Fill'er Up: Booming biz for gas station stocks

File photo of a man putting gas into his Mustang at a Marathon gas station in Chicago.
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File photo of a man putting gas into his Mustang at a Marathon gas station in Chicago.

As oil prices hold near five-year lows, gas stations may be the best way to play the energy sector right now, analysts said. CST Brands, Murphy USA and Marathon Petroleum are small, pure plays to watch, they said.

"Retailers of gasoline enjoy their largest profit margins in falling price environments like we are in right now," said John Kilduff, founding partner of Again Capital.

When oil prices were going up three or four years ago, several oil companies hoped to benefit from their operations in oil and gas exploration, a historically lucrative business known as the "upstream."

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The companies spun off the traditionally weaker business of oil processing and gas stations, known as the "downstream." Last year, several refineries went even further, spinning off the retail arms into individual stocks. Now as oil prices fall, those gasoline sellers are outperforming their parent firms.

"The timing for the spinoffs has been great (for investors), and the increased co-location of convenience stores at the retailers also helps the profit engine with high margin goods like soda and other snack foods," Kilduff said.

The hot gas station trend is most clearly seen with refinery Valero's spinoff of its retail side CST Brands in May 2013. CST operates 1,900 gas stations in North America and its stock has outperformed Valero since September.

"Certainly I think that (falling oil prices) should be in their favor," said Betty Chen, research analyst at Mizuho Securities, which has a "buy" rating on CST Brands. The drop in WTI '"should have a beneficial lift for the fuel margins."

CST also revamped the interior design and product offerings of the convenience stores attached to its gas stations, which Chen said contributed to a slight improvement in store sales for the third quarter.

Financial services firm Gabelli & Co. last week increased its 2014 earnings-per-share estimate on CST and said with the drop in crude oil it expects the company to earn 27 cents per gallon in the fourth quarter compared with 15 cents a year ago.

"We continue to believe CST is well positioned to benefit from the current positive fuel margin dynamics and remains an attractive asset in a consolidating industry," the report said.

Other gas station spinoffs from refineries include gas station operator Murphy USA, whose stock has gained during this oil collapse since the summer while its parent Murphy has declined.

Murphy USA said in its third-quarter earnings report that retail fuel margins before credit card expenses increased 2.7 cents a gallon from the same quarter last year, making for an average fuel retail fuel margin of 13 cents a gallon this year, at the high end of its guidance. Total merchandise sales are also expected to grow 6 percent, above guidance of 1 to 3 percent growth.

Marathon Oil's spinoff Marathon Petroleum has also outperformed its parent. In May, Marathon Petroleum boosted that retail focus with its subsidiary Speedway's purchase of gas stations from Hess.

Speedway reported record third-quarter 2014 earnings that it attributed to an increase in margins for merchandise and light products, Marathon Petroleum said in a press release

Refineries that kept their gas stations also noted strong performance in their retail arms during the last quarter.

Tesoro said its retail segment had record level performance in the most recent quarter from "strong demand and slowly decreasing crude oil prices."

It said its retail segment's operating income was $138 million, an increase of 146 percent from the same period in 2013.

Big box stores such as Costco that have gas stations connected to their stores also noted the benefit of lower oil prices in their earnings reports.

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"Within gross margin, which was higher year-over-year in the first quarter by 22 basis points, we benefited from strong margins in our gasoline business," Costco CFO Richard A. Galanti said in the company's fiscal first-quarter earnings conference call on Dec. 10.