Fuel Oil and LP Gas Dealers
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Industry Overview
The US fuel oil and LP gas dealer (fuel dealer) industry includes about 10,000 companies with combined annual revenue of about $20 billion. Major companies include AmeriGas Partners, Ferrellgas Partners, and Star Gas Partners. The fuel dealer industry is fragmented: the top 50 companies hold less than 40 percent of sales.
The term "LP gas" is used as shorthand for both liquid petroleum gas and liquid propane gas. Propane accounts for the majority of LP gas sales. Major uses for LP gas include heating, cooking, powering vehicles, and drying crops. Major uses of fuel oil include heating and cooking.
Competitive Landscape
Residential, commercial, industrial, and agricultural heating needs drive demand. The profitability of individual companies depends on efficient operations, low-cost purchasing, and competitive pricing. Large companies have advantages in purchasing, finance, and distribution. Small companies can compete effectively by serving a local market, offering unique products, or providing special services.
Fuel dealers compete with suppliers of other energy sources, including electricity and natural gas. The increased availability of natural gas has resulted in stagnant and declining markets for LP gas and fuel oil as home heating sources. In addition, companies may compete with farm cooperatives that sell energy to members.
Products, Operations & Technology
Major products sold include fuel oil (40 percent of industry sales); LP gas (40 percent); and auto fuel (10 percent). Fuel oil includes various grades (mostly No. 2 for heating) and kerosene. LP gas includes bulk and bottled forms. Auto fuels include diesel fuel and gas. LP gas dealers may rent storage tanks to customers or have portable tank exchanges. Companies may also sell, install, or service heating equipment.
Fuel oil and LP gas are derivatives of crude oil. Fuel oil is a distillate of crude oil, and is formed when oil is heated to a gas state and condensed. Of the six grades of fuel oil, No. 2 grade distillate is the type used for heating. LP gas is a by-product of natural gas production and petroleum refining. Extremely low temperatures or increased pressure converts gas to liquid, making it easier to transport. Fuel oil and LP gas are not interchangeable and conversion to a different fuel requires new heating equipment.
Fuel dealers generally serve suburban and rural areas without access to natural gas. Many small companies are family-owned and handed down from one generation to the next. Demand for different types of fuel is regional and based on the type of heating equipment used in a particular market. Companies may consider geographical size, the number and density of potential customers, types of fuel usage, competition, typical weather conditions, and existing infrastructure for supply when considering new markets. Fuel oil dealers service an average of 2,600 residential accounts, sell about 3 million gallons of heating oil, and generate less than $5 million annually, according to Fuel Oil News.
While large LP gas dealers can have hundreds of distribution outlets, the average dealer has at least two with storage tanks to hold fuel, according to LP Gas. On average, tank capacity for small LP gas dealers is about 45,000 gallons, while capacity for large dealers is 500,000. Tank capacity for fuel oil dealers averages 230,000 gallons, but varies widely by region. Dealers may own or lease secondary storage facilities to hold fuel during periods of low demand, such as summer.
Companies use tanker trucks or bobtail trucks to transport fuel to customer tanks. Independent fuel oil dealers have about seven trucks. The average truck holds between 2,400 and 3,300 gallons, although larger transport trucks meant to service commercial customers can hold up to 9,000 gallons. Residential customer tanks typically hold between 250 and 550 gallons of fuel. Customers may receive multiple deliveries annually and can opt for automatic deliveries. Route planning is important to control costs and to minimize miles traveled between customers.
Dealers buy fuel from oil companies, natural gas processors, and wholesalers. To deliver fuel, dealers may rely on suppliers or use trucking or rail services. Supply agreements may range from six months to three years and include minimum or maximum purchases. Since fuel oil and LP gas are commodity products, pricing is typically based on the market price at the time of the contract or delivery date, plus a differential. Dealers may also buy fuel on the spot market to meet excess demand. Because fuel oil and LP gas are tied to crude oil, prices can be volatile and companies may use contract terms, options, or futures contracts to reduce risk.
Most fuel dealers use computerized information systems to manage receivables, payables, general ledger, and payroll. Companies may also use computer systems to monitor storage tanks remotely, forecast customer fuel use, and track customers. Routing software helps schedule deliveries more efficiently, GPS helps drivers navigate routes, and in-truck terminals give drivers billing capabilities.
