Downstream Petroleum I Industry Spotlight Q Investment Banking I Industry Spotlight. Downstream Petroleum I Q3 2017

Transcription

1 Investment Banking I Industry Spotlight Downstream Petroleum I 1

2 Downstream Petroleum Group Overview Downstream Petroleum Investment Banking Sector Leadership Team Commitment to Downstream Petroleum Fifth Third is a leading financial partner and capital markets advisor in the Convenience Store and Downstream Fuel and Lubricant Distribution industries (collectively Downstream Petroleum ) Fifth Third has extensive credit exposure to the Downstream Petroleum industry and is actively engaged in the M&A marketplace Fifth Third has relationships with the largest operators in the U.S., reflecting our dedication to the C- Store industry with M&A advisory, capital markets activity, lending, and risk management strategies Capital Raising & Advisory M&A Advisor Lead Credit Provider Co-Manager on Bond Transactions Syndicated Lending Representative Services Risk Management Treasury Management Commodities Hedging Foreign Exchange Risk Management Interest Rate Risk Management Key Downstream Petroleum Contacts Mike Burr Managing Director Michael.Burr@53.com (630) Bill Benston Managing Director Bill.Benston@53.com (404) Craig Wolf C&R Group Head Craig.Wolf@53.com (312) Debt Capital Markets Kirk Johnson Managing Director Kirk.Johnson@53.com (513) Investment Banking Corporate Banking Recent M&A Transactions Rob Bohn Director Robert.Bohn@53.com (404) Zac Kennedy Sr. Associate Zac.Kennedy@53.com (704) Mike Ross Sr. Vice President Mike.Ross@53.com (972) Equity Capital Markets Mike Ryan Managing Director Michael.Ryan@53.com (615) Michael J. Burr Managing Director Bill Benston Managing Director Robert Bohn Director $425,000,000 Mike has 25+ years of investment banking experience with JP Morgan, Challenger Capital and Fifth Third Securities Mike has advised several of the largest c-store operators in North America in M&A as well as debt and equity capital raises Bill has over 20 years of investment banking experience with SunTrust Robinson-Humphrey, The Breckenridge Group and Fifth Third Securities Bill is a board member of The McPherson Companies and has focused on middle-market M&A transactions Rob has 12+ years of investment banking experience with Citigroup, Ewing Bemiss & Co. and Fifth Third Securities Rob has been active in developing Fifth Third s c- store relationships, advising on M&A and capital structuring issues has been acquired by Sell-Side Advisor has been acquired by Croton Holding Company Sell-Side Advisor has been acquired by Sell-Side Advisor 2

3 Public Market Valuations 5-Year Share Price Performance 5-Year EV / Forward EBITDA Performance 300.0% 250.0% Convenience Stores Petroleum Based Lubricants S&P 500 Petroleum Distribution & Logistics 16.0x 14.0x Convenience Stores Petroleum Distribution & Logistics Petroleum Based Lubricants S&P % 150.0% 100.0% 12.0x 10.0x 11.4x 10.9x 9.8x 9.6x 50.0% 0.0% 8.0x (50.0%) Sep-12 Sep-13 Sep-14 Sep-15 Sep-16 Sep x Sep-12 Sep-13 Sep-14 Sep-15 Sep-16 Sep-17 Sub-Sector Indices Stock Price Performance Sub-Sector Number of Companies Median Enterprise Value Median % Change in Price Median TEV / LTM Multiples Median TEV / Forward Multiples $ in millions YTD Revenue EBITDA Revenue EBITDA C-Stores 3 $5, % 0.8x 10.1x 0.6x 8.2x Petroleum Distribution & Logistics 7 2,564.2 (11.7%) 0.5x 10.7x 0.5x 9.3x Petroleum Based Lubricants 4 5, % 0.8x 13.9x 0.8x 13.6x S&P % 2.4x 12.2x Source: S&P Capital IQ and company filings 3

4 Public Company Comparables ($ in millions) Stock % of 52- Enterprise Value / Price at Week Market Enterprise LTM Financials Revenue Growth LTM Margins Debt / Price / Revenue EBITDA 9/29/17 High Cap Value Revenue EBITDA '15A - '16A '16A - '17E Gross EBITDA EBITDA Earnings LTM 2017E LTM 2017E C-Stores Alimentation Couche-Tard Inc % 27,238 34,516 39,331 2, % 22.7% 17.8% 6.4% 3.3x 23.4x 0.9x 0.7x 13.8x 11.6x Casey's General Stores, Inc % 4,202 5,116 6, % 28.8% 22.4% 7.5% 2.1x 24.8x 0.8x 0.6x 10.1x 8.2x Murphy USA Inc % 2,490 3,177 10, (10.2%) 39.9% 4.7% 3.6% 2.4x 20.2x 0.3x 0.2x 8.6x 7.3x Mean 2.0% 30.5% 15.0% 5.8% 2.6x 22.8x 0.6x 0.5x 10.8x 9.0x Median 5.3% 28.8% 17.8% 6.4% 2.4x 23.4x 0.8x 0.6x 10.1x 8.2x Petroleum Product Distribution and Logistics Energy Transfer Partners, L.P. $ % $22,115 $59,277 $23,656 $4,809 (36.3%) 24.6% 21.4% 20.3% * 6.9x NM 2.5x 2.2x 12.3x 8.8x Sunoco LP % 3,082 7,652 16, (15.0%) 6.4% 13.1% 4.0% 6.6x NM 0.5x 0.5x 11.5x 11.8x World Fuel Services Corp % 2,274 2,782 31, (11.1%) 20.9% 3.0% 0.8% 4.1x 21.8x 0.1x 0.1x 10.7x 7.5x Delek US Holdings, Inc % 2,134 2,564 4, (12.2%) 29.2% 10.3% 1.2% 14.9x * NM 0.6x 0.5x 46.5x * 10.9x Global Partners LP % 587 1,846 8, (20.1%) 12.2% 6.6% 2.7% 5.4x NM 0.2x 0.2x 7.9x 9.3x CrossAmerica Partners LP % 923 1,491 1, (15.8%) 23.0% 8.2% 3.8% 7.8x NM 0.8x 0.7x 20.3x * 12.8x Sprague Resources LP % 555 1,008 2, (31.4%) 3.7% 9.7% 4.0% 4.3x 12.4x 0.4x 0.4x 9.6x 8.5x Mean (20.3%) 17.1% 10.3% 2.8% 5.9x 17.1x 0.7x 0.6x 10.4x 9.9x Median (15.8%) 20.9% 9.7% 3.3% 6.0x 17.1x 0.5x 0.5x 10.7x 9.3x Petroleum Based Lubricants Brenntag AG $ % $8,585 $10,539 $12,811 $919 (1.4%) 4.2% 22.2% 7.2% 2.6x 20.7x 0.8x 0.9x 11.5x 11.8x Fuchs Petrolub SE % 7,476 7,394 2, % 2.2% 37.0% 17.3% * 0.0x NA 2.7x 3.0x 15.7x 16.9x Parkland Fuel Corporation % 2,764 4,190 5, % 64.6% 11.0% 3.7% 7.3x NM 0.8x 0.5x 21.3x 15.4x Calumet Specialty Products Partners, L.P % 629 2,712 3, (14.6%) 4.6% 11.2% 5.8% 9.3x NM 0.7x 0.7x 12.0x 10.6x Mean (1.8%) 18.9% 20.3% 5.5% 4.8x 20.7x 1.3x 1.3x 15.1x 13.6x Median 0.7% 4.4% 16.7% 5.8% 4.9x 20.7x 0.8x 0.8x 13.9x 13.6x Mean (10.2%) 20.5% 14.2% 4.2% 4.8x 20.5x 0.9x 0.8x 12.1x 10.8x Median (11.6%) 21.8% 11.1% 3.9% 4.3x 21.3x 0.7x 0.6x 11.5x 10.7x * Excluded from mean and median NA - Not available NM - Not meaningful E - Estimate Enterprise value equals market capitalization plus minority equity plus debt minus cash. Source: Company filings and S&P Capital IQ. Source: S&P Capital IQ 4

5 U.S. M&A Volume and Valuation Trends Transaction Volume 24,000 20,000 16,000 Recession Recession 12,000 8, vs % 4, Q Q 2017 Under $25mm $25 to $500mm Above $500mm Undisclosed Median Transaction Multiples (Enterprise Value / LTM EBITDA) 12.0x 10.0x 8.0x 8.0x 9.3x 8.8x 8.7x 8.7x 9.0x 07 to 11 Median Financial = 8.4x Strategic = 8.8x 7.2x 8.3x 8.1x 8.8x 12 to 16 Median Financial = 9.3x Strategic = 8.9x 9.9x 9.3x 9.0x 8.7x 8.7x 8.9x 8.4x 8.3x 8.4x 9.6x 9.7x 9.3x 10.0x 10.2x 10.2x 8.5x 6.0x YTD 8/2016 Financial Buyers Strategic Buyers YTD 8/2017 Note: This data represents the entire U.S. market (all industries) Source: PitchBook, S&P Capital IQ, and S&P Capital IQ LCD 5

6 M&A Case Study: Convenience Stores Major Players Differ in Retail Convenience Store Strategy Marathon Maintains Speedway as an Integrated Business Marathon Petroleum Corporation s ( MPC ) Board conducted a thorough review of potential strategic alternatives for MPC s c-store chain, Speedway Board s conclusion: Retaining Speedway as an integrated business within MPC drives the greatest long-term value for MPC s shareholders Strategic Rationale Integration Synergy Value: Substantial integration synergies (estimated to be ~$270.0 $390.0M per year) would be lost in a separation Leverage and Liquidity: Cash flow diversification from Speedway s merchandise sales provides significant value as a buffer to commodity cycles Focus on Growth: Speedway projects continued earnings growth from past organic investments and acquisitions. Speedway recognizes significant opportunities for additional investments over the longterm Speedway Retail Network & MPC Pipeline Infrastructure Sunoco Sells 1,100 C-Store to 7-Eleven, Inc. Sunoco LP ( SUN ) entered into a definitive agreement on April 6 th, 2017 to sell approximately 1,110 convenience stores to 7-Eleven, Inc. ( 7-Eleven ) for a purchase price of $3.3 billion in cash, plus fuel, merchandise, supplies and other inventories at close and a long term take or pay fuel contract was also included Strategic Rationale Streamline Operations: SUN s focus on the wholesale operations will drive MLP qualifying income and right-size its cost structure De-Leveraging: Transaction proceeds will allow SUN to reduce leverage, placing it within a range of x and improving coverage ratio Focus on Growth: This transaction provides breathing room to pursue and fund opportunistic M&A and high-return organic growth SUN Stores Sold to 7-Eleven & Stores to be Sold Convenience Stores Sources: Marathon Strategic Actions Update; Marathon Investor Presentation; Sunoco LP Investor Presentation Sold to 7-Eleven To Be Sold 19 Geographic Regions 1100 West Texas / New Mexico 182 Oklahoma / North Texas 25 Subtotal 1,100 Subtotal 207 6

7 M&A Case Study: Convenience Stores Comparative Strategies: Integration or Simplification? Different Conclusions Driven by Different Strategic Priorities Sunoco and Marathon came to different conclusions as to the value of an integrated retail and distribution operation for their shareholders Key differences between the Companies were instrumental in their decision to pursue different strategies Characteristic Differences between the Companies Impact of Selected Strategy Credit Ratings SUN is non-investment grade MPC is investment grade Leverage Profile SUN s Q cash flow leverage ratio was ~6.5x MPC s Q cash flow leverage was ~2.0x (1) Shareholder Considerations As an MLP, SUN is focused on maintaining quarterly unit distributions and incentive distribution rights MPC is focused on long-term growth and risk management SUN s leverage profile improvement may offset loss of retail cash flows MPC is committed to maintaining its investment grade rating and Speedway provides diverse cash flow streams that improve MPC s risk profile SUN needed a liquidity event to de-lever in order to right size its capital structure for future growth without further diluting current unit holders MPC leverage is manageable and not in need of immediate improvement Sale of retail assets provides SUN with immediate capital to de-lever, invest in capital expenditures or unit buy backs Speedway provides long-term stability to MPC as it provides diverse cash flows and a secure outlet for Marathon Fuel Impact to Independent Operators Expect Continued M&A Activity With a major distraction behind them, Marathon/Speedway is likely to continue to focus on growing its retail and distribution network Acquisition targets will need to be able to switch to Marathon fuel at little or no incremental cost Sunoco s leaner business operation and improved leverage profile will enable them to approach more targeted acquisitions of fuel distributors Sunoco and Marathon are likely to re-engage in M&A, competing with very active buyers such as 7-Eleven, Circle K and GPM Competitive Pressure May Increase Both Marathon and Sunoco are positioning themselves for growth Organic or acquisition growth will continue to increase the size of these already large companies, increasing their substantial cost advantages compared to smaller independent operators Notes: (1) Calculation excludes MPLX debt 7

8 M&A Case Study: Petroleum Lubricants M&A Activity Driven by PE Roll-Up Strategies Private Equity Groups ( PEG s ) have been driving a considerable amount of lubricant manufacturing and distribution M&A activity They are attracted by the ability to drive higher profit margins through economies of scale and the numerous bolt-on acquisition targets available in the highly fragmented industry Improving economic conditions and a potential for tax reform are also increasing demand for new customers, products and distribution routes to take advantage of market conditions Reladyne: Illustrative Case Study of Private Equity as a Catalyst for M&A Building the Platform Expanding Products & Services Ramping Up Scale Prior to Exit Change of Control to New Consolidator Continuing Rapid M&A Growth H H PE Invests AEA Investors acquires Reladyne Acquisitions James P. Hill Distribution (Dec 2011) SMF Energy Corp (May 2012) Paulson Oil Company (May 2013) Turbo Filtration (July 2014) Acquisitions Fentress Oil Co. (Jan 2015) Greg Wright Supply, Inc. (Jan 2015) Sunwell Corp (Jan 2015) Palatine Oil Co. (June 2015) Mid-State Industrial Supply Co. (Nov 2015) J.B. Weimar, Inc. (Nov 2015) Automotive Service, Inc. (Dec 2015) Acquisitions Parker Oil Co. (Jan 2016) Industrial Action Services, Inc. (Feb 2016) U.S. Refueling, LLC (May 2016) Hollingsworth Lubricants (June 2016) PE Invests Audax Group, Inc. acquires RelaDyne from AEA Acquisitions Cardwell Distributing (Sept 2016) Slidell Oil Co. (Nov 2016) Acquisitions Sensmeier Oil Co. (Feb 2017) Hager Oil Co. (April 2017) Western Marketing Inc. (May 2017) 8

9 Economic Dashboard Downstream Petroleum continues to benefit from macroeconomic trends Expectations for deregulation, tax reform and increased infrastructure spending have increased consumer and business confidence Improved economic growth and consumer confidence should offset any increases in retail gasoline prices while spurring continued in-store merchandise sales A sustained rebound in manufacturing is likely to increase petroleum based lubricant demand, in addition to diesel consumption from distribution networks Real GDP Growth 5.0% 5.0% 4.0% 3.5% 2.9% 2.6% 2.3% 2.3% 2.6% 2.6% 2.0% 2.0% 2.0% 2.0% 2.1% 1.9% 1.4% 1.4% 1.4% 0.9% 0.8% 0.9%0.8% 0.7% (1.2%) 1Q 3Q 2Q 4Q 3Q1Q 4Q2Q1Q3Q2Q4Q3Q1Q4Q 2Q1Q 3Q 2Q 4Q 3Q 4Q 1Q 1Q 2Q '14 '14 '15 '15 '16 '16 '17 '17 Source: Bureau of Economic Analysis National Unemployment Rate 7.0% 6.0% 5.0% 4.0% Source: Bureau of Labor Statistics PMI Manufacturing Index Consumer Sentiment Index Oil & Retail Gas Prices (in $ s per gallon) (in $ s per barrel) $4.00 $3.50 $3.00 $2.50 $2.00 $1.50 Gas WTI $110.0 $100.0 $90.0 $80.0 $70.0 $60.0 $50.0 $40.0 $30.0 $20.0 Source: S&P Capital IQ Source: University of Michigan Source: Energy Information Administration 9

10 U.S. Middle Market Loan Market Trends Loan Volume: Low Level of Supply Continues ($ in billions) Non-Rated Term Loan Yields Tighten Further [1] Non-Sponsored Sponsored MM B-rated MM NR $70.0 $60.0 $50.0 $40.0 $30.0 $20.0 $10.0 $ % 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% 6.29% 6.12% Covenant-Lite Volume Surges in 2Q17 ($ in billions) Leverage Multiples Remain Aggressive on Middle Market LBOs $ x 1st Lien Debt to EBITDA Junior Debt to EBITDA $ x $ x $ x $ x $ x $ x $ x Note: This data represents the entire U.S. middle market (all industries) Note: The middle market is defined as deal size < $100 million and borrower sales < $500 million [1] Includes both non-sponsored and sponsored transactions; sufficient data not available for MM NR loans in 1Q15 and 1Q17 Source: Bloomberg, S&P Capital IQ LCD, and Thomson Reuters LPC 10

11 Notes & Definitions S&P 500 Index- A broad index that includes American Companies. EBITDA- A company's earnings before interest, taxes, depreciation, and amortization, is an accounting measure calculated using a company's net earnings, before interest expenses, taxes, depreciation and amortization are subtracted, as a proxy for a company's current operating profitability. Dry Powder- Refers to cash reserves kept on hand to cover future obligations or to purchase assets. GDP- Gross domestic product is the market value of the goods and services produced by labor and property located in the United States Consumer Sentiment Index- The University of Michigan Consumer Sentiment Index is a consumer confidence index published monthly by the University of Michigan. The index is normalized to have a value of 100 in December 1964 National Unemployment Rate- the percentage of the total labor force that is unemployed but actively seeking employment and willing to work. Non-Farm Payroll- Nonfarm payroll employment is a compiled name for goods, construction and manufacturing companies in the US. It does not include farm workers, private household employees, non-profit organization employees, or government employees. It is an economic indicator released monthly by the United States Department of Labor as part of a comprehensive report on the state of the labor market. Housing Starts- are the number of new residential construction projects that have begun during any particular month. The Economist- offers authoritative insight and opinion on international news, politics, business, finance, science, technology and the connections between them LBO -- leveraged buyout (LBO) is the acquisition of another company using a significant amount of borrowed money to meet the cost of acquisition. The assets of the company being acquired are often used as collateral for the loans, along with the assets of the acquiring company. Industrial Production Index (IPI)- is an economic indicator published by the Federal Reserve Board of the United States that measures the real production output of manufacturing, mining, and utilities Capital Goods Orders. Covenant-lite loans- means that debt is being issued, both personally and commercially, to borrowers with less restrictions on collateral, payment terms, and level of income. IRR-Internal Rate of Return. 11

12 About Fifth Third Capital Markets Fifth Third Capital Markets is the marketing name under which Fifth Third Bank and its subsidiary, Fifth Third Securities, Inc., provide certain securities and investment banking products and services. Banking products and services are offered by Fifth Third Bank. Securities products and services are offered by licensed securities representatives of Fifth Third Securities, Inc., who may be employees of Fifth Third Bank. Important notice This document has been prepared by Fifth Third Bank ( Fifth Third ) or one of its subsidiaries for the sole purpose of providing a proposal to the parties to whom it is addressed in order that they may evaluate the capabilities of Fifth Third to supply the proposed services. It is not intended to provide specific investment advice or investment recommendations and does not constitute either a commitment to enter into a specific transaction or an offer or solicitation, with respect to the purchase or sale of any security. The information contained in this document has been compiled by Fifth Third and includes material which may have been obtained from information provided by various sources and discussions with management but has not been verified or audited. This document also contains confidential material proprietary to Fifth Third. Except in the general context of evaluating our capabilities, no reliance may be placed for any purposes whatsoever on the contents of this document or on its completeness. No representation or warranty, express or implied, is given and no responsibility or liability is or will be accepted by or on behalf of Fifth Third or by any of its subsidiaries, members, employees, agents or any other person as to the accuracy, completeness or correctness of the information contained in this document or any other oral information made available and any such liability is expressly disclaimed. This document and its contents are confidential and may not be reproduced, redistributed or passed on, directly or indirectly, to any other person in whole or in part without our prior written consent. Past performance is No Guarantee of Future Results. Fifth Third Capital Markets is a wholly owned subsidiary of Fifth Third Bank offering investment banking++, debt capital markets+, bond capital markets++, equity capital markets++, financial risk management+, and fixed income sales and trading++. Fifth Third Bank provides access to investments and investment services through various subsidiaries, including Fifth Third Securities. Fifth Third Securities is the trade name used by Fifth Third Securities, Inc., member FINRA/SIPC, a registered broker-dealer and registered investment advisor registered with the U.S. Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training. Securities and investments offered through Fifth Third Securities, Inc. and insurance products: Are Not FDIC Insured Offer No Bank Guarantee May Lose Value Are Not Insured By Any Federal Government Agency Are Not A Deposit + Services and activities offered through Fifth Third Bank ++ Services and activities offered through Fifth Third Securities, Inc Fifth Third Bank