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Previously we had reported on various companies that focus on fuel distribution (gas stations and other fuels). This sub-sector of the MLP space is predominately comprised of three companies: Sunoco LP (SUN) which yields 14%, Global Partners LP (GLP) which yields 16% and CrossAmerica Partners (CAPL), which yields 15%.
Today we will revisit our favorite fuel and gasoline distributor, Global Partners, and conclude with a recommendation on their preferred stock. GLP is a master limited partnership, or MLP, that has largely been flying under the radar. It was originally focused on heating oil, but management has carefully transitioned GLP into primarily a gasoline distribution-focused company.
Fuel delivery companies focus on buying fuel from refineries and delivering it to gas stations. One of the big advantages of some of these companies is the fact that they also own convenience stores in most of their gas stations, making the business model even more recession resilient.
They work with long-term contracts. SUN and CAPL would be considered midstream companies as they do not sell directly to consumers. GLP, however, is a downstream company. It does participate in midstream activities of fuel delivery, but also runs various gas stations and convenience stores directly, along with other downstream activities.
Over the past two years, all three fuel distributors have outperformed most Midstream MLPs ETF (AMLP).
In The Family
Global Partners (GLP) was founded in 1933 as a single-truck heating oil distributor. Since then, the company has grown through the acquisition of gasoline stations, convenience stores, pipelines, and storage terminals. GLP is a large company today, but is still being run by the same family. The CEO is Eric Slifka, leading the company founded by his grandfather 87 years ago.
Eric Slifka heads up the company founded by his grandfather in 1933 with one oil truck. (Image source: Boston Globe.)
Currently, GLP is broken into three distinct reporting segments: Wholesale, Commercial, and Gas Distribution & Station Operations (“GDSO”). These segments cover all of GLP’s business activities and are reported independently in the financial statements.
The Wholesale segment is involved in the bulk purchase of fuel, the blending of fuels and storage. The company’s Wholesale group stores fuel for other smaller distributors who buy from the group to sell it to the stores.
Source: GLP Presentation
As you can see, GLP’s storage locations command a strong presence in multiple markets. This creates limited opportunities for competitors to break into the market. The northeastern United States does not have many premier locations left where new facilities can be built. That makes existing assets all the more valuable.
Looking further west, the Wholesale segment jointly owns two additional locations. One is in North Dakota and can store 732,000 barrels, while being connected to two pipelines and a rail terminal. The other location is in Oregon with the ability to fuel Panamax vessels. This one has 200,000 barrels of storage capacity with room to expand.
The Wholesale segment also covers GLP’s legacy heating oil business, which is highly seasonal. Sprague Resources (SRLP) too has a large heating oil business in the same areas as GLP. As a result, these two are the primary competitors in the northeastern United States. GLP, however, continues to transition away from a heating oil focus toward gasoline and fuel distribution. Heating oil’s seasonality means that 90% of those sales occur in the first and fourth quarters. This can create bumpy earnings and cash flows for a company that depends on them. However, GLP has carefully invested in business sectors that help solve the aforementioned bumpiness.
GLP’s Commercial segment focuses on the sale of fuels to large commercial customers, government agencies and marine vessels. This is the smallest of its reporting segments. Currently, it makes up 3% of the company’s product margin. Management is preparing this segment to see strong revenue growth opportunities with the upcoming IMO 2020 rule changes. Other fuel-oriented businesses also have highlighted the opportunities that exist with this upcoming change. PBF Energy (PBF) is transitioning its business to capture additional revenues. The major difference, however, between PBF and GLP is that while PBF refines and mixes the fuel, GLP brings it to the vessels, operating as a middleman. This is a classic midstream role to play and one that GLP has found success working within.
GDSO – Gas Distribution and Store Operations
GDSO is by far the largest contributor to GLP’s current success. It provides about 93% of the company’s product margin.
Source: GLP Presentation
Distributing gasoline alone provides 64% and when you add in the benefit from its convenience store activities, this percent of margin jumps by 29%. This sector suffers from a smaller degree of seasonality as well. SUN, which is predominantly a gasoline distributor, repeatedly notes that the second and third quarters are its strongest, occurring during the summer travel season. For GLP, this means its gasoline business offsets the seasonality of its heating oil business, and vice versa.
This segment of the company has been the primary focus of management. Fuel distribution and, to a greater degree, C-store operation, are both highly fragmented. GLP has been actively buying smaller competitors and rolling them into the flock.
Source: GLP Presentation
This process has allowed the company to have an extremely strong presence in the northeastern United States by owning and operating premier locations.
Source: GLP Presentation
In this business, GLP directly competes with SUN for fuel distribution, while simultaneously operating some of SUN’s gas station locations and C-stores. SUN divested the operational side of its business in the last couple of years due to its inability to replicate the success that GLP has had. Furthermore, GLP strongly outperforms CAPL which also operates a fuel distribution business. CAPL has been actively buying operations in the southeastern United States, essentially moving away from GLP’s main domain. CAPL currently does not operate C-stores but has completely moved out of them, following in SUN’s footsteps. GLP remains the only C-store AND Fuel distributor of the major 3.
Part of the success is directly tied to the willingness to operate C-stores attached to other brand-named fuel, like GLP operating a SUN station.
Source: GLP Presentation
Likewise, the company directly operates stations connected to most large well-known fuel producers. This willingness to operate in the background allows for GLP growth while being anonymous. Customers see Royal Dutch Shell (NYSE:RDS.A) (RDS.B), Valero (VLO) or BP plc (BP), not Global, on the signage. This ability to adapt has proven valuable in capturing fuel margins. GLP also gets to capture the retail location profit. This vastly expands its total margins.
Source: GLP Presentation
While fuel margins have seen pressure, the retail operations continue to see higher profit margins, letting GLP continue to profit. SUN forecasts Cents-per-Gallon margin of only 9.5-10.5, which it achieved in 2019. This means GLP is seeing stronger margins than its peers before factoring in the boosted income from operating the C-stores.
We fully expect that management will continue to actively invest in this segment above the others. Why? Opportunities abound to purchase smaller operators and lease out or operate these locations. Organic growth can be found by renovating locations to be more attractive to drivers and maintaining an extra-clean presence.
Currently, GLP common offers a 16% yield even though it recently cut its distribution by 25% to $0.3938 per share. This was done in reaction to COVID-19 related impacts. We had previously estimated that COVID-19 would hit fuel distribution heavily. GLP saw 50% volume declines across various stations during the depths of the shutdowns in Northern States. The cut was done more to protect GLP from any further unforeseen issues than a coverage issue. Distributable cash flow was down 20% quarter over quarter to $22 million.
If GLP held its distribution steady at $0.525, it would have been covered 1.23x. The new distribution is covered 1.65x. So we do not expect the need for further cuts. At this time however we feel the preferred shares offer a better opportunity.
One Step Up the Ladder
Taking a look at GLP, we can see that while fuel demand is generally elastic, government-forced shutdowns can impact even the most inelastic of demand. GLP’s management decided to play it safe and cut their distribution. While we understand their decision we have decided to focus on their preferred shares instead for the time being. Global Partners, 9.75% Series A Fixed/Float Cumulative Redeemable Perpetual Preferred Units (GLP.PA) currently offers a 10.2% yield and is trading below par. Note that it also issues a K-1 at tax time.
The benefit of GLP-A is that management cannot cut the preferred dividend but it also has enormous coverage. GLP had an Adjusted EBITDA of $44.6 million in Q1 of 2020 vs an interest plus preferred dividend cost of $23.3 million. This leaves their dividend ratio of coverage at 1.91x. We see GLP’s Adjusted EBITDA improving as the economy reopens and fuel usage returns to normal.
GLP’s general partner along with their directors own 21.4% of the GLP common units outstanding. Meanwhile, GLP’s insiders have been buying up their common and perferred securities this year.
Source: Open Insider
GLP’s management has historically been very active in buying up their own stock and recently has been a buyer of their preferred shares.
Taking in the Big Picture
With our encouragement of GLP-A vs. GLP many may wonder at the big picture for fuel distribution and gas station operations. Owning and operating C-stores attached to gas stations provides a one-up on their competitors for GLP. Why?
Simple. The future of fuel has clouds on the horizon. Electrified vehicles, longer ranges, and better fuel economy all spell a multi-decade risk for fuel distributors. GLP however has the benefit of C-store ownership. C-stores are a place for drivers to get out, stretch their legs and eat food. Many of GLP’s locations have restaurants or other accommodations that would appeal to travelers. Even in the age of electrified vehicles, they will need to stop and charge, drivers will still need a place to eat and take a moment. There will still be a need for the operations that GLP runs.
What we have seen these past months is not a standard recession but an unforeseen lockdown of the economy. Rightfully so, the backbone of that economy – gasoline – saw a significant drop is usage. Meanwhile, cars have not suddenly become electrified and gasoline usage will return to prior levels. Those stops in the C-store for morning coffee on the way to work will not stop.
GLP-A is the only fuel distribution AND C-store preferred shares offered to us by the market.
GLP operates in a recession-resilient business model. As the economies reopen fuel demand already is returning to normal levels.
Joe Kim, CEO of SUN (same business as GLP) stated such in their earnings call:
As Tom mentioned, we saw the impact of stay-at-home orders starting in mid-March. The peak of our volume decline occurred about a month later in mid-April. For the total month of April, volume was down roughly 40% on a year-over-year basis. The good news is that our volume is recovering.
So far May, our volumes continue to rebound showing a decrease of roughly 30% year-over-year. As economic activity continues to increase, fuel demand will be on the leading edge. Although the exact rate of demand recovery is still undetermined, I want to reinforce key factors that position SUN to meet the current challenge.
At this point, buying up GLP-A shares will allow a conservative investor to get a +10% yield trading below par. GLP-A is a strong buy for this recession resilient preferred stock. Likewise, a more aggressive investor can buy into GLP common for the potential capital gains, anticipating GLP to return to a more normal distribution growth pattern.
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Disclosure: I am/we are long GLP, GLP.PA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Originally published on Seeking Alpha