You know what’s the secret to finding big profits from energy stocks over the next few months? Hot dogs, chewing gum and sodas.
I’m being dead serious.
As oil has continued its spiral downwards, so has gasoline. Prices for gasoline have actually dropped daily for the last three months and that’s dwindled the cost of our morning commutes for average American by an average of $550 a year.
Our wallets are getting fatter from not spending it at the pump. And you know what energy stocks benefit immensely from lower gasoline prices and more discretionary spending?
Those downstream energy stocks that own/operate convenience stores and service plazas.
For investors, the purveyors of roadside food and gasoline could be entering their heyday and are worthy of your portfolio’s attention.
Lower Gas Prices = Profits For These Energy Stocks
While it may sound counterintuitive, higher prices for gasoline actually hurts the operators of service stations. That’s because margins per gallon are very very thin — sometimes as low as 3 cents per gallon. And as the cost of buying that fuel from refiners goes up, service station operators actually make less money per gallon.
When you add in the high cost of credit card processing fees, that profit margin actually becomes a loss for many gas station operators.
Credit card fees have historically been the No. 1 cause of many convenience store closures owned by “mom & pops” over the last few years.
However, lower priced oil, an abundance of refined gasoline and overall higher fuel efficiency standards on automobiles have caused prices for the transportation fuel to plunge. Average prices across the country have dropped and according to AAA, now sit at an average $2.28 per gallon. In many parts of the country, that number has crossed the $2 mark.
That’s awesome news for the energy stocks in the downstream retail sector. Essentially, they are going to be able to buy more gasoline at cheaper prices and maximize their very thin profit margins.
But the gas station owners benefit another way — the extra cash in consumers’ pockets. Many service stations look for food, soda and cigarette products in order to boost profits and stay afloat. By spending less on a tank of gas, consumers now have a few more dollars to go buy a cup of coffee or candy bar from inside the shop. That’ll boost profits even further.
For example, mega-energy stock Royal Dutch Shell (RDS.A, RDS.B) sold more than 100 million cups of coffee last year from its 45,000 gas stations across the world. Those cups of joe, hot dogs and other snacks helped Shell generate more than $6 billion in non-fuel revenue last year.
With prices for gasoline dropping, analysts expect that number to grow substantially this year. For energy stocks that offer pure convenience store exposure, the effect is even greater.
As if lower feedstock costs and higher customer spending wasn’t enough to get convenience store energy stocks humming, growth in the sector is coming from other avenues as well. First, many are taking the master limited partnership (MLP) plunge and are using the tax-structure to shelter assets and reap huge dividends. That’s big for the profit margin front.
Secondly, rising M&A activity is helping drive up valuations. This is game of scale, as cost savings are key to realize higher margins and profits. Canadian-based Alimentation Couche-Tard Inc’s recent $1.7 billion buyout of 1,500-store The Pantry, Inc. (PTRY) is just the latest example of the merger frenzy.
SUN and CASY: Two Convenience Store Energy Stocks To Buy
Energy Transfer Partners LP (ETP) is one of the largest midstream and logistics energy stocks in North America. It became a pretty big downstream firm as well when it purchased iconic Sunoco, Inc. and its assets a few years ago.
The thing for ETP was that it was really interested in the firm’s pipeline businesses, Sunoco Logistics Partners L.P. (SXL), and not so much its service stations. After a few years, ETP decided that convenience store assets were worth something — if only they were bigger.
After buying out operator Susser Holdings Petroleum, ETP rechristened the operation as Sunoco LP (SUN) and added more than 630 service stations to its umbrella as well as distributing fuel to more than 5,000 branded/franchised Sunoco stations. Not willing to rest, SUN recently purchased two smaller independent operators that added an additional 300 stores across the continental U.S. and Hawaii.
All in all, SUN’s continued growth and massive cost of scale synergies — due to being part of ETP — have helped it see a 30.1% increase in profits. That should continue as gasoline prices dwindle and consumers open up their wallets at its stores. SUN’s dividend should rise as well. Already, Sunoco increased its payout by 5% on the back of this good news.
The path to greatness for Casey’s General Stores Inc (CASY) is two-fold. Like PTRY, CASY is small enough to be swallowed by a larger firm. At only 1,800 stores and a market cap of $3.45 billion, CASY is certainly in the “possible-next-to-be-bought-out” camp as larger firms continue to work on scale.
However, CASY is good enough to stand on its own for investors.
According to the firm’s latest earnings report, lower gasoline prices helped CASY sell more gasoline and snacks for its fiscal second quarter. Revenues rose and more importantly, profits at the downstream energy stock jumped 26%. Both numbers beat analyst’s expectations by a wide margin.
With gasoline continuing to plunge, CASY should be able to keep on seeing higher profits. Investors will continue to see higher gains — in both capital appreciation and dividends. CASY stock as already risen 18% this year and the firm yields a growing 1%.
The Bottom Line
Hot dogs are great for energy stocks in the retail segment of the market. As gasoline prices continue to fall, firms like SUN and CASY will continue to see higher profits.
As of this writing, Aaron Levitt does not hold a position in any of the aforementioned securities.
