By LOU WILIN
Marathon Petroleum Corp. said Thursday it will about double its Speedway subsidiary’s size and prepare for more growth with the $2.87 billion purchase of Hess Corp.’s retail business.
Speedway will become the nation’s largest company-owned convenience store chain by revenue, said Tony Kenney, Speedway president. It now is the fourth-largest, and Hess, dominant on the East Coast, is fifth-largest.
In terms of store numbers, Speedway will be second-largest, behind 7-Eleven. Speedway’s reach will extend from the current 1,478 stations in nine Midwestern states to 1,256 additional stores in 16 East Coast and Southeastern states.
The deal will close by September, the companies said. Marathon Petroleum will fund the purchase with cash and debt. The Hess stores will be rebranded to Speedway within three years.
“It is a very good deal for both companies,” said Fadel Gheit, senior energy analyst for Oppenheimer.
New York-based Hess wanted to sell its retail outlets to help reverse its recent rough fortunes and to focus on exploration and production.
Hess did well at selling fuel, but Speedway excels at that and selling higher-margin merchandise, and minimizing costs. It plans to extend that model to the Hess stores.
Speedway’s growth will give parent corporation Marathon Petroleum a bigger piece of a segment that earns more steady profits than the yo-yo fortunes of refining. It also assures Marathon more sales of its refined products. Marathon made a large expansion of its refining capacity last year with the purchase of a Galveston Bay refinery, in Texas, from BP.
“You’ve got all this refining capacity and you want to improve your flexibility to move it around,” said John Parry, retired principal analyst for IHS Herold, Norwalk, Connecticut.
“The immediate addition of 200,000 barrels per day of refined product demand substantially increases our assured gasoline sales to approximately 75 percent of our refining production,” said Gary Heminger, Marathon Petroleum chief executive officer. “It also provides an additional outlet for production from our Gulf Coast refineries.”
Marathon’s larger size and its ownership of operations from refining to transporting to the gas pump ensures efficiency and lower costs.
“Even if you’re only picking up pennies here and there, the type of volume now that we’re talking about within Speedway … it just drives tremendous efficiency,” Heminger said.
That drives bigger profits.
Every penny-per-gallon gain in fuel profit margin translates into $30 million in pre-tax earnings, said Angelia Graves, director of public and state government affairs for Marathon Petroleum.
Speedway expects $120 million in potential savings from efficiencies, higher use of Marathon terminals and combining overhead among the 2,734 stores, Kenney said.
“I don’t know where there is anybody that’s close where Speedway is in (efficiency),” Heminger said. “I think we are going to be able to compound that going into this transaction.”
Speedway not only plans to sell more fuel and do it more efficiently. It also plans to outsell Hess in higher-profit energy drinks, water, tea, sports drinks and soft drinks, Kenney said.
“We have actually performed quite well in that area,” he said.
“Hess has done an outstanding job of driving (fuel sales) at their locations, and our performance inside the store has been slightly better than the Hess performance,” Kenney said. “The opportunity … lies in our ability to utilize our Speedy Rewards program to drive some of that gasoline volume traffic, that Hess has performed so well at, inside the store.”
As excited as Heminger was about the acquisition of the Hess stores, he seemed to be foreshadowing bigger things ahead for Marathon Petroleum. He was not specific Thursday. But he talked about it as a growth platform.
He also talked about synergies, which refers to the interaction of multiple elements in a system to produce an effect that is greater than the sum. It’s a word that gets used a lot at the podium by business leaders. But Heminger packed it with more punch Thursday.
“I’m very confident … We’re just beginning to peel back the onion of the opportunities here and we will find many more than just (what) we’ve highlighted today,” Heminger said. “This gives us multiple levels of optionality. When I look now at (Marathon Petroleum Corp.) with this transaction: east of the Rockies, top refining system, top pipeline system, top terminal system and top retail and marine system. So we have many, many levels of optionality on how we can try to enhance the value from this portfolio.”
Heminger also said, “Can’t get into the details on the logistics side yet, but this gives us the platform on how we can move more (crude oil and refined product) through our logistics system, more through our terminals, more through our pipelines that enhances the value of (MPLX, which is Marathon Petroleum’s pipeline subsidiary) and I think it enhances the value of many other things we are looking at into the future.”
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