After CrossAmerica Partners (NYSE: CAPL) rolled the dice on their large acquisition of 7-Eleven, they saw 2022 as a hit or miss for their very high payout yield of 10.81%, like my previous article Explain. Although 2022 has started with booming operating conditions, with wholesale fuel margins and volumes reaching near record highs, unfortunately, a reduction in distribution is still likely despite the extraordinary times.
Executive summary and ratings
Since many readers are likely short on time, the table below provides a very brief summary and scores for the main criteria assessed. This google doc provides a list of all my equivalent ratings as well as more information about my rating system. The following section provides a detailed analysis for readers wishing to delve deeper into their situation.
*Instead of simply assessing distribution coverage through distributable cash flow, I prefer to use free cash flow as it provides the strictest criteria and also best captures the true impact on their financial position.
Although 2021 ends with a rather murky outlook due to the uncertainty surrounding the contributions of their acquisition of 7-Eleven, fortunately their results for the first quarter of 2022 have been released and so with this acquisition now largely integrated, they help provide a clearer picture. Reviewing their cash performance shows their cash from operations grew a very significant 60.67% year-over-year to $28.4 million from its previous result of 17 .7 million in the first quarter of 2021, but alas, this is still insufficient to reduce the burden of their distribution payments.
In addition to providing only a weak distribution coverage of 97.68% once their capital expenditure of $8.9 million was eliminated in the first quarter of 2022, these results were significantly helped by a cash draw working capital of $3.4 million. If removed, this would see their underlying operating cash flow at only $25 million and thus leave their distribution coverage lower at 80.65% and therefore even more dependent on debt financing to fill consumption cash. Given that their capital expenditures are actually down 15.88% year-over-year from their previous level of $10.6 million in the first quarter of 2021 despite the acquisition of wide range of new assets from 7-Eleven, their low distribution coverage cannot simply be blamed on growth. investments.
In the previous analysis, it was hoped that their acquisition of 7-Eleven would finally put an end to this cash burn, but unfortunately that has not been the case, which is particularly disappointing as it coincides with difficult conditions. booming operation in the refined products market. . This resulted in near-record fourth quarter 2021 wholesale fuel margins that continued into the first quarter of 2022, as shown in the chart below.
It can be seen that their wholesale fuel margin of $0.102 in the first quarter of 2022 is a near record in the past five years, with only their result of $0.108 in the second quarter of 2020 being higher. Clearly, higher wholesale fuel margins contribute to their financial performance, although it’s normally offset by lower volumes due to demand destruction, which offsets overall, but it’s worth noting that this dynamic does not seem to have manifested significantly during the first quarter of 2022, creating extraordinary moments. Unfortunately, their acquisition of 7-Eleven skews the comparison of their year-over-year results, but fortunately those of their closest counterpart, Sunoco (SUN), can still be used to estimate relative change given the commercial nature of their industry. These show that during the first quarter of 2022 their volumes were effectively flat year over year at 1,769 million gallons compared to 1,756 million gallons during the first quarter of 2021, according to Sunoco. Q1 2022 8-K.
While the lack of demand destruction in the first quarter of 2022 may sound positive, it actually makes their inability to provide adequate distribution coverage even more disappointing, as these results likely represent some of the best that investors can reasonably expect. hope to see, let alone be supported. well in the future. Given the prospect of a looming recession as the Federal Reserve pushes interest rates up at the fastest rate in decades, this is expected to depress demand, thereby reducing wholesale volumes or margins on fuel, these booming operating conditions should end fairly soon.
Despite their continued consumption of cash to fund their oversized distribution payments throughout the first quarter of 2022, their net debt has further declined from $813.9 million at the end of 2021 to just under $790.7 million. . Unsurprisingly, this stemmed from divestments of $1.5 million and, more importantly, an additional $25 million preferred stock issue of which they received $24.5 million net of related expenses. While not a huge difference, these new units are entitled to a 9% distribution yield that will consume an additional $2.25 million per year of their cash flow going forward. This makes it a particularly expensive way to reduce their net debt but, as we have seen below, the impact has only been marginal.
Thanks to their better financial performance during the first quarter of 2022 and a slightly lower net debt, their leverage has decreased in parallel. Despite the positive direction, it remains well within very high territory given that both of their results are still well above the applicable threshold of 5.01 with their respective net debt to EBITDA and net debt to operating cash flow. decreasing to 6.54 and 7.91 from their previous respective results of 7.27 and 8.53 at the end of 2021. This follows the same trend seen during the fourth quarter of 2021 which was driven by the integration of their 7-Eleven acquisition, as my previous analysis discussed.
Going forward, this positive trend is unlikely to continue now that their acquisition of 7-Eleven is largely integrated and, as previously reported, their booming wholesale fuel margins are unlikely to continue in the future. This means that unless they continue to issue more preferred stock, their deleveraging will at best cease, or even reverse given the continued consumption of cash to fund their oversized distribution payments.
While their liquidity once again seems to have improved on the surface, that only tells a fraction of the story. Although their respective current and cash ratios improve to 0.70 and 0.07 compared to their previous respective results of 0.62 and 0.05 at the end of 2021, their liquidity remains weak given only minimal improvements in the leverage ratio limit for their credit facility agreement, in accordance with the management commentary included below.
“Our overall combined leverage ratio would be approximately 4.9x, compared to approximately 5.1x at the end of Q4 2021.”
– CrossAmerica Partners Q1 2022 conference call.
While this nevertheless represents an improvement, it remains small and has also been aided by their issuance of preferred shares and therefore not necessarily fundamental improvements that can be regularly replicated without imposing additional costs on their already strained cash inflows. There are several moving elements in this situation, the most significant being that after September 30, 2022, the leverage ratio limit for their credit facility clause returns to only 4.75 and therefore below their current result of 4.90. Following the previously discussed outlook for their wider leverage, it seems very doubtful that this will be achievable so quickly even if achieved, that it can be sustained once their net debt starts climbing higher on their backs. cash burn to fund their oversized distribution payments.
Since they should see their leverage ratio not only reach this limit, but at least fall slightly below it to maintain their distributions, a reduction is likely in the coming months. If you are interested in more details regarding their liquidity and credit facility clause, please refer to my previously linked article as not much seems to have changed since publication.
Even if these booming operating conditions were to hold forever, their distributions would still be oversized, thus leaving them very risky with the end of the third quarter of 2022 on the horizon as the deadline given their credit facility covenant which will likely see a reduction. Following this analysis, it should come as no surprise that I continue to believe that my maintenance rating is appropriate again.
Notes: Unless otherwise stated, all figures in this article are taken from CrossAmerica Partners’ SEC Filingsall calculated figures were performed by the author.