Pat McKeough recently replied to a member of his Inner Circle who wants more information on Parkland Fuel Corp. and its plans to increase its dividend. The retailer has also agreed to buy 17 Esso stations and the franchise rights for On the Run convenience stores. But its growth by acquisition has hurt earnings and cash flow, says Pat.
Q: Pat: This month, Parkland Fuel agreed to buy some of Imperial Oil’s remaining Esso stations. Would you share your opinion on Parkland? Thank you.
A: PARKLAND FUEL CORP. (symbol PKI on Toronto; www.parkland.ca) operates gas stations, convenience stores and a fuel-distribution business, mostly in Western Canada and Ontario. It was called Parkland Income Fund before it converted to a dividend-paying corporation on December 31, 2010.
The company owns 312 rural gas stations and convenience stores. Its brands include Fas Gas Plus, Race Trac Gas and Short Stop. Many of Parkland’s stations sell propane in addition to gasoline and diesel fuel.
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Parkland also operates Esso stations in Western Canada and Ontario under a licensing deal with Imperial Oil (symbol IMO on Toronto). In addition, it has an agreement to use the Chevron brand in B.C.
The company continues to sell stations to franchisees. This lets it collect rent and commissions on fuel sales without having to staff and operate the stations.
Parkland also sells fuel directly to businesses and 763 independent gas stations. In 2012, it converted its Bowden oil-storage tanks near Red Deer, Alberta, into a more profitable distribution terminal. The Bowden facility holds 220,000 barrels.
The company continues to expand by acquisition: in January 2014, it entered the U.S. with a $98.1 million cash-and-stock purchase of North Dakota’s SPF Energy. That business supplies fuel to over 200 gas stations in North Dakota, Montana, Minnesota, South Dakota and Wyoming.
In June 2015, Parkland paid $397.6 million in cash and stock for Pioneer Energy, a 50/50 joint venture between Suncor and Pioneer Group that owns 397 gas stations in Ontario and Manitoba.
The company also recently completed its deal to buy 11 Chevron gas stations in B.C. for $18.3 million.
In 2015, Parkland’s revenue fell 16.3%, to $6.3 billion from $7.5 billion in 2014. That’s because lower gasoline prices offset the contribution of its new businesses.
Earnings fell 20.8%, to $39.5 million from $49.9 million. Per-share profits dropped 31.8%, to $0.45 from $0.66, on more shares outstanding. Cash flow per share fell 10.0%, to $1.17 from $1.30. These declines mainly stem from the costs to integrate the Pioneer assets and other acquisitions. The company’s purchases also increased its interest and depreciation expenses.
Parkland’s long-term debt of $441.0 million (as of December 31, 2015) is a moderate 22% of its market cap. It also held cash of $36.7 million, or $0.39 a share.
In March 2016, Parkland agreed to buy 17 Esso stations in Saskatchewan and Manitoba from Imperial Oil. The deal includes the franchise agreements for about 80 On the Run/ Marché Express convenience stores across Canada. Parkland will also acquire the rights to these banners, which it can use to sign up new franchisees.
The company has not yet said how much it will pay, but it expects to complete the purchase by September 30, 2016.
Parkland is also buying Propane Nord-Ouest for $22.5 million. This firm sells propane to mining and industrial clients in northwestern Quebec.
The company currently pays monthly dividends of $0.09 a share, for an annualized yield of 5.3%. In 2015, dividends accounted for 89% of its cash flow.
Starting in April 2016, Parkland will eliminate its Premium Dividend Plan. This program lets shareholders reinvest their payouts in new shares at a 5% discount on the market price, or receive an enhanced dividend equal to 102% of the regular monthly payout. Eliminating this plan will simplify the tax treatment of Parkland’s dividend payments.
The company will still let shareholders reinvest their dividends in new shares under its regular dividend reinvestment plan. It also intends to raise the annual payout by 5% in 2016.
Parkland is in a highly competitive business, and its growth-by-acquisition strategy adds risk. However, it mainly operates in rural areas, where it faces fewer rivals. That gives it somewhat higher profit margins. In addition, a drop in oil prices, as we’ve seen lately, can improve fuel retailers’ profit margins, at least temporarily.
Parkland Fuel is okay to hold, but only for aggressive investors.
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