This Energy Stock Profits from the Pump

PKI - Parkland Fuel Corporation

Parkland is a supplier and marketer of fuel and petroleum products across Canada, the U.S, the Caribbean region and the Americas. It also operates convenience stores.

Parkland is Canada’s largest independent marketers of fuel and petroleum products. The company owns many well-known brands such as Sol, Pioneer, Ultramar, Racetrac, Corner Store, etc. It is also the branded distributor of major fuel brands, such as Chevron and Esso. Parkland markets over 17 billion litres of petroleum products across Canada and the U.S. About 84% of Canadians live in close proximity to the company’s retail sites.

Parkland has five operating segments: Canada Retail (23% of recent quarter’s earnings), Canada Commercial (13%), USA (3%), International (22%), Supply (45%), Corporate (-8%). It operates a 55,000 bpd light/sweet crude refinery in Burnaby, British Columbia, a large national delivery network and an extensive cardlock network.

Parkland sells its products through a variety of marketing channels, including its retail gas stations, commercial diesel cardlocks, and lubricant delivery branches. The company also supplies third parties and uses dealer retail network.

PKI - Brands

Investment Data

Revenue Growth & Market Exposure

Parkland’s Canada retail business supplies and supports a network of 1,854 retail gas stations in Canada. Its commercial segment delivers bulk fuel, propane, heating oil, lubricants, and other related products to commercial, industrial, wholesale as well as residential customers across Canada and the U.S.

Over the years of its existence, Parkland has developed strong supply relationships with major refiners, fuel suppliers and carriers across North America and the Caribbean. It also has access to strategic terminals and storage locations in the Caribbean.

Parkland has become the preferred choice for its customers and suppliers, given its outstanding service, competitive products, and safe and on-time deliveries. The company’s supply relationships, storage infrastructure, and third-party rail and highway carriers connections have helped it to aid customers even at times of supply disruptions. A portfolio of reputed fuel brands and convenience store offerings have further enabled sticky customer relationships.

As one of North America’s fastest growing marketers of fuel and petroleum products, Parkland Fuel supplies one out of every six gas stations in Canada. The company delivered roughly 18 billion litres of fuel within Canada in 2018. Rising demand for automobiles will act as a tailwind for Parkland Fuel.

The company is growing organically and through acquisitions. Parkland acquired Sol this year, which further strengthened its foothold in the Caribbean fuel market. The company is also looking at increasing the production of lower-carbon intensity fuels at Burnaby Refinery which is operating at a refinery utilization of 92%.

Dividends

Parkland is a Canadian Dividend Aristocrat with a sound track record of growing dividend consistently and of maintaining a conservative payout ratio. The company sports an annual average yield of 2.9% currently. It last raised its dividend by 1.7% and has compounded its dividend growth at 2.8% annually, over the last three years.

Parkland has a proven track record of business integration and is looking at driving returns through acquisitions and synergy capture. The company’s impressive cash generation has managed to keep the debt levels low, in spite of its aggressive buying spree. Parkland is targeting 3%-5% organic growth each year and C$42 million in run-rate synergies by 2021. Great brands, a diversified nationwide portfolio, emerging digital platforms, sticky customer relationships, and non-fuel capabilities make Parkland an undisputed leader in the fuel distribution market.

Parkland is well-positioned to be a leader in consolidation given the highly fragmented state of the fuel distribution market. Potential supply and cost synergies, as well as expertise across all fuel marketing channels, make it an attractive consolidation candidate. The management is anticipating cost savings of up to 20% if Parkland integrates with a company having a similar scale.

Its USA segment provides a platform for growth in the U.S. and offers significant export opportunities for products from western Canada. The company is targeting to grow its annual average EBITDA by 3-5%. A strong retail base, roll out of its proprietary private label brand 59th Street Food Co., and operations at Burnaby Refinery should support growth in the future.

Competition

Gen III Oil Corp is one of Parkland’s largest competitor. Parkland Fuel’s large scale grants it strong supply advantage and a marketing platform to provide fuel to the Canadian fuel stations. The company’s acquisition strategy helps it to continuously add scale which makes it a distinguished player in the North American fuel distribution market. Logistic expertise, strategic infrastructure and strong supplier relationships differentiates Parkland from its peers.

Bottom Line

Parkland is in a good position to benefit from the highly fragmented nature of the retail fuel market. The company is expanding its geographic presence in the U.S. which is approximately 10-12x the market size of Canada. Parkland is looking at driving future EBITDA growth through a combination of acquisitions and organic growth initiatives. Quality assets from Ultramar, Chevron, and Sol should also support growth in the future.

I am not big on the energy sector but this company is definitely playing it safe. Dividend growth keeps up with inflation and the dividend yield is not too aggressive either. Best of all, it beats both the S&P500 index and TSE composite index. My educated guess is that the pump distribution is what has given the company growth and stability.

PKI vs Indexes

DISCLOSURE: Please note that I may have a position in one or many of the holdings listed. For a complete list of my holdings, please see my Dividend Portfolio.

DISCLAIMER: Please note that this blog post represents my opinion and not an advice/recommendation. I am not a financial adviser, I am not qualified to give financial advice. Before you buy any stocks/funds consult with a qualified financial planner. Make your investment decisions at your own risk – see my full disclaimer for more details.
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