SAN ANTONIO -- Driven by recent acquisitions, Andeavor Corp. is beginning to convert some of its gas stations and convenience stores from a multisite operator (MSO) model to company-operated locations, Chairman and CEO Greg Goff revealed on the company’s third-quarter 2017 earnings call on Nov. 8.
San Antonio-based Andeavor, an integrated marketing, logistics and refining company with 10 refineries in the midcontinent and western United States, changed its name from Tesoro Corp. on Aug. 1. As Tesoro, the company owned more than 2,500 gas stations and c-stores under the Arco, Shell, Exxon, Mobil, USA Gasoline, Rebel, Tesoro and other brands in Arizona, California, Nevada, Oregon and Washington.
Here are the background and details of the conversion from the MSO model, as well as quarterly financial highlights …
Tesoro acquired Western Refining in June through a stock transaction valued at $4.1 billion.
Western Refining, El Paso, Texas, was an independent refining and marketing company. Its retail operations included about 550 gas stations and c-stores in Arizona, Colorado, Minnesota, New Mexico, Texas and Wisconsin under the Giant, Howdy’s, Mustang and Sundial brands. That number also includes about 290 under the SuperAmerica brand in Minnesota and Wisconsin, acquired in June 2016 through a merger with Northern Tier Energy LP, Tempe, Ariz.
With the acquisition, Andeavor’s retail-marketing system now includes more than 3,100 c-stores under multiple fuel brands, including Arco, SuperAmerica, Shell, Exxon, Mobil, Tesoro, USA Gasoline and Giant. The company also has ownership in Andeavor Logistics LP and its noneconomic general partner.
Goff offered an update on the synergies from Western Refining.
“Andeavor is committed to delivering an expected $350 million to $425 million in annual run-rate synergies by June 2019, the second year following the close of the transaction,” he said on the call. “This includes approximately $120 million to $160 million from value-chain optimization, $130 million to $140 million from operational improvements and $100 million to $125 million from corporate efficiencies. Andeavor estimates it has achieved approximately $110 million in annual run-rate synergies though third-quarter 2017, consisting primarily of approximately $85 million of corporate efficiencies and the remainder in value-chain optimization and operational improvements.”
Auburn, Calif.-based Flyers Energy is a third-generation family-owned business operated by the Dwelle family. It exited the retail c-store industry with the deal.
Flyers Energy ranked No. 100 on CSP’s2017 Top 202 list of the largest convenience-store chains in the country.
Andeavor has continued to expand its network of branded stores, increasing store count by 657 or 27% year over year to 3,124 stores.
“This is primarily driven by the additional stores from the Western and Northern California [Flyers] retail acquisitions, and the continued execution of the company's organic growth plan,” said Goff. “Our organic growth plan execution has resulted in the addition of 74 net new branded stores year over year and continues to grow.”
The acquisitions have prompted a change in Andeavor’s ownership strategy.
In late 2014, Tesoro converted all of its company-operated gas stations to a multisite operator (MSO) retail-marketing system. Under the MSO model, the company supplies the fuel sold at these locations and continues to own and have the rights to revenues earned from the fuels, but it no longer operates the c-stores, no longer owns the related merchandise inventory and no longer employs the store employees. The MSO operates the stations.
Under the new strategy, “we expect the initial conversion of approximately 50 stores from MSO to company operated in the fourth quarter, given the capabilities of our retail group that joined the company is part of the Western acquisition,” Goff said. “This conversion will allow us to begin to capture additional nonfuel margins and enhance overall station profitability. … It's not a significant impact from a cost to do the conversion. They were relatively short-term contracts that have provisions that make the transition back to us pretty easily.”
The company will “continue to do the whole transition” soon, he said. “We need to do that in an orderly fashion so that we can successfully integrate them back in the business.”
The first 50 stations are “what we feel like we can manage on a quarterly basis.”
Andeavor Corp. has reported third-quarter 2017 earnings of $551 million, compared to $170 million a year ago. EBITDA for third-quarter 2017 was $1.2 billion vs. $577 million last year.
"Our business delivered strong results across our integrated value chain for the quarter,” said Goff. “Our marketing business is well-positioned for continued growth following the Western Refining and [Flyers] retail acquisitions, which bring more secure and profitable earnings to the portfolio. Our strong cash generation and financial discipline allow us to continue to invest in the business for growth and return cash to shareholders.”
When it moved to the MSO model, Tesoro combined its wholesale and retail operations into one segment, called marketing.
The change reflected its business model at the time and showed “the combined value of the sales channels we use to reach our customers,” Steven Sterin, executive vice president and CFO of Andeavor, said at the time. “As we moved to the MSO model on our retail business, we created this marketing segment so you can see all of our customer-facing business in one place. The real focus is on creating value through our strategy, being integrated.”
Andeavor still refers to those operations as marketing.
Marketing segment operating income was $175 million and segment EBITDA was $193 million in third-quarter 2017. This compares to segment operating income of $273 million and segment EBITDA of $285 million last year.
Overall fuel margins were 10 cents per gallon (CPG) in third-quarter 2017, compared to 14.9 CPG last year. Retail and branded fuel margins were 19.3 CPG compared to 25.3 CPG in 2016. With a significant increase in product spot prices during the first half of the quarter, Andeavor's integrated business reflected the value of this rise in the refining segment's results for the quarter. The company still expects marketing segment fuel margins to average 11 to 14 CPG over time.
Merchandise margin increased to $54 million from $3 million in 2016 driven by the Western acquisition.