Spencer P. Cavalier, CFA, ASA, Director; Cedric C. Fortemps, CFA, Director; Stephen C. Lynch, CPA, Senior Analyst; Andrew A. LoPresti, CPA, CFE, Senior Analyst; Downstream Energy & Convenience Retail Investment Banking Group

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Introduction
The downstream energy industry has been our primary focus for many years. Over that time we have had the opportunity to review many different types of charts and graphs (herein referred to as “charts”) that were intended to summarize pertinent information and relationships between sets of industry and/or financial data. While providing some interesting information, many of these charts fail to fully provide the analyses we find particularly useful, so we have created a set of charts that we believe best illustrate the most pertinent downstream industry and financial trends. In this issue, we introduce the first set of charts, along with some commentary for your consideration and review. It is our hope that you find these beneficial both now and in the future as they are updated. As always, we appreciate your feedback and ideas.

There are two main objectives for creating these charts. The first objective relates to understanding whether correlations (either positive or negative) exist between how private companies and publicly traded companies perform, and whether public companies serve as a reliable benchmark from which to value private companies. Public convenience store companies are required to disclose quarterly operating results and receive a lot of media exposure surrounding their earnings releases and analyst calls. Securities analysts who follow the convenience store sector then use this financial information together with other available data to issue reports based on their own analysis and interpretation of the operating results. This is certainly valuable information if you are an investor, but none of these reports attempt to understand whether a correlation exists between public company performance and private company valuations that can be used meaningfully by privately held business owners.

Our second objective is to be a resource for a set of core, thought provoking charts that are updated quarterly and available all in one place. In this issue, we are introducing a set of charts that we believe are pertinent and illustrative. The goal is to provide our readers with a set of resources to which they may quickly refer in order to understand trends and relationships occurring in the downstream energy industry. The charts will be updated quarterly and the most recent ones will be included in our next issue and will all be available on our website http://www.matrixenergyandretail.com/markets_perspective.php.

In total we have created five proprietary Matrix charts and indices as listed below. In this issue we introduce the first two charts, the Matrix CS-EVX Chart™ and the Matrix CS-MC Index™, and we plan to publish the three remaining charts in our next issue. These charts were developed internally at Matrix and contain an explanation of how we think this information will bring added value to you and your business. We have also included select charts on downstream energy industry macro data that reflect important trends that need to be considered when projecting future performance and updating valuation. Some of the charts contain source notes, which are included at the end of the overview.

1. Matrix CS-EVX Chart™: The Matrix Convenience Store Enterprise Value Multiple Chart
2. Matrix CS-MC Index™: The Matrix Convenience Store Market Capitalization Index
3. Matrix Fuel MLP-EVX Chart™: The Matrix Wholesale Fuel MLP Enterprise Value Multiple Chart
4. Matrix Fuel MLP-MC Index™: The Matrix Wholesale Fuel MLP Market Capitalization Index
5. Matrix Fuel MLP-Yield Chart™: The Matrix Wholesale MLP Dividend Yield Chart

I. Publicly Traded Convenience Store Companies
In this section we focus on the four companies that Matrix categorizes as public companies operating primarily as convenience retailers: The Pantry, Inc. (PTRY), Susser Holdings Corporation (SUSS), Casey’s General Stores, Inc. (CASY), and Alimentation Couche-Tard, Inc. (ATD-B Shares). Not included in this segment are companies with substantial convenience retail operations that are part of larger enterprises that are also refiners, as we believe the financial performances of those companies are not comparable to retail centric companies. For example, you will note that Delek US Holdings (DK) and Marathon Petroleum Corporation (MPC) are not included. Further, Master Limited Partnerships (MLPs) are not included in this section as those companies are primarily focused on wholesale fuel distribution and the collection of rents, primarily because retail income is non-qualifying MLP income under the Internal Revenue Code. MLPs will be discussed further in our next issue.

Purpose:
The purpose of the Matrix CS-EVX Chart™ is to illustrate historical Corporate Enterprise Value/EBITDA trading multiples for each company and the average quarterly trading multiple and trendline for all four companies. This chart provides a general guide of how the industry has performed over the last 5 years, but these multiples cannot be directly applied to privately held companies for reasons highlighted below.

Enterprise Value to EBITDA:
The majority of sale transactions for privately-held companies are structured as asset sales.  So, as an alternative to market capitalization as a measure of value (which is the total market value of a company’s outstanding common shares), it is more relevant to examine Enterprise Value of public companies because Enterprise Value is essentially the total value of a company’s assets (real and personal property, goodwill and other intangible assets), or alternatively the market value of the total invested capital (equity plus term debt).     We calculate Enterprise Value (EV) as follows:

EV = Market Cap. + Preferred Stock + Interest Bearing Debt + Minority Interest – Excess Cash

At Matrix, we define Excess Cash as only the portion of cash that allows the current ratio (current assets – current liabilities) to exceed one.  The theory is that the value of the common equity inherently reflects the existing level of working capital so any excess liquidity would be retained by the seller.  We use a current ratio benchmark of one because it is a level at which many convenience store companies operate effectively.

EBITDA is defined as Earnings Before Interest Taxes Depreciation and Amortization.

Corporate Level EBITDA Multiples of Publicly Held Companies vs. Store Level EBITDA Multiples of Privately Held Companies:
It is important to recognize that when privately-held convenience store companies are sold, the multiples most commonly quoted are Store Level EV/EBITDA, not Corporate Level EV/EBITDA. Corporate Level EBITDA differs from Store Level EBITDA as it includes corporate overhead and other discretionary expenses. Store Level EBITDA multiples are most commonly quoted since operators’ corporate overhead expense can vary greatly between companies, especially in the private sector.

Due to the high number of private company transactions completed by Matrix, we have accumulated many data points with which to analyze both Store Level and Corporate Level EV/EBITDA multiples. From this experience, we have found that while the Corporate Level EV multiples of publicly traded convenience store companies certainly imply a valuation trend that we believe is very useful, the values achieved in private company transactions are not consistently correlated to public company values. The following are some reasons for this inconsistent correlation:

• • EBITDA multiples for private companies vary greatly depending on when, where, and how a transaction is executed. For example, the EBITDA multiple for groups of stores located in an urban area is almost always higher than the multiple paid for a similar group of stores in a rural area. So, if a public company operating in the Northeast has a Corporate EV/EBITDA multiple that reflects the ownership of many stores, including the underlying real estate, it most likely will not pay that same multiple for a similar chain based in a rural area of the Midwest, even if the EBITDA is comparable.
  • There are only four publicly traded convenience store companies. This is a small sample of companies in the industry, and each of these companies varies in regards to operating market, real estate ownership, financial risk, etc. For this reason, using public company valuations to value a privately held company that is similarly structured and in a similar market is more useful than using public company valuations to value a privately held company in a different market or with different real estate ownership structures. Additionally, the economics and inherent real estate values of some regional markets in the U.S. are not represented by the retail assets of the four companies included in our index.
  • All things being equal, an acquisition will only be accretive if the target company has a lower multiple of earnings (EV/EBITDA, P/E, etc.) than the acquiring company. For example, if a public company had an EV/EBITDA multiple of eight, any transaction with a target company that had an EV/EBITDA multiple above eight would be dilutive because the public company would be paying more for each dollar of earnings than the market values its own earnings. That being said, it is sometimes logical for acquirers to execute theoretically dilutive transactions in order to gain value in other ways, namely for market expansion, exploitation of cost synergies, or in order to prevent a competitor from purchasing the target.
  • Furthermore, opportunistic changes in capital markets activity, which are not necessarily reflected by the EV/EBITDA multiples, can have a significant influence on the price a buyer is willing to pay. Examples include the higher multiples buyers were willing to pay during the securitized lending boom of the late 1990’s and at the height of the real estate bubble when access to traditional senior debt was at an all-time high.
    Therefore, in order to properly value privately held petroleum marketing and convenience store companies, one must adjust public multiples to value each unique company, and this is where the chart above falls short for being a stand-alone tool that is applicable to any individual privately held company. In addition, the cash flows of the privately held companies must also be analyzed and adjusted for discretionary, nonrecurring and unallocated expenses and income. Finally, the way a sales process is structured and run will have a tremendous impact on the multiple a seller will receive, as additional competition drives a sale price higher regardless of public company multiples. In summary, public company Enterprise Value multiples can be a very useful benchmark, but not as a definitive rule to what privately held companies are worth.

Observations:
The time duration of the Matrix CS-EVX Chart™ illustrates not only business cycle changes affecting our four subject companies, but also provides insight into each company’s performance. We chose to begin charting performance in 2007 as SUSS went public in 2006.

From a business cycle perspective, the chart illustrates the strength of each public company’s market performance during the strong economic cycle of 2007. In 2007, the public markets rewarded companies for growth through acquisitions and analysts predicted continued growth in same-store fuel volumes and merchandise sales. Of note are the high multiples achieved by PTRY and SUSS in that year. PTRY acquired 152 units that year, with Petro Express being its largest acquisition, while SUSS acquired Town and Country, a large convenience retailer comprised of 168 units. In addition, 2007 became the period of peak fuel volumes as the demand for gallons hit a record high of 9.29 million barrels per day.

As we progressed through 2008, 2009 and 2010, the multiples of all companies were depressed by the broader economic downturn. However, CASY, which was not heavily leveraged with external debt or long-term lease obligations, experienced less multiple depression relative to the other companies. The public markets seemed to punish companies that chose to lease versus own real estate during these years. Ironically, CASY’s lack of growth and leverage from 2005 – 2008 were part of the reason it became a takeover candidate, with Couche-Tard making an unsolicited offer in April 2010. This takeover activity, which was rumored to also include 7-Eleven, Inc. significantly increased CASY’s stock price and multiples.

Multiples for all companies improved in 2011 and 2012, with CASY’s and Couche-Tard (ATD) leading the way. While takeover activity dissipated for CASY, it began to grow faster through small acquisitions, new-to-industry sites and a strong pizza franchise. Couche-Tard announced a large international acquisition of Statoil Fuel & Retail ASA for $2.8 billion and its financial performance remained strong. PTRY continues to not pursue unit growth, and its multiples have been lower than their peer group, potentially implying more risk.

The chart conveys a message that the public markets reward retailers that both grow and are financially successful. If a company is simply financially successful but not growing, it will not be rewarded by the public markets. This historical perspective also allows us to note exceptions, such as during the buildup to the financial crisis, when the public markets seemed to become completely enamored with growth but ignored the financial risks that accompanied it.

Purpose:
The purpose of the Matrix CS-MC Index™ is to illustrate the market capitalization performance of the four stocks as one composite relative to the S&P 500 composite performance, on a price return basis (ignoring the reinvestment of ordinary and special dividends). We chose to use the S&P 500 index as the benchmark because most individual investors are familiar with it and invested in it via mutual funds, ETFs, etc. Performance change is measured quarterly relative to the each company’s market capitalization as of December 31, 2006. This index weights each stock equally regardless of its market capitalization or economic size (sales, earnings, book value). Thus, the index does not overweight overpriced stocks and underweight underpriced stocks.

Market Capitalization:
Market capitalization is defined as a company’s adjusted stock price (which reflects stock splits and dividend effects) multiplied by the number of shares outstanding less any nonvested shares.

Observations:
The base year for the Matrix CS-MC Index™ is currently set at December 31, 2006. Thus, the positive and negative performance of the convenience store composite is anchored to that base year. The primary observation is very clear: the composite index of convenience store stocks significantly outperformed the broader equity market, using the S&P 500 as the benchmark. The strong market capitalization performance of Casey’s, Couche-Tard, and Susser drove the index higher.

There were only two periods, in 2008 and early 2010, where the convenience store index underperformed the S&P 500. It’s important to note that relative performance of the two indexes would change if we moved the base year forward (after December 31, 2006). However, the relative performance of the convenience store index through December 31, 2012 would remain stronger than the S&P 500.

It is interesting to compare the performance of a single industry to the broader market, however, the S&P 500 contains so many more stocks than the Matrix CS-MC Index™ that it could be argued that it is not an appropriate benchmark, and that the Matrix CS-MC Index™ will certainly be more volatile due to only four stocks comprising the composite. We agree with the merits of both arguments but still feel this is a useful tool in measuring the relative performance of the convenience store industry to the broader economy.

Purpose:
These two charts allow us to view the aggregate and individual market capitalizations (equity values) of the four publicly traded convenience store companies, as well as growth or decline in each company’s equity value since December 31, 2006.

Observations:
Chart 3 illustrates the relative market capitalizations (i.e. equity values) of our four publicly traded convenience store companies. The range in value is wide with PTRY’s market capitalization at $339 million and Couche-Tard’s at $6.1 billion. Public companies are classified by their market capitalizations. For example, “Small Cap” companies are usually defined as having market capitalization values between $300 million and $2 billion, and “Mid Cap” companies are usually defined as having market capitalizations between $2 billion and $10 billion.

Most publicly traded convenience store companies are close to the Small Cap threshold, with the exception of Couche-Tard whose market capitalization is firmly in the Mid Cap segment. Casey’s is technically a Mid Cap company, but has a market capitalization just over the $2 billion threshold ($2.189 billion). Susser is a Small Cap, but only as recently as August 2011, when it had been trading below $300 million, making it a “Micro Cap” (defined as between $50 million and $300 million). At a market capitalization of $339 million, PTRY is barely a Small Cap stock today. In fact, its market capitalization has fluctuated greatly, from a high of $1.1 billion in February 2007 to a low of $258 million in May 2008. Overall, market capitalizations for Small Cap and Mid Cap companies are expected to be more volatile relative to “Large Cap” companies, and this is certainly evidenced by the convenience store companies.

Chart 4 illustrates the stock performance of each publicly traded convenience store company. Had you purchased the stock of SUSS, CASY or Couche-Tard on January 1, 2007, you would have been very happy with your returns. These stocks have driven the performance of the Matrix CS-MC Index™. However, had you purchased the stock of PTRY, you would have been disappointed with your returns. This underscores the observations expressed earlier: over the long haul, public markets reward retailers for both growth and financial strength. If a retailer possesses only one of those attributes, its market capitalization will be punished.

II. Downstream Energy Industry Macro Charts
The following are some of Matrix’s preferred industry macro data charts that depict the data in the most useful manner. These include fuel demand for gasoline and distillates, implied demand for finished motor gasoline relative to miles driven, and historical spot prices of crude oil (Brent) relative to NY Harbor CBOB. The last chart illustrates EIA’s expected gasoline and diesel fuel consumption through 2035. These charts are self-explanatory.

Chart Notes:

Note 1
The Matrix Market Capitalization Index® equally weights the quarterly changes in market capitalizations for The Pantry Inc., Susser Holdings Corporation, Casey’s General Stores, Inc. & Alimentation Couche-Tard Inc. Historical, daily stock prices were obtained from Yahoo! Finance and were multiplied by the number of outstanding shares reported in each company’s most recent quarterly filing as of quarter end. The following outlines the filing dates of the most recent quarterly filings as of 12/31/2012 for each company:

The Pantry Inc. – 11/9/2012
Susser Holdings Corporation – 12/11/2012
Casey’s General Stores, Inc. – 11/27/2012
Alimentation Couche-Tard Inc. – 12/10/2012

Alimentation Couche-Tard Inc.’s shares are listed on the Toronto Stock Exchange under the ticker symbols ATD.A and ATD.B. Couche-Tard Inc. has two classes of common shares: Class A Multiple Voting Shares and Class B Subordinate Voting Shares. Class A is largely held by incorporators and certain institutional investors. Class B is normally the most negotiated class as it is held by a greater number of shareholders and is therefore used in the index computation.

Note 2
The Matrix EV/EBITDA Multiple® was calculated for The Pantry Inc., Susser Holdings Corporation, Casey’s General Stores, Inc. & Alimentation Couche-Tard Inc. by dividing each company’s enterprise value by corporate EBITDA. Matrix utilized the market capitalization data described in Note 1 as well as information obtained from Capital IQ in this calculation. Enterprise Value was defined to be the company’s market capitalization less excess cash plus total debt plus minority interest. Excess cash was determined to be the adjustment required to lower a company’s working capital ratio to 1.0. This chart is only updated through the third quarter of 2012 as yearend financials had not been issued at the time of this publication.

Note 3
Europe Brent Spot Price quotes were used to graph price changes in Brent Oil and New York Harbor Conventional Gasoline Regular Spot Price quotes were used to graph price changes in NY Harbor CBOB. Both were obtained from The U.S. Energy Information Administration (EIA).

Note 4
Total miles driven data was obtained from the Federal Highway Administration (FHWA). The FHWA collects hourly traffic count data reported by States on a monthly basis. This data is collected at approximately 4,000 continuous traffic counting locations nationwide and is used to estimate the percent change in traffic for the current month compared with the same month in the previous year. Estimates are re-adjusted annually to match the vehicle miles of travel from the Highway Performance Monitoring System and are continually updated with additional data. Implied Demand Data was determined using the Weekly U.S. Product Supplied of Finished Motor Gasoline obtained from the U.S. Energy Information Administration’s (EIA). The TVT report is published within 60 days after the close of the given month.

Note 5
Data is based on historical demand data through 2010 and reflects the U.S. Energy Information Administration’s (EIA) projected demand through 2035.

Financial Disclosure
Matrix does not market, sell, or make any representations regarding the advisability of investing in any investable product tracked in this publication, and all Matrix employees are strictly prohibited from investing in The Pantry Inc., Susser Holdings Corporation, Casey’s General Stores, Inc. or Alimentation Couche-Tard Inc.

This report reflects the consensus opinion of the investment bankers in our Energy & Multi-Site Retail Group.

Matrix’s Energy and Multi-Site Retail Group is recognized as the national leader in providing transactional advisory services to companies in the downstream energy and multi-site retail sectors including convenience store chains and petroleum marketers.

 

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