Gas stations are vital fuel for the U.S. economy. In 2019, there were nearly 122,000 convenience stores in the U.S. that dispensed motor fuel. Overall, these gas stations sold about 80% of the motor fuels purchased in the country.

Despite its importance to the economy, the gas station industry has been under pressure on many fronts in recent years. Not only is the sector highly competitive due to the number of stations, but it is also battling several headwinds, including oil price volatility and increased vehicle fuel efficiency. Because of that, the sector has been a challenging one for investors, especially since there are few publicly traded options available.

However, during strong market conditions, gas stations can make lots of money, which is why investors will want to understand this sector. Here's an in-depth look at how to invest in gas station stocks.

A gas station at night.

Image source: Getty Images.

How gas stations fit within the oil industry

Gas stations are retail stores that sell motor fuels like gasoline and diesel for cars and trucks as well as a variety of convenience items like food and auto-related products. Because gas stations sell not only refined petroleum products but also other consumer goods, they overlap with the retail sector and the oil industry. However, gas stations are officially an extension of the oil industry, which organizes itself into three segments:

  1. Upstream companies produce oil and gas by drilling new wells into underground reservoirs.
  2. Midstream companies process, transport, and store the oil and gas produced upstream.
  3. Downstream companies turn raw oil and gas into higher-valued fuels and petrochemicals, which they sell to end-users through gas stations and other distribution assets.

Gas stations fit into that last link of the oil industry's value chain as part of the downstream segment. Because of that, many integrated oil companies, which are those that operate assets in the upstream, midstream, and downstream sectors also have some retail assets. That's why most Americans are familiar with oil giants like Exxon, Chevron, and BP since they often pump gas at their branded stations. Many of these oil companies, though, don't own and operate these stations, but instead license their fuel brands to independent gas station operators. As of 2017, oil companies owned less than 1% of America's gas stations.

Likewise, downstream companies focused on refining such as Marathon PetroleumValero Energy, and Phillips 66 each have branded retail businesses. Though like most large oil companies, these refiners typically license their branded fuels to third parties that operate the stations.

Overall, more than 60% of all convenience stores that sell fuel in the U.S. were single-store operators as of 2018, according to the National Association of Convenience Stores. Larger independent companies operated most of the rest of the stores, some of which are publicly traded, making up the small pool of gas stations stocks.

How gas stations make money

Gas stations make money on the difference between where they buy a gallon of gas and sell it to customers. This profit margin can fluctuate wildly due to changes in the price of oil and competition. The average retail gas station gross profit margin from 2014 through 2019 was $0.207 per gallon above the wholesale price paid to distributors for the fuel. However, after subtracting costs, including credit card fees, utilities, and rent, the average gas station only makes a net profit of about $0.05 per gallon of gasoline sold.

Because of that slim margin, fuel sales, which typically account for 60% of a gas station's revenue, only contribute roughly 38% of its profit. The rest of the sales and the majority of a store's earnings come from selling a variety of convenience items such as food and beverages. Like gasoline sales, convenience stores make money on the margin between where they buy these products and sell them to consumers. The gross margins for these convenience items are much higher than gasoline margins. Grocery and other merchandise often carry gross margins of more than 30% while margins on prepared foods and fountain drinks can be more than 60%. 

Threats to the gas station industry

The gas station industry has grown sales significantly over the last few decades. Gas station revenue, for example, rose from nearly $250 billion in 2000 up to about $500 billion right before the financial crisis hit in 2008, according to data by the Federal Reserve Bank of St. Louis. The industry's revenue, however, has been much more volatile in the decade since that last recession.

A chart showing gas station revenue.

Data source: The U.S. Federal Reserve Bank of St. Louis.

Several factors have caused the industry's sales to bounce around in recent years.

One of the biggest is the price of oil, which has been incredibly volatile since the end of the financial crisis. That has a direct impact on gas station revenue since gas prices rise and fall with crude oil. Gas station margins, however, tend to shrink as oil prices rise and widen when they decline. As a result, they typically make more money when oil prices are low, even though their revenue increases when crude prices balloon.

Another issue impacting the industry is the improvement in vehicle fuel efficiency. The fuel economy of new cars built in 2017 hit a record 24.9 miles per gallon (MPG), which is a notable improvement from 20 MPG for new vehicles in 2005. Driving this improved fuel economy has been the increased adoption of more fuel-efficient technologies such as hybrid power systems.

The headwinds from new technology will continue to impact gas stations in the coming years. The biggest threat comes from the shift toward electric vehicles (EVs), hybrid electric vehicles (HEVs), and autonomous cars. EVs only accounted for about 1% of global sales in 2016 while HEV's totaled about 3%. However, according to an estimate by investment bank J.P. Morgan, EVs and HEVs could command 30% of the new vehicle market by 2025 and as much as 60% by 2030. This rapid growth will not only impact fuel sales but food and beverage revenue since consumers won't need to stop at gas stations as often.

Top gas station stocks

As noted earlier, roughly 60% of all gas stations are single-store operators, which shrinks the sector's investment pool considerably. Meanwhile, many of the largest gas station owners are either privately held or trade on foreign exchanges. However, investors who are interested in gas station stocks do have several options they could consider:

Top Gas Station Stocks

Defining Characteristics

Casey's General Stores (NASDAQ:CASY)

Midwest-focused convenience stores.

CrossAmerica Partners (NYSE:CAPL)

A master limited partnership (MLP) that distributes motor fuel to convenience stores.

Getty Realty (NYSE:GTY)

A real estate investment trust (REIT) focused on owning gas stations.

Global Partners (NYSE:GLP)

An MLP that distributes motor fuel to convenience stores.

Marathon Petroleum (NYSE:MPC)

America's largest refiner and operator of several retail brands.

Murphy USA (NYSE:MUSA)

Southern and midwestern U.S. convenience stores.

Sunoco LP (NYSE:SUN)

An MLP that distributes motor fuel to convenience stores.

TravelCenters of America (NASDAQ:TA)

The largest publicly traded full-service travel center company in the U.S.

Data source: Company investors relations presentations.

To help investors understand these gas station investment options, we'll put them into groups and analyze their different characteristics.

A fuel tanker delivering gasoline to a gas station.

Image source: Getty Images.

Gas station operators

Casey's General Stores and Murphy USA both primarily own and operate convenience stores that sell gasoline. Casey's General Stores operated the fourth largest convenience store business in North America in the middle of 2019 with more than 2,000 locations in 16 mid-western states. The company focuses on operating gas stations in less populated areas, with more than 50% of its store count located where the population is less than 5,000. Because of that, its stores have less competition not only for selling fuel but other items like groceries and prepared foods. Casey's focus on operating general stores in rural areas should prove to be a longer-term competitive advantage since these locations are vital to meeting the needs of these smaller communities.

Murphy USA operated more than 1,400 locations across 26 southern and midwestern states as of mid-2019, most of which were adjacent to Walmart stores. The company targets lower-income customers who want low-priced fuel and tobacco as well as lottery tickets and convenience items. By focusing on serving the needs of lower-income consumers, Murphy USA should be able to avoid some of the headwinds from increased adoption of EVs since its core customers can't afford to buy these expensive new cars.

Retail fuel distribution companies

CrossAmerica Partners, Global Partners, and Sunoco LP are wholesale fuel distribution companies that transport gasoline and diesel from refineries to retail gas stations. As a result, they primarily make money on the margin they earn from where they buy fuel from a refinery and sell it to a gas station. That wholesale margin tends to be less sensitive to oil prices -- often set at a fixed rate as part of a long-term distribution agreement -- which enables these companies to generate steadier cash flow. In addition to their fuel distribution businesses, all three operate some retail stores as well as lease locations to third parties.

CrossAmerica Partners distributed fuel to 1,200 retail locations across 29 states in the eastern half of the U.S. as of mid-2019, including 900 that it either owned or leased. The MLP distributes fuel from several different brands, including being one of the largest distributors of ExxonMobil fuel in the country. The company also leases many of its gas stations to third parties, enabling it not only to collect rent but also make money by distributing fuel to these locations. CrossAmerica Partners' business model of distributing fuel under long-term contracts and leasing its gas stations to third-party operators enables it to produce steadier earnings than gas stations, which are highly sensitive to volatile retail gas margins.  

Sunoco LP distributed fuel to more than 10,000 retail locations across 30 states as of the middle of 2019. The company used to have a large retail operation, but it sold most of its sites to 7-Eleven. However, it still distributes fuel to those locations under a long-term, fixed-fee contract that supplies it with stable cash flow. The company also owned or controlled about 950 retail locations, most of which it leased to third-party operators, which provided it with another steady income stream. Like CrossAmerica Partners, Sunoco LP's business model enables it to generate more consistent cash flow than gas stations since it has limited direct exposure to retail gas margins.  

Global Partners distributed fuel to nearly 1,600 retail locations in 2019, primarily in the Northeast, including roughly 300 that it operated. The company also had one of the largest networks of petroleum products and renewable fuels storage terminals in the Northeast. Global Partners' integration of both distribution and retail enables it to make money in many ways, including distributing gas, leasing stores, operating retail locations, and storing refined petroleum products. 

These fuel distribution companies offer investors a way to invest in the gas station business without as much direct exposure to volatile gas prices, which makes them a less risky alternative. This business model enables these companies to generate steadier cash flow, the bulk of which they typically distribute to investors via high-yielding dividends. That makes them more suitable for income-focused investors. 

Gas station real estate

Several REITs own gas stations that they lease to third-party operators as part of a diversified real estate portfolio. Getty Realty, however, specializes in owning the gas stations. As of the middle of 2019, the company owned more than 900 properties in 30 states that operated under major gas station brands like Getty, BP, and Exxon. Getty Realty focuses on owning gas stations located in prime locations such as street corners in densely populated areas. The company signs net leases with tenants, which makes them responsible for expenses such as property taxes, building insurance, and maintenance. Those agreements supply Getty Realty with a steady income stream that it uses to pay a dividend to investors.

Another REIT that stands out as a potential option for investors looking to invest in gas stations is Hospitality Properties Trust (NASDAQ:HPT). While this REIT makes most of its money leasing hotels, it also controls a large portfolio of highway travel centers. In 2019, nearly 30% of Hospitality Properties Trust's revenue came from its collection of travel centers. Not only do these locations dispense gasoline and diesel, but also have restaurants, large convenience stores, and truck repair facilities. Hospitality Properties Trust leases all its sites to TravelCenters of America under long-term, triple-net agreements, which supplies the company with steady cash flow.

REITs that own the real estate under gas stations are the lowest risk way to invest in the gas station industry. That's because they don't make money on volatile gasoline margins but earn stable cash flow from the rent they collect from gas station operators. In the meantime, if a gas station they own does go out of business, they can often redevelop the site for alternative use such as putting in a bank, restaurant, or other retail operation. 

Refining stocks with a retail arm

Many refining companies also have marketing and retail segments, which not only distribute fuel but operate retail locations. Marathon Petroleum had the largest marketing and retail businesses among the major independent refiners with more than 12,000 locations in the U.S. as of the middle of 2019. The refining company had a nationwide retail footprint consisting of three brands: Marathon, Speedway, and Arco. Marathon owned and operated nearly 4,000 of those locations and licensed the other sites to independent operators. Marathon Petroleum's retail business enables it to make even more money on each barrel of oil it refines since it can earn a margin on refining, distribution, and the final retail sale. However, Marathon Petroleum's marketing and retail operations only supplied it with about 15% of its earnings in 2019. So, it's not the best way to directly invest in gas stations.

Several other refining companies, as well as major oil producers, operate retail assets, though most primarily license their brand to third-party operators. Because of that, they're also not an ideal way to invest in gas stations since their marketing and retail operations usually supply a small percentage of their revenue and profits.

How to invest in gas station stocks

Investors who are interested in gas station stocks have two options. First, they can invest in gas station operators like Casey's General Stores, Murphy USA, and TravelCenters of America, which all generate a large portion of their revenue by selling fuel to customers. Their profit margins are highly sensitive to changes in oil prices and the economy. While that can hurt profitability during periods of higher oil prices, gas station operators can make lots of money under the right market conditions. Investors should therefore consider buying shares in a gas station operator when oil prices are lower, but the economy is strong since those factors should yield the highest margins, which could fuel big gains in their stock prices.

The other option is to invest in either a fuel distribution company or a REIT that owns a significant portfolio of gas stations. These companies tend to generate steadier income since they earn fees from either distributing gas to retail locations or leasing them to other operators. That business model enables these companies to pay high-yielding dividends, making them more appealing options for income-seeking investors.