Sep 17 2013
As seen in The RMA Journal
Volatile crude oil prices since 2008 have led to peaks and valleys in revenue for the Fuel Dealers and the Gasoline and Petroleum Wholesalers industries over the past five years. And that volatile industry revenue is the main factor contributing to these industries’ high-risk status over the period.
When world crude oil prices plummeted 36.3% during the recession in 2009, revenue for the Fuel Dealers industry followed suit, dropping 14.5% that year. Likewise, revenue for the Gasoline and Petroleum Wholesaling industry fell 34.6%.
These fluctuations are anticipated to flatten out over the next five years for both industries as prices for crude oil begin to stabilize, rising at an annualized rate of 0.4% through 2018. Even though fuel costs are increasing overall for operators, steady downstream demand is helping these industries maintain revenue growth and mitigate future risk, creating opportunities for lenders looking for higher returns on investment, especially as demand for oil-based fuels continues to rise.
Fuel dealers sell heating oil, propane and other fuels directly to end users, making oil and natural gas prices the primary drivers of revenue for the industry. Propane and heating oil are the industry’s largest product segments, generating a respective 38.5% and 34.1% of revenue.
Consumers make up the largest market for fuel dealers’ goods at 46.3% of industry revenue. In areas not serviced with natural gas, households typically demand heating oil and propane for cooking and heating purposes.
As a result, growth in demand for the industry’s products depends heavily on housing starts. From 2013 to 2018, housing starts are projected to rise an annualized 10.0%, which will boost demand for energy from the residential market.
Additionally, demand from many of the Fuel Dealers industry’s downstream markets, such as petrochemical manufacturers and bus service operators, will remain steady or even increase during the next five years. Many of these markets regard the industry’s fuel products as essential to their own operations. So even though demand for other forms of energy will rise over the next five years and complicate fuel dealers’ future performance, large declines in demand are not anticipated over the period, helping to lower risk related to volatile revenue.
During the next five years, investment in natural gas distribution networks is anticipated to rise, forcing fuel dealers to increasingly vie with natural gas distribution companies to be the fuel of choice in new homes. As this infrastructure becomes more widely available, customers are expected to switch from the industry’s propane and heating oil products to natural gas.
To combat this threat, operators will expand their geographic footprint to access new customers and retain existing ones. Although natural gas pipeline expansion is currently in the works, construction of these distribution networks will only slowly ramp up during the next five years, leaving rural and other areas not currently serviced with electricity or natural gas dependent on propane and heating oil and giving fuel dealers an edge.
As the economic recovery picks up during the next five years, per capita disposable income is expected to rise 2.4% per year on average, allowing consumers to absorb higher fuel costs. In addition, downstream industries will continue requiring the industry’s fuel products to power their own operations. As a result, consistently rising fuel prices will be a boon to operators, helping revenue grow an estimated 2.2% annually on average to $51.3 billion in the five years to 2018.
About 16.7% of fuel dealers’ revenue comes from the industrial sector, particularly the Petrochemical Manufacturing industry. From 2013 to 2018, the industry’s revenue is projected to rise 3.7% annually on average to $99.9 billion. Petrochemical manufacturers rely heavily on natural gas and oil as raw material inputs in their production processes. With the prices of these commodities rising during the next five years, the cost of production is anticipated to increase for these manufacturers, causing petrochemical product prices to rise.
Despite higher prices, however, most key buyers of petrochemical products will continue purchasing chemicals from this industry: buyers are typically another segment of the petrochemical company’s operations, so the company manufactures products directly for them, thereby generating steady demand. As long as demand is steady, these operators will continually need oil inputs, keeping raw material purchases high.
But manufacturers are unlikely to raise prices for its customers, including those customers not part of the company’s operations, for fear of deterring purchases. With higher costs but no corresponding product price increases, profit margins will fall.
Because they cannot reduce their demand for inputs, petrochemical manufacturers will likely adjust their production processes to mitigate these high costs, including closing low-profit plants and increasing efficiencies at other facilities, as well as moving some establishments abroad to take advantage of lower production costs. As a result, the Fuel Dealers industry can expect a steady source of demand from petrochemical manufacturers, making this high-risk industry a little less risky for lenders.
Bus service operators
The Scheduled and Charter Bus Services industry uses fuel dealers’ liquefied petroleum gas to fuel its vehicles. Although these firms benefited from low fuel costs during the recession and slow recovery years since, rising fuel costs during the next five years are unlikely to negatively impact bus services. These operators are able to easily raise prices for their services to cover the costs of rising oil prices.
In fact, increasing oil prices encourage consumers to turn to bus services to save money on gasoline and reduce travel expenses, which flows back to fuel dealers as higher demand for their fuel products as bus operators boost their services to accommodate more passengers.
Over the long term, gas prices are anticipated to continue their upward trend, driving more consumers toward scheduled and charter bus services. Consequently, revenue for the Scheduled and Charter Bus Services industry is projected to rise at an average annual rate of 2.9% to $6.5 billion from 2013 to 2018, indicating increasing demand for fuel, lower future risk for fuel dealers and a potential opportunity for investors.
Gasoline and Petroleum Wholesaling
Revenue and risk for the Gasoline and Petroleum Wholesaling industry depend heavily on global crude oil prices. Although the volatile crude oil prices that resulted from the recession are unlikely to recur, there is still potential that natural disasters or political events could impact prices. Protests and regime changes in the Middle East, a region that includes some of the most prolific oil-producing nations, may cause more spikes in oil prices, increasing the industry’s risk.
Meanwhile, a legislative push for fuel efficiency, including higher miles per gallon required for cars and light trucks, will weaken domestic demand and slow the growth in the volume of petroleum products sold by wholesalers.
Despite the risks involved, wholesalers play a vital role in the petroleum product supply chain. Slim profit margins and the already-established relationships many customers have with wholesalers make it not worthwhile for oil companies to set up their own wholesaling operations.
In addition, some downstream industries lack the infrastructure to purchase petroleum products directly from manufacturers. Combined with recovering product prices, wholesalers’ key role will help revenue grow at an annualized rate of 2.5% to $439.5 billion in the five years to 2018. Gasoline and petroleum wholesalers can take comfort in the fact that demand for their products will not likely fall considerably in the short term. Many downstream customers still depend on the industry’s products for their operations, which ensures steady demand.
Gas retailers are the major market for gasoline and petroleum wholesalers, accounting for 47.0% of the industry’s revenue in 2013. Consequently, the success of gasoline retailers heavily depends on the prices wholesalers charge for their gasoline products. Higher crude oil prices during the next five years will lead to higher gas prices.
Luckily for gas retailers, per capita disposable income is also rising over the period. As incomes rise, consumers will be able to absorb higher gas prices and hit the road again, boosting revenue for gas stations with convenience stores up at an annualized 2.0% to $514.4 billion, while gas stations without convenience stores grow 1.0% on average per year to $143.8 billion. Rising consumer demand for gasoline will flow on to gasoline and petroleum wholesalers as higher demand for petroleum products, reducing wholesalers’ future risk of volatile revenue.
At the same time, the push for fuel efficiency will mitigate long-term potential growth for both gas retailers and petroleum wholesalers. In accordance with federal regulations, particularly the Corporate Average Fuel Economy standards, vehicles are becoming more fuel efficient.
Although rising demand for these vehicles will limit gasoline sales growth in the coming years, sales will not decline enough to offset rising prices and demand for gasoline, leading to overall growth over the next five years. In addition, the total number of vehicles on the road will increase as the economy continues to pick up steam, revving up demand for gasoline from both gas stations and wholesalers.
The Car and Automobile manufacturing industry is taking advantage of rising regulations, higher oil and gas prices, and changing consumer preferences toward smaller, more fuel-efficient vehicles. These trends are anticipated to bolster industry revenue growth at an annualized rate of 2.4%, reaching $109.0 billion in 2018. To benefit from the push, car manufacturers will seek potential opportunities in the hybrid and electric vehicle market.
For example, Toyota has already released a family of vehicles based on the company’s popular Prius model. During the next five years, both Toyota and Ford will concentrate on producing new hybrids from their existing platforms. As a result, the US market for hybrid vehicles and clean-diesel engines is expected to grow and make up an increasing share of the total US light vehicle market as crude oil prices and prices at the pump grow.
In addition, car manufacturers are currently producing the next generation of hybrid vehicles. Known as plug-in hybrid vehicles (PHEV), these cars are gas-optional with batteries that recharge through wall outlets. Certain models, notably Chevrolet’s Volt, also use an onboard gasoline generator to recharge batteries while driving. However, demand for these vehicles will grow only slowly until prices for these models come down, thereby keeping demand for gas-powered vehicles on its upward trend and boosting demand for gasoline products from wholesalers.
Nevertheless, fully electric vehicles (EVs) are also becoming increasingly popular among consumers. For example, Tesla Motors is an automaker that manufactures EVs and electric powertrains, a rapidly growing segment for car manufacturers. The company’s Model S, a fully electric luxury sedan, sold about 4,750 vehicles in the first quarter of 2013, more than any other luxury sedan. The company will further benefit from this product line as the number of recharging stations available to drivers grows, making EVs more viable in the five years to 2018.
All in all, the long-term trend of rising crude oil prices is acting as the catalyst for car manufacturers to refocus their energies on producing fuel-efficient vehicles. Although these new vehicles will eventually reduce demand for fuel from both gasoline retailers and gasoline and petroleum wholesalers, demand for gas products will continue to rise in the near future.
Despite their risky nature, the Fuel Dealers and Gasoline and Petroleum Wholesalers industries will still experience steady demand for their products despite rising competition from other energy sources and the US push for clean energy and energy efficiency.
Consequently, the extreme revenue volatility these two industries experienced in the past will not characterize their future as more stable oil prices and steady growth in demand mitigate future risk and give potential investors a chance at higher returns.