Permian Basin Still Problematic for Alon USA

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Permian Basin Still Problematic for Alon USA

07/29/2016

DALLAS — A couple of years ago, when gas prices were skyrocketing, convenience stores located in natural gas-producing areas were reaping huge sales and profit benefits. However, now that gas prices have remained low, the tables have turned. 

Dallas-based Alon USA Energy Inc. felt this pinch in its fiscal second quarter at c-stores it operates in Texas’ Permian Basin. Located in the Midland/Odessa region of the state, the Permian Basin has long been one of the most important oil and gas-producing areas of the United States.

"Our retail results were negatively impacted by headwinds in the Permian Basin,” President and CEO Paul Eisman reported Friday during the company's second-quarter earnings call. “However, we believe we are positioned well to benefit as the markets in which we operate improve and are expecting greater profitability in the second half of the year.”

Alon USA, the largest 7-Eleven licensee in North America, saw net profit at its retail division decline by $2 million in the second quarter ended June 30, to $4.8 million.

Looking at the results more closely, merchandise sales dropped by $1.2 million year over year to $83.67 million. Merchandise per store per month decreased by $5,000 to $91,000. Merchandise margin percentage declined slightly to 31 percent.

In-store merchandise sales plummeted by 12 percent at Alon's Permian Basin area c-stores, but all other sites saw sales rise by 2 percent, Eisman revealed during Friday's call.

Results at the forecourt were more mixed. Retail fuel gallons sold increased by more than 1.3 million gallons to 50.87 million. Retail fuel margins on a per-gallon basis rose by half a cent to 20.8 cents per gallon. However, retail fuel sales per site per month dropped by 1,000 gallons to 57,000 gallons. 

Retail fuel prices averaged $2.03 per gallon at the pump in Alon's 2016 second quarter, compared to $2.46 per gallon in its 2015 second quarter, according to the retailer. 

Alon had 306 convenience stores as of June 30, an increase of 12 stores year over year.

THE BOTTOM IS NOT HERE YET

Looking at its Permian Basin stores moving forward, Eisman said he cannot yet “call a bottom” regarding declining sales. But he stressed that these stores are the only area of weakness in Alon’s retail division.

“It’s all about the Permian. We saw continued deterioration in the second quarter,” the chief executive said. “I don’t know if we’ve seen the bottom. I do know more [oil] rigs are being built. It appears it’s trending toward stabilization.”

Companywide, Alon USA reported a net loss of $20.4 million in its most recent quarter, compared to a profit of $36.4 million during the same period in 2015. A refinery power outage was one of the chief reasons for the earnings decline, explained Eisman.

“The refining environment in the second quarter of 2016 remained challenging as crack spreads were pressured by high product inventories,” he concluded. “The average Gulf Coast 3-2-1 benchmark crack spread for the second quarter of 2016 was approximately $6.50 per barrel lower than the average for the same period last year. We continue to optimize our operations and control our costs in this difficult environment.”