Do Speedway’s Results Signal Separation Anxiety?
By Greg Lindenberg on Feb. 02, 2017FINDLAY, Ohio -- As Marathon Petroleum Corp. moves ahead with its deliberations on whether to spin off its Speedway LLC retail network, Speedway itself set records for full-year 2016, MPC CEO Gary Heminger said on the company’s fourth-quarter and full-year 2016 earnings call.
MPC shareholder Elliott Management Corp. has been pushing it to spin off the retail network, arguing that MPC is “severely undervalued” and should consider a separation, among other possible moves. While he agrees MPC is undervalued, Heminger has said that he disagrees with Elliott Management’s conclusions and has expressed previously that the company continues to value an integrated supply chain.
In early January, MPC announced that a special committee of its board will conduct a review of Speedway, the third-largest convenience-store chain in North America, with the assistance of an independent financial adviser. The review will look at all options, which could include “a tax-free separation of Speedway to MPC shareholders and other strategic and financial alternatives.”
Click through to see what the latest financial results say about the possibility of a spinoff …
“Speedway set all-time records for the year, while continuing to maintain its disciplined approach to cost control,” Heminger said on the Feb. 1 call. It surpassed segment all-time highs in income from operations, light product gallons sold, merchandise sales and merchandise gross margin on a percentage and absolute dollar basis, he said.
“Speedway continues to exceed expectations by driving marketing enhancement opportunities and continuing to realize acquisition synergies across the network,” said Heminger. The brand’s performance “highlights the strong value our team is creating for investors.”
The company plans to invest approximately $380 million in Speedway “primarily to build new stores and to remodel and rebuild existing retail locations in its core markets, driving continued growth and opportunities in merchandise across the platform,” said Heminger.
Speedway segment income from operations was $165 million in fourth-quarter 2016 and $734 million for full-year 2016, compared with $135 million in fourth-quarter 2015 and $673 million for full-year 2015.
The increase in segment income from operations for the fourth quarter was primarily due to lower operating costs and an increase in merchandise margin, substantially offset by lower light product margin. Speedway’s light product margin decreased from 18.23 cents per gallon in fourth-quarter 2015 to 16.17 cents per gallon in fourth-quarter 2016.
The increase in segment results for full-year 2016 was primarily due to higher merchandise margin and gains from asset sales, partially offset by lower light product margin, which decreased from 18.23 cents per gallon in 2015 to 16.56 cents per gallon in 2016.
“So far this year, we've seen a roughly 3.8% decrease in same-store gasoline volumes when comparing January 2017 to January of last year due to lower demand seen across our marketing area, in addition to the impacts from the ice storms in the Southeast,” MPC CFO Tim Griffith said on the call.
“For the same period, U.S. gasoline demand decreased approximately 6.5%,” he said. “Despite the seasonal weakness in demand, we continue to expect gasoline demand to rebound to levels comparable to 2016.”
MPC reported 2016 fourth-quarter earnings of $227 million, compared with $187 million in fourth-quarter 2015. Earnings were $1.17 billion for full-year 2016, compared with $2.85 billion for full-year 2015.
Refining and marketing segment income from operations was $219 million in fourth-quarter 2016 and $1.54 billion for full-year 2016, compared with $179 million and $4.09 billion in fourth-quarter 2015 and full-year 2015, respectively.
Do these results, and management’s tone, indicate that MPC is not ready to part with a vital link in its supply chain, or that it is positioning Speedway for the next stage of its evolution?
MPC said it expects to provide an update on the promised “robust” review by mid-2017.
“We're doing the full and thorough review over all the scenarios that we really can consider at this time,” said Heminger. “You have to look at counterparty risk, you have to look at the balance sheet of MPC, after you drop in the fuels distribution. You have to look at the credit profile. So we’re going to look at all the different scenarios, and I'm not going to lean one way or another.”
Findlay, Ohio-based refiner-marketer MPC sells Marathon-branded gasoline through approximately 5,500 independently owned retail outlets across 19 states. In addition, Enon, Ohio-based Speedway LLC, an MPC subsidiary, owns and operates approximately 2,730 convenience stores in 21 states.