The home heating oil industry has a long and proud history, and Fuel Oil News has been there supporting it since 1935. It is an industry that has faced many challenges during that time. In its 77th year, Fuel Oil News is doing more than just holding
Issue link: https://read.dmtmag.com/i/235533
BUSINESS OPERATIONS By Steven ABBATE, President of CETANE ASSOCIATEs Building Value through Propane "H ome energy companies" are quickly replacing traditional home heating oil companies as customer perceptions have changed and owners look to diversify; seeking new revenue streams to replace gallons lost to conservation and conversion. There are many avenues a marketer can take to continue to grow the business through diversification. We have seen successes in propane, alarm systems, energy audits, insulation services, lawn care, plumbing, electrical services and even insurance products to name a few. While these business lines can add profits, the one that is currently adding the most value is propane. To better understand value we should look at the definition. Merriam-Webster defines value as: The amount of money that something is worth: a fair return or equivalent in goods, services or money for something exchanged. Why is propane so valuable to energy marketers? Let me touch on some reasons. 1) The tank: Most marketers own the customer propane tank and not the heating oil tank. This leads to a stickier customer with less chance they will switch suppliers. Many companies charge customers to lease propane tanks which also leads to additional revenues. 2) Diversified uses: As with heating oil, propane is used for heating and hot water. Unlike heating oil, propane is also used for generators, clothes drying, fireplace logs, cooking and even decorative lighting. These additional uses lead to higher sales of fuel as well as sales of the related appliances. 3) Higher margins: In addition to a higher margin per gallon for most marketers, heating units with similar efficiencies use more propane gallons than heating oil gallons as there is less heat content in a gallon of propane (almost 30%). The other margin to consider is the margin on sales dollars. A gallon of propane that cost $1.25 and is sold for $2.50 has a 100% margin or mark-up. A gallon of hearing oil that cost $3.00 and is sold for $3.75 has a 25% margin or mark-up. The lower sales revenues for propane will also reduce some operating expenses including bad debt, credit card processing fees and working capital interest to name a few. 4) Hard assets: Banks prefer hard assets such as trucks, tanks and real estate and will lend against them. Customer list lending ratios have declined substantially from five years ago. It is easier to get bank funding to acquire a propane company because of the hard assets and this brings more buyers into the market and drives company value up. In addition, real estate with propane bulk storage typically has more value than similar real estate with distillate and gasoline storage. Propane tanks are more easily moved and have a greater resale value than oil tanks. There is also less of an environmental concern with propane properties. In addition to the above items, customer perception and domestic supply outlook are helping to promote the use of propane. Companies with capital available for tanks are quickly promoting conversion from heating oil to propane for many of the reasons listed above. Diversifying into propane through an acquisition is a great way for a heating oil marketer to enter the business as it typically allows for immediate infrastructure and expertise. Rarely a week goes by when I am not asked by a marketer to let them know when we have a propane company available in their area. Our last company sale (heating oil and propane) was on the market less than 60 days from releasing the offering to closing. Most marketers know that even if an oil only company and a full-service oil company make the same profit, the full-service company has a greater value and will sell more quickly. The same is true for a full-service heating oil company as compared to a full service heating oil and propane company. Propane adds value beyond the earnings it produces as most buyers are considering the long term outlook for the home energy industry. l F O N Steve Abbate is the president of Cetane Associates, which provides hands-on merger and acquisition advisory services for privately held companies. Abbate has been providing M&A advisory services for most of his career. In addition to his track record of completing over 70 successful transactions, he has consulted with and performed financial and operational evaluations on hundreds of businesses throughout the U.S. Steven Abbate Cetane Associates LLC 4504 Stonecrest Drive Ellicott City, MD 21043 410-480-4930 office 410-404-3199 cell www.cetane.net www.fueloilnews.com | FUEL OIL NEWS | JANuary 2014 23