Star Group, L.P. (SGU)

Executive Summary / Key Takeaways

• Acquisition-driven growth in a shrinking pond: Star Group is aggressively consolidating the fragmented home heating oil market, completing nine acquisitions over the past two years for $126.5 million, adding nearly 12 million gallons of annual volume. This strategy directly addresses the industry's structural decline—1.3% annual customer loss to natural gas and electricity—by buying volume faster than it evaporates.

• Financial performance defies gravity: Fiscal 2025 Adjusted EBITDA surged 22.2% to $136.4 million despite weather volatility, driven by an 11.5% increase in heating oil/propane volume and disciplined margin management. Net income more than doubled to $73.5 million, demonstrating operational leverage that converts top-line growth into bottom-line cash.

• Service segment as stealth moat: The installations and services business grew revenue 9.3% to $346.8 million, contributing higher-margin, weather-resilient cash flows. This diversification reduces dependence on commodity heating oil sales and creates customer stickiness that pure-play distributors cannot replicate.

• Regulatory existential threat: New York and Massachusetts climate mandates pose a direct threat to SGU's core business, with fossil fuel bans for new construction facing legal challenges but remaining on the horizon. Management admits it's "really difficult to predict how that regulatory environment is going to impact us," creating a binary outcome for long-term viability.

• Valuation reflects terminal decline fears: Trading at 4.51x EV/EBITDA and 6.54x P/E with a 6.31% dividend yield, SGU trades at a steep discount to propane peers like Suburban Propane (9.28x EV/EBITDA) and UGI (12.45x P/E). The market prices SGU as a melting ice cube, offering value investors a high current yield but demanding conviction that management can outrun obsolescence.

Setting the Scene: The Last Heating Oil Giant Standing

Star Group, L.P. began its corporate life in 1995 as Star Gas Partners, a traditional master limited partnership distributing home heating oil across the Northeast. The 2017 transformation—changing its name to Star Group and electing corporate tax status—marked more than a rebranding. It signaled management's recognition that the partnership structure, with its K-1 tax complications, had become a liability in attracting institutional capital to a business facing existential headwinds. This structural pivot laid the foundation for the acquisition spree that defines SGU today.

The company operates in a market that is simultaneously massive and dying. As the largest retail distributor of home heating oil in the United States, SGU commands significant regional density in the Northeast and Mid-Atlantic, where legacy heating infrastructure and cold winters sustain demand. Yet the underlying trend is unforgiving: the retail home heating oil industry loses 1.1% to 1.6% of its customer base annually to natural gas and electricity conversions, with regulatory tailwinds accelerating this shift. Total market demand is expected to decline steadily as more fuel-efficient heating systems and alternative energy sources capture share.

SGU's response to this structural decline is brutally simple: buy market share faster than it disappears. The company has completed nine acquisitions since February 2024, spending $126.5 million to add nearly 12 million gallons of annual volume. This consolidation strategy exploits the industry's fragmentation—dominated by small, independent distributors lacking scale economies—while creating a self-reinforcing cycle: larger scale improves purchasing power and route density, generating cash to fund the next deal.

The competitive landscape reveals SGU's unique positioning. Suburban Propane and UGI's AmeriGas focus primarily on propane, giving SGU dominance in heating oil where it faces less direct competition. Global Partners operates a more commercial, wholesale-oriented model lacking SGU's residential service integration. Natural gas utilities and electricity providers represent the true long-term threat, offering cheaper, cleaner alternatives that slowly erode SGU's addressable market. SGU's moat isn't technological—it's geographic density and customer relationships built over decades.

Technology, Products, and Strategic Differentiation: The Service Integration Play

While SGU's petroleum distribution generates 76% of revenue, the installations and services segment represents the company's strategic future. This business—HVAC installation, maintenance, and repair—grew 9.3% in fiscal 2025 to $346.8 million, contributing $37.7 million in gross profit. The segment's importance extends beyond its financial contribution; it transforms SGU from a commodity fuel seller into a full-service home comfort provider.

Why does this matter? Service revenue is weather-resilient and commands higher margins than fuel delivery. When a customer's furnace fails in July, they don't care about heating oil prices—they need immediate repair. This creates year-round cash flows that smooth the seasonal volatility of the heating business. More importantly, it builds customer stickiness. A homeowner with a service contract is significantly less likely to switch to natural gas, even if fuel prices spike. The service technician's relationship becomes SGU's retention weapon.

Management is doubling down on this strategy, investing in additional training for sales and technical teams and expanding HVAC offerings beyond the traditional heating oil and propane customer base. The goal is to position Star Group as a "fully diversified energy provider" that can install and service natural gas and heat pump systems—even as these technologies cannibalize the core fuel business. This pragmatic pivot acknowledges the energy transition while capturing value from it.

The company has also begun integrating AI into its customer interface, though management stresses that "we're a service business first." This measured approach reflects SGU's demographic reality: its customer base values personal relationships and reliable service over digital convenience. The technology investment aims to enhance, not replace, the human touch that differentiates SGU from delivery-only competitors.

Financial Performance & Segment Dynamics: Converting Volume Into Value

Fiscal 2025's financial results validate SGU's acquisition strategy while exposing its operational leverage. Adjusted EBITDA rose $24.8 million to $136.4 million, a 22.2% increase that significantly outpaced the 1.5% revenue growth to $1.78 billion. This margin expansion reveals the power of scale: incremental gallons from acquisitions flow through a largely fixed cost base, dropping directly to the bottom line.

The petroleum products segment delivered the headline numbers. Home heating oil and propane volume jumped 11.5% to 282.6 million gallons, driven by acquisitions and weather that was 8% colder than fiscal 2024. Per-gallon margins held steady at $1.70, up slightly from $1.68, demonstrating pricing discipline in a competitive market. Product gross profit surged $57 million to $525 million, a 12% increase that shows volume growth translating directly to profit.

Quarterly dynamics reveal the business's seasonality and weather sensitivity. Q1 2025 saw volume rise 3% on temperatures 4.1% colder than prior year, generating $151 million in product gross profit. Q2 benefited from weather 13% colder than fiscal 2024, driving a 23% volume increase and $32 million EBITDA improvement. Q3, however, showed the downside: volume fell 3.8% as weather turned 20% warmer than normal, highlighting the quarterly volatility that makes annual results more meaningful than any single quarter.

The service segment's gross profit increased by $3.8 million to $37.7 million, which may seem modest, but its 9.3% revenue growth provides ballast. Management notes that recent acquisitions contributed $2.7 million to this improvement, and base business initiatives added $2.1 million, indicating both organic and inorganic strategies are contributing. The segment's profitability is improving through productivity gains and expense control, not just top-line growth.

SGU's balance sheet reflects its acquisition appetite. The company ended fiscal 2025 with $189 million in term loan debt and $165 million available under its revolving credit facility, providing ample firepower for deals. The 0.96 debt-to-equity ratio is manageable for a capital-intensive business, though it limits financial flexibility compared to less leveraged peers. The company invested $81 million in acquisitions, $16 million in unit repurchases, and paid $26 million in distributions, demonstrating a balanced capital allocation approach.

Outlook, Management Guidance, and Execution Risk

Management's guidance for fiscal 2026 reveals both confidence and caution. The company has placed $15 million in weather hedges with terms similar to 2025, protecting against warm winter downside while capping upside. This hedging program is crucial: fiscal 2025 saw a $3.1 million expense from hedges after a $7.5 million benefit in 2024, creating a $10.6 million swing that demonstrates the program's impact on volatility.

The acquisition pipeline remains "active" with "a number of opportunities under review," primarily tuck-in heating oil and propane businesses plus smaller standalones. Management completed four quality deals in 2025 and four in 2024, expressing optimism about continuing the trend. However, they note that acquisitions hitting the market after heating season will incur losses during the non-heating season, tempering near-term profits. This seasonal drag is the cost of building long-term scale.

Customer attrition remains the key operational challenge. Net attrition rose to 4.7% in fiscal 2025 from 4.2% in 2024, driven by lower real estate activity and less disruptive weather that typically drives prospects to SGU's high-quality brands. Management emphasizes that loss rates are at "historical low points" and internal satisfaction metrics are strong, but new customer gains have been sluggish. The company is "constantly reviewing our sales and marketing structure" to attract more customers, acknowledging that retention alone cannot drive growth.

Regulatory uncertainty clouds the long-term outlook. New York's Climate Leadership and Community Protection Act aims for 60% GHG reduction by 2030, with fossil fuel bans for new buildings under seven stories starting December 2025 and all buildings by 2029. Massachusetts has similar initiatives. While legal challenges have delayed implementation, the direction is clear. CEO Jeff Woosnam's candid admission that "it's really difficult to predict how that regulatory environment is going to impact us" highlights the binary nature of this risk: either SGU successfully pivots to service non-fossil fuel systems, or its core market gradually disappears.

Risks and Asymmetries: When the Music Stops

The regulatory threat represents SGU's primary existential risk. If New York and Massachusetts successfully implement fossil fuel bans for new construction, SGU's addressable market will begin shrinking at an accelerating rate. While the company can pivot to servicing heat pumps and natural gas systems, this transition fundamentally changes its business model from fuel supplier to pure-play HVAC contractor—a lower-margin, more competitive space. The legal challenges provide temporary relief, but investors must monitor appellate court rulings closely.

Customer attrition, while currently manageable, could accelerate if natural gas infrastructure expands or electricity prices fall. The 1.3% annual loss rate to fuel conversions understates the risk because it excludes normal churn from moves and price competition. Gross customer losses reached 13.5% in fiscal 2025, meaning SGU must acquire 8.8% new customers just to stay flat. In a low real estate activity environment, this becomes increasingly difficult.

Weather dependence creates earnings volatility that no hedge can fully eliminate. The $10.6 million swing in hedge results between fiscal 2024 and 2025 demonstrates this impact. While hedges protect against catastrophic warm winters, they also cap upside in cold years and create expense volatility that complicates financial planning. A multi-year warm period could compress margins even with hedges in place.

Scale disadvantages versus larger competitors like UGI and SPH limit SGU's bargaining power with suppliers and ability to invest in technology. UGI's $8.27 billion market cap and diversified utility business provide financial resilience that SGU's $393 million market cap cannot match. In a price war, SGU would be disadvantaged. The company's 0.96 debt-to-equity ratio, while manageable, is lower than UGI's 1.42 (on a much larger equity base) and SPH's 2.22, suggesting potentially more financial flexibility in terms of leverage compared to these peers.

Tariffs on HVAC equipment (3-15% price increases) and general credit weakness among customers add near-term pressure. While vendors have provided notice to adjust pricing, margin compression is possible if competitive dynamics prevent full pass-through. The company's 4.08% profit margin leaves little room for error.

Valuation Context: Cheap for a Reason

At $11.88 per share, SGU trades at a significant discount to its peer group. The 4.51x EV/EBITDA multiple compares favorably to Suburban Propane's 9.28x and Global Partners' (GLP) 9.20x, while the 6.54x P/E is less than half of UGI's 12.45x. This valuation gap reflects the market's assessment of SGU's higher risk profile in a declining industry.

The 6.31% dividend yield is attractive, especially with a conservative 39.29% payout ratio that provides coverage even if earnings decline. This yield exceeds UGI's (UGI) 3.99% but is lower than SPH's 6.99%, making SGU compelling for income-focused investors, particularly given its more sustainable payout ratio. The 26.22% ROE demonstrates efficient capital deployment, though this is partly leverage-driven.

Free cash flow generation remains robust at $56.03 million annually, representing a 7.01x P/FCF multiple that suggests the market undervalues SGU's cash generation. However, this cash flow is highly seasonal and vulnerable to weather and regulatory shifts. The 0.59 current ratio indicates tight working capital management, typical for a distribution business but leaving little cushion for disruptions.

The valuation discount essentially prices SGU as a melting ice cube. Investors are paid handsomely to wait while management attempts to outrun industry decline through acquisitions and service diversification. The key question is whether the 6.31% yield compensates for the regulatory and secular risks. For comparison, SPH (SPH) trades at a premium despite similar challenges, suggesting the market may be overly pessimistic about SGU's ability to pivot.

Conclusion: A High-Yield Bet on Management's Ability to Outrun Obsolescence

Star Group represents a classic value investor's dilemma: a business generating strong current cash flows and trading at attractive multiples, but operating in an industry with clear existential threats. The company's acquisition strategy has proven effective at consolidating market share and driving EBITDA growth, while the service segment provides a plausible path toward diversification. Management's disciplined approach to capital allocation—balancing acquisitions, buybacks, and distributions—demonstrates shareholder-friendly governance.

However, the regulatory overhang in New York and Massachusetts creates a ticking clock. SGU must successfully transform from a heating oil distributor into a comprehensive home services provider before its core market materially shrinks. The company's scale disadvantage versus larger competitors and its weather-dependent earnings add execution risk to this transition.

The 6.31% dividend yield and 4.51x EV/EBITDA multiple offer compelling value for investors willing to underwrite management's ability to navigate these challenges. The stock will likely outperform if regulatory timelines extend and acquisitions continue delivering synergies. Conversely, accelerated fossil fuel bans or a string of warm winters could validate the market's pessimistic valuation.

For long-term investors, the critical variables are regulatory developments and the pace of service segment growth. If SGU can demonstrate that its HVAC and installation business can offset heating oil decline, the valuation discount should narrow. Until then, investors are paid to wait—but they must monitor closely for signs that the industry's decline is accelerating beyond management's ability to acquire its way to growth.