2023-05-11 07:46:16 ET
Summary
- CrossAmerica Partners LP posted a stellar rebound in its financial performance in 2022 versus 2021 levels, and put up decent results in the first quarter of 2023.
- The company's minimal liquidity levels, modest access to liquidity via its senior secured revolving credit facility, and large net debt load are why I'm sitting on the sidelines for now.
- In 2020, CrossAmerica Partners got rid of its incentive distribution rights, a big win for common unitholders.
CrossAmerica Partners LP ( CAPL ) is a motor fuel distribution company based in the US with sizable domestic wholesale and retail distribution businesses. The limited partnership also runs convenience stores in the US under brands such as Joe’s Kwik Marts and Uni-Mart, which generally include a gas station run by one of its partners. Additionally, CrossAmerica Partners generates revenues by leasing or sub-leasing out real estate. The vast majority of its motor fuel sales (92% in 2022 ) are represented by branded motor fuel volumes. Units of CAPL yield a hefty ~10.8% as of this writing, though its weak balance sheet is a major concern that has me sitting on the sidelines for now.
The limited partnership’s general partner is owned by Topper Group which also owned a 38.5% equity stake in CrossAmerica Partners as of February 23, 2023, and Joseph Topper Jr. is the chairman of the limited partnership. CrossAmerica Partners has two main business operating segments including ‘Wholesale’, which is represented by its wholesale motor fuel distribution operations, and ‘Retail’, which is represented by its retail motor fuel distribution operations (specifically volumes sold at company operated and commissions sites) and its convenience store operations (merchandise sales).
First Quarter Update
CrossAmerica Partners’ motor fuel distribution business reported a decent performance in the first quarter of 2023. On the wholesale front, the company distributed 201.9 million gallons of motor fuel last quarter which was down 1% year-over-year however, its average gross margin improved by 5% to reach $0.083 per gallon. Improvements in the profitability of its wholesale fuel distribution business more than offset the modest decline in volumes as this segment’s gross profit rose to $31 million in the first quarter of 2023, up 3% year-over-year.
Pivoting to CrossAmerica Partners’ retail motor fuel distribution operations, the firm distributed 119.1 million gallons last quarter, up 3% year-over-year. On a same-store basis, CrossAmerica Partners reported 2% year-over-year growth in distributed motor fuel volumes at its retail segment last quarter. This operation's margins held steady last quarter as it posted a gross profit of $0.318 per gallon before taking credit card fees and commissions into account (down an insignificant amount on a year-over-year basis). CrossAmerica Partners reported that its retail segment motor fuel distribution business saw its gross profit grow by 2% year-over-year to hit $27 million in the first quarter of 2023.
The company’s same-store merchandise sales, excluding cigarettes, were up 10% year-over-year and its merchandise gross margin rose by ~100 basis points to reach 27.8% last quarter. Its gross profit at its merchandise segment rose by 8% year-over-year last quarter to reach $18 million.
Please note that CrossAmerica Partners does have some exposure to commodity prices, particularly crude oil prices, that the firm highlighted in its 2022 Annual Report:
Regarding our supplier relationships, a material amount of our total gallons of motor fuel purchased are subject to Terms Discounts for prompt payment and other rebates and incentives, which are recorded within cost of sales. Prompt payment discounts are based on a percentage of the purchase price of motor fuel. As such, the dollar value of these discounts increases and decreases corresponding with motor fuel prices. Therefore, in periods of lower wholesale motor fuel prices, our gross profit is negatively affected, and, in periods of higher wholesale motor fuel prices, our gross profit is positively affected (as it relates to these discounts). Based on our current volumes, we estimate a $10 per barrel change in the price of crude oil would impact our overall annual wholesale motor fuel gross profit by approximately $2.8 million related to these payment discounts.
Crude oil prices are volatile, though it appears that WTI (the premier US oil pricing benchmark) is well-supported around the $70 per barrel level. In 2022, CrossAmerica Partners generated just under $5.0 billion in GAAP revenue (up 39% year-over-year), $376 million in GAAP gross profits (up 36% year-over-year), $96 million in GAAP operating income (almost up three-fold year-over-year), $62 million in GAAP net income available to limited partners (almost up three-fold year-over-year), and $1.63 per diluted unit in GAAP earnings (almost up three-fold year-over-year). The company’s financial performance in 2022 was significantly stronger than its performance the prior year when its operations faced major hurdles due to the COVID-19 pandemic.
Pivoting back to CrossAmerica Partners' performance during the first quarter of this year, its GAAP revenues dropped by 7% year-over-year, hitting $1.0 billion, keeping in mind its revenues are heavily influenced by changes in motor fuel prices (which is why its gross margin performance is a major focus). The firm's GAAP gross margin rose by over 85 basis points year-over-year to reach 8.1% last quarter as its GAAP gross profit climbed higher by 4% to reach $82 million. Its GAAP operating income declined by 6% year-over-year last quarter, coming in at $9 million, largely due to rising operating expenses. CrossAmerica Partners saw its net interest expenses grow by 80% year-over-year last quarter (largely due to rising interest rates and the company’s large net debt load), hitting $12 million, which along with other factors saw the company report a GAAP net loss of $2 million (negative $2 million in earnings). Its GAAP diluted earnings per unit came in at -$0.04 (negative $0.04) last quarter versus a profit in the same period in 2022.
Financial Overview
Distribution payments can be organically funded by free cash flows, defined as net operating cash flow less capital expenditures, and by net cash positions. At the end of March 2023, CrossAmerica Partners had $16 million in cash and cash equivalents on hand versus $11 million in short-term debt (this figure includes finance lease obligations) and $762 million in long-term debt (this figure includes finance lease obligations). Here I will caution that CrossAmerica Partners has a large net debt load and limited cash on hand, which represents major downside risks for the firm.
The company has a senior secured revolving credit line with $925 million in borrowing capacity that matures in March 2028 after getting extended and upsized in March 2023. Please note that this facility is secured by virtually all of CrossAmerica Partners’ assets. Should its creditors agree and if certain conditions are met, there is room to expand the borrowing capacity of this revolving credit line by up to an additional $350 million. At the end of March 2023, there was just under $143 million in remaining borrowing capacity on that revolving credit line after taking debt covenant restrictions into account.
In CrossAmerica Partners’ first quarter of 2023 earnings press release, the firm noted that it had $154 million in remaining borrowing capacity under this facility as of May 4, highlighting the firm's efforts to slowly improve its financial strength. From the end of March 2022 to the end of March 2023, the company’s leverage ratio as defined by its senior secured revolving credit facility fell from 4.6x to 4.05x. Part of CrossAmerica Partners’ strategy involves managing its interest rate risk via swaps. The firm entered into various interest rate swaps in April 2023 and management noted during the company’s latest earnings call that this would help provide some level of certainty as it concerns CrossAmerica Partners’ interest expenses over the coming quarters.
Pivoting to CrossAmerica Partners’ cash flow position, from 2020-2022 it generated ~$84 million in annual free cash flow on average. This highlights its ability to generate free cash flow in almost any operating environment given the difficulties the COVID-19 pandemic created for its business in recent years (especially in 2020 and 2021). CrossAmerica Partners generated $131 million in free cash flow in 2022 and spent $79 million covering its total payout obligations (distributions paid on common units and distributions paid on distribution equivalent rights). Back in 2020 , the company got rid of its incentive distribution rights [‘IDRs’] and the related distributions, which represented a big win for common unitholders as IDRs are very favorable for general partners to the determent of common unitholders.
CrossAmerica Partners provides investors with a distributable cash flow figure, though that is not a good measure of its free cash flow generating abilities and that metric does not properly highlight its ability to make good on its distribution payouts (in short, this financial metric includes too many adjustments and excludes important items). The biggest risk to CrossAmerica Partners’ distribution is its large net debt load, minimal liquidity levels, and modest access to liquidity via the remaining borrowing capacity on its senior secured revolving credit line.
Concluding Thoughts
Rising interest rates has placed quite a burden on companies that grew accustomed to relatively low interest rates during the 2010s decade, and CrossAmerica Partners is no exception. The firm’s GAAP operating income was completely consumed, and then some, by its net interest expenses during the first quarter of this year and its large net debt load will continue to place an enormous burden on the limited partnership’s financials going forward. However, the company has historically been a solid free cash flow generator and CrossAmerica Partners put up strong numbers in 2022 as its business rebounded from the various headwinds created by the COVID-19 pandemic.
Management needs to focus on reducing CrossAmerica Partners’ leverage ratio while bolstering the firm’s liquidity levels. CrossAmerica Partners generates sizable normalized free cash flows and earnings throughout the economic cycle, though I’m sitting on the sidelines for now as a lot of work needs to be done to improve the firm’s balance sheet. Given its strong cash flow profile, CrossAmerica Partners is not in dire straits by any means, but its minimal liquidity levels are a major concern.
For further details see:
CrossAmerica Partners: Juicy Yield Faces Hurdles From Weak Balance Sheet