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Parkland Fuel Corp. sells products such as diesel, gasoline, heating oil and lubricants to retail, commercial and wholesale clients, with a focus on non-urban areas. (Parkland.ca)
Parkland Fuel Corp. sells products such as diesel, gasoline, heating oil and lubricants to retail, commercial and wholesale clients, with a focus on non-urban areas. (Parkland.ca)

VOX

Is Parkland Fuel sputtering? Think again Add to ...

You could say, pardon the pun, that Parkland Fuel Corp. is a well-oiled machine, supporting a tasty dividend that tops 6 per cent.

But after a run that has seen shares more than double since late 2011, the stock has been, um, out of fuel this year. It closed yesterday at $17.71, down $2.59 from it’s 52-week high in February, a fate not uncommon in the energy sector.

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The company seems to be on a path to add to its profits, however, and support its tempting payout.

Parkland Fuel, based in Red Deer, Alta., is an interesting amalgam of businesses tied to petrol. For most of its first three decades, it was an operator of gas stations. While it still operates or franchises more than 700 locations with names such as Fas Gas Plus, Esso and Race Trac, the traditional gas-station business now makes up less than half of sales and profits thanks to growth in new segments over the past five years.

Its commercial fuels business sells gas – as well as propane, heating oil, lubricants and agricultural inputs – to customers across Canada. Its wholesale business buys fuel from refiners and sells it to customers who use it themselves, or sell it again to retailers.

All told, Parkland sold more than 4 billion litres of fuel in the past 12 months, roughly 5 per cent of the Canadian market. First-quarter revenues were 14 per cent above 2012 levels, with the volume of sales up 30 per cent.

So why is Parkland trading at a reasonable 13 times forward earnings?

Part of the problem is its customers, or, more accurately, fears about their near-term prospects. Analyst Megan MacNeill of Haywood Securities Inc. notes the company’s commercial business, which supplies about 40 per cent of profits, is “exceptionally vulnerable to the level of activity in Canada’s primary industries” — energy and mining, and the pulp and paper industry.

Its retail stores face significant competition (although Ms. MacNeill notes many are in rural areas with fewer players).

And one-quarter of the fuel it sells comes from the refineries of Suncor; that deal, with its appealing margins, is slated to end at the close of 2013. The company says it won’t face a supply disruption, but the market seems less sure.

Given such uncertainties, why would investors want to buy in? Analysts say the company’s healthy balance sheet, track record for acquisitions, current cost-management plans, and conservative earnings guidance all add up to a healthy long-term bet.

Analyst Derek Dley of CanAccord Genuity, who has a “buy” rating and $20.50 target price (about 15 per cent above current levels), says he believes the company will produce $212-million of EBITDA, or earnings before interest, taxes, depreciation and amortization, versus the company’s guidance of $190-million.

Parkland has a goal of doubling 2011 EBITDA of $125-million by 2016. It hopes to add $55-million of that via acquisition; one year after announcing the plan, it has already added $27-million, Mr. Dley notes.

While the company has debt – about $315-million worth, net of cash, as of March 31 – it represents just 1.6 times its EBITDA. That suggests it can continue to make deals, Mr. Dley says.

Ms. MacNeill, who has a $19.50 target price, says she believes the company “will continue to exert itself as the prominent industry consolidator, leading to future revenue growth and margin improvement through greater economies of scale.”

She sees a dividend payout ratio of just 50 per cent of the company’s “distributable cash flow” in 2013. That moderate payout, combined with rising earnings and a dividend reinvestment plan that’s popular among Parkland’s shareholders, causes Ms. MacNeill to forecast dividend increases of about 4 per cent in each of the next three years.

Certainly, Parkland isn’t without risk. Companies that deal in commodities and want to grow by a stream of deal-making can easily make a misstep. So far, however, Parkland’s management has made the right moves, making the shares an intriguing option to energize a portfolio.

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