The battle lines are being drawn. MLP strategies begin to coalesce while sidelining traditional marketers.

By Mark Radosevich

Over the past year, the character of Master Limited Partnerships (MLP’s) has begun to morph from a gallon aggregation model, where the primary objective was to capture increasing amounts of wholesale fuel distribution volume, to a device that enables sophisticated store operators to garner a competitive advantage by “dropping down” their fuel volume into an MLP.

Given the tremendous level of MLP news and activity, it’s enlightening to take a step back and consider their original U.S. federal government definition and intent: Energy MLPs must own energy infrastructure in the United States, pipelines, natural gas, gasoline, oil, storage, terminals and processing plants. An entity can qualify for MLP status if it owns some or all of these qualifying categories and earns at least 90% of its cash flow from these sources.

Given this definition, a person could logically conclude that the true intent of an Energy MLP was to promote the extraction and transportation of petroleum products up to and including the terminal. However, the concept of “transportation” seems to have left the door open for a more liberal interpretation to include hauling and distribution activities past the terminal. Thus the geneses of the MLP as we in the retail petroleum industry know it today.

When early MLP-manifestations made acquisitions of company operated stores, a third party operator was required to lease the stores, with the operator purchasing fuel, and in some cases being charged an enhanced rent to offset inside sales revenues. MLPs can book rent as a qualifying cash flow source but not inside sales, as direct store operations fall outside governmental MLP guidelines. By gaining controlling interest in an MLP, a sophisticated c-store operator will possess a valuable financial enhancement mechanism, through the favorable tax treatment garnered from fuel distribution to the company operated chain.

One unintended consequence of the current MLP phenomena is the inadvertent hastening of the demise of the small to midsized marketer segment. MLP-backed competitors are able to grow both organically and through acquisitions by tapping into favorable and seemingly limitless financing sources, while enjoying the tax savings offered by the MLP structure. Smaller marketers will find quality acquisitions increasingly more expensive and out of reach; the quality gap between their best stores and that of the MLP-backed competitor widening; and sustainable fuel margins increasingly less certain.

Fair or unfair, short of lobbying the government to revisit the overall intent of the Energy MLP structure, we must accept the fact that they are here to stay. Proactive marketers should begin to develop plans to cope with this reality including some of the following tactics:

• Pragmatically assess ones chain looking to divest under-performers or ones facing future threat.
• Consider transitioning the business away from direct store operations to a dealer lease or dealer supply model.
• Consider expanding/entering the commercial business and strategically withdrawing from retail all together.
• Consider exiting the industry entirely while purchase multiples remain at all time highs.

Without significant scale and the ability to grow, smaller marketers will find the retail business increasingly competitive, unpredictable and less profitable.  Many multi-generational marketers, who have dealt with nothing but petroleum over the years, find it difficult to get comfortable with the thought that there could be other non-petro business possibilities. They are clearly selling themselves short, given the business complexities and thankless challenges that they face every day to survive. Rather, the lyrics to the song “New York, New York” better summarizes a petroleum marketer’s prospects for success in transitioning to a new post-petro business venture: “If I can make it there, I’ll make it anywhere.”

Possessing over 35 years of downstream petroleum experience, Mark Radosevich is a strong industry advocate. He is president of PetroActive Real Estate Services, LLC, offering confidential mergers & acquisition representation and financing services exclusively to petroleum wholesalers. Mark can be reached by email at [email protected] and directly by phone at (423) 442-1327, web address www.petroactive.net.