Murphy USA Inc. — Q3 2013 Form 10-Q
Reporting period: Quarter ended September 30, 2013; filed November 8, 2013. Murphy USA became independent on August 30, 2013. Accordingly, Q3 2013 results combine two months of pre-spin historical operations with one month as a stand-alone company; 2012 comparatives are combined results of the former parent’s contributed business. Pre-spin allocations and results may not represent stand-alone costs or future performance.
Business context and results
The company operated 1,185 retail fuel stations in 23 states, alongside wholesale marketing and ethanol production. It reported two segments: Marketing and Ethanol.
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $4,785.7m | $4,966.0m | $14,185.5m | $14,657.9m |
| Operating income | $65.9m | $19.7m | $228.8m | $110.4m |
| Net income | $41.7m | $11.0m | $141.4m | $64.5m |
| Diluted EPS | $0.89 | $0.24 | $3.02 | $1.38 |
| Adjusted EBITDA | $85.5m | $39.3m | $288.2m | $167.9m |
Revenue declined 3.6% in Q3 and 3.2% year to date, primarily as lower fuel prices outweighed higher volumes. Retail fuel volumes rose 1.1% in Q3 and 2.5% year to date. Fuel margin increased to 14.8 cents per gallon in Q3 from 10.3 cents, and to 13.9 cents year to date from 12.5 cents. Merchandise margin fell to 13.2% in Q3 from 14.4%, and to 13.0% year to date from 13.6%.
Marketing segment income was $40.9m in Q3 and $130.9m year to date, versus $20.5m and $81.1m. RIN sales contributed $31.8m in Q3 and $74.8m year to date, compared with $5.0m and $6.8m. Ethanol segment income improved to $4.5m in Q3 and $14.0m year to date, from losses of $9.4m and $15.3m, helped by stronger ethanol margins and lower corn costs.
Cash flow, liquidity and debt
For the nine months, operating cash flow was $370.0m, investing cash outflow $315.2m, and financing cash outflow $47.8m. Free cash flow, as defined by the company, was $247.9m after $122.1m of property additions. Operating cash flow benefited substantially from a $175.0m decrease in noncash working capital, including receivables and inventory reductions; it should not be viewed as solely reflecting earnings growth.
At September 30, cash and cash equivalents were $64.3m and marketable securities were $198.2m. Long-term debt was $642.4m, including $500m principal of 6.00% senior notes due 2023 and a $150m term loan due 2016; total debt carrying value including current maturities was approximately $642.5m. The notes and term loan helped fund a $650m cash dividend to Murphy Oil at separation. The new credit agreement includes a $450m asset-based revolver, subject to a borrowing base, and a $200m uncommitted incremental facility. The reported borrowing base was approximately $338m; actual remaining availability is not clearly stated. The company reported secured leverage and fixed-charge coverage ratios of 0.39 and 2.48, respectively, at quarter end.
Changes, outlook and risks
- Q3 and year-to-date net income increased substantially, with higher fuel margins, RIN revenue and improved ethanol results among the stated drivers. Revenue was lower, and Q3 included $14.3m of spin-related and other nonrecurring SG&A charges. A $6.0m year-to-date gain on asset sales included the sale of North Dakota crude supply assets.
- Management expected approximately $197m of 2013 capital expenditures and described plans to develop about 200 Walmart-adjacent stations over three years, subject to execution and funding. The filing also lists segment capital spending estimates of $183m for Marketing, $2m for Ethanol and $7m for Corporate, which total $192m; the difference from the $197m headline estimate is not explained.
- In October, the board approved a bidder for the Hankinson ethanol facility sale, subject to customary closing conditions, with closing expected before year-end. The company was evaluating alternatives for Hereford; neither plant was classified as held for sale at September 30.
- Management said Q3 fuel and ethanol margins had weakened versus Q2 and noted declining RIN prices late in Q3 and into early Q4. Fuel margins are volatile and exposed to crude and refined-product prices, competition, supply disruption and demand; ethanol results are exposed to corn, co-product and regulatory conditions. The company stated its internal forecasts did not depend on RIN revenue.
- Key risks include the Walmart relationship and planned site growth, commodity and interest-rate volatility, and access to liquidity. The company reported environmental matters and a Superfund site for which it had not accrued remediation liabilities, while judging expected costs not material based on information available. Fuel-temperature class actions remained unresolved; losses were considered reasonably possible but not estimable, and an adverse result could materially affect the business. Outstanding letters of credit totaled $18.6m and were not accrued because a draw was considered remote.
- No quantified earnings or margin guidance was provided. Management expressed confidence that liquidity would be adequate, but cautioned that operating cash generation and access to credit are not assured. The company used transition services from Murphy Oil for up to 18 months, with a possible six-month extension.
Important facts for investors to verify
- How much of the earnings and cash-flow improvement is sustainable after separating RIN gains, margin volatility, working-capital timing and nonrecurring spin costs.
- Actual unused ABL availability after borrowing-base reserves, letters of credit and any other usage, and compliance with debt covenants.
- The final 2013 capital-expenditure estimate, given the filing’s approximately $197m headline and $192m segment estimates.
- Completion, proceeds and effects of the Hankinson sale, and the company’s decision on the Hereford facility.
- Developments in the fuel-temperature litigation, environmental matters and other contingencies, including any changes to potential exposure.