Spinoff Fever Expected to Continue

NATIONAL REPORT -- A dramatic shift is underway in the convenience and petroleum retailing industry that will forever alter the landscape. Spinoffs and master limited partnerships (MLPs) have dominated the headlines recently, and industry insiders expect this trend to continue indefinitely.

Several companies have spun off their retail divisions — parent to their convenience store and gas station assets — while even more have spun off their midstream pipeline assets into initial public offerings. Some corporations in the industry have gone so far as to do both.

Take San Antonio-based Valero Energy Corp., which spun off its entire retail division into a company called CST Brands Inc. on May 1. Immediately following that transaction, CEO Bill Klesse announced that Valero would look into creating an MLP of its midstream assets, while the parent company would primarily focus on exploration and production.

Most recently, Murphy Oil Corp. spun off its retail division as Murphy USA Inc. on Aug. 30. The new El Dorado, Ark.-based company expects to operate 1,235 convenience stores by the end of this year.

"Separating these two businesses will allow each to unlock its own potential for growth," said Claiborne Deming, Murphy Oil Corp.'s chairman of the board. "We have built two strong, but distinct businesses. Murphy will be a pure-play exploration and production company with strong returns and attractive investment opportunities, while Murphy USA will be a leading retailer with over 1,100 retail gasoline outlets."

So, why are companies taking this approach? From the retail c-store perspective, spinoffs have unlocked value for companies, said Bonnie Herzog, senior analyst at Wells Fargo Securities LLC. They also can provide tax benefits and provide more flexibility.

Kim Bowers, CEO of the new CST Brands, operator of 1,040 Corner Store locations in the United States, believes her newly independent company will be better than ever before.

"As part of a much larger refining company, retail in a good year was 10 percent of Valero's overall income pie. So, we had a fairly slower growth model recently," she explained. "Prior [to being spun off], we were more focused on [selling] Valero's fuel, which is how it should be as a subsidiary. But going forward, we are all about doing the best for our shareholders, providing the best opportunities for employees and providing the best experience for our customers."

Herzog predicts that retail spinoffs will continue over the next several years. The search for growth, she said, is the main reason why such spinoffs will become commonplace.

"I wouldn't be surprised…if we see this trend continue," she added. "The drivers of this industry are consolidations and acquisitions. It's still a very fragmented industry, but organic growth through store builds and acquisitions of smaller independents or smaller chains will be an ongoing trend over the next five or 10 years."

For more on the spinoff trend, including a deeper dive into the advantages of MLPs, check out the October issue of Convenience Store News.