition centers on pricing, service reliability, and customer relationships. Beyond direct fuel competitors, the industry faces the secular challenge of conversions to alternative energy sources, particularly natural gas and electricity, which can lead to customer attrition. SGU's strategic response to this dynamic environment is multifaceted: leveraging its full-service offering to enhance customer stickiness, pursuing targeted acquisitions to consolidate market share and expand its footprint, and focusing on operational efficiency to manage costs and improve profitability.
While the company does not appear to possess a unique, proprietary core technology that provides a deep technological moat akin to those seen in manufacturing or software sectors, SGU does employ operational tools and strategic initiatives to enhance its business model. A notable example is the use of weather hedge contracts, a financial instrument designed to mitigate the significant impact of warmer-than-normal weather on heating fuel volume and cash flows. For fiscal years 2025 and 2026, these hedges allow SGU to receive up to $15 million annually if temperatures exceed certain thresholds, although the fiscal 2025 and 2026 contracts also include an obligation to pay up to $5 million if temperatures are colder than a different threshold, a feature not present in the fiscal 2024 contract. This demonstrates a pragmatic approach to managing a core operational risk through financial means. Furthermore, management has highlighted internal initiatives focused on improving productivity and efficiency within the base business and is undertaking efforts to organically build out its HVAC service capabilities and cross-sell additional services to existing customers. These are operational and strategic improvements supported by internal systems and processes, rather than a distinct technological advantage over competitors.
Strategic Execution and Recent Performance
SGU's growth strategy is significantly underpinned by its active acquisition program. Management views acquisitions not only as a means of expansion but also as necessary to replace business lost through natural customer attrition, which is influenced by factors like move-outs, credit losses, and conversions to competing energy sources. The company has been particularly active on this front recently, completing $126.5 million in transactions since February 1, 2024. This includes five deals totaling $49.4 million in fiscal 2024, adding over 20,000 customers and 23 million gallons of volume, and a substantial $79.6 million spent on acquisitions during the first six months of fiscal 2025, adding 14.7 million gallons of annualized volume. These acquired businesses are strategically located within SGU's existing operating footprint, strengthening its regional density and operational synergies. The successful refinancing of the credit facility in September 2024, providing a $400 million revolving credit facility (expandable to $475 million during heating season) and a $210 million term loan, ensures ample liquidity to continue pursuing this active acquisition pipeline.
Alongside external growth, SGU is focused on internal operational improvements. Management has emphasized initiatives aimed at increasing productivity and efficiency within the base business, noting that these efforts are yielding positive results. The push to expand the HVAC service business, including an organic build-out initiative and efforts to increase sales of services to existing customers, is designed to enhance profitability and provide a more stable revenue stream less susceptible to weather and commodity price fluctuations.
The impact of these strategies, combined with weather variability, is evident in the company's recent financial performance. For the three months ended March 31, 2025 (Q2 FY25), total sales increased by 11.7% to $743 million compared to $666 million in the prior year period. This was primarily driven by a 22.9% increase in home heating oil and propane volume sold, reaching 143.9 million gallons, benefiting significantly from temperatures that were 12.9% colder than Q2 FY24, although still 4.5% warmer than normal. Acquisitions also contributed meaningfully to this volume growth. Product gross profit saw a substantial 25.4% increase to $258.2 million, reflecting both higher volume and an increase in home heating oil and propane per gallon margins, which rose by $0.04 (2.5%) year-over-year to $1.72 per gallon ($1.75 in the base business, a 4.4% increase). The service and installation segment also showed improved profitability, with combined gross profit increasing by $1.6 million.
For the six months ended March 31, 2025 (YTD FY25), total sales increased by 2.0% to $1.23 billion. Home heating oil and propane volume increased by 14.7% to 226.3 million gallons, driven by acquisitions and temperatures that were 9.4% colder than the prior year period (but still 6.8% warmer than normal). Product gross profit for the six months rose by 16.5% to $408.9 million, with home heating oil and propane margins increasing by $0.03 (2.2%) to $1.71 per gallon ($1.74 in the base business, a 4.0% increase). The service and installation business contributed a $4.1 million increase in Adjusted EBITDA year-to-date.
These positive top-line and gross profit trends translated into strong bottom-line growth. Net income for Q2 FY25 increased by $17.5 million to $85.9 million. Adjusted EBITDA for Q2 FY25 rose significantly by $31.9 million to $128.2 million. This improvement was primarily attributed to the increase in home heating oil and propane volumes and margins in the base business due to colder weather, the Adjusted EBITDA contribution from recent acquisitions, and improved service and installation profitability. For the six months ended March 31, 2025, net income increased by $37.4 million to $118.8 million, and Adjusted EBITDA rose by $34.7 million to $180.0 million, driven by similar factors.
However, operating expenses also increased. Delivery and branch expenses rose by $20.8 million (20.0%) in Q2 FY25, significantly impacted by a $9.6 million swing in the weather hedge results (a $3.1 million expense in Q2 FY25 compared to a $6.5 million benefit in Q2 FY24 due to differing weather conditions relative to the contract strikes). Expenses from recent acquisitions ($7.5 million) and increased delivery costs in the base business due to higher volume ($3.2 million) also contributed. General and administrative expenses increased due to higher profit sharing expense tied to improved Adjusted EBITDA. Net interest expense also rose due to higher average borrowings, partially offset by a lower weighted average interest rate.
Competitive Landscape and Operational Dynamics
SGU operates in a competitive environment where its positioning is defined by its full-service model and regional density built through acquisitions, contrasting with the scale and potential cost advantages of larger national players like AmeriGas and Suburban Propane. While precise, directly comparable market share figures for all niche competitors are not publicly detailed, SGU's focus on providing comprehensive heating, cooling, and fuel services aims to create a stickier customer base less prone to switching solely based on price. This is particularly important given the ongoing threat of conversions to natural gas and electricity, which resulted in an estimated 0.7% loss of home heating oil and propane accounts in the first six months of fiscal 2025. SGU attempts to counter this by offering service contracts for these alternative systems and expanding its HVAC capabilities, positioning itself as a broader home comfort provider.
Customer attrition remains a factor, influenced by price competition, move-outs, credit losses, and conversions. For the six months ended March 31, 2025, the company experienced a net loss of 6,000 home heating oil and propane accounts, representing 1.5% of its base, similar to the prior year period. While gross customer losses have seen some improvement, new customer additions have been somewhat sluggish, influenced by factors like real estate market activity and the absence of severe weather events that often drive customers to seek out reliable full-service providers.
The seasonal nature of SGU's business is a fundamental operational dynamic, with the majority of heating fuel volume sold during the colder first and second fiscal quarters. This seasonality dictates significant working capital swings, requiring substantial cash use during the winter months to build inventory and manage receivables, and generating cash during the warmer months as collections outpace deliveries. The company's ability to manage this cycle and maintain sufficient liquidity is critical.
Liquidity, Capital Allocation, and Shareholder Returns
SGU's liquidity is primarily derived from cash flows from operating activities, cash on hand, and its revolving credit facility. As of March 31, 2025, the company had $18.5 million in cash and cash equivalents and $212.6 million in availability under its credit agreement, which includes a $400 million revolving facility (increasing to $475 million during heating season). The company was in compliance with its financial covenants, including the senior secured leverage ratio and fixed charge coverage ratio requirements.
Primary uses of liquidity include funding working capital needs, capital expenditures, distributions to unitholders, acquisitions, and unit repurchases. Capital expenditures for the remainder of fiscal 2025 are estimated at $6.0 million to $7.0 million for maintenance, plus $0.4 million to $0.5 million for propane operations expansion.
SGU has a stated goal of allocating capital to maximize returns for investors, balancing debt reduction, returning capital, and reinvesting in the business. The company has a history of returning capital through distributions and unit repurchases. In April 2025, SGU increased its quarterly distribution to $0.1850 per unit ($0.74 annualized), marking the 13th consecutive annual increase. This decision is typically made after assessing the heating season's progress. The company also continues to repurchase Common Units under its repurchase plan, with 1.5 million units remaining authorized as of March 31, 2025.
Cash flow generation reflects the seasonal and operational dynamics. For the six months ended March 31, 2025, cash used in operating activities increased to $16.0 million from $5.2 million in the prior year, primarily due to a larger increase in accounts receivable (driven by colder weather and acquisitions) and higher inventory purchases, partially offset by improved cash flows from operations and accounts payable timing. Cash used in investing activities increased significantly to $86.4 million from $29.2 million, reflecting the higher acquisition spending. Cash provided by financing activities increased to $3.5 million from $1.3 million, driven by higher net borrowings under the revolving credit facility.
Outlook and Risks
Management plans based on normal weather conditions for forecasting purposes, acknowledging the inherent unpredictability of weather and its significant impact on results. They remain optimistic about the acquisition pipeline, with opportunities currently under review, and believe the company is well-positioned to execute on these deals, supported by its liquidity. Continued focus on operational efficiency, cost control, and expanding the HVAC business are expected to drive future performance.
However, several risks could impact SGU's outlook. Weather remains the most significant variable; warmer-than-normal temperatures would negatively affect volume and profitability, potentially offsetting gains from acquisitions and efficiency. Commodity price volatility poses a risk, as rising prices can lead to customer conservation and increased attrition, while also impacting working capital requirements. Tariffs could increase the cost of equipment and potentially products. Upcoming increases in state biofuel blending requirements could affect product costs and competitive dynamics. Customer attrition, particularly losses to natural gas and electricity conversions, is an ongoing challenge that could pressure the customer base. While historically low, customer credit risk could increase depending on economic conditions. The company is also exposed to interest rate risk on its variable-rate debt, although partially hedged by interest rate swaps. Execution risk related to integrating acquired businesses and realizing expected synergies is also present.
Conclusion
Star Group's investment thesis is centered on its ability to generate stable cash flows from a large, recurring customer base in essential home energy services, supplemented by growth through strategic acquisitions and operational improvements. The first half of fiscal 2025 demonstrated the positive impact of colder weather (relative to the prior year) and recent acquisitions on volume, margins, and profitability, highlighting the sensitivity of the business to external factors but also the benefits of its growth strategy. While the company does not rely on a unique, proprietary core technology moat, its use of financial hedging tools and focus on operational efficiency and service expansion represent strategic responses to market dynamics and risks.
The active acquisition pipeline, supported by a solid liquidity position and a recently refinanced credit facility, provides a clear path for continued external growth. Coupled with ongoing efforts to enhance base business performance and expand the higher-margin service segment, SGU appears well-positioned to navigate the challenges of weather volatility, commodity price swings, and competitive pressures, including the secular trend of energy conversions. The company's commitment to returning capital, evidenced by its consistent dividend increases, further enhances the investment appeal for income-focused investors. Key factors to monitor include the execution and integration of future acquisitions, the impact of weather patterns, trends in customer attrition (particularly conversions), and the ability to maintain per-gallon margins in a volatile commodity environment.