SUN - CrossAmerica Partners: 10% Payback At The Gas Pump

2023-06-18 09:15:00 ET

Summary

• CrossAmerica Partners LP yields 10.43%.
• It owns ~1,750 sites located in 34 states.
• It has trailing 1.7X dividend coverage.

Have you ever shopped for the cheapest gasoline price in your town?

Of course you have, but maybe there's another way to get a "payback at the pump," via investing in publicly traded C-store companies.

Profile:

CrossAmerica Partners LP ( CAPL ) is a convenience store operator, a wholesale distributor of motor fuels, and owner and lessee of real estate used in the retail distribution of motor fuels. CrossAmerica Partners distributes branded and unbranded petroleum for motor vehicles in the U.S. to ~1,750 sites located in 34 states; and owned or leased approximately 1,150 sites. ( CAPL site .)

CAPL sourced 89% of its fuel from oil majors in Q1 '23, with 42% coming from Exxon Mobil Corporation (XOM).

Earnings:

CAPL's Retail segment is its largest, accounting for ~63% of trailing Q1 '23 gross profit. Volume has improved steadily since 2020, with the reopening of the economy post-COVID. Retail margin/gallon and gross profit both surged in 2022, up 43% and 85%, respectively.

The Wholesale segment's volume increased 8% in 2021, but declined ~9% in 2022, with gross profit up 22% in 2021, and flattish in 2022.

Rental gross profits were pretty steady in 2020-2022.

Q1 '23:

"Operating revenues decreased $77.1M (7%), and gross profit increased $3.2M (4%). A $61.3M (10%) decrease in our wholesale segment revenues primarily attributable to a 20% decrease in the average daily spot price of WTI crude oil to $75.93 per barrel for the first quarter of 2023, compared to $95.18 per barrel for the first quarter of 2022." ( Q1 '23 10Q .)

Interest expenses rose ~$5.35M in Q1 '23, an 80% jump, after rising 76% in 2022.

2022:

"The $3.2 million (4%) increase in motor fuel gross profit was primarily driven by a 15% increase in our average fuel margin per gallon as compared to 2021 due to higher terms discounts as a result of higher crude prices. The average daily spot price of WTI crude oil increased 39% from $68.14 per barrel in 2021 to $94.90 per barrel in 2022. "(CAPL 2022 10K.)

Revenue rose ~39%, with Net Income up 194%, Adjusted EBITDA up ~46%, and discounted cash flow ("DCF") up ~38% in full year 2022.

Adjusted EBITDA rose 15% in 2021, and 46% in 2022, as the U.S. economy reopening developed, and remained steady on a trailing basis in Q1 '23:

Dividends:

At its 6/16/23 intraday price of $20.14, CAPL yielded 10.43%. It should go ex-dividend next on ~8/2/23, with an ~8/10/23 pay date. Management has kept the quarterly payout at $.525, after cutting it in Q2 2018, hence the -3.17% 5-year dividend growth ratio.

With DCF falling 21%, DCF/Distribution coverage dipped to .96X in Q1 '23, far below the strong 1.77X full year 2022 coverage factor, bringing trailing 12-month coverage to 1.7X. There is some seasonality with CAPL, as Q1 is typically its weakest quarter, due to harsher weather.

While Q1 '23 coverage was sub-par, CAPL's annual coverage has mostly trended higher since 2018, and has remained well above 1X since 2020:

Taxes:

CAPL issues a K-1 tax form to unit holders.

"As a limited partnership, we are not subject to federal and state income taxes. However, our corporate subsidiaries are subject to income taxes. Income tax attributable to our taxable income (including any dividend income from our corporate subsidiaries), which may differ significantly from income for financial statement purposes, is assessed at the individual limited partner unitholder level." (2022 10Q.)

There may be UBTI involved for unitholders who invest in CAPL via tax-deferred accounts. Please consult your accountant for more details.

Profitability & Leverage:

CAPL has a small equity base of $28.83M, as of 3/31/23, vs. ~$53M in the previous quarter. Its total debt and lease obligations of ~$947M give it a very high Debt/Equity of 32.84X, and a 200% ROE.

We show a trailing Q1 '23 Net Debt/EBITDA figure of 4.36X, vs. management's figure of 4.05X. Our figure includes ~$38K in current debt, and finance lease obligations, less ~$7.5M in cash, leaving Net Debt of $784M.

EBITDA/Interest declined from 5.69X in pre-COVID Q3 '20, to 4.8X in Q1 '23, which was still higher than the industry average of 3.91X. CAPL is in a low margin business, with an EBITDA margin of just 3.67%, vs. the 2.89% industry average.

Debt & Liquidity:

CAPL has a $925M Credit Revolver, which matures on March 31, 2028. As of 3/31/23, there was $778M outstanding.

"On March 31, 2023, the Partnership and its subsidiary, LGWS, amended and restated the CAPL Credit Facility. As amended, the CAPL Credit Facility provides for an increase of the senior secured revolving credit facility from $750 million to $925 million and extends the maturity date from April 1, 2024 to March 31, 2028. The credit facility can be increased from time to time upon the Partnership’s written request, subject to certain conditions, up to an additional $350M. (CAPL Q1 '23 10Q.)

Performance:

CAPL has outperformed its industry, and the broad energy sector over the past month, and so far in 2023. It has lagged the S&P 500 (SP500) year to date, but outperformed it in the past month, with an 8.59% gain.

After that big 1-month gain, CAPL looks overbought on its slow stochastic chart:

Insiders:

CAPL's General partner is controlled by entities affiliated with Joseph V. Topper Jr., the founder and Chairman of the BOARD of CAPL. The Topper Group controls~38.5% of CAPL units. Mr. Topper bought ~54,000 units of CAPL in May, at prices ranging from $18.16 to $18.48. 2 other directors also bought a total of 2,000 units in May.

Valuations:

CAPL has one of the smaller market caps in the Oil and Gas Refining & Marketing industry, at $768M, vs. the $9.1B average cap. Its small equity value gives it a very high Price/Book, whereas it has a much lower than average Price/Sales valuation of .16X.

While the industry average distribution coverage figure was 4.55X, CAPL's trailing 1.70X figure is similar to the Q1 '23 1.78X figure for its competitor Sunoco LP ( SUN ). Its Price/DCF of 5.62X is a bit lower than the 5.94X it was at in early February '23.

Parting Thoughts:

While C-Stores are an ongoing part of the U.S. economy, we don't recommend jumping into CrossAmerica Partners LP units at this time. If there's a hard landing, these units will get discounted to a more advantageous valuation.

All tables furnished by Hidden Dividend Stocks Plus, unless otherwise noted.

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