GLP - Global Partners: The 8.7% Yielding Stock 7.0% Senior Notes Great For Income

2023-06-02 14:41:09 ET

Summary

• Global Partners LP has seen positive growth through acquisitions and sale-leaseback transactions, expanding its portfolio of fueling stations and convenience stores.
• The company has managed to recycle capital, reducing the need for new debt and maintaining a stable balance sheet.
• Both the 8.7% dividend and 7.0% senior notes have adequate earnings coverage, making Global Partners an attractive income investment for those seeking steady cash flow.

Global Partners LP ( GLP ) is a master limited partnership ("MLP") that participated in the oil & refined products storage, transport, and retailing business. It owns oil & refined products transport terminals, as well as runs a portfolio of over 1,700 fueling station & convenience store sites, largely in the North-eastern United States.

Even though gas stations and convenience stores are not the flashiest business to be in (let's face it, they're downright boring), they are businesses that, in Warren Buffett's words, "any idiot could run." Their profits and profit drivers are steady and well-known, so while they are technologically uninteresting businesses, they are stable and reliable sources of cash flow, year in year out. Let's face it, for those of us who don't like volatility in our portfolios, boring is better .

The last time I wrote about Global Partners LP, I talked about several things:

• Global Partners had a debt overhang and goodwill write-down from the dismantling of the oil-by-rail transport business, which collapsed because the price difference between central U.S. oil prices and coastal oil prices collapsed, closing the arbitrage window.
• Global Partners had a habit of using its credit facility to pay for acquisitions, and then turn to the fixed income markets to issue bonds and preferred stock to pay off the credit facility. These acquisitions were mostly regional chains of gas stations & convenience stores.

How is GLP doing now? The stock and dividend payout are both certainly up:

Global Partners is very attractive as an income investment. As the business has consolidated itself after the COVID-19 fiasco and the unwinding of the oil by rail business, it has steadily grown its dividend payout. Except for the one-time dividend at the beginning of 2023, the dividend payout has grown by about 30% since the cut due to the COVID crisis. And the market has rewarded GLP in terms of its share price:

In this article, I seek to try to explain why the positive development has happened, as well as make my recommendation about this stock. Let's start by listing the expansion efforts on the part of GLP.

Growth By Acquisitions & Sale-Leaseback

In the past 3 years since my last article, GLP has continued its strategy of growth by acquisition, acquiring a string of small regional convenience & fuel chains, as well as some oil & oil products transport infrastructure.

Growth Transactions

March 28, 2023 - GLP and ExxonMobil signed an agreement to acquire 64 convenience and fueling sites from the Landmark Group in the Houston area. This is expected to be completed in second quarter 2023.

December 15, 2022 - GLP entered into an equity purchase agreement with Gulf Oil Limited Partnership to acquire all the equity interests of New Haven NewCo, Woodbury NewCo, Portland NewCo, Linden NewCo, and Chelsea NewCo, for $273M in cash . These businesses are in the storage and transport of refined oil products.

September 20, 2022 - GLP acquired all the assets of Tidewater Convenience, which amounts to 14 convenience store sites and 1 fuel site, all in Virginia. The price was $40.3M .

June 28, 2022 - GLP sold its Revere terminal on Boston Harbor for $150M , and leased back key infrastructure.

February 1, 2022 - GLP acquired Miller Oil Co., Inc. in a cash transaction of $60.1M . The acquisition includes 21 company convenience stores, 2 owned or leased fuel sites in Virginia, and 34 fuel supply only sites.

January 25, 2022 - GLP acquired Consumers Petroleum of Connecticut, Inc., in a cash transaction. The acquisition added 26 convenience stores & fuel sites, as well as 22 fuel only sites in Connecticut and New York. This acquisition cost $154.7M .

Recycling Of Capital & Reduced Need For New Debt

An important aspect to note here is the balance between acquisitions and sales: they are more balanced than before, meaning that there has been on the whole somewhat of a recycling of capital from old assets into new, bolstered by sale-leasebacks.

The recycling of capital means that over the last 3 years means that Global Partners has not had to incur substantial amounts of extra debt. This means that it is unlikely to need to make large new issues of brand-new senior notes or preferred stock in order to cover the acquisition costs.

In the abridged balance sheet I present below, the recycling of capital can be seen by the decreased use of credit facilities over the last 3 years.

Balance Sheet Leverage

Global Partners remains a highly leveraged enterprise. Let's compare its balance sheet today with its balance sheet from 3 years ago to see how much has changed.

I have bolded out the intangible assets, so that we can see how much tangible equity exists in the business. Once we subtract out the intangible assets from the Partners' Equity, there is precious little tangible equity left.

This point I want to make here is that the stock price is justified solely by the earnings power of the assets - indeed, if the business were liquidated and everything on the books were sold at its carrying value, there would be nothing left for the common equity holders.

Safety Of Preferred & Common Equity Dividend

Since Global Partners is dependent on real estate, its Net Income does not reflect its distributable cash flow. I would estimate Global Partners' distributable cash flow as Net Income + Depreciation & Amortization.

I will avoid using the Q1 2023 figures to compute the payout ratio because of the unusual dividend. Instead, I will use the Q4 2022 figures instead.

In Q4 2022, it had Net Income of $30,485,000, and Depreciation & Amortization of $26,701,000, for a total estimated distributable cash flow of $57,186,000. It paid out $24,337,000 in dividends, which means a payout ratio of 42.6% . Hence, this dividend appears to be very well covered.

Safety Of Senior Notes

Global Partners has $400M of 7.00% senior notes due 2027, as well as $350M of 6.875% senior notes due 2029.

I will use the EBITDA coverage test to assess the safety of the senior notes. Since I could not find EBITDA reported anywhere, I will have to estimate it myself.

The interest coverage ratio would be $78,147,000 / $22,068,000 = 3.54 .

This appears to me to be on the somewhat lower end of what is a safe coverage, but I would consider it adequately covered nonetheless.

Pricing Of The Common Equity & Senior Notes

Given that the common shares have no tangible equity backing them up, their 8.7% yield is roughly fair, as compared with the 6.875-7.00% yield on the senior notes, implying a 1.8-2.0% equity risk premium as compared to the bond. This feels about right to me, given that management likes to increase the payout on the common shares gradually.

At this pricing, there is little difference between the senior notes and common shares in terms of risk-adjusted returns, so which one an investor should buy depends on their risk appetite. Investors who do not want the opportunity for capital appreciation should buy the senior notes, while those who do want the extra risk can buy the shares. Both the dividend and the senior notes have adequate earnings covering them.

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