Murphy USA Inc. quarterly report, Q1 FY2014

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Murphy USA Inc. — Form 10-Q Summary

Reporting period: Three months ended March 31, 2014; filed May 6, 2014. Comparative income and cash-flow results are for Q1 2013. Murphy USA operates a U.S. fuel-retail and wholesale business and a remaining ethanol facility in Hereford, Texas. It had 1,214 company stations in 23 states. The company was spun off from Murphy Oil in August 2013; consequently, 2013 comparative results are combined historical results and include allocated parent-company costs.

Financial performance

  • Revenue: $4.164 billion, down 4.4% from $4.358 billion. Petroleum sales were $3.594 billion, merchandise sales $502.7 million, and ethanol sales and other revenue $67.3 million. Revenue includes fuel excise taxes of $445.4 million.
  • Profit: Operating income was $23.3 million versus $34.7 million; net income was $9.6 million versus $22.0 million. Diluted EPS was $0.21 versus $0.47. Continuing-operations income was $8.9 million versus $20.6 million. The 2014 result also included $0.8 million after tax from the final working-capital adjustment on the 2013 Hankinson ethanol-plant sale.
  • Margins and operating drivers: Retail fuel margin fell to 6.8 cents per gallon from 11.0 cents, while total retail fuel volume rose 3.4% to 910.1 million gallons. Merchandise margin improved to 14.0% from 12.9%; merchandise revenue declined 2.5%. Marketing-segment continuing income fell to $13.8 million from $23.4 million.
  • Cash flow: Operating cash flow was $112.8 million, up from $91.4 million. Property additions were $23.7 million versus $67.5 million; the company’s defined free cash flow was $89.1 million versus $24.0 million. The increase in operating cash flow benefited from an $84.8 million working-capital decrease, so it should not be read as a comparable increase in underlying earnings.
  • Liquidity: Cash was $369.4 million at March 31, up from $294.7 million at year-end. Current assets were $686.3 million and current liabilities $544.0 million. The company reported approximately $328 million of ABL borrowing-base availability, subject to facility terms and reserves.
  • Debt: Debt carrying value was $546.8 million, comprising approximately $491.8 million of 6% senior notes due 2023 and $55 million of term debt due 2016. The company repaid $15 million of term debt in Q1 and, in May 2014, repaid the remaining $55 million with cash. Q1 interest expense was $9.1 million versus $0.1 million a year earlier, primarily reflecting post-spin borrowing.

Material changes and unusual items

  • Lower fuel margins were the primary earnings headwind. Management attributed the comparison partly to a flat-to-rising wholesale-price environment in Q1 2014 versus a sharp wholesale-price decline that benefited Q1 2013.
  • A $17.8 million benefit from a LIFO inventory decrement boosted product-supply and wholesale margin dollars; the company said the inventory reduction was not expected to be restored by year-end. This is an important nonrecurring or timing-sensitive factor to assess.
  • RIN sales were $17.6 million, up from $13.3 million; 38 million RINs were sold at an average $0.47 each. Management noted RIN prices had declined or remained steady since late Q3 2013.
  • SG&A declined, in part because Q1 2013 included employee-related costs allocated by Murphy Oil that did not recur. Transition services from Murphy Oil continued under an agreement generally lasting up to 18 months, with a possible six-month extension.
  • The Hankinson, North Dakota ethanol facility was sold in December 2013 and is presented as discontinued operations. Management was considering strategic alternatives for the remaining Hereford facility, but had not made a final decision.

Outlook, risks and contingencies

  • Management expected 2014 capital expenditures of approximately $205 million, including about $194 million for retail marketing, and intended to fund the program primarily from operating cash flow. The company cited plans to build additional stations, including sites contemplated under its Walmart land-development agreement, but gave no assurance all planned sites would be developed.
  • Management said it expected fuel volumes to grow and expected recent fuel-margin pressure to subside, while emphasizing that margins are volatile. It reported historically high ethanol margins near the end of Q1 that moderated early in Q2.
  • Key risks include volatile crude oil, refined-product and corn prices; the ability to pass wholesale fuel-cost increases to customers; local competition and supply disruptions; changes in RIN prices and regulation; and dependence on the Walmart relationship and planned store growth.
  • The company disclosed environmental and routine legal matters, including potential responsibility at one Superfund site, but stated that currently known exposures were not expected to have a material adverse effect. It had $15.3 million in outstanding letters of credit and had not accrued a liability because draws were considered remote. Workers’ compensation claims included an accrued liability of $4.6 million.
  • ABL covenants include a fixed-charge coverage test triggered by low availability and a maximum secured-debt-to-EBITDA ratio when term commitments or loans are outstanding. The company reported a 0.17 secured leverage ratio and 1.32 fixed-charge coverage ratio at March 31, 2014. Disclosure controls were reported effective; the filing did not yet include management’s assessment of internal control over financial reporting.

Most important facts for investors to verify

  1. Whether retail fuel margins recover, and whether volume growth can offset continued margin pressure.
  2. How much Q1 earnings and cash generation depended on the $17.8 million LIFO benefit and working-capital release.
  3. Whether merchandise trends, especially tobacco sales, and RIN revenue remain sustainable.
  4. Execution and returns on the approximately $205 million capital-spending plan and the proposed Walmart-area station expansion.
  5. Post-May debt and liquidity position, including remaining ABL availability, covenant headroom and cash needs.
  6. Any decision regarding the Hereford ethanol facility and any changes in environmental, tax or legal exposures.