GLP - Global Partners LP: Gas Fuels The Potential For Future Distribution Increases

2023-08-13 22:05:40 ET

Summary

• The last five years have shown significant stock growth and increasing distributions.
• The company's recent focus on expansion and its cyclical nature presents an opportunity to benefit from increases in energy costs.
• With expected revenue growth and strong financial performance, GLP has the potential for further distribution growth and share price appreciation.

Global Partners LP ( GLP ) has had a lackluster decade earnings returns of -3.98% excluding distributions. Including the yearly average distributions of approximately $2.20 annually makes the returns slightly better. I remind my readers that as an LP, owners of units need to fill out a K1 tax form and receive distributions not dividends.

Cyclical businesses have their good and bad times. Recently, it has been good times at GLP and its units looks like a solid buy for income oriented investors. The last five years have seen a dramatic shift in returns with the stock up over 65% not including the distributions. The current distribution of over 8% and show signs of growing.

The recent focus on expansion has allowed the company to increase payments and improve the company's cash flow. As a cyclical business, it appears that GLP is in a current upcycle and presents an opportunity to benefit from increases in energy costs.

With revenue expected to grow from $17 billion in 2023 to $21 billion in 2024, we can expect higher distributions moving forward. The surprising profits from 2022 show how energy prices volatility can cause a wide variety of outcomes for GLP so estimates can fluctuate highly. The past results indicate that such growth is possible.

Since 2018, operating income and earnings per share has more than doubled. This should continue in the short term and lead to further price appreciation. If energy prices maintain or increase, GLP should benefit. With the post pandemic global reopening, we expect prices to increase, but this is difficult to predict. If prices drop, GLP will rely on its strong balance sheet to continue providing distributions. The recent acquisitions and growth strategy point to increased earnings and distributions in the future. With a current payout ratio of 40%, the distribution is well covered and has room to grow.

With earnings of $3.69 per share expected in 2024, we expect further distribution growth and share price appreciation. The chance of a surprise to the upside should be noted due to the current place in the energy cycle. Giving a modest earnings multiple of 10, $37 is our low end range for expectations. However, a dramatic increase in energy prices could see earnings of $6-10 which means GLP has upside optionality on energy prices and could increase to over $50. We think the modest floor and upside potential make GLP a buy at its current price.

A look at total return over the past ten years shows steady growth. The last five years and three years have been exceptional.

Let's examine GLP's recent earnings report from August 2023.

Earnings call Highlights

The Good

• Expertise in Energy Industry : "From an operating perspective, we bring an exceptionally high level of technical, marketing and M&A expertise amassed over decades in the energy industry." The company emphasizes its deep expertise in technical, marketing, and M&A aspects of the energy industry, highlighting the strong foundation supporting their growth strategy.

• Growth Strategy Overview : The growth strategy is characterized by three core tenets: acquire, invest, and optimize, underscoring a comprehensive approach to value creation.

• Expansion into Texas : The successful acquisition of 64 convenience and fueling facilities in Greater Houston expands their footprint into Texas, representing a significant growth milestone.

• M&A Activity and Value Creation: Highlighting the transformative nature of recent acquisitions, totaling over $570 million, the company emphasizes the importance of maintaining a strong balance sheet while driving value for unitholders.

• Clean Fuel Initiatives: The company's engagement in clean fuel solutions, such as hydrogen infrastructure and renewable diesel, underscores their commitment to low-carbon transportation and their positioning in the changing energy landscape.

• Distribution and Unitholder Value: "In July, the Board agreed upon a quarterly cash distribution of $0.6750 or $2.70 on an annualized basis on all our outstanding common units for the period of April 1 to June 30, 2023." The announcement of a quarterly cash distribution demonstrates the company's commitment to shareholder returns, offering insight into their distribution strategy.

• Segment Performance Breakdown: "GDSO product margin was up $0.2 million in the quarter to $199.1 million. The gasoline distribution contribution to product margin was down $2 million to $127.9 million, in part due to decline in volumes sold. Fuel margins continue to be strong at $0.31 per gallon in the second quarter of 2023, essentially flat compared with the second quarter of 2022. Station operations product margin, which includes convenience store and prepared food sales, sundries and rental income, increased $2.2 million to $71.2 million from the second quarter of 2022." A detailed breakdown of segment performance, including product margins and key contributing factors, provides investors with insight into the various drivers of the company's results.

• Balance Sheet and Leverage: The company's strong balance sheet and leverage ratio indicate financial stability and prudent management of capital resources, important factors for investors concerned with risk management.

My Thoughts

The company's acknowledgment of the Wholesale and GDSO segments' solid performance, underpinned by strong customer relationships, suggests a competitive advantage that could contribute to sustained growth and market stability. The emphasis on their profound expertise in technical, marketing, and M&A aspects of the energy industry provides reassurance of informed decision-making in their growth strategy. This strategy, outlined through the three core tenets of acquisition, investment, and optimization, signifies a comprehensive approach to value creation that could mitigate risks associated with relying solely on one avenue for growth.

Global Partners' successful expansion into Texas, marked by the acquisition of convenience and fueling facilities, underscores the company's ability to capitalize on growth opportunities in new markets. The spread throughout different regions should help keep revenues steady and returns for these acquisitions are expected to be in the mid teens. It's essential to remain cautious of potential challenges linked to entering uncharted territories. The company's history of substantial acquisitions while maintaining a strong balance sheet highlights a prudent approach to M&A activity and value creation, aligning with the interests of unitholders.

Global Partners' engagement in clean fuel solutions, such as hydrogen infrastructure and renewable diesel, positions them favorably within an evolving energy landscape. This forward-looking approach could potentially enhance the company's relevance and sustainability over the long term. The commitment to distributing cash to unitholders signifies a focus on shareholder returns, but a thorough assessment of the sustainability of such distributions in alignment with long-term profitability is warranted.

While the detailed financial performance analysis and segment breakdown provide transparency, revealing insights into the company's strengths and weaknesses, the decline in certain earnings metrics raises concerns. GLP's vulnerability to less favorable market conditions, leading to a decline in the Wholesale segment's product margin, suggests a susceptibility to market volatility.

The Concerns

• Decline in Earnings Metrics: The financial review reveals a decline in key earnings metrics such as adjusted EBITDA, net income, and DCF compared to the same period in the previous year. "For the second quarter of 2023, adjusted EBITDA was $91.6 million compared with $134.9 million for the same period in 2022. Net income was $41.4 million compared with $162.8 million and DCF was $54.8 million compared with $178.2 million in the same period last year." This decline could suggest potential operational challenges or market conditions that might impact the company's ability to maintain its historical levels of profitability.

• Market Conditions Impact: "Second quarter 2023 product margin decreased $30.8 million to $59.7 million, primarily due to less favorable market conditions in distillates and residual oil." The Wholesale segment's product margin decrease of $30.8 million is attributed to less favorable market conditions in distillates and residual oil. This indicates vulnerability to market volatility and shifts in conditions, which could potentially impact the company's overall financial performance in the future.

The company's acknowledgment of the challenging year-over-year comparison due to exceptional past results in the Wholesale segment raises a red flag. While strong past results are positive, they can create a high bar for future performance. To quote Benjamin Graham in his book Security Analysis, "We find these forward projections of the past to be misleading at least as often as they are useful." GLP's recent growth could be misleading.

The decline in key earnings metrics like adjusted EBITDA, net income, and DCF compared to the previous year raises concerns about the company's operational performance and overall profitability quarter to quarter. My belief is that overall earnings have improved and one really good year caused a seeming drop. The possibility of more really good quarters in the future outweighs concerns of poor performance.

The Wholesale segment's product margin decrease due to less favorable market conditions highlights the company's exposure to external factors like market volatility. This points to the importance of assessing the company's risk management strategies. GPL's decisions have been sound and prudent. Investors should also consider the company's ability to adapt and diversify its revenue sources to reduce vulnerability to specific market segments. One long term concern that GLP faces is conversion away from fossil fuel based automotives. With a possible diminishing need to buy gas nationwide, the convenience store fueling facility model could be less profitable in the future.

Future Growth

GLP has been committed to finding more opportunities across the country expanding as an owner operator of convenience and fueling facilities. The company continues to seek deals that will make returns of greater than 15%. This sweet spot is highlighted in its most recent acquisitions.

Recent Acquisitions

• Global Partners acquires Tidewater Convenience to expand footprint in mid-Atlantic region adding 15 stores in VA.

• Global Partners acquires Connecticut's Wheels retail fuel and convenience stores

• In June, the joint venture owned by subsidiaries of Global and Exxon Mobil, completed its acquisition of 64 convenience and fueling facilities

• "Including Gulf, in less than 2 years, GLP will have completed more than $570 million of acquisitions while maintaining the strength and flexibility of our balance sheet. Applying our target mid-teens returns, these deals are transformative for Global, building on our competitive position and driving increased value for unitholders."

• "In the Greater Houston area, which expands our footprint into Texas. We invested approximately $69.5 million in cash for a 49.9% ownership interest in the joint venture and under an operations and maintenance agreement, we operate and manage these locations."

According to management, "The Wheels retail fuel and convenience stores are well-sited to benefit from synergies in our operations and supply network, ultimately contributing to Global's bottom line. Like Global, Consumers Petroleum is a family founded company that grew to include high-value real estate and fuel operations; we are excited to welcome them to our portfolio." said Greg Hanson, CFO. The transaction includes 26 company-operated "Wheels" branded convenience stores in Connecticut, as well as fuel supply agreements with 22 sites in Connecticut and New York."

These previous comments demonstrate how the company seeks to grow its footprint in the future.

Conclusion

Global Partners LP's recent performance and strategic focus present a complex landscape for deep value investors. While the company has experienced lackluster returns over the past decade, the last five years have shown a promising shift, with significant stock growth and increasing distributions. The expansion strategy, backed by expertise in the energy industry, suggests a commitment to value creation. The company's ability to tap into new markets, like the successful acquisitions in Texas, demonstrates an opportunistic approach to growth.

Caution is warranted. The recent past might not be indicative of the future. The potential challenges of replicating exceptional past results in the Wholesale segment might impact future growth. The company's exposure to market conditions, as evidenced by the product margin decrease, underscores the importance of risk management and adaptability.

Despite these concerns, Global Partners LP's positive aspects, such as its competitive advantage, growth strategy, clean fuel initiatives, and strong balance sheet, cannot be overlooked. Over the past five years they have more than doubled revenue and units have provided returns of over 34% annually. Over the last three years units have returned over 75% annually. As energy prices continue to evolve and markets recover from the pandemic, there is potential for higher revenue, increased distributions, and further share price appreciation. The cyclical nature of the energy sector makes it difficult to determine where we are in the current cycle and could impact an investment in GLP.

I consider GLP to be a buy under $35 due to its potential for growth and its optionality to energy prices. For this reason, GLP might make a better speculative purchase in part of a well-diversified portfolio. Income oriented investors wanting more exposure to energy should consider looking closer at GLP. As always, please do your own due diligence on any investment before purchasing and Good Luck investing.

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