CA - Global Partners: Consider Long-Term Trends

2024-01-11 12:43:31 ET

Summary

• Global Partners' business relies on managing oil transport and supply. Its 12-month performance is flat and there are hints of decreasing oil demand.
• Business risk includes a significant reduction in oil consumption due to the adoption of zero-emissions energy solutions. Rapid BEV uptake is a reality check.
• Global Partners is staying with fossil fuels as it grows its business, with $570 million spent recently on acquisitions.
• While Global Partners has an exceptional dividend, the threat of reduced oil consumption is real. Investors might consider this long-term trend.

Global Partners LP ( GLP ) is a significant player in Northeastern US liquid fossil fuel logistics, including 1646 (plus 64 JV sites in Texas) owned, leased and supplied retail gasoline outlets.

In March 2022 I explored Global Partners LP business strategy in considering whether the high dividend it pays was secure. GLP’s business has been very focused on distributing and selling liquid fossil fuels in the Northeast of the US. My point was that change is coming as transport gets electrified. The last 18 months have not produced a change in the dividend paid by GLP although the share price was static for most of 2023. Since 2022 there has been a dramatic increase in adoption of electric cars and trucks and here I show that this change will soon produce significant changes to oil consumption.

It's clear that we are approaching the end of the internal combustion engine and this means liquid fuel (both traditional oil or biofuel) is at risk. Note that green diesel still assumes an internal combustion engine, which I suspect is a risky assumption. My timing was wrong in my 2022 article, but the thesis that oil consumption is set to fall through electrification of wheeled transport remains valid and the clock is ticking. Investors might consider what impact this will have on GLP’s business. GLP continues an aggressive acquisition strategy for assets involving oil transport, storage and sale. This includes a significant new focus on Texas. Gen Alpha recently put his finger on the pulse when he described GLP’s business having exposure to an irreplaceable asset base on the US East Coast and Texas. My take is that GLP’s business can increasingly be seen as replaceable (through electrification of transport). Investors might consider this when thinking about investment in GLP.

Business as usual

Just about all discussion about GLP (and its preferred shares GLP.PR.A, GLP.PR.B) acts as if the core business of the company is not under threat. Gasoline (and other liquid fuels, eg diesel) are assumed to be core fixtures in the modern world. The risks are seen in terms of fluctuating oil prices through international events and changes in the cost of capital. Future good times are seen to come from further deals in managing liquid fuel supply (storage, shipment and sale). If you're a day trader or have a short term investment focus this is a reasonable assumption. On the other hand, as I indicate here, my take is that the industry that GLP lives in is subject to dramatic change in the relatively short term.

Is electrified transport a threat?

Consideration of oil consumption is a complex story, but central to the health of the current oil industry is consumption by China which accounts for more than half of global oil consumption. The traditional energy bodies produce high level figures which often reflect an inability to acknowledge that the world is changing fast and that renewable energy is rapidly becoming the dominant new energy source. I contend that China’s recovery from COVID with resultant expansion of oil consumption hides the emerging decrease in oil consumption due especially to the electrification of transport. China is massively investing in renewable energy and especially the electrification of transport. In 2023 Chinese BEV (Battery Electric Vehicle) sales amount to 26% of new car sales, with plug-in hybrids accounting for an additional 12%. For the first seven months of 2023, electric vehicle sales in China amount to almost 4 million cars . While China is leading the way, the global outlook for electric vehicle sales is growing rapidly as indicated by the IEA Global EV Outlook f or 2023.

I’ve argued elsewhere that the accelerating rate of electrification of transport comes as a result of the drive and passion of two genius car company CEOs : Elon Musk (Tesla ( TSLA )) and Wang Chuanfu (BYD ( BYDDF )). Tesla and BYD are forcing legacy car companies to pay attention because their actions are changing the industry fast.

In addition, the decreased OPEC and Russian oil production in 2023 also hides the fact that already electrification of transport is having an impact on oil consumption.

Coupled with the above is the evidence that everything is getting electrified. It's clear that the age of the internal combustion engine is coming to an end. Looking at the numbers is always interesting. A recent analysis by Peter AG Davies is helpful.

It's becoming clear that BEV (battery electric vehicle) sales will reach ~50% of new car sales well before 2030. Clearly already things are not where they have been in terms of fuel demand and it was interesting to hear reasons given in the GLP Q2 2023 earnings call Q&A for fuel demand being “off” (which included rainy days in June.). My reading of the small truck sector suggests that a significant portion of the existing diesel truck market is going electric now, with urban pressure to decrease vehicle emissions. In the GLP Q2 2023 earnings call Q&A Mark Romaine ((COO)) noted that diesel sales are down year on year, while gasoline sales are up somewhat year-on-year but still not back to 2019 levels.

Peter Davies figures suggest that there will be an almost 3% annual decrease in oil consumption due to road transport in 2024 and decrease in annual oil consumption from BEV penetration will be 9.5% by 2027 and in excess of 20% by 2030. This is a really big deal and it must impact the GLP business.

GLP’s expansion of its fuel distribution business

When one looks at companies in industries that are going to experience dramatic change in the near future, it's instructive to see where they make new investments to grow their business. GLP has recently made clear that it does not feel threatened by the coming electrification of transport. In the Q2 2023 earnings call, CEO Eric Sifka made clear that GLP sees more oil assets as a key to its growth strategy, which involves three core tenets: Acquire, invest, optimize. There's no hint of any thoughts of alternative strategies as oil consumption declines.

Indeed a recent JV investment with Exxon Mobil ( XOM ) in the greater Houston area involves a substantial expansion of the oil distribution business from the Northeast of the US to encompass expansion of its Texan business activities.

GLP is working through acquisition of five of Gulf Oil LP’s East Coast refined product terminals which might close in 2023. This will bring $570 million of acquisitions in less than two years. And then there's a major new announcement of acquisition of 25 refined product terminals along the Atlantic Coast, in the Southeast and in Texas, from Motiva Enterprises for $305.8 million.

While CEO Eric Slifka indicated that the cost of money was a reason that acquisition prices are down in the Q2 2023 Q&A, I can’t help but wonder if purchasers are noting the increased risk to the industry.

In the Q3 2023 Q&A COO Mark Romaine responded to a question about GLP beginning to include EV charging stations by saying that the company is looking to take advantage of incentives and funding for EV charging. He saw this as getting to the forefront of change, but spent more time talking about handling renewable biodiesel. Renewable it might be, but biodiesel still provides fuel for an internal combustion engine and that's what is going to disappear. There was no hint that GLP has any understanding of the change that is coming fast.

Q3 2023 earnings call and finances

The reporting for Q3 2023 in comparison with Q3 2022 was a very stark picture of a dramatic shortfall in 2023, which was blamed on Q3 2022 being an exceptionally good quarter. The earnings were introduced as “somewhat challenging” but in line with expectations. Here are the numbers for Q3 2022 compared with Q3 2023:

EBITDA: Q3 2022, $168.5 million; Q3 2023, $77.7 million

Net income: Q3 2022, $111.4 million; Q3 2023, $26.8 million

DCF: Q3 2022, $128 million; Q3 2023, $42.2 million

The above figures show how volatile the fuel business is.

What the market thinks

GLP doesn’t have big coverage on Seeking Alpha or Wall Street, with just two articles on each in the past 90 days (Seeking Alpha 1 buy, 1 hold; Wall Street 1 strong buy, 1 hold) and the Quant rating is a hold.

Given the above gloomy Q3 2023 figures, it's most likely that the positive outlook comes from the recent acquisitions and strengthening of the business in the Southeast and Texas.

Conclusion

It's a very strange time for investors, which makes it almost impossible to guess the short-term impact of COVID recovery, war, political uncertainty in the US and climate change. For dividend investors the horizon is a long one, as dividends are quarterly, biannual or annual matters. My focus is on qualitative impact of long-term changes, especially as with regard to the accelerating impact of climate change and need for urgent emissions reductions. Anyone paying attention will be aware that climate change is now impacting just about everyone, as evidenced by New York inhabitants experiencing respiratory problems as a result of Canadian wildfires. The fossil fuel industry has been successful in delaying restriction of combustion of fossil fuels even though wheeled transport and power production are major causes of emissions that have technologies available for substitution. This is changing as the scale of the climate emergency is coming into focus. The point is that the dividend of Global Partners, which I suggested was in danger in my 2022 article, has not been impacted in the past 18 months. Various emergencies, notably the Russian invasion of Ukraine, have played a part.

I’ve argued here that the increased business risk I predicted is now tangible because the impact of electrification of wheeled transport (both cars and trucks) is coming fast. It's clear that electrification of transport will produce a reduction in oil consumption of ~3% annually in the near future (and growing rapidly from there). This level of reduction in oil demand has to impact the oil industry and Global Partners' close alignment with oil consumption is going to be impacted. I have argued that the recent partnership of Global Partners with Exxon Mobil in Texan oil outlets shows clearly that, like Exxon Mobil, Global Partners is doubling down on its dependence on oil consumption. There's no hint of a plan B in Global Partners business. For this reason I suggest that investors might carefully examine the risks of continuing holding this stock, while acknowledging that the quarterly dividend is substantial. Investors considering becoming shareholders might consider the speed of the change that is coming and the likely impact on GLP’s business.

I'm not a financial advisor but I follow closely dramatic changes coming as the world begins to address the need to exit burning fossil fuels. I hope my commentary is helpful to you and your financial advisor as you consider investment in Global Partners.

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