Global Partners

Moat: 1/5

Understandability: 3/5

Balance Sheet Health: 3/5

Global Partners LP is a midstream company engaged in the purchasing, storing, and transporting of petroleum products, primarily gasoline and distillates, as well as the retail sale of petroleum products, and the wholesale distribution of gasoline, mostly in the Northeast United States.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

The concept of an “economic moat” often refers to a company’s ability to maintain a competitive advantage over its rivals, protecting its profits and market share for an extended period. In the case of Global Partners LP, assessing its moat requires a careful look at the dynamics of the midstream energy sector.

Moat Assessment: 1 / 5

Global Partners LP doesn’t have a substantial or easily defensible economic moat. Its operations involve the storage and distribution of petroleum products, which are fundamentally commodity businesses. Here’s why I assign it a moat rating of 1 out of 5:

Commodity-Based Products: The core products that Global Partners deals with, such as gasoline and distillates, are commodities. These items lack differentiation and are often subject to pricing pressures from global markets. Competitors can easily replicate their offerings as there aren’t that many barriers to entry.
Limited Pricing Power: As a midstream company, Global Partners’ pricing power is limited. They are a price taker rather than a price maker, where its earnings are directly correlated to the prices of the commodities they handle and the market sentiment, both of which they cannot influence. They cannot command premium prices, and intense competition often puts downward pressure on prices and margins.
Regional Market Competition: While Global Partners does have a strong regional presence in the Northeast, there is no exclusivity, so other players in the Northeast can steal their market share and profits. Other major companies also have strong distribution networks, further limiting the firm’s ability to earn excess returns.
Capital Intensity: The midstream business often requires high capital investments in pipelines, storage terminals, and distribution networks. Replicating these assets isn’t cheap, which creates a barrier to entry, but since these assets are not a barrier to market share and prices for long-term sustainability, they do not provide a strong and defensible moat.

While the assets may be hard to replicate for new competitors, this cost advantage from a high capital investment is not what gives companies a long-lasting competitive advantage to stay profitable.

Legitimate Risks That Could Harm the Moat and Business Resilience

Economic Downturn: A reduction in economic activity could lead to lower demand for petroleum products and, consequently, hurt Global Partners’ volumes. Lower demand will decrease the utilization of assets, resulting in lower earnings. The commodity prices may also be affected by an economic downturn.
Commodity Price Volatility: The fluctuations in oil and gas prices can significantly impact Global Partners’ margins and profitability. Sharp drops in oil prices could affect their revenues and margins negatively.
Regulatory Changes: Changes in environmental laws or regulations could force the company to make costly investments and reduce profitability. New environmental laws such as restrictions on certain fuels, or changes to tax benefits, could hinder or cripple their ability to operate.
Operational Disruptions: Disruptions to the supply chain, unforeseen outages, or natural disasters can also negatively impact Global Partners’ operations and profitability. The lack of geographic diversification leaves them more vulnerable to localized economic disruptions.
Loss of Customers and Volume: The loss of a few large key customers or a decline in the volume of their core operations could decrease the profitability of the company. It is not easy to acquire new customers and this would make the business less attractive.
Competition and Pricing Pressure: Competitive forces from new entrants or existing peers could erode profit margins and make pricing power more difficult to attain. Competitors can aggressively increase competition and make profits from a large company like Global Partners more difficult.
Interest Rate Risk: As interest rates rise, the cost of borrowing will go up, which will reduce profitability and the ability to pay debt obligations. Higher cost of debt will lead to declining financial health.

While the company has an extensive network of gas stations and terminals, if these were damaged or became unusable due to weather, it could be very problematic and expensive for the company.

Detailed Explanation of the Business

Global Partners LP operates primarily in the midstream energy sector, with a strong presence in the northeastern United States. Their business revolves around the distribution and retail sale of petroleum products. Here’s a breakdown:

Revenue Distribution:
- Petroleum Distribution and Terminals: This segment is the company’s most significant revenue generator. It includes wholesale and retail sales of gasoline and distillates. This involves sourcing products from producers or other refiners, storing, and transporting them to various customers, like gas stations.
  - The sales of gasoline are largely driven by car users, who primarily buy gasoline based on price.
  - Distillates have much more variable demand as these are used for heating and manufacturing. Demand is highest during winter.
- Retail Operations: Global Partners owns and operates convenience stores and gasoline stations. This segment is directly exposed to the retail consumer, where profit margins can be slightly higher because they can charge a small premium.
- Other: This includes transportation and storage of other petroleum products. There is also a small distribution of other products in this business, such as propane.
Industry Trends:
- Demand Dynamics: Demand for gasoline has generally declined in developed countries, with consumers switching to hybrid or electric vehicles. However, the demand for distillates is dependent on economic activity and is still going strong in areas where heating oil is used often.
- Consolidation: In general, the midstream business is an environment where consolidation is common. New companies often try to challenge the incumbents, and the biggest player often buys them out and eliminates competition.
- Evolving Regulations: Governments are continually changing regulations in this business. Most regulations are implemented to ensure that companies meet safety standards.
Competitive Landscape:
- Global Partners’ competition varies with each different part of the business. In retail, competitors are local and regional chains. In the midstream business, the competition is more from the bigger oil and gas players.
What Makes the Company Different: * The regional focus gives it a better understanding of local market needs. * The company owns and operates gas stations and distribution networks, which enables it to cut costs and take more profit from its customers.

Financials

Revenues: The company has significant revenues as they move a lot of different products. The average revenue is around $16 Billion per year.
Gross Profit Margins: Gross margins tend to be relatively low due to the commodity-based nature of the products. Historically, margins have ranged from 5 to 10 percent.
Profitability: * High debt levels may reduce profitability and create instability. * Net margins are also slim, often fluctuating depending on commodity prices.
Cash Flows: The cash flow tends to be tied to revenues and prices and as such can vary, making it difficult to predict.
- Free cash flow is typically low or negative since the company has a high level of required capital expenditures to maintain and build their distribution and retail network.
Debt levels: Companies are highly leveraged as capital expenditures tend to be high. This creates potential problems if earnings fall short of debt obligations. High levels of debt also increase the cost of capital and make companies vulnerable to fluctuations in the interest rates.

While the company does have a good amount of revenue and is very profitable, it has very high debt levels. The financial health is fragile and vulnerable to economic and financial factors.

Understandability: 3 / 5

The business model is relatively straightforward to understand if you are familiar with supply chains. However, the detailed financials can be more difficult to follow and require a decent amount of expertise.

Balance Sheet Health: 3 / 5

The company has assets that provide value, but its leverage is high, which makes it susceptible to financial distress. This combined with the reliance on commodity prices, make the financial health of the company fragile and hard to predict.

Recent Concerns and Problems

Increased debt levels. The company has a large amount of debt, making it susceptible to higher interest rates and economic downturn.
Dependence on commodity prices. Since Global Partners’ products are commodities, they are prone to high volatility due to fluctuations in crude and other refined product prices.
Competition. The company is facing increasing competition from other larger or similar size companies.
Geographic concentration. The company focuses mostly on the northeast United States, which exposes it to regional economic disruptions or any regulatory changes.
Capital intensity. To keep growing, the company will need to allocate more capital, which further increases risk and may create less value.
Energy Transition: The company is exposed to the risk of energy transition. There has been growing adoption of more environmentally sustainable sources of energy that could potentially threaten the value of their legacy assets.

Global Partners management has expressed optimism for their future, stating that the company intends to focus on operational excellence and organic growth in the business, but this does not address or mitigate all of the threats above.