ST. PETERSBURG, Fla. -- Volatility can be a friend or foe to fuel retailers, but the degree to which it influences margins depends greatly on the operator.
That’s one takeaway from the latest Convenience Store Grab-N-Go research note by Raymond James & Associates, St. Petersburg, Fla. First, some background: Investors watch oil’s price trends in determining the size and direction of a fuel retailer’s profits because it makes up about 46% of the cost of gasoline. As oil prices and wholesale costs fall, retail price tends to respond slowly as retailers make up margin. When oil prices rise, profits tend to slim down as retailers try to stay competitive while passing along their cost increases—especially during weak, seasonal demand periods.
Raymond James analysts are projecting an increase of $20 per barrel to reach $65 per barrel in West Texas Intermediate (WTI) oil prices for the second half of 2016, and an increase of $15 per barrel for the first half of 2017. With this increase and expected tighter fuel margins as a backdrop, Raymond James has lowered their earnings-per-share (EPS) projections for second-quarter and second-half 2016, as well as 2017, for most of the retailers they follow, which includes Casey’s General Stores, CST Brands, Murphy USA, CrossAmerica Partners, Sunoco LP and TravelCenters of America.
In second-quarter 2016, national retail fuel margins dropped 8%, or 1.6 cents per gallon (CPG), from the first quarter to settle around 18 CPG. This represents a 14% or 2.2-CPG increase compared to second-quarter 2015, when margins fell to a six-year low for the quarter.
National diesel margins in second-quarter 2016 fell 31% year over year, and were down about 40% from the first quarter.
While fuel provided about 69% of convenience industry revenues and only one-third of gross profit in 2015, this share varies greatly among the chains that Raymond James follows. That’s because fuel profits respond directionally to oil price changes in the short term, but they also have structural influences, including an individual retailer’s pricing strategy, regional supply and demand, local competition, supply terms and operating cost structures.
For example, at Murphy USA, which follows a low-cost, high-volume strategy, fuel provides 82% of revenue and 66% of gross profit (including sales of Renewable Identification Numbers, or RIN). CST Brands gets 53% of its gross profits from fuel, while Sunoco earns around 56%, according to Raymond James estimates and company reports. The analysts are cutting their second-quarter 2016 EPS estimates an average of 19% for Murphy, CST and Sunoco.
TravelCenters of America earned only 30% of its gross profit from fuel. On the lowest end: Casey’s General Stores, which has a strong foodservice focus, got only 24% of its gross profit from fuel in calendar year 2015 (including RIN sales) and 59% of its revenue. It also benefits from having fewer competitors and more dedicated traffic in its rural markets.
Casey’s has also enjoyed the most stable fuel margins among the chains Raymond James follows. For example, its margins have trended above the average through several quarters when WTI had risen more than $10 per barrel. Thus, the analysts are maintaining their second-quarter 2016 estimates for the Ankeny, Iowa-based chain, “partially reflecting better-than-expected margin results throughout the most recent fiscal quarter despite the generally rising oil price environment.”
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