June 30, 2022

Botu Linum

The Car & Automotive Devotees

I Own The Gas Pump, With +8% Yields (GLP & CAPL)

4 min read

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Co-produced with Treading Softly

Gas prices continue to be a major concern for many people. It is sometimes called “the commuter tax” since many are forced to drive to work regardless of fuel prices. During COVID, many offices allowed their workers to work from home. As COVID has abated, more offices are recalling workers or moving to a hybrid model causing a rebound in demand.

Additionally, fuel demand while inelastic historically is also seasonal. The summer and fall months have higher levels of fuel demand and consumption than the colder winter and spring months.

So, we are rapidly approaching when fuel is most in-demand, while seeing higher than normal gas prices. There has been some pain at the pump for the average driver. I hear them complaining – however, two groups are not suffering – the government, which keeps on collecting their taxes, and the gas station, which passes the higher costs onto consumers.

As investors, what do we do when we see strong fundamentals driving prices higher? We buy the companies that benefit! So, while others are suffering at the pump, I own it. I get to take a cut from the profits and enjoy the benefits of being an income investor.

Let’s revisit our old friends, the fuel distributors, and remember you too can own the pump. I will note they both issue K-1s at tax time.

Pick #1: GLP – Yield 8.4%

Global Partners LP (GLP) is a partnership that is a vertically integrated supplier of gasoline. GLP has a wholesale segment, supplying gasoline and other petroleum products to retailers, a station operations segment operating convenience stores, and a commercial segment, supplying petroleum products for businesses.

GLP has a record quarter with DCF (distributable cash flow) available to common units of $46.4 million or $1.36/unit. That’s up from $27 million in Q4 and $12 million in Q1 2021 with no increase in the number of units. GLP just raised its distribution to $0.595 and that distribution is extremely well covered.

The spike in gas prices certainly helped with this beat, and we all know that high prices won’t last forever, though they are likely to persist for the foreseeable future. Those tailwinds will slow down so we can’t automatically project that DCF will continue to cover the distribution by nearly 230%.

However, GLP is putting in more permanent growth. In Q1, GLP acquired 105 new stores. Even as prices become less favorable, earnings will continue on a higher basis.

As the year goes on, we expect GLP will continue to grow through acquisitions. The C-store market is highly fragmented and GLP can use its superior size and capabilities to buy out smaller operators and get immediate cash-flow benefits. The best part is, that with the current cash flow so high, GLP is able to acquire without increasing debt or issuing new equity.

GLP will continue raking in money hand over fist as long as this commodity boom lasts, and that could be years. In the meantime, it is expanding to ensure a more profitable future as well.

Note: GLP is a partnership that issues a K-1 at tax time.

Pick #2: CAPL – 10.4%

CrossAmerica Partners LP (CAPL) lives and breathes the same grounds as GLP. However, unlike GLP, CAPL is a pure-play fuel distribution and convenience store MLP.

They service over 1800 locations with gasoline and own/lease 1100 locations. This places CAPL in the same category as GLP. However, CAPL is even more focused. While GLP owns terminals and operates a heating fuel business as well, CrossAmerica Partners is strictly gasoline-focused.

CrossAmerica Partners

CrossAmerica Partners

Currently, CAPL pays a hefty $0.525 per unit distribution with a Q1 coverage ratio of over 1.22x and a trailing twelve-month coverage of 1.33x with distributable cash flow.

We are heading directly into the Summer driving season and CAPL is well-positioned to continue its strong distribution coverage.

Since our last coverage, CAPL has been busy, they closed on the last of the locations tied to the 7-Eleven and Raceway merger, while also issuing out $25 million in privately placed preferred securities.

These actions will help keep CAPL’s base assets growing. We would like to see CAPL now focus on reducing their overall indebtedness vs attempting to grow further. Unlike GLP, CAPL needs to digest its recent acquisitions in our opinion. The distribution is extremely generous and fuel demand remains strong.

Thankfully, management agrees with us. The stores they operate almost doubled in the past 12 months and they expect in the next 12-18 months to reduce their leverage ratio down from 4.9x currently to 4x-4.25x. To put this into perspective, even with the closing on the final assets and preferred issuance, CAPL dropped its leverage ratio from 5.1x to 4.9x – improvement is already occurring.

So, while CAPL focuses on reducing their leverage and absorbing all their new locations, we can enjoy their large distribution and know the gas pump is our friend, not our enemy!

Note: CAPL is a partnership that issues a K-1 at tax time.

Conclusion

GLP and CAPL are minting cash while other sections of our economy are trying to ramp up. Rewarding shareholders even as stocks in general struggle.

Chart
Data by YCharts

GLP and CAPL have provided over 25% better returns year to date vs. the market. We expect them to continue to generate strong levels of income and to continue to outperform the market.

I love owning basic aspects of daily life, and while many are electrified vehicle apologists, the fact remains we are still living in an ICE vehicle world and will for many years to come. CAPL and GLP provide a basic service to the operation of our economy, and even if we enter a recession, gasoline will still be needed.

This means you can have your income flowing in retirement in good times or bad times. I own the gas pump, and you should too.

https://seekingalpha.com/article/4514016-own-the-gas-pump-with-yields