North Carolina, USA

What a Difference a Quarter Makes

The gas price pendulum in full “swing”

Gavin P. Smith – Griffin Report

Remember those high gas prices at the pump?  Remember the cries of talking heads from various media outlets chastising the greedy Big Oil companies?  Just a year ago, gas at the pump hit an average of $4.50 or more throughout most of the country.  In September alone, gas in Florida hit almost $5.50 per gallon thanks to Hurricane Ike and the sudden fuel shortage in the Southeast.  All of a sudden, consumers were dealt a rude awakening.

Already stretched to the breaking point, people wondered when prices would stop going up.  As well, consumers began to curb their appetites for gasoline altogether.  Studies show consumer demand in a steady decline over the past year, with fewer gallons sold overall in 2008 compared to 2007.  According to the American Petroleum Institute, consumer demand is trending consistently downward.  Total U.S. petroleum deliveries, which dropped more than 4 percent in October, have fallen 5 percent from January through October.  That is a rate not seen since the early 1980s.

Meanwhile, c-store owners have crunched spreadsheet numbers trying to find innovative ways to fend off declining merchandise profits.  They have also seen their overall margins eaten away by higher fuel costs, increased salary costs and higher credit card fees.  Many looked to banks to access credit lines to sustain their operations, only to find the door slammed in their faces due to restricted credit.  While struggling c-stores weathered the high prices and slowing demand, companies such as Exxon were announcing record-breaking profits.   It may have been blue skies for Big Oil, but the horizon appeared bleak for mom and pop chains as well as the average consumer.

In that environment, you might ask “is there opportunity in economic chaos?”  For the answer, just ask BP.

At the start of the fourth quarter, British Petroleum touted an operating cash flow at $14.9b, up an amazing 133%.  Good news for executives, and even better for shareholders.  The credit freeze is of no concern to BP.

“BP is very aware that in the current volatile climate dividends and the strength of balance sheets are a matter of concern to investors, including pension funds,” said BP chief executive Tony Hayward.

While crude prices were just starting their slide, Hayward remained unshaken.

“I believe that BP is well-positioned to cope with such volatility,” said Hayward. “We think the current turmoil may in fact create opportunities for us and we will look at those very closely.  We are well-placed to weather the prevailing financial storm and to benefit from the business opportunities that may well arise from a downturn.”

That was then, this is now.  However, ‘then’ was only a couple of months ago (September to be exact).

Indeed, what a difference a quarter makes.

Now that we are seeing the very turbulent effects of the U.S. economy play out at home and around the world, the bottom has dropped out.  Crude oil has plunged.  The freefall of barrel prices caused gas at the pump to drop to a national average of just $1.75 per gallon.  That’s a staggering 62% reduction in a year.  Fifty-percent of that reduction has happened in the past quarter alone.

The drop comes as crude oil prices have fallen dramatically.  In the third quarter, crude barrel prices saw a spike to an all-time high of $147.27 per barrel.  As of this week, crude oil is selling at under $50 a barrel, a two-thirds drop in value in one quarter.

While Exxon, BP and others were showing very good dividends through last quarter, will it last?  The southeastern U.S. market provides a good litmus test of what’s happening across the country.

“It is abundantly clear that here in Florida there is a dramatic change in the buying habits of consumers where petroleum is involved,” said Jim Smith, President of the Florida Petroleum Marketers & Convenience Store Association. “They cut back and continue to maintain that mindset. I can assume that the current economic situation has driven that mindset for consumers.”

As a result, companies are putting together conservative budgets and even scaling back.  Chevron Corp., one of the top 5 oil companies in the world, is looking at selling refineries due to fuel-production margins being lower as a result of the growing global economic recession.  Other smaller companies have eliminated or delayed exploration and production projects due to lack of credit funding.  With the economy remaining lethargic in the credit sector, the credit is simply not available to proceed.

On the flip side, c-store gas profits are starting to get a boost thanks to the change in fuel prices at the pump.  The Pantry, Inc., one of the largest independently operated convenience store chains in the country, recently revealed revenues for the fourth quarter amounting to approximately $2.5 billion, a 24.5% increase from the corresponding period a year ago.

“As gas margins improved with the dramatic pullback in oil prices, we were able to fully leverage the aggressive actions we took throughout the year to reduce operating costs,” said Peter J. Sodini, Chairman and Chief Executive Officer, The Pantry, Inc.

That doesn’t mean that c-store owners can relax when it comes to demand for their in-store consumer goods.  For The Pantry, merchandise revenues for the fourth quarter declined 0.7% overall and 2.5% on a comparable store basis from last year’s fourth quarter.

Perhaps the biggest concern is that, while the petroleum industry and c-stores are hanging on during these swings in pricing and demand, this may be just the beginning of a very volatile time for the next few years.  Consumer confidence is lacking, which will have a continued impact.

“I believe that consumers don’t think these lower prices will be around long term,” said Smith.   “Bottom line is that for the most part, consumers have changed their buying habits and they aren’t in any hurry to go back to the way they were.”

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