Steep drop in oil prices drives earnings despite demand destruction,
In an April 17 quarterly earnings call, Andrew Clyde, president and CEO of El Dorado, Ark.-based Murphy USA, said the effects of the COVID-19 pandemic, as well as the sudden and dramatic drop in oil prices, created an unusual first quarter.
“The principles upon which we have designed and built our business model has enabled Murphy USA to rise to the challenges of these events,” Clyde said.
Clyde cited three developments that have affected the company amid the COVID-19 pandemic:
- The steep fall of crude prices.
- Demand destruction created by the closure of businesses.
- The large-scale government response designed to shore up the economy.
The initial result has been strong margins, given Murphy is already a low-margin, low-price operator. So even though volumes declined as shelter-in-place orders took effect, Clyde said fuel contributions for the quarter were expected to be “at or above 100%” of normal levels.
While the drop in crude prices from about $62 a barrel in January to just below $20 a barrel in late March was not of the same magnitude that the industry saw in 2008, it occurred in a much shorter time frame, Clyde said. The immediate result was total fuel margins of 22.5 cents per gallon, which in turn led to a record first-quarter financial performance.
“It is important to remember the falloff in crude prices was largely driven by geopolitical events that led to the high-margin environment going into the COVID-19 crisis,” he said. “And in that period, we were experiencing fuel volume increases of approximately 2.7% through February on a same-store basis as our fuel pricing initiatives were delivering exceptional results.”
March, however, became a story of three time periods. In the first 10 days of March, before the COVID-19 crisis became widespread, consumer demand was very strong, and the company was seeing per-store volumes up 6.2%. Then the demand shocks began as shelter-in-place orders across the country took hold, having a significant effect on the second half of March performance.
“During the middle 10 days of the month, as schools closed and more people started working from home, we saw some prebuying behavior,” Clyde said. “And as a result, per-store volumes remained relatively strong at 2.7% over the prior-year period.”
The last 10 days of March saw a major dip, with the full effects of shelter-in-place orders creating per-store fuel volume year-over-year declines of 31.7%. April month-to-date fuel volumes have leveled out at an average decline of 31.6%, with the variance of daily levels reflecting a variety of factors, Clyde said. Some of these factors included paydays and government stimulus payments as well as prior-year effects. Higher total margins endured throughout the quarter as crude prices continued to fall.
In-store business has also picked up primarily due to the sites’ proximity to Walmart stores, the chain’s value-price position and rewards program, and their wholesaler partner, Core-Mark, and its ability to keep up inventories of their stores’ highest-selling items.
As a result, performance in categories such as cigarettes have remained positive throughout, with the company seeing shifts in carton buyers going from 48% to 58% of purchases. Because some competitors do not even offer cartons, the trend has led to notable share gains, Clyde said. Through the first two weeks of April, total merchandise sales were up 8.3%, with tobacco up 13.3% and nontobacco down 4.3%. Beer and alcohol sales were up 9.1% and general merchandise is up 6.5%, in part due to rising demand for hand sanitizer, he said.
- Murphy USA is No. 5 on the Top 40 update to CSP’s 2019 Top 202 ranking of U.S. c-store chains by number of retail outlets. CSP will release the complete 2020 list in June.
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