Winners & Losers
Lower gasoline prices won't save everyone in the current economic climate: Kloza
WALL, N.J. -- The collapse of the credit market is a mixed blessing for the gasoline marketing and retailing businesses. "If you're a company that's not highly leveraged...and don't have a lot of debt, you've really seen the marketplace, at least on a temporary basis, reward you," Tom Kloza, chief oil analyst with the Oil Price Information Service (OPIS), Wall, N.J., told CSP Daily News. Heavily leveraged companies, meanwhile, are clearly on the losing side. "Even if money has not locked up for you, you've seen carrying charge increases come out in spades. It's a real [image-nocss] schism between winners and losers here."
For those on the winning side, "You may have lower inside and gasoline sales, but you're making more money on the gasoline side of it and there's going to be the opportunity to use some of that cash flow to look at some interesting expansion."
Those companies also will have their pick of their highly leveraged, cash-strapped cousins, which Kloza said he believes will drive up merger-and-acquisition activity on the retail side of the business in the near future.
"The stronger will get stronger, and the weak, some may get healthy enough here in the last 100 days because of margins to get in a little better position, but over the long term, they need more access to credit to get bigger and to not have these huge carrying charges," he said.
Feeding the M&A activity: lower product prices. "You have to remember that a transport truck of gasoline in June and July cost close to $40,000 in terms of cash flow," Kloza said. "That cost has come down, and yet the gross margin has come up for marketers. If you're not heavily leveraged, and if you don't have lot of short-term debt tied to LIBOR [London Interbank Offered Rate] right now, you've been a big beneficiary of this move."
Kloza doesn't anticipate crude oil reaching the astronomical levels of $147 a barrel seen earlier in 2008 or 2009, unless there is a catastrophic event that impacts supply; however, save for the implementation of a comprehensive energy policy, he expects the president-elect Barack Obama will face both $50 and $150 barrels of oil over his term, simply because demand will inevitably outstrip supply, thanks, if anything, to simple population growth vs. production capacity.
At what point will higher fuel costs again imperil cash-strapped fuel marketers? Kloza isn't certain, noting that he anticipated that the system couldn't support wholesale prices above $2.75 per gallon-and this was before the credit crisis fully hit.
Until recently, there was a small hitch in using this expanded cash flow in fully taking advantage of acquisition opportunities: Banks simply were unwilling to extend credit to even some of their most financially sound clients. But Kloza sees the credit situation thawing somewhat. The analyst has no hunch on the ultimate mix of highly leveraged vs. cash-rich retailers.
However, the good times can't last forever. Margins-which recently rose to three times their yearly average, according to OPIS figures-are already beginning to retract. "For folks who...don't have a lot of credit costs right now and are doing pretty well on the margin side, my advice would be put that away for the winter, because it's going to be an ugly winter. You will have lower gas demand, you will have the retail-price downtrend trying to keep up with the wholesale-price downtrend. It's going to be better in terms of not having to pay $40,000 a load. But I can say with certainty that you won't see margins in a recession that are going to be 30% to 50% above previous years."
Kloza also anticipates that both crude and gasoline inventories will surely drop in the waning month of 2008. "We've moved from incredible inflationary paranoia that held the country's interest in the first six months of the year to...a deflationary perspective," he said. "If you believe your price is dropping, whether retailer, terminal operator or refinery, you're not going to carry much inventory. So it wouldn't surprise me if we get down to numbers in inventory where everyone in the chain will basically try, instead of just-in time inventories, will go to hand-to-mouth inventories."
To read more about how the collapse of the credit market is affecting retailers and petroleum marketers, watch for the December issue of CSP magazine.