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FIRST SEEN IN FUEL OIL NEWS | Early on in my career in the delivered fuels industry I managed an operation with around sixteen drivers and a dozen service technicians.  Toward the end of every calendar year we would pull our tickets ahead of the degree day clock so that by the New Year we were 200 degrees days ahead of the clock.  That’s how I was taught and that’s just the way it was done.  The thought was to get ahead before the severe cold so we could ensure no runouts and have the capacity to pick up additional gallons and customers.

 

That made sense then and until recently, I thought that was a best practice that every fuel company should follow.  I have since come across a new method that appears to be a much more efficient method which can save significant expenses for companies by reducing driver wages, reducing the number of trucks needed and also give companies excess capacity when there are opportunities to pick up new customers.

 

So why does someone involved in valuations and M&A advisory care so much about how fuel is delivered?  There are a couple of reasons.  First off, it’s good for our industry as we are facing a severe driver shortage.  It’s a national concern and it hits home when energy marketers tell me that they just can’t find any qualified drivers.  Another reason is because it helps my clients by making their businesses prosper and in turn, when it’s time for them to sell, we can obtain a better offer for them.  A fairly new question I hear from prospective purchasers is; are the companies we are representing for sale fully staffed? In the past buyers were looking to eliminate positions and now they are looking for drivers and technicians to fill slots.

 

I was recently exposed to a program developed by Angus Energy called ADEPT.  They have taken a different view on pulling ahead to have capacity.  They have developed an algorithm (complex math formula) to calculate when deliveries should be made throughout the year to maximize delivery capacity.  As an example, for certain accounts with high K-factors, the system may tell you to not deliver that account at a certain time as it would make it more difficult delivering a lower K in peak season.

 

I’m a number cruncher by nature and profession, so I asked for some details on how it worked.  After I analyzed it, my big question was why someone had not thought of this years ago.  It just made sense.  I remember the long nights I spent in dispatch deciding which customers would get a delivery and which ones would not.  I understood that I could hold off delivering a 12 K, even though we were in the neighborhood making other deliveries.  I knew we had 1,200 tickets in the rack and a capacity to deliver 600.  We had to pick who got fuel and who could wait.

 

The ADEPT program not only makes the calculations for you, it does it far in advance so you are not under the gun when the next polar vortex comes.

 

I want to be clear that I don’t work for Angus and I was not asked to write this article for them.  I just felt so strongly that I had to share my unbiased opinion with the readers of this article with hopes that it will help a fellow industry company become a better more efficient business.  Runouts and lack of delivery capacity can turn into black eyes for companies as well as our industry.  It’s worth contacting Danny Silverman at Angus (dsilverman@angusenergy.com) to see if this program is right for your business.

Steven Abbate

January 2021

First published in Fuel Oil News, January 2021 edition


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We were very pleased to have such a knowledgeable and experienced company in our corner with the team at Cetane. It was obvious that they knew the best process and how to get the ball over the goal line. Their advice throughout the process was greatly appreciated and we thoroughly enjoyed working with them.

— Steve Lombardi, Brodeur’s Oil, Moosup, CT
Articles

FIRST SEEN IN BPN | Aldous Leonard Huxley, an English writer and philosopher in the first half of the 20th century, once wrote, “There are things known and there are things unknown, and in between are the doors of perception.” Offers for businesses by buyers in an acquisition market depend on perception of value. And potential acquirers can differ quite widely in their perceptions of value when contemplating an offer for a propane business. These differences largely stem from variations in their respective assessments of potential future cash flows, weighted average costs of capital, perceived synergistic opportunities and savings, and motivations for pursuing the acquisition in the first place. Knowledge of why these differences arise will help position a business for sale in a way that maximizes its value in a competitive process.

Assessment of Potential Future Cash Flows

Fundamentally, an acquired business can be viewed as a package of potential cash flows available for distribution to its owners sometime in the future. Discounting these future cash flows at the cost of capital of a potential acquirer represents the investment value of the business to that specific potential acquirer. Potential acquirers develop these future cash flows by examining the historical and current cash flows of the business and making a variety of assumptions concerning the future. Tank control, customer churn, customer mix, competition, and required annual reinvestment can all impact the future pattern and stability of cash flow. And all potential acquirers take such factors into consideration.

Also, potential acquirers will generally reflect the operating expense structures and corporate overhead of their own businesses when formulating these projections. Whether an acquirer plans to operate the business as a standalone entity or completely fold it into existing operations influences which operating expenses will be maintained, and which ones might be reduced or eliminated. Hence, potential acquirers can differ on their assumptions about potential future cash flows.

Cost of Capital

Potential acquirers will vary in their weighted average cost of capital (WACC) used to evaluate the potential acquisition. Differences in sizes, capital structures, corporate tax rates, projected growth, and stability of cash flows all influence the nature and cost of capital available to the acquirers to fund the contemplated acquisition.

By way of example, consider two potential acquirers of SellerCo – BuyerCoA and BuyerCoB.  Both BuyerCoA and BuyerCoB reach similar, but independent estimates of potential future cash flows for SellerCo – $250,000 with an annual growth rate of 5 percent for the next ten years. But larger, creditworthy BuyerCoA enjoys a WACC of 8 percent, while smaller, riskier BuyerCoB has a WACC of 12 percent. Using their respective WACC to discount the package of future cash flows results in an 11 percent difference – BuyerCoA’s estimate of value of $1,095,000 versus BuyerCoB’s estimate of value of $985,000. In other words, BuyerCoA can afford to pay more.

Synergistic Opportunities and Savings

Beyond standalone value, potential acquirers also evaluate acquisitions in terms of the economic benefits of putting the two organizations together. An acquirer that sells both distillates and HVAC services might acquire a local propane distributor with a perceived opportunity to market propane to existing dual fuel customers in its account base. Or the combination of two propane businesses with overlapping delivery areas might present an opportunity for substantial expense reduction through routing optimization. To gauge the financial impact of such possible synergies, a buyer will create a pro forma financial model of the potential acquisition on both a standalone basis and a combined basis. All other factors being equal, an acquirer with a clearly identifiable set of synergistic opportunities can usually afford to present a higher offer than an acquirer without such opportunities.

Motivation

Certainly, acquirers can have dissimilar motivations for pursuing a particular acquisition or similar motivations weighted differently by importance. This can influence their perception of the overall value of a propane business, at least on the margin. Larger businesses can attract higher valuation multiples compared with smaller ones, so one acquirer could be a multi-state marketer positioning its business for future sale and might intend to use the acquisition to bootstrap the eventual sales multiple it receives. Another acquirer might be a private equity firm interested in employing a “roll-up” strategy in the propane industry and intending to use the acquisition as an initial platform company with which to make further smaller acquisitions. And yet another acquirer might be looking to opportunistically expand its current operating area. Such different motivations for completing an acquisition can cause potential acquirers to each see the value of a target propane business differently and impact how aggressively they might behave in a sales process.

Conclusion

Potential acquirers of propane businesses can develop very different perceptions of value. Understanding these key areas of differences – assessments of potential future cash flow, differences in their costs of capital, synergistic opportunities and savings, and motivations for pursuing the acquisition – can help a seller to better communicate the underlying value of its business in a way tailored to each potential acquirer and ultimately maximize the final price obtained in a sale.

Joshua Wolf

January 2021

First published in Butane Propane News, January 2021 edition


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We were very pleased to have such a knowledgeable and experienced company in our corner with the team at Cetane. It was obvious that they knew the best process and how to get the ball over the goal line. Their advice throughout the process was greatly appreciated and we thoroughly enjoyed working with them.

— Steve Lombardi, Brodeur’s Oil, Moosup, CT
Articles

FIRST SEEN IN LP GAS MAGAZINE | If you look into how businesses are valued you will likely hear that the most common method is a multiple of EBITDA (Earnings Before Interest Taxes Depreciation Amortization) sometimes referred to as cash flow or operating income.  Actually, when a valuation is performed it is typically done on a multiple of “Adjusted EBITDA”.  Financial information is adjusted to normalize the earnings.  There could be weather adjustments, hedging adjustments, expenses that could have been capitalized and there are almost always adjustments to remove owner compensation and expenses that would not occur under new ownership.  These are sometimes referred to as owner add backs.

Every purchaser will also do their own financial model to come up with a “Purchaser EBITDA” based on operating synergies and projected gross profit and operating expenses.  So, everyone looking to purchase a company will have a slightly different EBITDA calculation.

No matter what EBITDA you come up with you have to pick a multiple to use to calculate a value.  You also must determine what assets are included in the value.  Does it include real estate or propane tanks or vehicles or working capital?  Once again, every purchaser will include different assets, however comparing apples to apples on an offer becomes easier as you can quantify the value of most of those physical (hard) assets.  It’s getting to the intangible asset value of customer list and goodwill that has you make the jump from math to art.

Determining the multiple of EBITDA to use is based on value drivers.  What makes one business more valuable than another?  Let me give you an example.  Take two propane companies.  Both have $2 Million in company owned propane tanks at customer locations, however for one, that represents 90% tank control of total customers and for the other 20%.  The company with 20% would be a larger company in volume and probably EBITDA, however they would have less of a value multiplier, as the lower tank control would be perceived negatively by a purchaser.

Here is a list of several micro-economic value drivers:

  1. Size of Business
  2. Percentage of company owned propane tanks
  3. Customer makeup- residential/commercial/agricultural
  4. Customer demographics – median household income
  5. Vehicle and equipment age and condition
  6. Bulk tank storage/real estate
  7. Concentration risk analysis (Bids/Co-ops)
  8. Safety & Compliance (propane gas checks)
  9. Automatic delivery
  10. Tank monitors
  11. Service contract percentage
  12. Customers on a budget
  13. Customers using automatic credit card payment
  14. Exposure to natural gas/electric conversions
  15. Competition for assets
  16. Employee non-competition concerns
  17. Product mix
  18. Union vs. non-union employees

There are some other macro-economic factors that will affect the multiplier.  The big one is the cost of capital.  Buyers are looking for their best return on investment and most buyers are not using 100% of their cash.  Easy access to capital and low interest rates can drive up multiples.  Low product cost means less working capital needed for revolving lines of credit.  This also drives up overall return on investment and as a result it drives up the multiple.

Tax incentives are another macro-economic value driver.  Accelerated depreciation as an example gives purchasers an incentive to get above market after tax returns.  That is an environment that incentivizes investment in business and also drives up value.

If you are a purchaser looking to acquire a business, do your adjusted EBITDA financial projections and take a hard look at the value drivers to make the best investment you can.  If you are ultimately a seller, you should also look at ways to maximize your EBITDA and be able to identify and quantify your adjustments.  Sellers should also take a hard look at value drivers to plan on a maximum return on your business asset.

Steven Abbate

November 2020

First published in LP Gas Magazine, November 2020 edition


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We were very pleased to have such a knowledgeable and experienced company in our corner with the team at Cetane. It was obvious that they knew the best process and how to get the ball over the goal line. Their advice throughout the process was greatly appreciated and we thoroughly enjoyed working with them.

— Steve Lombardi, Brodeur’s Oil, Moosup, CT
Articles

FIRST SEEN IN FUEL OIL NEWS | The heating oil industry is in the fight of its life. We are in danger of continuing to lose market share to other energy sources while under threat of being legislated out of business.

As an industry we have recognized many of our shortcomings.  We know that for our descendants, we want them to live on a cleaner greener planet and carbon-based fuels are not part of that plan.  Thankfully, there is a plan to transform our industry and provide arguably one of the cleanest, greenest, and most renewable fuels available.  As always, our path forward is fraught with challenges.  There are many stakeholders – customers, legislators, our own employees – who need convincing that the heating oil industry is no longer a dirty fuel provider.

While there is some uncertainty in the future, what’s crystal clear is that we will not win this battle by staying the course. That’s why so many industry leaders are getting behind what’s become known as “The Providence Resolution” which establishes an industry-wide (and industry-saving) target of achieving Net-Zero carbon emissions by 2050. I probably won’t make it to 2050, but it is important to me that the industry which has given so much to so many family-owned businesses, survives.

As with all good causes, it will not be an easy venture.  We are fighting the electrify everything movement and those people and politicians waving the electric flag fail to consider where electric comes from.  Sure, electric panels on roofs and on solar farms are clean energy, however only around 1.8% of the electricity generated comes from solar, 62.7% comes from fossil fuels and 19.7% from nuclear according to EIA.

Renewables account for 17.5% and is the fastest growing segment.  The delivered fuels industry can be part of that growth and we can continue to support the family owned businesses who provide high paying jobs in local communities.  They key is to have a comprehensive plan, and the industry is in the process, however it takes money, lots of money, to implement the plan.  We need to get the word out to the masses and have the supply chain ready to service our customers.

We have learned that it takes money to fight for your livelihood.  In the heating oil industry, we fought for the National Oilheat Research Alliance (NORA) and were able to get legislation passed to assess $.002 gallon on all heating oil for education and research purposes.  Those funds could not be used to target other fuels such as natural gas, who was targeting heating oil.  As a result, the American Energy Coalition was formed to point out the shortcomings of natural gas.  Hundreds of thousands of dollars were contributed by fuel dealers and vendors to the fuel industry.  Their efforts have shown real progress.

 

Half a Penny for Your Thoughts

So how much will it cost?  Someone close to the net zero carbon movement told me they thought it would cost around $19,000 a week for the next phase.  That’s around a million bucks a year.  Chump change I say!  NORA generates eight times that at 20 points a gallon.  I question if that would be enough.  I think we should more than double the NORA allocation that amount and go to ½ cent.  Do you really think that your customers would mind paying ½ cent per gallon ($3.75 a year for 750 gallons) to promote and help implement a cleaner fuel with no carbon?  I think it’s a no brainer.  $.005 would be around $20 million a year to help develop a clean fuel for future generations while saving an industry.

I don’t know how the cards will play out, but I do know that this is a great shot at long term delivered fuel industry survival and a cleaner plan for our future generations.  Please support the industry as we try to move the ball forward on net zero carbon.

Steven Abbate

November 2020

First published in Fuel Oil News, November 2020 edition


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We were very pleased to have such a knowledgeable and experienced company in our corner with the team at Cetane. It was obvious that they knew the best process and how to get the ball over the goal line. Their advice throughout the process was greatly appreciated and we thoroughly enjoyed working with them.

— Steve Lombardi, Brodeur’s Oil, Moosup, CT
Articles

FIRST SEEN IN FUEL OIL NEWS | When the pandemic first wreaked havoc in the business community, no one could have predicted what it would mean for company profitability and values.  Since then we have seen some bumps up and bumps down in value depending on geography and product mix.

Marketers in tourist areas such as Orlando, Atlantic City, Las Vegas, Maine and several other highly seasonal and hotel/restaurant heavy areas have seen a reduction in sales and an increase in bad debt and receivables.  In our opinion the bump down has been mild as compared to the bump up.

When we put a new energy company on the market, we perform an assessment to let the owner know what we think the assets of the company will sell for.  While we typically exceed our projections, we have found that our projections were being exceeded by a substantial amount of between 9% and 20% over our projections.

In addition to seeing higher values, we noticed an uptick in interested purchasers and the number of qualified offers we received on our listings.  In 2019 we conducted a five-year study on the average number of offers we received on energy companies we put on the market.  In that time, we averaged 5.2 offers per business.  In 2020, we are averaging 5.9 or a 13.5% increase.

So why the increase in value and interest now?  We think there are several reasons.

  1. Interest rates are near record lows and banks are willing to lend. There is added paperwork to be completed and banks have been slowing down transactions.  In a transaction we recently closed, the bank required the seller to escrow the funds they received on their PPP loan until they received loan forgiveness.  The process is longer, however smart acquirers using leverage are willing to pay higher values for companies due to lower interest rates.
  2. PPP Loans have brought fresh capital into the market. Most energy marketers we have spoken with have taken advantage of the PPP loans.  The loans have done what they were designed to do and that was to keep people working and keep the economy robust.  Our industry may have had some slowdowns, however as a general rule we have done very well.  Many people stayed home, invested in home improvements including pool heaters, generators and BBQ’s.  All reports we see on BBQ cylinder refills is that they are very strong and substantially above last year.  The result is strong profits and additional capital to invest.  In our opinion this has helped Buyers who have come in the market looking for acquisitions, as well as increased offers for most buyers with an acquisition program in place.
  3. Accelerated depreciation remains an attractive tax strategy. Under the current tax laws, the 179 accelerated depreciation expenses have increased limits and can now be applied to used equipment, including vehicles and propane tanks.  This is a huge advantage for Buyers who can now depreciate assets quickly for a higher after-tax income.
  4. Essential industry investment is attractive. We have had a surge in calls from private equity groups looking to put their investors money in essential industries with consolidation opportunity and strong cash returns.  The delivered fuels industry fits this model.  We recently received two calls from two separate private equity firms, already in our industry, who were looking to deploy money into their home energy business.  They were looking for more acquisitions.  They both explained that their equity fund had several business lines.  One of the PE groups had investments in a chain of flea markets across the country.  The other was invested in the hospitality industry including hotels, rental cars and restaurants.  Both of the companies explained that their investors wanted to pull back investments in those business lines and instead invest in their already established downstream energy businesses due to the recession resistant nature of energy.

Back in March, no one knew how the pandemic would affect our industry, economy and business value.  This is still a fluid process with changes happening daily.  We have an election year upon us and no vaccine ready to distribute.  We can’t say how long the bump up in values will last, but it is certainly here now.

Steven Abbate

September 2020

First published in Fuel Oil News, September 2020 edition


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We were very pleased to have such a knowledgeable and experienced company in our corner with the team at Cetane. It was obvious that they knew the best process and how to get the ball over the goal line. Their advice throughout the process was greatly appreciated and we thoroughly enjoyed working with them.

— Steve Lombardi, Brodeur’s Oil, Moosup, CT