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Part 2
Equity research: Murphy USA, Inc. (Part 2 of 8)

Murphy USA: Why Murphy USA benefits from its Walmart partnership

Murphy USA, Inc. (MUSA): Company overview

Murphy is a low-price, high-volume fuel retailer that also sells convenience merchandise through low-cost kiosks. The business was recently spun off from Murphy Oil and primarily generates its revenues by marketing retail motor fuel products and convenience merchandise through a large chain of 1,179 (as of June 30, 2013) retail stations—all of which are in close proximity to Walmart stores. The company’s retail stations are located in 23 Southern and Midwestern states. 1,018 stations are branded “Murphy USA” and 161 are standalone “Murphy Express” locations, and the company is transitioning the Murphy Express locations to unified branding of Murphy USA. The company owns roughly 90% of its real estate. This allows the company to be a low-cost provider of commodity gasoline to retail consumers (MUSA doesn’t compete with trucking fuel programs).

Murphy USA Unleaded Fuel PriceEnlarge Graph

The company owns midstream assets, including product distribution terminals, pipeline positions, and two ethanol refineries that are being marketed for sale.  MUSA’s midstream assets are only 6% of total assets and just 2% when ethanol plants are sold)

Fuel sales ($14.9 billion 2012 revenue)

Note: Murphy has both a wholesale business, selling to Murphy USA retail gas stations, non-Murphy branded gas stations such as Pilot & Travel Centers of America, local farm depots, et cetera, as well as a retail network of 1,179 retail locations at June 30, 2013, selling fuel and convenience store items to the general public. Citing competitive rationale, the company declines to break out its wholesale and retail business to equity investors. As such, this write-up will address the wholesale and retail business together.

MUSA is a low-cost retailer defined by price paid by the consumer. The company aims for high volume and low operating costs. Gross fuel margins are lower than its peers; however, this is offset by increased volume and lower operating expenses versus its peers. According to the NACS, Murphy operates at 56% of the average industry operating costs.

Murphy USA Quarterly Retail Fuel MarginEnlarge Graph

Although Murphy is a low-cost provider, as shown in the above chart, the company focuses on providing the lowest-cost fuel in local geographies (store managers check local pricing two to three times per day). On certain occasions (such as Super Bowl weekend), MUSA will occasionally raise prices, with other local stations increasing to match in order to capture additional margin.

MUSA is able to source fuel at lower prices than competitors due to:

  • Proprietary terminal access: 8.8% of 2012 fuel volume was sourced via proprietary terminals
  • Shipper status on the colonial pipeline system
  • The company is not restricted to selling branded fuel versus its competition
  • 45% of 2012 fuel was contracted from outside of Murphy’s wholesale business

Additionally, MUSA can utilize its wholesale arm to distribute fuel and capture greater margins when retail pricing is not optimal. For example, if retail pricing is priced at a 1 cent profit, the company can sometimes locate a wholesale customer (truck stops, small farms, distributors, et cetera) and lock in a $0.03 profit.

Merchandise sales ($14.9 billion 2012 revenue)

Given their physical proximity to Walmart, Murphy pursues a strategy of offering SKUs that complement Walmart’s as opposed to directly competing on beverages et cetera. While primarily tobacco products (see below chart), Murphy is beginning to expand into larger convenience stores with higher margin and broader SKUs.

Murphy’s retail convenience stores are in two formats, a 280 square foot kiosk (77% of locations) and a 1,200 square foot store footprint (23% of current locations). Going forward, management plans on rolling out primarily the 1,200 square foot units, given the more attractive margins and return profile.

Ethanol ($644.4 thousand revenues/$84.0 thousand operating loss fiscal year 2012)

Note: The ethanol business is in the process of being sold and should be disposed of by year-end 2013.

Murphy operates two ethanol production facilities, located in Hankinson, North Dakota, and Hereford, Texas. The Hankinson plant, which was acquired in 2009 for ~$92 thousand, currently is rated at 132 thousand gallons of ethanol per year. The Hereford plant (acquired in 2010 for ~$40 thousand with operations beginning in 2011) and is rated at 105 thousand gallons of ethanol per year. The company sells ethanol for blending with gasoline and distilled dried grains.

The primary input in the production process for ethanol is corn. Corn prices have been volatile in the past years. In 2012, corn prices rose primarily due to drought conditions in the Midwest US, which in turn compressed margins for ethanol production operations and led to segment operating losses.

Importantly, the company has essentially viewed these assets as non-core. Murphy is actively looking into a potential sale of the two refineries when market conditions are optimal. The ethanol assets could sell for at least $130.0 thousand, which is in line with the historical purchase price. Further, the excess cash generated from a sale could be used to fund future growth capex (~$400 million expected over the next three-plus years).

The Market Realist Take

The company’s US operations generated a profit of $77.9 million in the 2013 second quarter compared to a profit of $73.3 million during the second quarter of 2012. The favorable result in the 2013 quarter was primarily due to stronger results for the company’s two ethanol production facilities, coupled with higher values realized for ethanol RINs credits sold in the current year. RINs sold at an average of $0.78 per credit in 2013 compared to $0.02 per credit in 2012.

US retail marketing margins were slightly weaker in 2013 compared to the 2012 quarter. US retail margins averaged $0.156 per gallon in 2013 and $0.197 per gallon in 2012. Overall, per-store retail fuel sales volumes in the current period were above 2012 levels by 1.2%. US retail operations generated lower profits from merchandise sales in the 2013 quarter due to a reduction in per-store sales by almost 1% and a lower margin generated as a percentage of sales. The latter was mostly driven by lower margins realized on certain tobacco products.

The ethanol production business had more favorable operating results in 2013 than in 2012, as margins at the Hankinson, North Dakota, and Hereford, Texas, plants were well above prior year levels. This led to profitable results for both plants in 2013 following losses in 2012. Compared to the 2012 second quarter, ethanol sales prices rose more than corn feedstock costs during 2013.

Murphy’s competitors in the convenience store space include Susser Holdings Corporation (SUSS), Casey’s General Stores (CASY), Alimentation Couche-Tard (ATD), The Pantry, Inc. (PTRY), TravelCenters of America (TA), and CST Brands, Inc. (CST)—spun off from Valero (VLO) in April.

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