Murphy USA Inc. — Q3 2015 Form 10-Q
Business context and period: Unaudited results for the quarter and nine months ended September 30, 2015, compared with the corresponding 2014 periods. Murphy USA operated 1,291 retail fuel stations in 23 states and reported one operating segment, Marketing. Its Hereford, Texas ethanol facility was classified as discontinued operations and held for sale.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Total revenue | $3.383 billion | $4.623 billion | $9.771 billion | $13.432 billion |
| Income from operations | $106.4 million | $99.5 million | $200.4 million | $225.2 million |
| Income from continuing operations | $60.0 million | $56.6 million | $108.4 million | $128.7 million |
| Net income | $60.5 million | $62.7 million | $109.7 million | $145.5 million |
| Diluted EPS | $1.41 | $1.36 | $2.47 | $3.13 |
| Adjusted EBITDA | $128.5 million | $119.4 million | $265.5 million | $285.0 million |
- Revenue and earnings: Revenue fell 26.8% in Q3 and 27.3% year to date, mainly because lower fuel prices reduced petroleum sales value. Lower fuel costs also reduced cost of sales. Q3 net income declined despite higher continuing-operations income, in part because discontinued-operations income fell to $0.5 million from $6.0 million. The nine-month comparison also includes substantially lower discontinued-operations income.
- Fuel and merchandise: Retail fuel margin was 18.1 cents per gallon in Q3 versus 17.5 cents; for nine months it was 12.5 cents versus 12.7 cents. Retail fuel volumes increased 3.5% in Q3 and 3.7% year to date, although gallons per store month declined in both comparisons. Merchandise margin was 14.6% in Q3 and 14.4% year to date, up from 13.7% and 13.8%, respectively. Product-supply and wholesale margins were pressured: excluding RINs, they were negative $22.4 million in Q3 and negative $9.0 million year to date.
- Cash flow and investment: Nine-month cash provided by operating activities was $148.8 million, down from $216.5 million; continuing-operations operating cash flow was $137.9 million versus $190.7 million. Property additions were $151.5 million versus $84.4 million. Company-defined free cash flow (continuing operating cash flow less property and equipment payments) was negative $13.6 million versus positive $106.3 million.
- Margins and expenses: Management attributed lower year-to-date Marketing earnings primarily to weaker retail fuel and wholesale margins, partly offset by higher fuel volumes and merchandise margins. Q3 Marketing income increased to $65.8 million from $62.6 million, reflecting improved retail fuel and merchandise margins, partly offset by weaker wholesale margins. SG&A rose 11.1% in Q3 and 12.0% year to date, mainly due to professional fees for ongoing projects.
- Liquidity and debt: Continuing-operations cash was $65.3 million at September 30, down from $327.2 million at December 31, 2014. Long-term debt, including capitalized leases, was $489.7 million; the principal debt is $500 million of 6% senior notes due 2023. No ABL borrowings were outstanding. The $450 million ABL facility was subject to a reported borrowing base of approximately $221 million; a further $200 million incremental facility is uncommitted. The filing states liquidity was adequate. The fixed-charge coverage ratio was 0.75, but the company said it had no current impact because there was no debt outstanding under the facility.
Changes, outlook, and key matters
- The company completed its $250 million share-repurchase authorization in Q3; it repurchased approximately $248.7 million of shares during the first nine months. Treasury shares totaled 5.09 million at quarter end.
- On October 28, 2015, after quarter end, Murphy USA signed a definitive agreement to sell the Hereford ethanol subsidiary to Green Plains for approximately $93.8 million, including estimated working capital. Closing was expected by the end of November, subject to customary conditions and regulatory approvals.
- Management expected 2015 capital expenditures of approximately $210–$230 million, primarily for new retail locations and land acquisition, and expected to fund the program mainly with operating cash flow or existing cash. It estimated an ongoing effective tax rate of approximately 38.5% for the remainder of 2015. No earnings or EPS guidance was provided in the filing.
- RIN sales were $20.0 million in Q3 versus $25.2 million and $93.9 million year to date versus $66.1 million. Management said the business model does not depend on RIN revenue, but RIN prices are exposed to regulatory and market changes.
- Key risks include volatile fuel margins and commodity prices, supply disruptions, competition, dependence on the Walmart relationship and successful site development, and regulatory changes affecting RINs. Environmental remediation, tax audits, routine claims, and outstanding letters of credit ($17.8 million) are disclosed; management did not expect the identified matters to have a material adverse effect. A patent-infringement case was settled for an amount described as immaterial.
- A $4.1 million loss on sale of assets was recorded in the nine-month period, including $4.1 million in Q3; the filing text does not clearly identify the asset or provide further detail in the supplied discussion. The company early adopted the debt-issuance-cost presentation standard retrospectively, reducing reported debt and other assets by the applicable unamortized costs; this was a presentation change.
Investor verification points
- Verify the completed Hereford sale proceeds, closing conditions, working-capital adjustment, and any gain or loss recognized on disposal.
- Assess the sustainability of fuel margins, wholesale economics, and RIN revenue against commodity, supply, and regulatory conditions.
- Reconcile the substantial decline in cash with capital spending and completed repurchases; monitor borrowing-base availability and covenant triggers.
- Track store openings, same-store fuel volumes, merchandise margins, and progress against the $210–$230 million 2015 capital-spending outlook.
- Review the nature of the $4.1 million asset-sale loss and the potential exposure from environmental, tax, insurance, and other contingencies.