Murphy USA Inc. — FY 2016 Form 10-K
Reporting period: Year ended December 31, 2016. This is an annual filing; fourth-quarter figures below are from unaudited supplemental quarterly information. Dollar amounts are in millions unless otherwise stated.
Business context
Murphy USA operates a low-cost, high-volume fuel and convenience merchandise business. At year-end it had 1,401 stores in 26 states, including 1,152 Murphy USA locations, generally near Walmart stores, and 249 Murphy Express locations. It sold approximately 4.2 billion gallons of retail motor fuel in 2016 and reports one operating segment, Marketing.
Financial performance and liquidity
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Revenue | $11,594.6 | $12,699.4 |
| Operating income | $299.9 | $254.8 |
| Income from continuing operations | $221.5 | $137.6 |
| Net income | $221.5 | $176.3 |
| Diluted EPS | $5.59 | $4.02 |
| Net cash from operating activities | $337.4 | $215.8 |
| Capital expenditures | $262.1 | $205.2 |
| Free cash flow, company-defined | $75.3 | $28.5 |
Revenue declined 8.7%, primarily because lower wholesale fuel prices reduced reported sales, partly offset by higher retail fuel volume. Net income increased 25.6%; continuing-operations income rose 61.0%. The 2015 net income comparison included $38.7 million of after-tax discontinued-operations income from the Hereford ethanol facility sale and operations. Adjusted EBITDA, a non-GAAP measure, was $400.1 million versus $342.9 million.
Retail fuel margin was 11.6 cents per gallon, down from 12.5 cents; chain retail volume increased 1.7%, while volume per store month fell 3.3%. Merchandise sales increased 2.8% to $2,338.6 million, and merchandise margin improved to 15.6% from 14.4%, which management primarily attributed to the Core-Mark supplier transition. RIN sales revenue was $181.1 million, compared with $117.5 million.
At December 31, cash was $153.8 million, current assets were $515.6 million and current liabilities were $514.6 million; the current ratio was 1.00 and working capital was approximately $1.0 million. Long-term debt, net of current maturities, was $629.6 million; total debt including current maturities and lease obligations was $670.2 million. This included $500 million principal of 6.00% notes due 2023 and a term loan with $180 million outstanding, due 2020. The $450 million asset-based facility was undrawn, subject to a borrowing base of approximately $215.9 million; a separate $150 million incremental facility was uncommitted.
Fourth-quarter information and changes
Fourth-quarter 2016 revenue was $3,055.8 million versus $2,928.2 million in the prior-year quarter. Income from continuing operations was $43.8 million versus $29.2 million, and diluted continuing-operations EPS was $1.14 versus $0.69. Net income was also $43.8 million in Q4 2016, compared with $66.7 million in Q4 2015; the prior-year quarter included discontinued operations. The filing does not provide a clear standalone fourth-quarter cash-flow value.
FY 2016 results benefited from an $88.2 million gain on asset sales, including the Camline pipeline sale, and higher RIN sales and merchandise margins. These benefits were partly offset by lower per-store fuel volumes and fuel margins, weaker product supply and wholesale contribution excluding RINs, and higher interest expense. The company drew a $200 million term loan in March 2016 and repurchased $323.3 million of shares during the year. No cash dividends were declared in 2015 or 2016.
Outlook, risks and contingencies
- Management expected 2017 capital expenditures of approximately $250 million to $300 million and planned 30–50 new sites annually; it described a 45–50-site 2017 pipeline as having high confidence. Growth is shifting toward independently sourced land rather than sites purchased directly from Walmart.
- Management expects to fund the 2017 capital program primarily from operating cash flow, supplemented if needed by borrowings. The filing gives no formal earnings or revenue guidance.
- Key exposures include volatile fuel prices and margins, supply or transport disruptions, seasonality, competition, and dependence on the Walmart relationship and Walmart-related property rights. Management cited Colonial Pipeline disruptions and rising wholesale prices among 2016 volume headwinds.
- RIN revenue and prices are variable; litigation could shift renewable-fuel compliance obligations from refiners to blenders, potentially affecting the company’s ability to sell RINs. Management stated that the business model is not dependent on RIN revenue.
- Core-Mark supplied more than 75% of merchandise in 2016 under a five-year agreement, creating supplier-concentration risk. Other material risks include environmental remediation, regulation, credit-card costs, and leverage and debt covenants.
- The company reported routine legal matters and stated that known matters were not expected to materially adversely affect results, financial condition or liquidity. It identified itself as a potentially responsible party at one Superfund site but considered its share likely immaterial; outstanding letters of credit were $16.9 million and were not accrued because a draw was considered remote.
Important facts for investors to verify
- How much of FY 2016 earnings and cash generation is repeatable without the $88.2 million asset-sale gain and elevated RIN revenue?
- Whether fuel margin and per-store volume stabilize, and how new-store growth affects returns and operating costs.
- Whether the independent land-sourcing strategy can sustain the targeted 30–50 annual openings and the planned 2017 capital program.
- Core-Mark’s ability to meet supply obligations and the durability of merchandise-margin improvement.
- Available ABL borrowing capacity under changing borrowing-base values, debt-covenant headroom, and the cash demands of capital spending and share repurchases.
- Developments in RIN regulation and litigation, environmental remediation, and the company’s Walmart agreements and property restrictions.