STAR GROUP, L.P. (SGU) stock intrinsic value fair value estimate & owner earnings analysis

Star Group is the largest retail distributor of home heating oil in the United States. At September 30, 2025 it delivered heating oil and propane to about 406,400 full-service residential and commercial customers, 59% of them in New York, New Jersey and Connecticut, with the rest in Massachusetts, Rhode Island, Vermont, Pennsylvania, Delaware, Maryland, Virginia, West Virginia, Washington D.C. and Michigan. In fiscal 2025 (year ended September 30), 63% of sales came from heating oil and propane, 18% from gasoline and diesel, and 19% from installing and servicing heating and air-conditioning equipment. Star is a limited partnership, so investors own common units rather than shares. Its general partner takes about $1.6 million a year of distributions ahead of the common units, and we deduct that in every case. What changed since our last review. The business facts are largely unchanged since our review three weeks ago, and the middle and upside estimates are essentially the same. We have made the downside case harsher in one respect: it now includes a specific weather shock and a costlier refinancing of the 2029 loan, rather than only a steady decline. That lowers the downside estimate slightly, from $11.41 to $11.04 per unit, and the margin-of-safety price is now $13 rather than $14. How we measure earnings. We start with cash from operations and remove the large seasonal swings in receivables, inventory and customer prepayments, which move by tens of millions of dollars a year because the fiscal year ends just before the heating season. We deduct the normal cost of replacing trucks, tanks and equipment, and customer bad debts, which have run between about $3 million and $10 million a year. Star pays no stock-based compensation; its management bonus plan is paid in cash and already charged. Changes in the market value of fuel hedges are paper gains and losses and are left out. To this we add back the cash interest Star paid, giving the cash the business produces before its lenders: $105.7 million in fiscal 2025 (including $19.2 million of interest), $87.3 million in fiscal 2024, $75.6 million in fiscal 2023, $78.4 million in fiscal 2022, $91.5 million in fiscal 2021 and $94.1 million in fiscal 2020. The median of these six years is $89.4 million. That span includes the warm winters of 2023 and 2024, the 2022 price spike and fiscal 2025, which was 8.3% warmer than normal. Earlier years are left out because the business then sold more gallons at a much lower profit per gallon. We measure this level in total dollars and divide by today's 32.8 million units, since Star has bought back a large share of its units over the past decade. What drives the business. Heating oil is in slow structural decline as homes switch to natural gas and electricity. Star loses more customers each year than it signs up; net attrition was 3.9%, 3.7%, 3.6%, 4.2% and 4.7% of the customer base in fiscal 2021 through 2025. In fiscal 2025 attrition cost 13.2 million gallons and conservation and other factors another 1.4 million, against 253.4 million gallons sold the year before; acquisitions added 25.1 million and colder weather 18.7 million, taking volume to 282.6 million gallons. Two things have offset the decline: a rising profit per gallon, and a steady programme of buying local dealers for cash, including $49.4 million in fiscal 2024 and $88.1 million in fiscal 2025. Spending on deals is lumpy and was under $1 million in the nine months to June 2026. The cash used for acquisitions and unit buybacks comes out of the earnings we value, so we credit acquisitions only for what they may earn above their cost, never as free growth. Growth path. Pre-lender cash rose 21% in fiscal 2025. Our base case assumes 0% for the first year, well below that, because part of fiscal 2025's rise came from a winter 8.2% colder than fiscal 2024. We hold the first year level rather than declining because the fiscal 2025 acquisitions contribute a full heating season only from fiscal 2026, and operating income for the nine months to June 2026 was $177.3 million against $155.4 million a year earlier (a figure that includes hedge value swings). We do not raise the starting level above the six-year median on the strength of one strong year and three quarters. Debt. At June 30, 2026 Star owed $173.3 million on its term loan, repayable at about $5.3 million a quarter with the balance due September 27, 2029, when the revolving credit line also matures, and held $27.0 million of cash with nothing drawn on the credit line. Across fiscal 2025 its total borrowings averaged $217.1 million, about $17.6 million more than the average term loan balance, because it borrows on the credit line each winter to carry fuel inventory and customer receivables; we count that seasonal borrowing as debt. The borrowings cost about 7.1%, a little above our yardstick rate, which we charge as about $4.6 million of extra cost until maturity. The filings put the loan's fair value at its face value. Net debt is therefore about $168.5 million, or $5.13 per unit. Operating leases, customer prepayments, deferred taxes and the small frozen pension plan are already paid for in the earnings above and are not subtracted again. Base case. Customer attrition stays around 4.5% a year, which with conservation shrinks volume about 5% a year, and profit per gallon rises about 2% a year, well below its record, on the view that price increases mainly cover rising costs. After the general partner's share, pre-lender cash is about $87.8 million in the first year, then falls about 3% a year to about $66.7 million in year ten and keeps falling about 4% a year after that as heating oil continues to decline. Acquisitions continue at about $25 million a year, tapering to nothing over the decade, and are credited as worth 10% more than they cost, adding $11.0 million. The business is worth about $942.5 million, it owes about $168.5 million, and the difference is about $774.1 million, or $23.59 per unit. About 38% of the business value comes from beyond year ten, all of it in a declining stream. Bear case (roughly a 1-in-10 downside). Pre-lender cash starts from the fiscal 2022 to 2024 median of $78.4 million, the level of the warm-winter years before the recent acquisitions, and falls about 7% a year with no end point, as attrition keeps climbing toward 6% or more and price increases only offset cost inflation. Acquisitions stop. On top of that steady decline, one year (fiscal 2030) suffers a further 17% drop, the size of the fall from fiscal 2021 to fiscal 2023 when warm winters and the 2022 price spike hit together. The filings name the structural pressures: New York's all-electric requirement extends to all new construction on January 1, 2029, and New York and Connecticut require more biodiesel in heating oil. Cash runs from about $71.4 million in the first year to about $37.2 million in year ten. When the loan matures in September 2029, about $105 million is left after scheduled payments, and in this case it is refinanced at roughly 9% for five years, which adds about $11.0 million to what the units owe. The business is worth about $541.8 million, it owes about $179.4 million on this basis, and the difference is about $362.3 million, or $11.04 per unit. Even here the debt can be carried: pre-lender cash of $45 million to $60 million a year around the maturity covers an interest bill near $10 million several times over. Bull case (roughly a 1-in-10 upside). Pre-lender cash starts at the fiscal 2025 level of $105.7 million, earned in a warmer-than-normal winter, so it is not a cold-weather windfall. Attrition returns to the 3.6% to 3.9% range of fiscal 2021 to 2023 and profit per gallon keeps rising faster than costs, so cash holds near $104.1 million for a decade before resuming a 4% annual decline. Acquisitions continue at about $37.5 million a year, tapering over ten years, and are credited as worth 25% more than they cost, adding $41.2 million. The business is worth about $1,365.3 million, it owes about $168.5 million, and the difference is about $1,196.8 million, or $36.48 per unit. What the units appear to be worth, and the margin-of-safety price. About $23.59 per unit in the base case, within a range of $11.04 to $36.48. We are fairly sure of the earnings level: six years spanning warm winters, a price spike and a year of heavy acquisitions sit in a band of about $76 million to $106 million before interest. The worst plausible outcome is faster-than-expected loss of customers to electric heat combined with two warm winters just as the loan and credit line mature in September 2029; the business has no single-customer concentration and its assets (trucks, tanks and customer lists) are modest, so it depends on lenders renewing the facility. Even in our downside case the cash comfortably covers the interest, so we judge refinancing likely, but on costlier terms. If we are wrong on attrition and on profit per gallon together, the units are worth about the $11 of the downside case. The business pays roughly $0.80 per unit a year in distributions at the current quarterly rate. The margin-of-safety price is about $13 per unit. The price assumes a three-to-four-year holding period; with those distributions, a move toward the base value implies roughly 21% to 27% a year, and the distributions collected along the way partly offset a downside outcome near $11. Above $13, a four-year holding period no longer reliably meets the 20% target. One gap: the report for the nine months to June 2026 was available to us only as financial data, so this year's weather and customer-attrition figures are not yet reflected.