Murphy USA third quarter income falls 25%, market is disrupted by second pipeline incident

Murphy USA Inc.’s profits fell nearly 25% in the third quarter as the El Dorado convenience store operator’s margins were cut by higher crude oil prices and disruptions in local fuel markets caused by a pipeline accident in September that disrupted fuel markets across the Southeast U.S.

For the period ended Sept. 30, the gasoline marketer and retailer reported third quarter earnings of $45.5 million, or $1.16 per share, compared to year ago earnings of $60.5 million, or 1.41 cents per share. Total revenues declined 11.2% to $3 billion, compared to nearly $3.38 billion in the same period of 2015. Wall Street analysts had forecasted the former Murphy Oil subsidiary to report third quarter earnings of $1.57 per share on sales of $3.13 billion, according to Thomson Reuters.

“Our business performed well during a challenging third quarter,” said President and CEO Andrew Clyde. “We continue to see record levels of merchandise margins in conjunction with lower store operating expenses, resulting in continued improvement to our fuel breakeven metric. However, atypical seasonal weakness in the fuels business was attributable primarily to a rising crude and wholesale price environment as well as market disruption created by the September Colonial pipeline shutdown, which challenged both volume and margins.”

According to Wells Fargo analyst Bonnie Herzog, the shutdown of the Colonial Pipeline on Sept. 9 that interrupted gas supplies across the Southeast US. will impact the El Dorado convenience store earnings in the range of 5 to 15 cents per share.

Colonial Pipeline is a significant source of transportation fuels supply for the Southeast and East Coast, particularly in the states of Georgia, South Carolina, North Carolina, Virginia, and parts of eastern Tennessee, according to the U.S. Energy Information Administration. Because there are no refineries between Alabama and Pennsylvania that produce substantial quantities of transportation fuels, the U.S. Southeast is supplied primarily by pipeline flows from refineries along the U.S. Gulf Coast and supplemented by marine shipments from the U.S. Gulf Coast and imports.

In a research note on Sept. 20, Herzog cut Murphy USA’s fiscal 2016 estimates by 16 cents to $4.43 per share. Still, the Wall Street analyst remained bullish on the company’s long-term prospects.

“We maintain our Outperform rating as we continue to believe MUSA has a strong long-term outlook, however, given the uncertainty around the Colonial Pipeline, we see a negative risk/reward for the near-term,” said Hezrog.

However, the publicly traded company could face future Wall Street downgrades in the coming week after Colonial suffered another shutdown of two major pipelines on Halloween in Shelby County, Ala., after a track hoe incident caused a pipeline fire that lead to several injuries and one death.

Colonial officials said Wednesday the size of the fire has reduced significantly in the last 24 hours and does not present a hazard to response workers or the public. Colonial Pipeline is a 2.5 million barrel per day (b/d) system of approximately 5,500 miles of pipeline and consistently runs at or near full capacity. Colonial connects 29 refineries and 267 distribution terminals, carrying refined petroleum products such as gasoline, diesel, heating oil, and jet fuel from as far west as Houston, Texas, to as far north as New York Harbor.

“Once the fire is extinguished, excavation work at the incident site will commence and an operational plan will be executed, in consultation with the relevant authorities, to bring Line 1 back into the service in a safe and expeditious manner. Line 2, Colonial’s distillates line, was restarted on Monday evening,” Colonial officials said in a statement.

Clyde did not specifically mention the second Colonial incident, but noted the market disruption and reiterated company’s robust earnings projections.

“Volatility will always play a role in the markets where we operate and will remain impactful to our bottom line results, but the initiatives we have taken to improve our core business against this backdrop of uncertainty help to mitigate short-term earnings variability and ultimately drive superior long-term performance. Strong year-to-date results support our annual guidance and year-on-year EPS growth,” said the Murphy USA chief executive.

During the quarter, nearly 607,000 shares were repurchased for $45 million, bringing the year-to-date total to $212 million of treasury stock acquisitions. At Sept. 30, 2016, the convenience store giant had common shares outstanding of 38,599,541. Cash balances in the third quarter totaled $206.7 million. Long-term debt consisted of approximately $489 million in carrying value of 6% senior notes due in 2023, and $190 million of term debt less $40 million of expected amortization. The company’s asset-based loan facility remains undrawn with a borrowing base of $192.0 million as of October 2016.

Murphy USA opened 21 retail locations in the third quarter, not including three raze and rebuilds, bringing the quarter end store count to 1,364. That total includes 1,134 Murphy USA sites and 230 Murphy Express sites. 28 stores are under construction and 10 stores have opened since in the past month.

Following are other key highlights of Murphy USA’s third quarter results.
Total retail gallons grew 1.2% to 1.09 billion gallons for the network in the third quarter while volumes on an APSM basis declined 3.9% versus prior year quarter and retail fuel margins declined from 18.1 (cents per gallon) cpg to 13.7 cpg.

Product supply and wholesale (PS&W) contribution, including RIN income, was $19.0 million in Q3 2016, adding 1.75 cpg on a retail gallon equivalent basis versus a loss of 0.22 cpg in the 2015 period.

Merchandise contribution dollars grew 10.8% year over year, or 5.2% APSM, to $95.7 million at average unit margins of 16.0%, which is a third consecutive quarterly record.

At the close of business on Wednesday, Murphy USA’s stock (NYSE: MUSA) were up 73 cents at $67.78 as more than 186,000 shares traded hands, well below normal volume. The company’s shares have traded in the range of $51.68 and $80.44 over the past 52 weeks.