Murphy USA Inc. — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013; filed February 28, 2014. Murphy USA completed its spin-off from Murphy Oil on August 30, 2013. Accordingly, 2013 results combine eight months of historical business results under Murphy Oil with four months as an independent company; comparisons with 2012 are not fully like-for-like.
Business context
Murphy USA operates a U.S. retail fuel and convenience business, with 1,203 stations in 23 states at year-end (1,021 Murphy USA and 182 Murphy Express). Nearly all are near Walmart stores. The company sold approximately 3.8 billion gallons of fuel in 2013. Following the December sale of its Hankinson ethanol plant, it reported one operating segment, Marketing; the remaining Hereford ethanol facility was included in corporate and other assets.
Key financial results
| Metric | 2013 | 2012 |
|---|---|---|
| Revenue | $18.08 billion | $19.30 billion |
| Income from continuing operations | $156.3 million | $86.4 million |
| Net income | $235.0 million | $83.6 million |
| Diluted earnings per share | $5.02 | $1.79 |
| Net cash from operating activities | $356.7 million | $237.4 million |
| Capital expenditures | $172.0 million | $111.6 million |
| Free cash flow (company-defined) | $192.2 million | $132.9 million |
Revenue declined 6.3%, reflecting lower fuel prices, a less favorable wholesale-price environment, weaker consumer demand and one fewer month of the Walmart discount program; total fuel volume nevertheless increased 0.8%, partly due to more stores. Retail fuel margin averaged 13.0 cents per gallon, versus 12.9 cents in 2012. Merchandise margin was 13.1% of sales, down from 13.5%. The calculated operating margin was approximately 1.5% of revenue.
Fourth-quarter 2013 revenue was $4.20 billion, continuing-operations income was $29.5 million and net income was $93.6 million ($2.00 diluted EPS). The filing’s quarterly table does not provide fourth-quarter cash flow.
Liquidity, debt and capital
At December 31, 2013, cash and equivalents were $294.7 million, working capital was $155.9 million and the current ratio was 1.30. Debt carrying value was $561.6 million, comprising $500 million principal of 6% senior notes due 2023 and $70 million of term loans due 2016; no revolving borrowings were outstanding. Cash less debt carrying value implies net debt of approximately $266.8 million. The $450 million asset-based facility was subject to its borrowing base, approximately $390 million at year-end; a further $200 million incremental facility was uncommitted.
Management said liquidity was adequate for operating needs and planned investment. The company did not declare common-stock cash dividends in 2013 or 2012. Credit documents impose restrictive covenants; year-end secured leverage ratio was 0.20, against a maximum of 4.5, and the fixed-charge coverage covenant applies when availability falls below specified thresholds.
Changes, outlook and risks
- Net income rose substantially, but included $78.7 million of after-tax discontinued-operations income, including a $52.5 million after-tax gain on the Hankinson sale. Continuing-operations income was $156.3 million. Marketing-segment income increased to $164.0 million from $139.6 million.
- RIN sales were $91.4 million in 2013 versus $8.9 million in 2012; management reported prices declining late in 2013 and warned that this revenue may not be sustainable. Management said the retail strategy does not depend on RIN revenue.
- The company issued $500 million of 6% notes and borrowed $150 million under its term facility in connection with the spin-off and a $650 million cash dividend to Murphy Oil; it repaid $80 million of term loans during 2013, including $65 million from Hankinson sale proceeds.
- Management expected approximately $196 million of 2014 capital expenditures, including about $183 million for retail marketing, largely for new sites. It planned to pursue approximately 200 Walmart-adjacent locations over the next several years, subject to Walmart approvals, permits and other conditions.
- Material risks include volatile fuel prices and retail margins, dependence on Walmart and its retained property and lease rights, supplier concentration (McLane supplied over 80% of merchandise), environmental obligations, regulatory changes, and the costs and execution risks of operating independently after the spin-off. Management was evaluating strategic alternatives for the remaining Hereford ethanol facility; no final decision had been made.
- An EPA consent agreement provided for a $150,000 civil penalty over alleged wetland impacts at a Florida development site; the company did not expect a material financial effect. Management reported effective disclosure controls; the first management assessment of internal control over financial reporting was required for 2014.
Important facts for investors to verify
- How much of continuing earnings and cash generation is repeatable without unusually high RIN proceeds or asset-sale gains.
- Whether fuel margins, per-store volumes and merchandise margins stabilize or weaken further, particularly after the lower fourth-quarter retail-margin environment.
- Progress, capital needs and returns from the Walmart site-development program, including approvals and any properties removed from the agreement.
- Debt covenant headroom, borrowing-base availability and the cost of replacing Murphy Oil transition services as the company operates independently.
- Environmental and other contingencies, and the outcome of the strategic review of the Hereford ethanol facility.