A Member of Pat McKeough’s Inner Circle recently asked for his advice on a company that operates gas stations, convenience stores and a fuel-distribution business in Canada and the U.S. While acquisitions have expanded its revenue and cash flow, Pat feels that strategy can be risky.

Its latest acquisitions include a U.S. fuel and lubricants business and a Caribbean-based fuel marketer. Pat feels the U.S. purchase alone should double the company’s U.S. business, while the Caribbean acquisition will add immediately to cash flow and further support the company’s 3.1%-yielding dividend. However, the company’s heavy debt load raises questions about dividend sustainability.

Q: Hello, Pat. What’s your opinion of Parkland Fuels? I have held it for some time now. Thanks.

A: Parkland Fuel Corp., (Symbol PKI on Toronto (www.parkland.ca), operates gas stations, convenience stores and a fuel-distribution business, in Canada and the U.S.

Its retail-fuel and convenience store banners include Ultramar, Esso, Fas Gas, Chevron, Pioneer, and On the Run. Its commercial-fuels business sells under the brands Bluewave Energy, Chevron, Columbia Fuels, Esso, Sparlings, Ultramar and others.

Parkland has relied on acquisitions to expand its business.

In March 2016, the company bought Esso stations in Saskatchewan and Manitoba.

In early 2017, it agreed to purchase Chevron’s downstream operations in British Columbia for $1.5 billion. Primarily, they are an oil refinery in Burnaby, 129 gas stations in the Vancouver area and a business that supplies fuel to the Vancouver International Airport. This acquisition was completed in the fourth quarter of 2017.

In August 2017, Parkland acquired the business assets of CST Brands, Inc. for $986.0 million from Alimentation Couche-Tard (symbol ATD.B on Toronto). Those assets mainly consist of refuelling stations that operate under the Ultramar brand.

Revenue growth for the past five years reflects these acquisitions: it increased 10.5%, from $5.7 billion in 2013 to $6.3 billion in 2016. With the Chevron and Ultramar deals, revenue then jumped 52.4%, to $9.6 billion in 2017.

Cash flow increased 11.8%, from $136.5 million ($1.90 per share) in 2013 to $152.6 million ($1.60 per share) in 2016. It then jumped 54.7%, to $234.6 million ($2.00 per share) in 2017.

Energy Stocks: U.S. and Caribbean acquisitions add to the bottom line

In August 2018, Parkland acquired Rhinehart Oil Co. for $176 million. Based in American Fork, Utah, this retail, commercial and lubricants business has operations across the state as well as Colorado, Wyoming and New Mexico.

In addition to providing a full range of fuels, lubricants and chemical products, Rhinehart provides equipment to customers in the region through its four cardlock facilities and nine retail sites. Its fuels and lubricants—selling about 72 million gallons per year—are also sold through 10 distribution facilities. The Rhinehart acquisition will double Parkland’s U.S. business.

In October 2018, the company agreed to buy 75% of Sol Investments Limited for $1.6 billion in cash and stock. SOL is a privately-held company owned by the Simpson Group and is the largest independent fuel marketer in the Caribbean. The firm supplies and markets a total of 4.8 billion litres of fuel annually across 23 countries.

The Simpson Group will get 12.1 million shares of Parkland as part of the deal. It will then own 9.9% of Parkland stock, and the firm intends to remain a long-term investor. The purchase will add immediately to Parkland’s cash flow per share.

In the three months ended September 30, 2018, the company’s revenue rose 48.0%, to $3.8 billion from $2.6 billion a year earlier. Cash flow rose 115.6%, to $138.0 million from $64.0 million. On a per-share basis, cash flow rose 108.0%, to $1.04 from $0.50, on more shares outstanding.

Parkland is in a highly competitive business, and its rapid growth-by-acquisition strategy adds debt—and also risk. On September 30, 2018, long-term debt stood at a somewhat high $2.1 billion, or 42.0% of the company’s market cap.

However, Parkland continues to integrate its Chevron and Ultramar acquisitions. They should improve profit margins through cost savings, which includes improved economies of scale. The company is also repositioning its convenience store operations under the On the Run brand and has introduced its own food label, 59th Street Food Co.

Parkland’s same-store sales increased 6.7% in the 2018 third quarter; these and other initiatives should continue that growth.

The stock trades at 9.5 times 2019’s cash flow forecast of $4.03 per share. The shares yield 3.1%.

Recommendation in Inner Circle: Parkland Fuel is okay to hold, but only for aggressive investors.