STAR GAS PARTNERS -LP SGU
December 19, 2015 - 3:59pm EST by
dr123
2015 2016
Price: 7.13 EPS 0 0
Shares Out. (in M): 57 P/E 0 0
Market Cap (in $M): 400 P/FCF 12 12
Net Debt (in $M): 90 EBIT 0 0
TEV ($): 490 TEV/EBIT 0 0

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  • Oil and Gas
  • Secular decline
  • Small Cap

Description

The last several SGU VIC write-ups provide background, with bgm’s the most useful.

 

SGU trades at 8%-10% of my range of recurring free cash flow and has valuable take-out optionality.

 

This range stems mainly from the free cash flow sensitivity to gallon attrition.

 

Under my worst free cash flow assumptions of gallon attrition, (which is 6% of home heating oil and propane), free cash flow would fall to 3% of current price, probably causing a large share price fall.

 

Using the last 3 year average attrition of 3%, the recurring free cash flow yield is 11%.

 

So buying SGU is a bet that attrition remains near 3% and/or that SGU is bought by a competitor.

 

year #

1

2

3

4

5

6

7

8

fiscal year

2015

2014

2013

2012

2011

2010

2009

2008

total gallons sold (includes other petroleum)

484

447

384

330

399

347

387.4

399

gallon attrition

9.3

6

10

21

11.7

12.4

29

22

attrition as % of previous year heating oil & propane gallons

2.6%

1.8%

3.6%

5.9%

3.8%

3.5%

7.3%

5.8%

average attrition as % of previous year heating oil and propane gallons

4.3%

             

gross profit

471

407

353

298

354

309

331

285

 

At 4.3% average future attrition, the average annual gallons lost would be 15.2MM.

 

SGU avg gallon acquisition capex since 2009 is $2.1/gallon, so replacing such attrition requires  $34MM of annual capex

 

 

Using avg EBITDA per gallon since 2010, which has varied less than 3% when one normalizes for change in heating oil price (heating oil margins expand when heating oil price declines and vice versa) and weather, SGU’s free cash flow yield approximates 8% as follows:

 

 

2015 total gallons sold

484

 

avg gallons lost in 2016 but repurchased in 2016

  15.18

 

2015 Delivery and Branch expense stays flat in 2016

309

 

 Delivery and Branch expense per gallon

0.64

 

Avg gross profit per gallon

0.914

 

EBITDA per gallon pre corp G&A

0.276

 

future EBITDA pre corp G&A

  134

 

Capex to replace gallons

34

 

other capex (my estimate)

10

 

G&A

26

 

tax d&a (my estimate)

38*

 

interest exp

4

 

finance charge income+derivative expense

3

 

EBT

   68

 

taxes

  29

 

FCF

  33

 

shares out

  57.5

 

FCF per share

0.58

*Over time, tax book d&a would increase to $44MM, which is total capex, increasing FCF per share to $0.62

 

So on avg, an SGU shareholder should earn an inflation protected ~8% return while waiting for a take-out.

 

Why is a take-out likely?

 

Because similar distributors with lower cost of capital would realize synergies.

 

BGM’s write up explains:

Comps:  There are no other public heating oil distributers and the best comps for SGU are the propane distributors APU, FGP and SPH which trade at EBITDA multiples of 8-12x.”

 

SGU, in its largest acquisition since 2011, paid $71MM excluding working capital for 26.5MM gallons in 2014, or $2.6 per gallon.


Applying this $2.6 per gallon only to SGU’s 2015 heating oil gallons sold of 384MM implies a share price of $16. SGU’s other gallons generated $30MM in 2015 gross profit.

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.

Catalyst

fcf yield and/or take-out

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