US heating oil distributors warn of debt problems

New York (Platts)--28Oct2004

US heating oil distributors have warned state and federal officials of
prospective debt problems facing the industry, and are asking officials to
push lenders to cooperate in warding off what could be a capital crisis. Banks
in areas of high oil-heat consumption soon will also be directly approached.
At least one regional trade association in New York has contacted both houses
of its state legislature in Albany to make certain the government understands
the criticality of distributors getting sufficient bank credit. But the
group's executive said the industry's situation did not yet call for action
since most buy only a 10-day supply and cold weather has not set in. But
Daniel F. Gilligan, president of the Petroleum Marketers Association, is
preparing letters that will go out next week to nearly 50 lenders to the oil
industry in the Northeast, Northwest and Midwest, asking for understanding and
flexibility in extending credit.

Gilligan will also contact the US Small Business Administration to see what
loan guarantees may be available to oil distributors, although noting the SBA
appears to be strapped. The PMA will then take congressional action to augment
the agency's lending powers, Gilligan said. He is also concerned that federal
funds to provide heating oil to low-income people will be insufficient. The
allocation is $2-bil plus, but heating oil's high value is reducing the fund's
efficiency, he noted, so Congress may have to augment that emergency program.
Gilligan's expectation is that the heating oil issue is "temporary" and will
be solved by price corrections, but he acknowledged that distributors confront
a "difficult winter" owing to their credit limits. Increasingly, heating oil
distributors are in the hands of bankers and other creditors, sources
stressed, using terms like "cooperation" and "flexibility" to state what they
thought lending institutions must show more of.

But two analysts said if crude tops $60/bbl -- causing heating oil to jump --
it will prompt heightened consolidations, with one forecasting a "shakeout" of
companies before spring. Front-month crude on the New York Mercantile Exchange
has slipped around $4/bbl over the past two days to under $51/bbl, but Kevin
Norrish, analyst at Barclays Capital, said for crude to reach $60 would only
require a cold winter. "There's no supply flexibility in the system to deal
with a demand surge," he said, reiterating that a frigid season ahead would
make high heating oil "almost inevitable...a certainty." While crude
inventories have climbed 13.9-mil bbl over the past five weeks, according to
the Department of Energy, US distillate stocks have fallen 11.7-mil bbl since
Sep 10, at a time when inventories should be building.

All analysts and industry executives contacted said distributors are
attempting to shore up their finances and today confront no problems with rack
owners; retailers are not being denied fill-ups. Even financially troubled
Star Gas's operating unit, Petro, is obtaining all it needs since, as one rack
executive said, transactions with Petro are strictly cash or letter of credit.
On Oct 18, Star Gas, the US's largest heating oil distributor, warned of a
decline in earnings for this year and next and possible bankruptcy, partially
because of the company's inability to pass on high heating oil prices to
consumers. However, apparently to prove its viability, the rack executive said
Star's subsidiary was "throwing cash at us left, right and center; they've
allayed my fears." Star/Petro's ability to secure full supply, he continued,
is due partly to its currently moderate demands. In mid-winter, "when volumes
really start rocking, that kind of demand will be the true test" not only for
Star but for all heating oil distributors, the executive said.

Meanwhile, so-called mom and pop oil distributors are now said to be more
easily pirating customers from large full-service deliverers, including the
few that are public partnerships. Eroding the customers' allegiance are high
prices, industry analysts say, citing NYMEX heating oil, which hit an all-time
high of $1.603/gal on Oct 22. The front-month price has since slipped and
settled at $1.4532/gal Thursday, but remains roughly 82% higher year-on-year.
Mom and pops are said to operate on 30-45 cts/gal above their rack costs,
compared to 50-60 cts/gal for mid-size firms. Large full-service distributors
work on much higher margins of 70-75 cts/gal, several industry sources told
Platts. For the week ending Oct 25, New York residential heating oil prices
averaged $2.199/gal, according to the DOE, compared to an average metro New
York diesel rack price of $1.5853/gal for the week.

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