Energy & Petroleum Articles
Opportunities & Threats Within The Heating Oil Industry
James A. Deleo, MBA, CPA/MST
Gray, Gray & Gray, LLP
The current economic climate presents numerous challenges for every oilheat dealer. At the same time, there are opportunities to be found in the industry today. Let’s look at both sides of the coin.
THREATS
Fallout from Declining Prices
As a result of price declines and energy conservation, revenue and volume are predicted to decline sharply in 2009, posing the following threats:
- A corresponding decrease in accounts receivable and inventory, putting an increased emphasis on collections and inventory management (especially parts inventory).
- A decline in the borrowing base for working requirements that will result in reduced availability on lines of credit from financial institutions.
- Companies need to change their performance metrics and properly budget and track monthly cash flow and operating expenses.
High-Priced Futures Contracts
Oil dealers have had to honor higher priced futures contracts with wholesalers. However, customers have been opting out of their own high price fixed contracts if they do not have downside protection. Termination fees for fixed price contracts have proven to be too low to impede customers from opting out, leaving many dealers with losses on these contracts or reduced margins upon draw-down as the winter progresses.
Collections
The economic downturn will impact accounts receivable collections toward the end of the 2009 heating season. Dealers must be diligent in collecting past due amounts. Declining accounts receivable balances caused by declining volume and prices could hide potential collection issues if not monitored closely.
Conservation
Conservation as a result of the economic downturn and growing concern over greenhouse effects will help keep prices and volume down. Dealers will need to adjust to fewer deliveries per customer and learn to maximize delivery efficiency.
Available Credit
A limited number of financial institutions remain willing to lend to this industry. New sources of financing – often more expensive sources – must be found.
The threat that speculators will eventually re-enter the market once the economy recovers and cause price volatility.
Another issue is timing. Most suppliers withdraw payment via EFT (electronic funds transfer) within 10 business days of delivery or draw. Yet many customers don’t pay their bills for 30 days – or longer. This gap reduces your available credit, and places more importance on rapid collections.
Weather Problems
Could global warming be harming your business? Historical decreases in degree days over the past several years have contributed to lower volume of oil sales. Again, adjustments must be made to adapt your company to a world in which total gallons sold is diminishing.
Service Costs
Can you still afford to keep a service technician on call 24-hours per day? Too many dealers fail to charge enough for service contracts, or neglect to charge a premium for “off hours” service calls. You will be faced with a decision to either adjust your billing and service contract rates to reflect higher costs, or limit service calls to normal business hours in the near future.
Declining Business Value
Customer lists, long the most valuable asset of an oilheat company, have lost significant value and are no longer used as collateral in acquisition financing. As a result, overall business values have declined, further complicating the search for financing and credit.
OPPORTUNITIES
Price advantages
The decline in oil prices has an upside for dealers.
- Lower prices for heating oil should slow conversions to natural gas to levels at or below the historical level of ½% per year. Dealers should be able to retain more customers based on price.
- Lower prices for heating oil combined with the decreased cost of borrowing could reduce financing costs related to working capital.
- Growing use of credit cards for customer payments can speed up collections.
Dealer Stability
The global economic downturn provides well-run, well-established full service oil dealers with an advantage over “thinly capitalized” competitors. Lower product prices have narrowed the cost gap and made it easier for customers to buy oil from a full service dealer who offers a more reliable source of oil and additional benefits. Good communication with customers about pricing and volatility issues leads directly to higher retention rates.
Margin Strength
Companies that are able to keep margins up (on a cents per gallon basis) in the face of declines in oil prices and consumption are well positioned to weather the economic downturn. Improved software is now available to companies to assist with margin analysis and control.
Mergers & Acquisitions
Merger and acquisition opportunities abound for companies with strong balance sheets.
- The majority of deals transacted recently have been on a retained gallons basis, providing the buyer with increased protection post acquisition.
Competitor Attrition
Established companies are well positioned to take on customer attrition from other companies. In these uncertain times more customers are concerned, not only about the price they will pay for oil, but also about the viability of their oil company.
“Green” Installation
With an increased emphasis on conservation to save both money and the environment, full service dealers face a potential windfall in service and installation projects that assist consumers in improving energy efficiency.
James DeLeo, CPA is a partner with Gray, Gray & Gray, LLP, Certified Public Accountants, Westwood, MA. Gray, Gray & Gray serves the tax, accounting and business advisory needs of businesses in the energy industry. Mr. DeLeo can be reached at (781) 407-0300, or via e-mail to: jdeleo@gggcpas.com.