Pennsylvania-based Lehigh Gas Partners (LGP), a wholesale distributor of gasoline and diesel fuel in the U.S., recently released its first-quarter 2014 results. The partnership, which, according to its 10-Q report, owns or leases over 65 percent of the sites to which it distributes its motor fuels, saw an overall decline in gross profit from fuel sales due to the rise in fuel prices earlier in the year. In general, rising fuel prices tend to decrease margins for oil marketers. During the quarter, total gross profit from motor fuel sales came in at $9.7 million, compared with $9.9 million in the year-ago quarter.
Despite the slowdown in sales during the first quarter, Lehigh Gas Partners still stands out as a good investment. Not only is the momentary negativity induced by the slow quarter a good entry point for investors, but Lehigh Gas Partners' positioning in view of the greater scheme of things in the oil and gas sector is reassuring.
Appetite for Acquisitions will Counter Headwinds
Refiners have been facing major headwinds owing to increased prices of crude oil, which has increased the cost of acquiring feedstock and in effect put pressure on margins. Part of refiners' additional costs have, however, been passed on to oil marketers in the form of higher prices of finished products such as gasoline, increasing the operating expenses of most oil marketers and squeezing margins.
While prices are expected to stabilize in the short term, all indications show that they may increase in the long term, making it painfully difficult for oil marketers without sufficient scale to make sizable profits. According to a new special report by the International Energy Agency (IEA) dubbed "World Energy Investment Outlook", global oil prices at their current range of between $90 and $110, despite being seemingly high, are still too low to sufficiently sustain producers' costs of tackling ever-more challenging geology. This essentially means that at current prices, it is uneconomical to produce in some areas, despite the need to produce more in order to feed the growing global energy demand. The IEA proposes a price of at least $120 per barrel to fund exploration in areas with challenging geologies such as the Arctic.
Moreover, the IEA contends that $48 trillion will be needed in investments through 2035 in order to meet the increasing global energy demand. Again, this points toward higher prices, as investors' call for solid returns will be reflected in increased price levels of crude.
As the price of crude oil increases in the long run, producers will gain immediately, but refiners and marketers will have to slowly restructure to face the new realities. In the face of such change, oil marketers with sufficient scale to comfortably deal with thinner margins per unit that can be offset by relatively greater sales volume due to their larger footprints will survive.
Lehigh Gas Partners' appetite for acquisitions will allow it to grow its scale sufficiently to counter the expected uptick in prices in the long term. The oil marketer entered an agreement on April 16, 2014 to acquire 55 wholesale supply contracts, two commission marketing contracts, 11 fee or leasehold sites and certain other assets from affiliates of Atlas Oil Company for $38.5 million. Lehigh Gas Partners also acquired Virginia-based Roanoke on April 30, 2014 for $61 million. It also entered into a $450 million amended and restated credit facility in the first quarter, increasing its borrowing capacity by $126 million. This signals that more acquisitions could be on the way. With a dividend yield of 7.60 percent, Leigh Gas Partners is a great opportunity to snap up.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.