Murphy USA Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; unaudited. Murphy USA operates retail fuel and convenience stores and sells fuel wholesale. At quarter-end it operated 1,406 stores in 26 states.
Financial results and position
| Metric | Q1 2017 | Q1 2016 / comparison |
|---|---|---|
| Total revenue | $2,999.6 million | $2,490.3 million; up 20.5% |
| Operating income | $2.9 million | $59.2 million |
| Net income (loss) | $(3.0) million; diluted EPS $(0.08) | $85.9 million; diluted EPS $2.08 |
| Adjusted EBITDA (non-GAAP) | $30.3 million | $83.1 million |
| Cash from operations | $(45.9) million | $76.9 million |
| Capital expenditures | $65.9 million | $47.3 million |
| Free cash flow (non-GAAP) | $(111.8) million | $29.6 million |
| Cash and cash equivalents, March 31 | $36.3 million | $153.8 million at December 31, 2016 |
| Total debt carrying value | $687.4 million | $670.2 million at December 31, 2016 |
| Current assets / current liabilities | $396.9 million / $454.9 million | Current ratio approximately 0.87 |
Fuel margin was 10.1 cents per gallon versus 11.1 cents; gallons sold per store-month were 243,088 versus 252,067. Merchandise margin was 15.7% of sales versus 15.3%. Interest expense was $9.5 million, compared with $9.4 million.
Material changes versus Q1 2016
- Revenue rose mainly because of higher fuel prices, slightly higher retail fuel volumes, more stores and higher merchandise sales. Petroleum product sales increased to $2.40 billion from $1.89 billion; merchandise sales increased modestly to $565.8 million from $561.7 million.
- Revenue growth did not translate into higher earnings: fuel margins weakened and product supply and wholesale margins excluding RINs were negative $28.5 million, versus negative $9.1 million.
- Q1 2016 included an $89.5 million pretax gain on asset sales from the CAM pipeline disposition (reported as $56.0 million after tax). There was no comparable gain in 2017, a major reason for the earnings decline.
- Operating cash flow deteriorated primarily as working capital used $80.4 million, compared with a $24.8 million source in Q1 2016. The filing cites higher inventories and prepaids and a large decrease in accounts payable.
- Cash declined by $117.6 million during the quarter. The company spent $17.4 million on treasury stock repurchases and had $16.3 million of net debt borrowings.
Liquidity, debt and outlook
- At March 31, debt included $500 million principal amount of 6% notes due 2023, $170 million term loan due 2020 and $26.5 million drawn under the ABL facility, in addition to capitalized leases. Reported debt carrying value was $687.4 million.
- The company reported $172 million of remaining ABL capacity and more than $100 million of availability. It said liquidity was adequate for operations, investment and other expected needs. The fixed-charge coverage ratio was 0.57, below 1.0, but the covenant test was not then operative because facility availability remained above its threshold; secured debt-to-EBITDA was 0.55 to 1.0.
- Management expected 2017 capital expenditures of approximately $250 million to $300 million, including store development, maintenance and corporate projects; funding was expected primarily from operating cash flow, supplemented by credit facilities as needed. The company planned to continue growth through new locations and stated that the 2012 Walmart-site construction program was expected to be completed in 2017.
- Management estimated an ongoing effective tax rate of approximately 38% for the remainder of 2017. No full-year earnings or revenue guidance is provided in the filing.
- Subsequent event: on April 25, 2017, the company issued $300 million of 5.625% senior notes due 2027. Approximately $50 million of net proceeds was used to repay term-loan debt; the remainder was designated for general corporate purposes.
Management commentary, risks and unusual items
- Management attributed weak retail fuel margins to a flatter wholesale price environment and more challenging pricing conditions. It cited record-high gasoline inventories, subdued retail demand and discounted pipeline space values as factors pressuring wholesale results.
- Retail fuel sales volume per store-month fell 3.6%; management noted subdued demand and 17 high-performing stores taken out of service for raze-and-rebuild work. Chain-wide retail fuel volumes nevertheless increased 0.6% to 1.01 billion gallons, with store count rising to 1,406 from 1,336.
- RIN revenue declined to $29.0 million from $38.8 million; the company sold 53 million RINs at an average $0.55 each, versus 54 million at $0.72. Management says its business model does not depend on RIN revenue, but prices and regulatory requirements create uncertainty.
- Risks include volatile crude and refined-product prices, inability to pass through fuel-cost increases, competition, supply interruptions, customer demand, Walmart relationship disruption, regulatory change and environmental obligations. Derivative positions were immaterial; management stated a 10% benchmark-price move would have an immaterial effect on those contracts.
- Environmental and routine legal matters were not expected by management to materially adversely affect results or liquidity. The company reported $16.9 million of outstanding letters of credit and no recorded liability because drawdown was considered remote. It was a potentially responsible party at one Superfund site and considered its expected share immaterial.
- The 2017 tax benefit included approximately $1.8 million of excess share-based compensation tax benefits and a $1.5 million benefit from settlement of prior-year state tax positions. Adoption of new revenue-recognition guidance was planned for January 1, 2018; review remained ongoing. Net reporting of excise taxes, if elected, would reduce both revenue and cost of goods sold without affecting net income.
Key facts investors should verify
- Whether retail fuel margins, per-store fuel volumes and wholesale/product-supply results recover from Q1 levels.
- How much of the reported earnings decline reflects the absence of the prior-year pipeline gain versus underlying operating performance.
- Working-capital movements, cash generation and the funding plan for the $250 million to $300 million 2017 capital program and remaining repurchase authorization.
- Post-quarter debt refinancing effects, including use of the 2027 note proceeds, interest costs and remaining facility availability.
- Progress and eventual accounting presentation under the revenue-recognition standard, including excise taxes, and exposure to RIN pricing and environmental or tax contingencies.