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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

When Bob Espey's gas tank is nearing empty, he'll often begrudgingly pull into a Petro-Canada or Shell station near his Calgary office. As CEO of Parkland Fuel Corp., Canada's largest independent fuel distributor, he'd rather use a station run by his company. "[But] I struggle to find a Parkland site in Calgary and Edmonton," he says. "We're underrepresented."

If Espey has his way, that will change. Parkland is a fuel wholesaler to gas stations and commercial clients, but it also owns and operates hundreds of stations and convenience stores under brand names that include Fas Gas Plus, Pioneer and many Esso locations. In the past, Parkland's operations were concentrated in small towns in the Prairie provinces. But the company has been on an expansion drive in recent years that has shifted into high gear.

Last August, Parkland bought most of the Canadian assets of CST Brands from Alimentation Couche-Tard for $965 million, adding about 490 outlets in Quebec and Atlantic Canada—mostly Ultramar stations. In April, Parkland bought 129 gas stations in the Vancouver area from Chevron Canada, as well as a refinery and marine and airport fuel businesses, for $1.5 billion. After the deals close, likely later this year, Parkland will operate more than 1,800 stations across Canada, owning 576 of them itself.

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Gasoline retailing is a notoriously low-margin business—profits amount to just a few cents a litre—which is why majors such as Imperial Oil, Shell Canada and Chevron have been selling stations to independents for years. Parkland started as a feedlot in Red Deer, Alberta, in the 1960s, but soon shifted to fuel distribution, and it has learned to squeeze profits out of the business as it has grown.

Over the past five years, the company's revenues have climbed by almost 60% and are forecast to reach almost $10 billion this year. Operating earnings, as measured by adjusted EBITDA, have surged by 19% to $253.5 million in 2016.

Some investors may see a mini Couche-Tard in Parkland— both companies have grown rapidly by acquisition. But there are important differences, says James Reid, an equity analyst with Haywood Securities. "Couche-Tarde is a convenience store owner first and a gas station operation second," he says. "With Parkland, that's flipped around."

Couche-Tard is also a global company. Parkland owns some outlets in North Dakota, but Espey remains focused on growth prospects among Canada's 12,000 gas stations. "The market is still quite fragmented," he says.

Despite Parkland's solid growth so far, there are concerns about its debt load. If the CST and Chevron deals close as planned, the company's long-term debt will climb to about $2.1 billion, or 3.5 times its combined EBITDA of $599 million (excluding synergies). But Parkland has usually traded near that multiple, says Donald Marleau, a credit analyst with S&P Global Ratings. Espey expects continued strong growth in EBITDA, which will allow the company to pay the debt down quickly.

The Chevron refinery in Burnaby, British Columbia, also worries some analysts. Refinery earnings tend to track crude prices, which can be volatile. But Espey says Parkland bought the refinery partly because 85% of its output goes to Chevron's Vancouver-area stations.

The other glaring concern with Parkland is valuation. Its stock has been trading at 60 times trailing earnings per share recently, and 34 times forecast earnings for 2017, which is pricey even for a growth stock.

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But analyst Reid says the enterprise-value-to-EBITDA ratio is a better metric in sectors where profits can waver due to factors such as hedging strategies and the weather. Parkland has lately been trading at 7.6 times its forecast EBITDA for next year, while its peers, such as Couche-Tard, are trading at about 9.4 times.

As Espey aims to get even bigger, he's still on the lookout for one small target: a station near his workplace. "Hopefully we'll find an opportunity," he says.

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