Speedway's Growth Discipline

With more capital, more patience required, more opportunities for consideration

Samantha Oller, Senior Editor/Fuels, CSP

Tony Kenney

Tony Kenney

FINDLAY, OHIO -- At Marathon Petroleum Corp.'s (MPC) 2013 Analyst & Investor Day this week, it was clear where the refiner-marketer was putting its money for the coming year: its midstream, in the form of its master limited partnership MPLX, and perhaps more notably, retail.

In fact, as reported previously in CSP Daily News, MPC plans to allocation $925 million toward growing its Speedway retail business between 2014 and 2015. To put this amount in some perspective, prior MPC's spinoff from Marathon Oil Corp. in 2011, Speedway's average annual capital budget, as a standalone company, totaled around $100 million per year.

"This capital level basically represents sustaining our maintenance level for a chain of 1,500 convenience stores," said Tony Kenney, president of Speedway LLC, Enon, Ohio, during his remarks at the investor event.

In a separate e-mail to CSP Daily News, Kenney said that accelerated growth program includes an investment of $300 million per year in capital expenditures between 2014 and 2016 to add approximately 60 to 65 new build or rebuild stores each year, with most being new builds.

When it comes to new builds, Speedway aims for a mid-teen return. While this infusion of capital presents a huge opportunity for Speedway to expand even further beyond its 1,470-store, nine-state footprint, it also is a great responsibility.

"It takes patience and discipline to execute a $300 million annual capital program," Kenney told CSP Daily News. "If you are trying to build 50 new stores per year, you really have to be working on twice that number of projects at any point in time. It takes patience to work diligently through all stages of project development. You have to acquire the right real estate and work through zoning, permitting, Department of Transportation issues, etc., all of which could take several years. It then takes the discipline to only build those stores that will hurdle our ROI objectives and to know when to walk away from those projects that will not."

While there is plenty of speculation and expectation that Marathon Petroleum could spring for some or all of Hess' retail network--adding potentially up to more than 1,300 sites--there is no priority of acquisition vs. organic growth, or even in the size of a potential acquisition.

"From Speedway's perspective, there is not an ideal mix as it is strictly dependent upon the value that any investment would bring," Kenney told CSP Daily News. "Our capital is focused on organic projects in our existing and new contiguous markets. We will always look at high-quality, opportunistic acquisitions."

In response to an analyst's question about how MPC and Speedway gauge retail acquisition prospects, Kenney said avoiding cannibalization of existing business is a consideration. But most important: how the stores would fit within Speedway's brand strategy, including size of the store, to continue to sustain its gross margin performance and grow cash flow.

Gary R. Heminger, CEO and president of MPC, emphasized the need to leverage economic synergies from MPC's refineries down to Speedway and Marathon-branded locations.  "We've talked about having a sure place to sell either through the Marathon brand or Speedway," he said at the analyst day event. "We think there's economic rent in knowing where that is and knowing every day how you're going to be able to have bigger tankers, bigger ships, bigger barges that moves that product to the marketplace."

Heminger also noted that back in 2009, Marathon was perhaps the only downstream company to have positive earnings, which he credited to its strong retail arm and logistics. While these businesses are far from dwarfing refining, "we can continue to grow those, and we see the much higher value that was given in the marketplace for those. We certainly can grow both of those around our refining system, as I said earlier. Logistics are a big key, but retail is a big key. If we can, we want to capture both sides of that molecule movement."

Beyond growth in store count, growth in sales and profits also are propelling Speedway forward. Kenney highlighted the fact that Speedway's light product volume and margin ranks near the top of publically traded peers. Meanwhile, inside the store, Speedway is ahead of the pack by merchandise sales and ranks second in merchandise margin. On a combined fuel and merchandise gross-margin basis, Speedway ranked at the top of its publically traded peers.

Speedway is set to sell 3.2 billion gallons of gas and diesel in 2013, compared to 3.0 billion in 2012. Merchandise sales are expected to match up at approximately $3.2 billion, vs. just under $3.1 billion in 2012. But from Kenney's perspective, the biggest Speedway success story can be found in gross margins on fuel and merchandise--particularly the latter. Between 2011 and 2013, nearly two-thirds of Speedway's gross margin was generated inside the c-store.

In his analyst day comments, Kenney noted that by 2020, Speedway aims to generate $1 billion in EBITDA. And it has shown a remarkable resilience and ability to generate returns, regardless the larger economic picture. Consider that between 2008 and 2012, during the height of the recession, Speedway averaged a 17% return on capital employed. "We are in an excellent position to take advantage of the economy's return to some modest levels of growth, reduced unemployment--particularly in the Midwest--and higher levels of consumer confidence," said Kenney. "And as a result, we ultimately will execute on our plan to deliver long-term sustainable value."