Murphy USA Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Unaudited consolidated results. Murphy USA operated 1,725 stores in 27 states, including 1,566 Murphy-branded and 159 QuickChek stores.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $5.585 billion | $6.767 billion | $10.663 billion | $11.885 billion |
| Operating income | $198.7 million | $262.3 million | $361.5 million | $483.0 million |
| Net income | $132.8 million | $183.3 million | $239.1 million | $335.7 million |
| Diluted EPS | $6.02 | $7.53 | $10.82 | $13.59 |
| Adjusted EBITDA | $257.1 million | $316.6 million | $477.3 million | $593.6 million |
- Revenue and earnings: Q2 revenue fell 17.5% year over year, primarily reflecting lower retail fuel prices (down 23.8%), partly offset by 2.3% higher retail fuel volume and increased merchandise sales. Q2 net income declined about 27.6%. For the first half, revenue fell 10.3% and net income fell about 28.8%.
- Fuel: Q2 total fuel contribution was $365.8 million, or 29.5 cents per gallon, versus $422.9 million and 34.9 cents. Retail fuel margin was 27.0 cents per gallon, up from 26.5 cents; product supply and wholesale contribution including RINs was $31.1 million versus $101.8 million. Management attributed the decline mainly to timing and inventory-pricing adjustments. First-half total fuel contribution was $695.7 million versus $792.6 million.
- Merchandise: Q2 contribution increased 5.1% to $206.8 million; first-half contribution increased 5.8% to $393.9 million. First-half merchandise sales rose 6.8% to $2.015 billion.
- Cash flow and investment: First-half operating cash flow was $320.9 million versus $516.5 million, with lower net income and a $61.6 million working-capital cash use contributing to the decline. Investing activities used $142.3 million; property additions were $145.2 million. Financing activities used $146.2 million, including $107.9 million of treasury-stock purchases and $16.3 million of dividends. Cash increased $32.4 million to $92.9 million.
- Liquidity and debt: Cash and marketable securities totaled $113.3 million. Long-term debt, including current maturities and capitalized lease obligations, was $1.802 billion. The $350 million revolving facility was undrawn, with $4.7 million of letters of credit outstanding. The reported total leverage ratio was 1.66x; the filing states restricted payments were not limited at quarter-end.
- Margins and costs: Higher merchandise contribution partly offset lower fuel contribution. Store operating costs and SG&A rose; Q2 SG&A increased 13.8% to $59.4 million, and first-half SG&A rose 20.3% to $118.4 million. Interest expense was $25.0 million in Q2 versus $20.2 million.
Material changes and capital allocation
- Average crude oil prices were $74 per barrel in Q2 2023 versus $109 in Q2 2022. Lower fuel selling prices reduced reported revenue, while fuel volumes increased.
- First-half cash repurchases were $107.9 million, compared with $355.4 million in the prior-year period. The company had approximately $105.7 million remaining under its existing $1 billion authorization at June 30, 2023, and approved a new $1.5 billion authorization to begin after the existing authorization is completed.
- First-half dividends were $0.75 per share versus $0.60 a year earlier. Management stated an intention to target double-digit per-share dividend growth over time.
- At May 4, 2023, shareholders approved a new 2023 Omnibus Incentive Compensation Plan, with up to 1.725 million shares available for issuance.
Outlook, risks and contingencies
- Outlook: Management expected 2023 capital expenditures of approximately $375 million to $425 million, including $285 million to $315 million for retail growth and $50 million to $60 million for maintenance. The company expected to fund the program primarily from operating cash flow, with borrowing available if needed. Estimated effective tax rate for the remainder of 2023 was 24% to 26%. No specific earnings or fuel-margin guidance was provided.
- Management commentary: Management said it expected continued growth from expanding food and beverage capabilities and new-store development, while noting growth plans may change with cash generation and financing availability. Results are seasonal, generally strongest in the second and third quarters.
- Key operating risks: Fuel margins and refined-product prices are volatile; other cited risks include supply-chain disruption, severe weather, geopolitical events, inflation and competition, cybersecurity incidents, regulatory changes affecting RINs, reduced fuel demand from efficiency standards or electric-vehicle adoption, and dependence on maintaining a good relationship with Walmart.
- Debt and interest-rate exposure: The term loan’s effective interest rate was 6.94% at quarter-end, up from 5.95% at year-end 2022. Debt covenants include leverage limits and may restrict certain payments if pro forma total leverage exceeds 3.0x. Management reported that a 10% interest-rate change would have an immaterial financial-statement impact at June 30.
- Legal and environmental matters: The company disclosed climate-related lawsuits brought by the City of Charleston and State of Delaware against energy companies, including Murphy USA; outcomes and potential liability were uncertain. It also disclosed environmental remediation matters and one Superfund site where it considers itself a de minimis responsible party; no liability was recorded for that site. Management did not expect currently known matters to have a material adverse effect, but noted additional expenditures remain possible.
- Other: Insurance claims accrued were $47.5 million. Outstanding letters of credit totaled $8.7 million as contingencies; the company considered a draw remote. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether fuel contribution and product supply/wholesale results recover from the timing and inventory-pricing effects that reduced Q2 results.
- Whether higher store operating and SG&A costs continue to outpace merchandise contribution growth.
- Progress against the $375 million to $425 million 2023 capital-spending outlook and the expected funding mix.
- Debt, interest-rate exposure, leverage covenant headroom, and conditions governing the new share-repurchase authorization and dividends.
- Developments in climate litigation, environmental remediation, and RIN-related regulation or market pricing.