Alon USA Energy
Riding the tailwind
The company reported first-quarter 2006 earnings Wednesday after market-close, and discussed the results on a conference call this morning. The headlines will tell you that net income increased 142% to $54.2 million; however, both 2006 and 2005 numbers include one-time gains. Stripping out the special items produces net income of $24.1 million, compared with $5.3 million in 2005. This comparison also has limited value, since the Big Spring refinery was shut down for an expansion project for a significant part of last year's first quarter. Because of that expansion project, refinery capacity is higher this year than last.
The positive results were driven by Alon USA being in the right place at the right time. The Gulf 3-2-1 crack spread (link opens a PDF file) -- an industry measure of refining profit margins -- increased to $9.70 per barrel, versus $6.62 per barrel during the first quarter of 2005. The West Texas Intermediate/West Texas Sour crude differential (a.k.a. WTI/WTS, the difference in price between low-sulfur and high-sulfur crude oil) increased to $6.57 per barrel versus $5.08 per barrel in 2005. This metric benefits Alon USA because its Big Spring refinery operates with 90% high-sulfur, or sour, crude. To top it all off, operating expense per barrel fell compared to the fourth quarter of 2005, because of lower natural gas prices.
On the retail side, Alon USA operates 167 convenience stores across the Southwest. Total retail sales were basically flat compared with 2005, with a large drop in fuel sales. During the conference call, management claimed that it has implemented new, higher prices for fuel, which has increased margins but lowered volumes. Management was quick to point out that same-store sales for merchandise were up 9%. Merchandise carries a 33% profit margin, compared with a 6% to 7% profit margin for fuel sales. Therefore, the company focuses on in-store merchandise sales more than fuel sales.
The drop in fuel sales may still be a concern. Per-store volumes dropped almost 30%, from 48,000 gallons per month to 34,000 gallons per month. If a motorist does not stop to buy fuel, the company loses the opportunity for that motorist to purchase higher-margin items inside the store. In the retail world, companies such as Costco Wholesale
There will be plenty of other areas to watch going forward, as the company tries to integrate its recent purchases. For example, by next quarter, the company will have 55 more retail sites to report on because of the purchase of Good Time Stores. Alon USA will also be busy integrating its purchase of Paramount Petroleum and Edgington Oil.
Management has indicated that closing these transactions, incorporating them into the company, and delivering profits from the deals will be its focus for the immediate future. President and CEO Jeff Morris also indicated that it will likely be around two years before the company looks at additional large acquisitions.
What should investors do? In March, shares were still cheap, but that is no longer true. With two new acquisitions creating the potential for temporary confusion as the company works on integration, combined with general volatility in the oil patch, I believe there will be a better price for these shares down the road. If the shares fall back below $30, I'll pull out my calculator.
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