3, 2, 1 ... Spinoff!
As more downstream MLPs launch, their retail counterparts chart growth courses.
There’s a funny thing about master limited partnerships (MLP), the tax-friendly structure being embraced by energy players up and down the production stream, and popular with investors for their high yield: They have a way of super-charging growth.
“We’ve probably got eight or 10 real acquisitions that we’re looking at and trying to prioritize,” said Joe Topper, CEO of Lehigh Gas Partners LP, an Allentown, Pa.-based distributor with 800 sites in nine states, in a recent earnings call. Lehigh launched its MLP—LGP—in October 2012, based on its wholesale and retail business. Granted, Lehigh was on an acquisitions rampage before the IPO, closing on 70 sites in 2012 alone. “Quite honestly, it’s been accelerating,” Topper continued. “It’s either spring or there’s a certain optimism to the economy, but within the last week we’ve had three new opportunities that have come to us. And I think being the leader in the marketplace with the MLP has opened up a lot more doors to us in the sweet spot that we are, in the $20 million to $70 million [range] of acquisitions.”
For Susser Holdings Corp., Corpus Christi, Texas, which owns the 560-store Stripes chain, its new Susser Petroleum Partners (SUSP) MLP provides a fast—and less capital-intensive—track for growth.
“Part of why we executed the MLP IPO was we thought we would end up with a long-term lower cost of capital that we would be able to employ into a growing market,” president and CEO Sam Susser said in a recent earnings call. “And we do expect to use that capital to be more aggressive … organically as we build new stores, both at Stripes and [adding] to our very valuable dealer network.”
Lehigh and Susser are MLP outliers, even for the downstream, where most of these publicly traded limited partnerships are based on refinery assets. Refiners with exposure to crude differentials have mainly pursued the structure, says Sam Margolin, an analyst with Cowen Securities LLC, New York, who follows refiner-marketers Alon USA Energy, Western Refining, Marathon Petroleum Corp. and Northern Tier, all of whom have MLPs or are in the process of setting one up [CSP—Nov. ’12, p. 64].
This MLP stampede, he explains, is a function of three factors: No. 1, the refining environment allows these operators to produce free cash flow at the refinery level. No. 2, a lot of capital is moving into the MLP space, which offers a lower-risk, highly accretive investment.
“And three, it’s the valuation uplift they get,” Margolin continues. “Refiners are typically an undervalued sector, so any opportunity they have to re-rate the valuation of the asset is something all of these companies would look at pretty readily.”
Indeed, whether a refiner or fuel distributor, that potentially higher valuation is the trigger for these downstream entities. It should be noted that while MLPs can own c-store real estate and collect rent, as is the case with Lehigh and Susser, they cannot qualify c-store income, whether from inside the store or at the pump, for the favorable MLP tax treatment. Of course, there are ways around this technicality, based on how the MLP is set up—more on that later—and retail can also see side benefits from an MLP’s growth.
And for now, the convenience and retail petroleum sector is seeing a rush of prominent players entering or pursuing MLP status, presenting perhaps the most significant change in the landscape since Big Oil began shedding its retail assets.
When considering companies such as Energy Transfer Partners’ Sunoco, Valero, Susser, Alon, potentially Hess and more, the industry is seeing upwards of 15,000 sites, along with refineries, terminals and pipelines, changing hands or at least undergoing a radically new business model.
Take, for example, Alon USA Partners LP (ALDW), an MLP established in September 2012, based on one of its five refineries and its wholesale fuel distribution arm. While Kyle McKeen, president and CEO of Alon USA’s retail arm, Alon Brands, is quick to say his sites are not contained within or directly affected by ALDW, they should indirectly benefit from the MLP’s growth.
“Our retail assets were not included in the MLP, by design, but of course anything that benefits our wholesale business will ultimately benefit our retail business,” says McKeen. “We’ve brought a lot of capital into the company, and an amount of that capital will be used in our wholesale business. What we’ve proven is by bringing the wholesale and retail businesses together … that we’ve been on a record trajectory for both of those businesses in the last four years.”
What follows are three slices of the downstream MLP story. While there are a few similarities between these operators—all happen to be based in Texas, have viable c-store brands and launched an MLP in the past year—there are just as many differences in how they will benefit from this business structure and their paths to greater growth.
Ben Brownlow, an analyst for Raymond James, St. Petersburg, Fla., who follows Lehigh and Susser, points out that while “nontraditional” downstream MLPs have a higher risk profile than a traditional midstream MLP, their growth profile can also be tripled. “Because there are multiple growth avenues for these companies—acquisitions, drop-downs from the associated parent company, from new store builds—there is just any number of growth and organic acquisitions they can take,” he says.
For What It’s Worth
Susser Holdings was already strong, backed by Wellspring Capital Management, a leading mid-market private equity firm based in New York that owned about one-third of the company. It had created a burgeoning dual strategy anchored in wholesale fuel distribution and a rapidly expanding c-store strategy underscored by a new banner, Stripes.
But Susser’s stock performance? Solid, yet not enough to deliver the high yield Wellspring Capital expected as an investor since 2005.
“One of the things we were frustrated by was our holding company wasn’t getting reasonable valuations for our wholesale business,” says Rocky Dewbre, president of Susser Petroleum Partners, the wholesale subsidiary that last year distributed 1.4 billion gallons of motor fuel to a network of more than 1,100 sites, including 560 Stripes locations and more than 500 dealer outlets.
“The analyst and financial community valued our wholesale piece the same as or lower than our retail segment,” he continues. “We felt it warranted a higher valuation and the question was, ‘What could we do about that?’ ”
Dewbre, an executive in the Susser business for more than 20 years, shared exclusively with CSP the behind-thescenes details of its MLP journey, which made it a pioneer in the c-store/retail marketing sectors. “We saw how many midstream players had utilized the master limited partnerships and the tax advantages it offered,” he says.
Susser, a single entity with two true businesses, wondered whether a retailermarketer could tap this tax-friendly structure that rewarded stability and growth—components captured in the highly predictable midstream world of pipelines and terminals.This would mean splitting Susser’s wholesale and retail businesses into separate entities that instead of operating as one would relate more as siblings.
In December 2011, with guidance from its board of directors, bankers, attorneys and others, the company raised approximately $77 million in common equity as Susser Holdings (SUSS). In June 2012, the company filed the prospectus for the Susser Petroleum (SUSP) IPO. In the ensuing months, Wellspring would sell off the bulk of its shares and, in September, Susser Petroleum completed the IPO for its MLP, raising approximately $206 million after expenses.
The result was two symbiotic companies: Susser Holdings Corp., which drives retail growth; and Susser Petroleum Partners, which directs the wholesale fuels line.
Brownlow of Raymond James highlights two of the appeals of an MLP: “It’s a different avenue to raise capital, but there is also just the arbitrage opportunity between where these retailers were trading.
“For example, Susser, which was given a mid-single-digit EBITDA multiple,” he says. “When they looked at being able to form this as an MLP, relative multiples were in high single-, low double-digit multiples. It was immediately accretive, and very attractive to just an arbitrage opportunity.”
How big a windfall did Susser Holdings and its MLP-run Susser Petroleum reap from the special IPO? Philip Trinder, president of MLP Protocol, a Houston-based independent MLP analysis and investment firm, last fall told CSP that assets/cash flow that moved from Susser Holdings into Susser Petroleum went from being worth roughly $245 million to more than $500 million overnight because of the tax incentives. Put simply, the MLP let the Susser family of businesses keep more of its money and pay far less in taxes.
The move set the stage for Susser Holding’s big announcement in April: The company was closing on a new $500-million revolving debt facility. This means Susser could retire all previous debt, including redeeming several years in advance the interest-heavy senior notes due in 2016 and thus saving more than $30 million a year in interest alone.
The company then announced it was entering the Waco, Texas, market and increasing an aggressive ground-up retail strategy to further saturate its core markets in Texas while exploring new markets in its three-state core of Texas, Oklahoma and New Mexico.
But what makes this particular story so illuminating is that it underscores how this financial tool is being used in multiple ways. In other words, no MLP is identical.
Take Lehigh Gas Partners. For its MLP to grow, the company must acquire retail assets to broaden its fuel throughput. And for Lehigh to acquire retailers, it must raise fresh capital via the investment community. Based on Topper’s comments in Lehigh’s most recent earnings call, that is precisely what the company is doing.
Then there are traditional c-store chains that are publicly traded, such as The Pantry, Alimentation Couche-Tard and Casey’s General Stores. All of them feature significant retail assets but do not play in the fuel-distribution arena. Their income is built almost exclusively through merchandising and fuel sales.
Susser is neither Lehigh nor like its publicly traded c-store brethren. It possesses the large retail brand Stripes, backed by its proprietary foodservice, Laredo Taco Company. It distributes fuel to a large dealer network. The MLP allows Susser to optimize this dual tack.
Consider: Susser Holdings can acquire a retail network, thereby scooping up the dirt, which provides fresh capital and long-term equity. It then executes a sale-leaseback of the properties to Susser Petroleum, whose majority owner is Susser Holdings. This is a twofold win: It gives Susser Petroleum rental income, the full benefits of land ownership and a larger network, while furnishing Susser Holdings with a quarterly partnership distribution without the need to raise capital to develop those assets.
“When you take advantage of the arbitrage opportunity between the valuation levels of retailers and MLPs, you’re getting an infusion of capital,” Brownlow explains.
“Susser was funding a chunk of growth through sale-leaseback financing,” he says of the company’s previous model. “This [new approach] is a way for them to finance growth through raising capital with a spinoff of an MLP, but still maintaining control through the MLP of those underlying assets.”
“It allows us to grow through both our fuel and real estate,” says Dewbre. “And in the Texas market, where the population is expected to double over the next 30 to 40 years, this potentially is very lucrative. I’m not sure how many other states can say that about the demographic trends.”
With 10% growth in 2012 and a stronger balance sheet, Susser Holdings is now more independent and possesses more ways to make money.
“Not only are they able to look more aggressively at third-party acquisitions outside of intercompany retail acquisitions, but I think they can look more aggressively at acquiring other wholesalers,” says Brownlow. “They can look at retail acquisitions from the parent level or they can acquire a retailer; the MLP can take part in that acquisition and acquire fuel contracts from parent company Susser Holdings. There are a number of different ways they can do it.”
So Susser today is more nimble, better capitalized to leverage growth and strategically positioned to bolster both sides of its empire. “There’s a lot of synergy between our wholesale and retail businesses. That’s one of the special things about our company,” Dewbre says. “I do believe this is a case where one and one equals three. Getting the MLP executed has already proven that.”