Murphy USA Inc. — 2014 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2014. The filing also presents unaudited fourth-quarter results. Murphy USA was spun off from Murphy Oil on August 30, 2013; 2013 results combine pre-spin operations with post-spin results, so year-over-year comparisons are not fully like-for-like.
Business context
Murphy USA operates a low-price, high-volume fuel and convenience-merchandise business. At year-end it had 1,263 stations in 23 states, mostly near Walmart stores, and sold approximately 4.0 billion gallons of motor fuel during 2014. Nearly 1,000 stations participated in the Walmart fuel-discount program. The company also operates fuel-supply and wholesale assets and one remaining ethanol plant in Hereford, Texas.
Financial and operating metrics
| Metric | 2014 | 2013 |
|---|---|---|
| Revenue | $17.210 billion | $18.083 billion |
| Income from continuing operations | $243.1 million | $156.3 million |
| Net income | $243.9 million | $235.0 million |
| Diluted EPS | $5.26 | $5.02 |
| Net cash from operating activities | $305.6 million | $356.7 million |
| Capital expenditures | $138.9 million | $172.0 million |
| Free cash flow, as defined by the company | $166.7 million | $192.2 million |
| Cash and cash equivalents at year-end | $328.1 million | $294.7 million |
| Long-term debt at year-end | $492.4 million | $547.6 million |
| Working capital / current ratio | $252.8 million / 1.61 | $155.9 million / 1.30 |
All dollar amounts are U.S. dollars. Revenue includes excise taxes collected and remitted to governments ($1.931 billion in 2014). The 2014 reported fuel margin was 15.8 cents per gallon, versus 13.0 cents in 2013; merchandise margin was 14.0%, versus 13.1%. Fuel volume increased 4.8% overall, while average monthly gallons per store rose 0.7%. Operating income was $394.5 million. Adjusted EBITDA, a non-GAAP measure, was $474.9 million.
Fourth quarter: Revenue was $3.609 billion, income from continuing operations was $98.3 million, net income was $98.3 million, and diluted EPS was $2.13. Fourth-quarter 2013 revenue was $4.195 billion, continuing income was $29.5 million, net income was $93.6 million, and diluted EPS was $2.00. Fourth-quarter 2013 net income included earnings from the Hankinson ethanol business and its sale.
Material changes versus prior periods
- Annual revenue fell 4.8%, primarily reflecting lower fuel prices and lower wholesale volumes; retail fuel volume growth partly offset the decline. The sharp drop in crude oil prices in the second half of 2014 contributed to higher-than-normal retail fuel margins in the third and fourth quarters.
- Continuing income rose substantially, mainly on higher retail fuel margins, higher fuel volumes, improved merchandise margins, and a stronger contribution from the Hereford ethanol plant. Net income increased less because 2013 included a $52.5 million after-tax gain on the Hankinson plant sale; 2014 discontinued operations included a small final working-capital gain.
- RIN sales were $92.9 million in 2014, compared with $91.4 million in 2013. Product-supply and wholesale margin dollars excluding RINs declined to $13.5 million from $54.2 million.
- Operating cash flow declined 14.3%, to $305.6 million. Management cited working-capital movements, including reduced cash benefits from working capital and timing differences.
- The company repaid the remaining $150 million term loan in May 2014. Year-end debt was principally the 6% senior notes due 2023, with $500 million face value and $492.4 million carrying value. The company reported below-investment-grade credit ratings.
- Station count increased by 60, to 1,263. The company completed a $50 million share-repurchase authorization and began a second authorization of up to $250 million through December 31, 2015; 2014 treasury-stock purchases were $51.3 million. No common dividends were declared.
Outlook, commentary, and risks
- Management expected to build 60–80 sites annually over the next few years, subject to Walmart approvals, permits, site availability, and market conditions. Planned 2015 capital expenditures were approximately $230–$270 million, primarily for new retail sites and land; management expected to fund the program mainly from operating cash flow, with credit facilities available as needed.
- Management said margins started 2015 strong but weakened as crude prices stabilized and began rising. Retail margins remain exposed to rapid changes in wholesale fuel costs, competition, supply disruptions, and consumer demand. The company generally does not hedge a significant portion of its fuel-price exposure.
- RIN revenue depends on regulatory requirements and market prices and may not be sustainable. The filing notes uncertainty around government renewable-fuel standards; management said the business model does not depend on RIN revenue.
- Walmart is a key source of customer traffic and growth opportunities. Walmart approval rights, development restrictions, and rights affecting certain properties could constrain expansion. Some proposed sites under the agreement had already been terminated because of local development conditions.
- McLane supplied more than 85% of merchandise purchases; the supply contract ran through September 2015, and replacement supply could be delayed or less favorable.
- The company was evaluating strategic alternatives for the Hereford ethanol facility; no final decision had been made, and it was not classified as held for sale.
- Environmental obligations, fuel and emissions regulation, tobacco demand and rebates, credit-card fees, labor costs, cybersecurity, and the transition from Murphy Oil-provided services were identified as risks. The filing reported contamination investigations and remediation at certain properties and potential-responsible-party status at one Superfund site, for which no liability was recorded based on management’s assessment.
- In the Freeny patent lawsuit concerning an electronic pricing system, management assessed the probability of loss as remote, but damages could not be estimated; trial was scheduled for June 2015. Other routine legal matters were not expected to materially affect results or liquidity.
Important facts for investors to verify
- Whether elevated 2014 fuel margins persist or normalize, and how crude-price movements affect margins and volumes.
- The amount, composition, and durability of RIN revenue, alongside the decline in non-RIN wholesale margins.
- Progress, approvals, costs, and returns on the planned 2015 station openings and Walmart-related sites.
- Actual ABL availability: the facility commitment was $450 million, subject to a borrowing base reported at approximately $174 million at year-end; the filing also cited a separate $200 million uncommitted incremental facility.
- Cash generation relative to planned capital spending, share repurchases, debt service, and other obligations; the company reported $328.1 million of cash and a $1.0 billion 2023 note principal obligation.
- Developments in the Freeny litigation, environmental remediation and contingencies, the Hereford plant strategy, and the McLane supply agreement renewal.