EL DORADO, Ark. -- Weak margins, volatile RIN prices and new competition from an old retail partner: The past year was a turbulent one for Murphy USA.
And 2017 brings more uncertainty, as Andrew Clyde, president and CEO of the El Dorado, Ark.-based chain of 1,400 stores, explained in the company’s fourth-quarter 2016 earnings call. A new administration in the White House and the potential of rising oil prices are just a couple of factors that could greatly affect the retailer’s 2017 outlook.
Here are six takeaways on fuel from Murphy USA ...
1. Weak gallons, margins
For 2016, Murphy USA’s fuel volume rose 1.7% to hit 4.2 billion gallons, while retail fuel margin fell nearly a full penny to average 11.6 cents per gallon (CPG).
The rebound in gasoline prices in second-half 2016 created the challenging margin environment. The fourth quarter was soft, with gallons off 0.7% and margins dipping from 12.4 to 10.6 CPG.
That said, Clyde described 2016’s average margin as “relatively strong” considering that gasoline prices rose 80 CPG from their February 2016 low to their year-end high. He attributed it to Murphy USA’s disciplined approach to regional pricing and transportation initiatives.
While margins were tighter, Murphy USA trimmed its fuel breakeven by nearly 1 CPG to 1.6 CPG for 2016. This is a more than 50% cut from its 3.4-CPG breakeven cost since it spun off from Murphy Oil in 2013, “which has both strengthened the resiliency of the company and laid a solid foundation for long-term earnings growth,” said Clyde.
2. RIN volatility
Murphy USA expects the market for Renewable Identification Numbers (RIN) to stay volatile in 2017.
RINs act as a credit that obligated parties such as refiners use to demonstrate their compliance with blending quotas under the Renewable Fuel Standard (RFS). As a nonobligated party and blender, Murphy USA made $181.1 million in 2016 selling RINs, up from $117.5 million in 2015. In 2016, RIN prices hit their highest point in three years as the Environmental Protection Agency (EPA) increased RFS blending targets.
But recently RIN prices have swooned, as chatter grows that the Trump administration may move the point of obligation downstream. Before President Barack Obama left office, the EPA proposed to deny petitions requesting this shift, but left open a comment period that ends in February. Moving compliance downstream would hit the RIN market and large retailers such as Murphy USA.
Clyde questioned the logic of making this shift.
“The EPA is charged with running an effective program, so the real issues they look at are … is the compliance mechanism going to be more difficult when you now have hundreds of additional parties responsible for compliance? Is the RIN market going to be liquid like it is today?”
3. RFS future
The RFS as it is currently structured has been meeting its goals, encouraging investment and growing the renewable fuels market, Clyde contended.
“Our view is that the EPA has a very solid program,” said Clyde. “The refiners are not being harmed because [the RIN price is] built into the spot price of gasoline and therefore, their refining margins.”
If the point of obligation shifted, refiners’ margins would decline. “They wouldn't be reporting the RINs and they would be complaining that the refinery margins are 50% of what they were a year and a half ago when they were at peak levels, and I think that's really the fundamental issue facing the sector,” he said.
4. The new administration
While President Donald Trump has said he supports ethanol and the RFS, he is surrounding himself with opponents to both. Carl Icahn, who owns merchant refiner CVR Refining and is a big proponent of moving the point of obligation, is now advising Trump on regulatory reform. And Oklahoma Attorney General Scott Pruitt, waiting to be confirmed as head of the EPA, has also spoken out against the RFS, and has declined to comment on moving the point of obligation.
“There is going to be some new people involved at the top and we'll see how it plays out,” said Clyde. “It should not change our economics in any way.” If the point of obligation did shift, expect a period of volatility and disruption as spot prices fall, he said.
For Murphy USA, “there [are] no windfalls or headwinds on this,” Clyde said. Regardless, moving the point of obligation would involve many different parties and rule changes, and would take several months to be implemented, he said, adding, “I would think there would be a low probability based on the merits of the case.”
5. Wal-Mart as a competitor
In 2016, Wal-Mart announced it was ending its 20-year fuel partnership with Murphy, which had built more than 1,100 gas stations in the parking lots of Supercenters. Since then, Wal-Mart has been building its own fueling locations, including new c-store prototypes.
Clyde noted that around 80 Wal-Mart fueling sites have opened in past two years, “in places like West Virginia and Washington State and places that we are not in and not planning to go into.” But at least a couple have opened right next to Murphy USA stores, including in Nacogdoches, Texas, next to what Clyde described as “a high-performing store.”
“It’s still a high-performing store, but it's just like any other competitor that moves in next door,” he said. “You lose some volume from that, just like we gain some volume from competitors when we move in.”
Wal-Mart will continue to add fueling sites based on fuel economics and the Supercenter sales uplift, said Clyde. And Murphy USA will continue to build its own sites near the high-traffic Supercenters. It also plans to pilot a loyalty program in 2017, after losing access to Wal-Mart’s fuel-rewards-based credit-card program when the partnership ended.
6. A new pricing philosophy
Murphy USA expects its fuel volumes to grow 3.5% to 7% in 2017, depending on market conditions and the performance of new stores. It anticipates average monthly per-store volumes to fall between 255,000 to 265,000 gallons.
Clyde acknowledged that this is a wide range; he cited uncertainty in the oil markets and the possibility of higher gasoline prices in 2017, which could mean a volume average around the lower end of the range.
“We are staying competitive with the low-price player in the market,” said Clyde, who added that Murphy USA has shifted from the “volume-first mindset” it had for fuel pricing before the spinoff.
“We’re doing it more smartly, more strategically with a better appreciation of what markets are elastic and can provide that upside,” he said. “It makes no sense to get overly aggressive because it's going to be matched immediately.”