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Star Gas Partners, L.P. Message Board

  • toddly_ceo toddly_ceo Sep 22, 2005 1:32 PM Flag

    Natural Gas vs. Heating Oil

    I am a newbie here having recently picked up some shares at $2.66. According to the CC and the Q2 statistics, it appears that a turnaround is well under way and the heating oil segment could soon return to previous prosperity, although we may have to endure one more year of shakeout. There are many risks here, and one of them is that natural gas may become a cheaper option, with limited refining capacity in the US. In that vein I have some questions:

    1. Can heating oil be economically imported to the US?

    2. Will natural gas capacity cutbacks due to hurricanes increase the price of natural gas relative to oil (since any oil shortfall can theoretically be made up for by imports) and thus make heating oil more attractive?

    3. Would (relatively) cheaper natural gas be irrelevant since the required infrastructure to transport natural gas to residences is too costly or takes too long to put in place? Vice-versa, can residences using natural gas easily switch to heating oil (excuse me for living in California, we have no idea here how residential heating oil systems are plumbed)?

    TIA

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    • Todd,

      Good questions, perhaps I can elaborate.

      >1. Can heating oil be economically imported to the US?
      Yes, oil can be transported over water at low cost. (i.e. Crude oil & product tankers).

      >2. Will natural gas capacity cutbacks due to hurricanes increase the price of natural gas relative to oil (since any oil shortfall can theoretically be made up for by imports) and thus make heating oil more attractive?

      Yes, natural gas users are predicted to have a 74% price increase this season. (Secy Bodkin USDOE).

      >3. Would (relatively) cheaper natural gas be irrelevant since the required infrastructure to transport natural gas to residences is too costly or takes too long to put in place?

      Natural gas cannot be easily imported. It requires special LNG tankers and shoreside facilities. They do not exist in sufficient quantities in the USA to make a NG importation significant.

      >Vice-versa, can residences using natural gas easily switch to heating oil.

      No, natural gas users are usually not inclined to switch back to oil heat. The oil heat industry has never set up any kind of incentive program to woo homeowners back to oil, so I doubt it is going to happen now.

      • 1 Reply to oilguy20032003
      • <<>3. Would (relatively) cheaper natural gas be irrelevant since the required infrastructure to transport natural gas to residences is too costly or takes too long to put in place?

        Natural gas cannot be easily imported. It requires special LNG tankers and shoreside facilities. They do not exist in sufficient quantities in the USA to make a NG importation significant. >>

        To expand on that point, NG has traditionally traded at a discount to oil on a BTU basis in the US because it is both plentiful and not portable beyond fixed facilities (pipes). Current futures prices have NG in the $80+ range on a barrel of oil equivalency basis.

        The growing scarcity of NG is why I've been very long on NG stocks. It is also why I decided to go with an oil furnace now that I need to replace the current one. Gas would be much nicer because then I could get rid of the tank.

        One other difference between the fuels is the hotter burning oil heats quicker. This may not be as apparent with radiator or baseboard systems, but oil forced-air heats a house much faster than gas forced-air.

    • Hate to answer a question(s) with a question, but what "previous prosperity" are you referring to?

      From the perspective of earnings, this company has been, since 1997, a roll-up disaster that should be used in every business management 101 course as a shining example of what NOT to do.

      I'm curious as to what you saw in their earnings potential and cash flow that prompted you to buy it?

      • 1 Reply to sps7274
      • For the heating oil segment, operating income before amortization of customer acquisition costs has been positive historically.

        AFAIK, the only major mgmt disaster was the call center fiasco, now we have new mgmt and the numbers already show substantial improvement. The current impact of high prices hurts, but the little guys will soon go away and SGU and others will have an opportunity to perform better than ever before.

        JMHO

    • You have a heating oil tank, that Petro fills. The oil is then burned to heat water that is pumped through the house to radiators. Katriana has caused natural gas prices to rise because pipelines have been damaged. This should help Star Gas because there will be less incentive to shell out $3000 to get rid of heating oil and and install a natural gas system.

 
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