sign in sign up
<<
Home , Exxon, Mobil

battle

Are major oil sell-offs ‘last stand’ for jobbers, retailers?

By Angel Abcede and Bill Donahue [email protected] and [email protected]

hink Waterloo or Gettysburg or the says Tom Kelso, a managing partner Tet Offensive. Battles that decided with Baltimore-based Matrix Capital the destiny of nations sometimes Group.“If you marketed in and many locations in a market. What hap- define themselves in real time; oth- BP sells in Ohio, you needed to com- pens is the jobber doesn’t grow nearly Ters display monumental signifi- pete aggressively. Because once they’ve as fast [as the competition]. Pretty soon, cance months or even years later. announced the sale and have [those where [the jobber] was once a buyer, he For everyone from the big roll-up properties] sold, the opportunity is gone is now becoming a seller.” companies to jobbers and mid-sized and gone forever.” convenience-store chains, the release of What does “forever” mean? Francis Letting Go thousands of major-oil retail proper- Bologna, an industry consultant and The phenomenon of major oil compa- ties over a mere two to three years—“a head of F. Bologna and Associates, New nies relinquishing control of corporate- withdrawal of a magnitude we have Orleans, gives an example of a jobber run stores stretches across the mainland, never seen,”says one industry vet- who has 25 to 30 stores. from one coast to the other. Consider: eran—may prove pivotal, deciding “Let’s say he’s looking to buy eight to Last year ExxonMobil converted whether a chain moves to greater vital- 10 stores adjacent to him,”Bologna says. upstate New York, following other mar- ity or dies on the vine. “If they’re really nice stores, maybe kets, from a direct-served market to a “We’re seeing one-time opportuni- someone with stronger financing may variety of distributors. Sources say ties for someone to grow their business,” beat him out of the deal. There’s only so ExxonMobil may be considering trans-

36 CSP M arc h 2007 ferring control in additional markets. In December 2006, ConocoPhillips Wisconsin, and the Dakotas. Shell has moved many locations announced intentions to divest all of BP continues to move corporate run by MSOs, or multisite operators, its 830 direct-owned gas stations as part locations in key markets “east and west in key markets such as Indianapolis of an “asset rationalization program.” of the Rockies” to individual entrepre- and Denver to consolidators or other As CSP went to press, the company neurs. The company has also announced large operators. Recently, the company divulged additional details, saying it it would discontinue growing the BP sold more than 250 West Coast stores would shave 8.5% of its total branded Connect and instead pursue a to refiner-marketer Tesoro Corp.; the network by pulling out of Minnesota, nationwide program with its stores will retain the Shell brand for North Carolina, South Carolina and store. The growth, BP officials say, will the long term. certain portions of , Nevada, largely come through franchisees, not direct operations. These are the elephants’ graveyard, and nobody wants to Chevron appears to be a hold- out, apparently committed to its cur- “operate there. … Now you can put a big circle around Ohio rent infrastructure. and Indiana and maybe some corners of western . The situation is clear: In some mar- kets, the battle is over. In others, it’s a They’re just too ugly—they’re marketsnon grata . frenzy of closed-door meetings, mul- TOM” KLOZA OPIS tiple calculations and cell-phone alerts.

M arc h 2007 CSP 37 And yet in other markets, key players “The trend [of oil companies sell- buzz of late. Many of its best, company- are gearing up to fight. ing company-owned stores] will con- operated properties are in Denver, with A casual count of reported sell-offs tinue,”says Bill Trefethen, managing what one retailer estimates to be 60 to in the past year or so shows that 1,178 director of Trefethen & Co. LLC, Scotts- 70 of the chain’s prime sites. stores have shifted from the hands of dale, Ariz.“But as for where and when, Add to that the most recent acqui- majors to other parties—jobbers, who knows? It’s like saying it’s going to sitions by San Antonio-based Tesoro, c-store chains or small, independent snow in because you know it’s which purchased 250 Shell properties business owners. Counting the pend- going to happen, but you just don’t in and an additional 145 ing sale of ConocoPhillips’ company- know when and where.” stores on the West Coast from Thou- operated assets, the number will shoot Though growth-minded jobbers sand Oaks, Calif.-based USA Petro- to well above the 2,000-store mark. and local retail chains are poised to win leum, and the result is a lot of attention in many of these smaller, regional mar- shifting to that half of the country. kets, the big consolidators can roll “It’s definitely a mixed bag in that Market Indicators through like acquisition tanks, using there’s a lot of action,”says Evan Glad- A number of factors will determine Wall Street valuations to sweeten pots stone, executive managing director of where oil companies will divest and how and stymie the locals. But don’t dis- NRC Realty Advisors, Chicago.“But it’s appealing those properties will be to count the dealers. Lenders can create a all over the place.” would-be buyers: “band of brothers” amid the fractional If one were to cast a sell-off divin- masses, pulling together irresistible MARGINS “even the dogs” packages to dangle Margin changes for the first six months of before sophisticated, holistic-minded 2006 vs. 2005: majors [CSP—May ’06, p. 26]. Midwest: –1.6% Why are the majors selling? It’s a Northeast: 12.9% South Central: 20.5% matter of simple arithmetic, say many Southeast: 4.5% industry observers. WEST “A big part of this is responsible West: –0.5% Portland, Ore. National: 3.5% accounting on the majors’ part,”says Sacramento, Calif. one consultant who spoke on condi- POPULATION San Francisco tion of anonymity because of his close West: Expected to grow at twice the national rate, with California playing a ties to .“Stock analysts look at standout role. them sitting on tens of billions in real Midwest, Northeast: Expected to grow at estate and getting a poor return. Other half the national rate. people do a better job of running South: Will continue to have the highest stores. Why not just sell them the prod- population numbers. uct and let them take the risk with the Southeast: Florida set to outpace New York in terms of population. environmental and the people? In the meantime, you free up capital.” WEATHER Severe: Midwest, Northeast. Hot Markets Mild: West Coast, South, Southeast. So which markets are the hottest? Hous- Seasonal Concerns: Hurricanes and ton-based ConocoPhillips’ announce- tropical storms put a question mark on Florida and Gulf states. ment of its asset sale—836 stores, with about 500 dealer-operated and the rest Sources: CSX LLC, fall 2006; U.S. Census Bureau; CSP company ops mainly in the Rockies and Sources: BP/ConocoPhillips/ the West Coast—has created much CSP Information Group/ExxonMobil/Shell

38 CSP M arc h 2007 ing rod over a map of the , tance between cities and towns.“A com- what’s stone cold. Put another way, the Bologna would guess areas of moder- pany has to think,‘What’s it going to lack of luster and profit may be driving ate climate would be the favorite.“Any take to supply these stores, and do I Big Oil to divest in certain markets. area that is not seasonally challenged is want to build a network in a 500-mile “There are always markets you cir- preferable,”he says.“People have to get radius that’s full of hills?’” Bologna says. cle and say, ‘These are the elephants’ in and out of their cars [at sta- Population centers would be yet another graveyard,’and nobody wants to oper- tions] and they’re a lot more comfort- predictor of a hot market, he says. ate there,”says Tom Kloza, chief oil able when it’s not blistering cold.” In forecasting prime markets, analyst for Oil Price Information Ser- Then there’s topography and the dis- another strategy may be eliminating vice, Wall, N.J. “It used to be the

Hot Markets Across the United States, major oil companies are remaking the competitive landscape by selling off company-operated, franchised and dealer locations to players who design the most appealing packages. Laval, Quebec-based Alimentation Couche-Tard has been a big winner, but others have been participating—and winning. Here’s a map of markets that have come into play in the past year.

WESTERN CENTRAL MIDWEST Chicago: Couche-Tard picks Denver: Couche-Tard takes 71 from up 31 leases from Shell Shell; 60–70 ConocoPhillips Columbus, Ohio: True North buys company ops go on the block EAST 29 sites from Shell Albany, N.Y. Hammond, Ind. Atlanta Indianapolis, Ind.: Couche-Tard buys 40 Shell sites; BP puts up 29 sites Baltimore/Washington, D.C.: BP sells 70 sites to various Kansas City parties Twin Cities, Minn. Buffalo, N.Y. SOUTH EASTERN CENTRAL Orlando, Fla.: Couche-Tard Baton Rouge, La.: Couche-Tard picks up picks up 28 sites from Shell Memphis, Tenn. 22 sites from Shell Rochester, N.Y. Nashville, Tenn.: Delek buys 25 Dallas: Shell plans sell-off in 2007 sites from BP in late 2005 Houston: Shell plans sell-off in 2007 Syracuse, N.Y. : Shell plans sell-off in 2007

M arc h 2007 CSP 39 Front Line Reports

SACRAMENTO/ SAN DIEGO

STATUS: Mainly dealer units for Phoenix market and Southern Califor- at the moment. sale; Tesoro’s big buy nia. … Now you can put a big circle “We can’t predict what’s going to around Ohio and Indiana and maybe happen in the future,”says Valerie Corr, Chris Moore is concerned about Tesoro’s some corners of western Pennsylvania. spokeswoman for BP Products North purchase of almost 400 stores in two separate deals with Shell and USA They’re just too ugly—they’re markets America.“We continually review the Petroleum. That’s because, in his view, non grata. If you look at Indiana and network of branded sites, and that’s the the San Antonio-based refiner-marketer Ohio, people are not clamoring to most accurate way to put it. As you knows less about selling in-store retire there.” know, things change, so it’s hard to say merchandise and more about bringing In addition, other “ugly” pockets next year what things will look like.” cheap gasoline to the street. exist in parts of Georgia, and Corporate locations in Pittsburgh, “I’m worried that they’ll be like Virginia, where product is abundant South Florida and Atlanta, as well as ARCO,” he says, referring to how that and “ultracompetitive marketers” such throughout Arizona, California, Illinois West Coast chain made its name by discounting its gasoline. as QuikTrip and RaceTrac have driven and Indiana, have shifted to individual Moore, vice president of retail for their tent stakes firmly into the ground. entrepreneurs through sealed-bid sales New West Petroleum, Sacramento, In such areas, many oil companies pre- in the past two years; in that time, NRC Calif., says the West Coast presents an fer to shift the physical operations to has helped BP transition more than 130 interesting dilemma for distributorships someone else while maintaining—if not stores into the hands of new owners. A such as his. While the opportunities to building—volume. review of current sales on the NRC take on major-oil sell-offs exist, not all “There’s no disputing that, with the Web site showed a breadth of available properties are desirable. “For us, it’s not about the size [of our exception of [], Amerada Hess BP- and ARCO-branded sites from chain],” says Moore, whose company and maybe a few others, the traditional Washington and Oregon to New Jer- operates stores in Sacramento and San oil companies are probably not going sey and Pennsylvania. Diego. “We’re looking to grow with to want to own any dirt,” Kloza says. Paula P. Chen, U.S. field public bigger lots and bigger stations.” “They’ll just sell it through superjob- affairs adviser for Corp., bers or jobbers that are large enough Fairfax, Va., says ExxonMobil will con- to operate without a huge credit risk.” tinue to grow through three key DENVER classes of trade—company-operated STATUS: Shell divested; The Forecast stores, direct-served dealers and ConocoPhillips on the block Where will the next markets open up? branded distributors—though she Denver may prove a hot market, with as Some say that crystal ball is too cloudy couldn’t disclose the company’s plans many as 60 to 70 of ConocoPhillips’ direct ops in the area. The market also has seen Shell’s MSO (multisite operator) There are smaller markets or [places locations join the Couche-Tard family. where] the big boys have not come Brian Haldorson, president of A-B “ Petroleum Co., which operates 13 in yet … but it won’t be long before Denver stores, the majority of which fly the Conoco flag, is hopeful. He believes the bigger houses start to stretch his company could grow as a result of out. [Or they may say] now this recent and future M&A activity. “Companies like ConocoPhillips say particular company is large enough they want to use existing marketers to expand their business because it’s a that if we went out and bought it, more efficient model to survive,” he says. we could do strategic tuck-ins. “That’s what they said early on; whether they do that, we’ll wait and see.” FRANCIS BOLOGNA F. Bologna and Associates”

40 CSP M arc h 2007 Front Line Reports

CHICAGO/ INDIANAPOLIS

STATUS: More sell-off potential; tight or strategies for specific markets. Bassman, Mitchell & Alfano, Washing- gas margins By the end of 2006, ExxonMobil had ton, D.C.“They want to grow. They converted approximately 160 sites in have formulas crediting you with dol- In 2001, Bob Juckniess was the the upstate New York markets of lars for each gallon. It’s almost too bad Indianapolis “guinea pig” for Shell’s then-fledgling MSO program, through Albany, Buffalo, Syracuse and Rochester if you’re a single-branded Shell jobber, which seasoned operators gained markets to distributor sites, just as it because you don’t have any [new] gal- control over clusters of stores once has done previously in the Detroit and lons to bring to the table.” leased to dealers. At one point, he Milwaukee markets. Problem or “dog” sites represent oversaw as many as 50 stores in Indiana And ConocoPhillips ended the another wrinkle. Companies such and Ohio under his Indianapolis-based month of January by announcing it Couche-Tard and , while firm RWJ Management Cos. Inc. would pull out altogether in three states having a reputation for cherry-picking All that changed in mid-2006, when and in portions of five other states, fur- the best locations, can also pick up low- Shell sold 40 Indy stores—including 35 operated by Juckniess—and some thering opportunities for growth- volume sites to become a more attrac- supply contracts to Alimentation minded parties. tive bidder to the major oil company. Couche-Tard. Juckniess’ “They’re going to negotiate to buy stores went to a local jobber, leaving him Winning Deals as few properties that don’t meet their with a blank slate. So who will win as more markets open profile, but they’re going to get some So Juckniess started over. This time, up? Successful bidders will create pack- they don’t want,”Bologna says.“[But] he looked for the promise of growth with ages that are not only economically there’s a selling arm within those com- a different brand in a different market: BP in Chicago. appealing but also offer incentives to panies that is disposing as quickly as “We went into the bidding process the oil company. Two of the more val- they acquire. Again, they don’t want to and got six high-volume locations,” says ued incentives: added gallons and get- spend any time or money on a prop- Juckniess, who took over the sites in ting problem sites off the books. erty that doesn’t fit their profile.” November 2006. “BP wanted to make sure Bidders promising to rebrand addi- Although many of the known bid- they partnered with operators who could tional stores in the same market can ders—jobbers, mini-majors and larger execute the franchise program in a find their offers more appealing to the chains—can formulate proposals, deal- superior manner. … With our experience majors.“[The majors] don’t just want ers can also become players, mainly running 50 Shell-branded locations, we had a lot to bring to the table. At first blush, money; they want gallons,”says Bob through working with investment we’re doing very well.” Bassman, an industry attorney with groups. Suncor Capital, one such firm

SELL DIVISION Which Big Oil company’s retail sell-off is of most interest to you?

ConocoPhillips 16.1% Shell 21.3%

BP 11.2% Other 1.4%

None 10.5% The trend signified by all of the above 39.5% Source: Kraft/CSP Daily News Poll. Based on 286 respondents.

42 CSP M arc h 2007 Front Line Reports

NEW YORK

STATUS: Retailers finding opportunities based in Los Angeles, formulates these (earnings before interest, tax, deprecia- as majors’ direct-dealer class fades types of packages, working with deal- tion and amortization), the consolida- Major urban centers such as New York ers and dealer representatives to create tor could easily pay 6.5 or 7 times and Chicago remain watershed markets larger proposals. EBITDA due to the chain’s stock value. for major oil, according to Harry Singh, A Suncor official, who spoke on “Because their stock is trading at 7.5 president of Bolla Management Corp., Brooklyn, N.Y., a distributor and marketer condition he not be named, says estab- or 8 [times EBITA], they automatically of ExxonMobil, Sunoco lishing relationships with dealers have accretive value by buying that rev- and BP fuels. and formulating a package that enue stream,”Bologna says. For retail- “When you go into includes lower-volume and closed ers trying to wrap their heads around urban areas like New York sites leads to an appetizing proposal the economics, the success of the for- City, the growth is for the majors. mula lies in the consolidator growing tremendous,” he says. “In “If [a major] wants to sell … the number of dollars it generates with- New York, the city is still a profitable market for most oil companies. then what about the dealer sites, the out losing money on transition costs If you go out in Long Island … there are raw land or stations that have been or the stores falling short of projected more distributors there, so the oil closed for five years?” the source says. revenue. If a company can minimize companies are getting out of direct- “When you buy as a package, you solve the losses, then the new revenues can served. Their dealers can’t survive there.” [the major’s problems] and everyone have a positive effect on the company’s He has grown most aggressively can get their fair share of [the deal.]” trading price and its overall value. with ExxonMobil, through which he has Jobbers will still have their fair share more than 20 sites, followed by Sunoco Little Fish, Big Fish of wins in the sell-off frenzy, but and, most recently, BP. By the end of the year, he expects to have more than 40 No one can dispute that opportunities Bologna believes these will be in mar- sites split between the three . abound. But as the majors chum the kets where consolidators can’t make the waters, the little fish still have to fight numbers work. the sharks. To that end, the consolida- “The frustration is that [jobbers] can’t TAMPA, FLA. tors are an undeniable force. They have effectively compete in the marketplace STATUS: Majors out, except Wall Street muscle and the economic on acquisitions of quality stores because ExxonMobil with about a dozen sites formulas to trump area competi- of the reality [of the consolidators],” tors on price. Bologna says.“There are smaller The battle in Tampa, Fla., may be largely over, with Shell having hooked up with Bologna recalls how he markets or [places where] the big Couche-Tard yet again last year, and BP worked with a midsize boys have not come in yet … but and Chevron already having sold to area jobber on a deal for it won’t be long before the marketer Risser Oil, Clearwater, Fla. eight to 10 stores that bigger houses start to Kerry Katchuk, president of Risser, eventually went to a consolida- stretch out. [Or they may says all that’s left in his area are a dozen tor. He explained that while the say] now this particular com- or so ExxonMobil sites—locations he jobber was able to assess the pany is large enough that if we describes as “decent.” Katchuk views Couche-Tard as a prospective buy at a mul- went out and bought it, we good competitor, but believes the change tiple of 6 times EBITDA could do strategic tuck-ins.” from major-oil dealers is a welcome one. “In the old days, oil companies used The trend [of oil companies selling company-owned stores] to give dealers lower rents and low dealer tankwagon prices—we would be “will continue. … But as for where and when, who knows? It’s fighting a very competitive location,” he says. “These days [those sites] are not like saying it’s going to snow in Alaska because you know it’s cutthroat. It’s the unbranded and the going to happen, but you just don’t know when and where. hypermarkets who are our enemy now.” BILL TREFETHEN Trefethen & Co.” LLC

44 CSP M arc h 2007 In War’s Wake new assets may discover that victory is when a new store opens right around As the sell-offs and acquisitions pro- a double-edged sword. Image upgrades it. … Everything in that marketplace ceed market by market, clear winners and unforeseen environmental require- automatically starts to get dinged by and losers will emerge. “People who ments will now fall not on the majors virtue of a [consolidator’s] across-the- are well capitalized and hungry for but the jobbers and independent deal- board upgrade.” growth … are going to have an ers, Bassman says. The real scenario developing lies in opportunity to get access to terrific “If the laws change to require $2,500 the adage of one man’s treasure. And if sites,”says a petroleum- and conven- temperature-control pumps,”he says, any one of these growth-minded play- ience-focused attorney who asked not “the majors won’t care.” ers can formulate the numbers, then to be identified. Dealers who assume control over many of these properties will be of But there will be plenty of retailers lower-volume properties may also be value as time goes on. bearing the scars of battle, according vulnerable, says Bologna. This class of According to Kelso, many victors to Kelso. Multisite operators in mar- trade won’t have the capital necessary will emerge.“Oil companies are win- kets where majors have changed their to reinvest in stores and, depending on ners; they’re getting premium prices strategies have seen sites pulled out the site, may stumble sooner than later. for assets,”he says. “Jobbers are win- from under them. And hundreds of “It’s sheer dirt,”he says. “Even ners [by growing gallons] and because oil-company employees who used to though a station may be run-down, if many of these jobbers will want to oversee these locations could either be the location is good, the site will har- operate through dealer models, they’ll reassigned or let go. vest for a long time. Other dirt is mar- create opportunities for [smaller inde- Even those victorious in assuming ginal. As stores go, it will lose value pendents].” I

46 CSP M arc h 2007