Star Group, L.P. (NYSE:SGU) is a leading full-service provider specializing in the sale of home heating and air conditioning products and services to residential and commercial customers. The company has navigated the challenges of volatile weather conditions and rising costs with a steadfast focus on operational efficiency, strategic acquisitions, and a commitment to serving its diverse customer base.
Financial Highlights
For the fiscal year ended September 30, 2023, Star Group reported annual net income of $31,945,000, annual revenue of $1,952,862,000, annual operating cash flow of $123,658,000, and annual free cash flow of $114,646,000. In the second quarter of fiscal 2024, the company generated net income of $68,374,000 and adjusted EBITDA of $96,327,000.
Business Overview
Star Group operates primarily in the Northeast and Mid-Atlantic regions of the United States, serving approximately 403,700 full-service residential and commercial home heating oil and propane customers, as well as 60,800 customers on a delivery-only basis. The company also sells gasoline and diesel fuel to approximately 26,700 customers and provides installation, maintenance, and repair services for heating and air conditioning equipment, including approximately 20,700 service contracts for natural gas and other heating systems.
Navigating Volatile Weather Conditions
The seasonal nature of Star Group's business means that weather conditions have a significant impact on the demand for home heating oil and propane. To mitigate the adverse effects of warm weather on cash flow, the company has utilized weather hedging contracts for a number of years. In the second quarter of fiscal 2024, the company recorded a weather hedge benefit of $6.5 million, compared to a $12.9 million benefit in the prior-year period. For fiscal 2025, the company has put in place $15 million of weather hedges, which would have resulted in an additional $7.5 million in benefits if the same coverage had been in place during fiscal 2024.
Acquisition Strategy
Star Group has been actively pursuing strategic acquisitions to strengthen and broaden its portfolio of brands. During the six months ended March 31, 2024, the company acquired one propane and three heating oil businesses for an aggregate purchase price of approximately $22.6 million. These acquisitions, located in New Jersey and Long Island, are expected to provide synergies and expand the company's geographic footprint.
Financials
In the second quarter of fiscal 2024, Star Group's retail volume of home heating oil and propane sold decreased by 4.0 million gallons, or 3.3%, to 117.1 million gallons, compared to 121.1 million gallons in the prior-year period. This decline was primarily due to a 6.9% decrease in total volume sold, which was partially offset by a 5.3% increase in home heating oil and propane margins to $1.6768 per gallon.
Product sales decreased by $73.9 million, or 11.0%, to $595.3 million in the second quarter of fiscal 2024, driven by the decrease in total volume sold and a 12.5% decline in average selling prices. Installation and service revenue increased by $2.3 million, or 3.4%, to $70.7 million, reflecting an increase in service revenue.
Cost of product decreased by $76.9 million, or 16.5%, to $389.4 million, primarily due to the decrease in wholesale product cost and the decline in total volume sold. Delivery and branch expenses increased by $8.2 million, or 8.5%, to $104.1 million, largely due to a $6.4 million decrease in the weather hedge benefit compared to the prior-year period.
Net income for the second quarter of fiscal 2024 was $68.4 million, an increase of $6.3 million compared to the prior-year period, driven by a favorable change in the fair value of derivative instruments and a decrease in interest expense, partially offset by a decrease in adjusted EBITDA.
Liquidity
As of March 31, 2024, Star Group had $12.1 million in cash and cash equivalents and $221.8 million in availability under its revolving credit facility. The company's capital requirements are expected to be funded by cash flows from operating activities and the revolving credit facility.
Outlook
Star Group has not provided specific financial guidance for the remainder of fiscal 2024. However, the company's management has expressed confidence in the team's ability to navigate the challenges posed by volatile weather conditions and continue to pursue strategic acquisitions that align with the company's growth objectives.
Risks and Challenges
Star Group's business is subject to various risks, including volatility in the wholesale prices of home heating oil, propane, and motor fuels, customer attrition due to factors such as price competition and natural gas conversions, and the potential impact of legislative and regulatory changes related to climate change and environmental regulations.
Conclusion
Star Group, L.P. has demonstrated its resilience in the face of challenging weather conditions and rising costs. The company's strategic acquisitions, focus on operational efficiency, and commitment to serving its diverse customer base have positioned it well for continued success. While the company faces various risks, its experienced management team and strong financial position suggest that Star Group is well-equipped to navigate the evolving energy landscape and capitalize on future growth opportunities.