Plenty of mileage in fuel retailers, with EVS lending a further spark

The days when motorists would tell neatly attired service station attendants to “fill her up” are long gone, but the fuel-focused convenience retailers are still taking the mantra to heart and topping tanks with new sites.

This week, Viva Energy (ASX:VEA) settled its $300m purchase of Coles Express and its 700-plus sites.

Last month, Viva said it would acquire the South Australian convenience chain On The Run (OTR) for $1.1bn, from private owner Peregrine Capital.

The deal would add 205 canopies to Viva’s already impressive highway presence of 1350 Shell and Liberty outlets. But the competition regulator needs to approve it.

Sector leader Ampol (ASX:ALD) in 2021 acquired New Zealand counterpart ZEnergy for close to $Nz2bn ($1.86bn), with the purchase price offset by the $NZ570M divestment of the Gull distribution business.

At home, the owners of 7Eleven have hoisted the forsale sign, with a mooted $2bn price tag. Under the Mobil brand, the chain accounts for more than a third of the eastern seaboard fuel market.

The flurry at the bowser comes at a time of tailwinds for fuel retailers – and inevitable risks as the electric vehicle (EV) transition rolls out.

On the positive side, the post-pandemic recovery in vehicle usage has increased both foot traffic and the retail and refining margins on fuel.

Viva’s Geelong and Ampol’s Lytton, Brisbane refineries – the last two in Australia – are now producing bumper profits.

The key reason is widening “crack spreads” – not a reference to a tradie’s ill-fitting daks but to the refining catalytic cracking process and the difference between the price of the crude oil input and that of the end products.

As broker E&P notes, diesel retail margins are especially high – 19 cents per litre in April, compared with 12 cents for petrol. In June last year, the respective margins were 7 cents and 10 cents.

With diesel averaging more than $2 a litre at the pump, motorists aren’t exactly seeing the benefit: a familiar tale.

As more EVS glide silently past the bowsers to dedicated charging areas, the fuel chains need to enhance their in-store offerings and we’re not just talking about $2 self-serve coffees, which – by the way – are a welcome antidote to overpriced barista brews.

The retail-oriented OTR is being touted as the ideal model. OTR sites incorporate outlets such as Guzman Y

Gomez, Krispy Kreme donuts and even dog washes – crucial distractions as motorists wait for their EVS to recharge.

Viva’s calendar 2022 net profit surged 211 per cent to $596m, with refining and retailing/commercial operations contributing roughly equally.

With a $7bn market cap, Ampol has 1900 outlets and operates the Lytton refinery in Brisbane, as well as 16 terminals and six major pipelines.

Formerly known as Caltex, Ampol saw its underlying earnings jump 82 per cent to $345.4m in the March quarter, buoyed mainly by enhanced margins at Lytton and a 40 per cent jump in fuel sales.

Valued at $4.6bn and $7bn respectively, Viva and Ampol offer high-octane yields of above 6 per cent and pay fully franked dividends.

Both stocks trade on a similar multiple of roughly nine times current year earnings, with Viva shares up 6 per cent over the past year compared with Ampol’s 14 per cent decline.

With petrol there’s often a cheaper place down the road, but unlike pre-easter fuel prices, these stocks aren’t trading at a big premium.

This story does not constitute financial product advice. You should consider obtaining independent advice on any financial decisions.