Oil Prices and Their Impact on Industry M&A

There are many cross currents today impacting the economy and oil prices that it seemed time to discuss them and their likely impact on M&A activities in our industry. The background is further complicated by geopolitical events as once again oil is being used as a political tool further complicating the issue. The results are often met with unintended consequences, as is related natural gas but with a different set of dynamics.

It is important to remember that oil has served the world well since its inception. I feel this is mostly due to its inherent BTU energy content at a competitive cost, its ability to be refined into alternate usable products and petrochemicals, and its relative ease to transport and store. Its use has been complicated by wars and more recently by its impact on still controversial climate impacts, yet it remains a very critical resource.

Source crude oil remains relatively abundant, frequently within a couple of miles of the earth's surface. So, as a commodity, it is extremely price sensitive - even more so today because of technology improvements such as AI reducing both finding costs and production costs, which opens doors to new countries as new competitors at today's prices.

Because overall demand has flattened worldwide, excess crude oil production largely in the Middle East and perhaps Russia has created a surplus capacity of at least three million barrels per day (3%), plus a number of countries have established 'emergency' storage facilities. Any surplus is very sensitive to world economic growth, which remains spotty.

Thus, oil companies are reluctant to drill for more oil given this overhanging surplus since prices are vulnerable to new finds, and drillers have not always achieved their ROI objectives to satisfy stockholders and lenders. Improving fuel vehicle economy in the U.S. plus EV penetration, especially in China, have peaked world gasoline demand, and are likely bringing peak crude oil demand closer as well. The demand reduction has also greatly reduced refining margins further impacting finished product costs.

Arguably the downward trend provides more money to the consumer to make purchases in our convenience stores, which is also experiencing competitive changes. Historically, volatile oil prices have been the retailer's friend, since prices generally move down more slowly than up in most consumer industries, further helped today by internet communication of prices. Also, the downward price movement reduces the per gallon profit for fast pay discounts of 1.0-1.25% of price, especially impacting wholesale jobbers with thinner base margins.

The softening U.S. consumer economy increases the consumer's price sensitivity. And let's face it, size matters more than ever buying fuel today in an economy with surplus products that must be discounted or exported at considerable expense at times to balance refining production. Recently I have seen more companies promoting as much as 25c discounts at the pump not shown on the street posting, typically tied to loyalty programs, which are more important than ever and now can be tied to store purchases as well. Over time, these discounts are likely to impact overall margins to promote site visits in the hope that customers will come in the store, particularly for higher gross profit foodservice items where volume is absolutely essential in order to be profitable.

The net result of more price stability combined with strong competition from low cost marketers is a steady trend of competitive margins and strong competitors continuing to grow through both M&A and NTI's, foodservice potential being a driving force that impacts restaurants and QSR's. Many marketers have locations and business segments that are unprepared for this environment, which is made even more uncertain due to ongoing cost pressures in general and now also possibly from recession and tariffs.

More marketers are realizing that if a location or business segment has trouble achieving their profit goal, a sale of good facilities and/or locations will bring buyers who might have alternative solutions for profitability. And the proceeds received can often be put to better use. Fortunately, money for our industry remains readily available for the right operators, both from traditional sources and now private debt and equity providers.

All the above factors are driving uncertainty to slow industry M&A for the moment, but once settled, NRC expects it will pick up once again. Quality operators with great locations will always be in demand. In the meantime, we continue to see solid interest in individual site sales.