News & Our Thinking

(St. Louis Business Journal) 

Even companies not directly tied to gas prices, such as Panera Bread Co. and Isle of Capri Casinos Inc., can be impacted. “When we leave the gas station with more money in our pockets, we might say, ‘Let’s go to lunch.’ Ditto for Isle of Capri,” said Ken Crawford, an analyst at Argent Capital Management. “But MasterCard could be hurt because it gets a percentage of the amount we pay for gas using a credit card. They also could benefit because maybe we make more purchases in total.”

February 26, 2016 (Greg Edwards)

F or CIC Group, which builds and maintains large refineries, the decline in oil prices has been a slog. The result? Revenue dropped 13.5 percent last year, to $952 million.

“The company has experienced a major slowdown with its pipeline business in Utah and Colorado and has recently decided to exit this business as well during 2016,” said Don Lange, chairman, president and CEO.

At Jim Butler Automotive Group, low oil prices have been a gift. Revenue increased 35 percent last year, to $244.4 million, and Butler opened three new dealerships.

“Last year we had amazing growth, and it looks like it’ll get better this year,”Brad Sowers, president and CEO, said.

The low oil prices that have been saving you money at the gas pump have been a roller coaster for many St. Louis companies. The ride has been smooth for some (2015 sales reached $1.35 billion at Bommarito Auto Group), bumpy for others (revenue plummeted 56 percent in 2015 at Center Oil Co.). And for many, it has been mixed (utility Laclede Group Inc. is paying less for natural gas, but its fiscal first-quarter profit dropped a bit to $46.9 million because of warm weather).

Oil stocks fell dramatically in 2015 as West Texas crude prices dropped 30 percent — that’s on top of a decline of 39 percent in the last six months of 2014, according to MarketWatch. The causes were several: a massive increase in supply, much greater production in the U.S. as a result of fracking, a worldwide economic slowdown, and Saudi Arabia’s decision not to cut oil production, as it historically has done to prop up prices during times of slow demand.

Other companies with St. Louis ties that obviously are hurt include those in the coal and petroleum industries, such as Arch Coal Inc., Peabody Energy Corp. and Piasa Enterprises Inc. As sellers of coal, Arch and Peabody have to compete with low-priced oil. For petroleum companies, low-priced gas means less revenue.

Industrial equipment manufacturer Emerson is making changes in its business strategy, in part because of changes in the energy industry and oil prices. (See accompanying story).

“Lower oil prices continued to apply downward pressure on oil and gas spending, particularly upstream projects, as well as power generating alternators used in upstream applications,” Emerson said in reporting that fiscal first-quarter sales dropped 16 percent year over year to $4.7 billion, and profit dropped by more than a third, to $352 million from $529 million. The company is reducing its charitable giving by more than 25 percent for now.

For CIC Group, plummeting oil prices mean fewer plants are being built and upgraded. Lange looks for improvement in 2016. “We are expecting a better year with our construction business with current backlogs in refinery and petrochemical plants at higher levels than 2015, but are still concerned we may see some slowdown on the refinery side with oil prices starting to drop below $30 per barrel,” he said.

Private investors in St. Louis petroleum companies also have felt it.

• At Piasa Enterprises Inc., a petroleum wholesaler and distributor owned by Matt Schrimpf and Susan Hatfield, revenue plummeted 38 percent in 2015, to $1.8 billion.
• Midwest Petroleum Co., which operates gas stations, convenience stores and a truck stop and is owned by Donald McNutt, reported revenue dropped 20 percent, to $249 million.
• J.D. Streett & Co. Inc., a petroleum wholesaler owned by the Baker family, had a 29 percent drop in revenue, to $203 million.
• Home Service Oil Co., a petroleum retailer that is owned by David Mangelsdorf and Sandra Overberg, had a 30 percent drop in revenue, to $138 million.
• Moto Inc., which operates a chain of gas stations and convenience stores and is owned by the Forsyth, Kirchoff, Gustafson and Badgley families, reported a 17 percent revenue drop, to $375 million.

And even that’s a mixed bag. Though low gas prices resulted in a decrease in revenue for Moto, CEO Jim Forsyth said the chain of 79 gas stations and convenience stores had its best year ever, despite lower revenue. “We sold more gallons than we did the year before,” he said. “Lower gas prices mean lower inventory costs and lower credit card costs. We like lower prices because the consumer has more money, and they spend it in the convenience stores.” In fact, Forsyth said some store sales were flat in 2014 but jumped 5 percent in 2015.

According to the U.S. Energy Information Administration, the country had a weekly retail gas price of $3.437 in 2014. That number declined almost 27 percent in 2015 to $2.52.

Clear beneficiaries include car dealers. Bommarito Automotive Group, the largest dealer in St. Louis, sold 29,414 new and used vehicles in 2015, resulting in an 8 percent increase in revenue, to $1.35 billion. “This was fueled by low gas prices, and we expect it will continue for the next couple of years,” President John Bommarito said.

Sowers, Jim Butler Automotive Group’s president and CEO, believes it will only get better. “The car business, I believe, is going to have its best year ever. Already in January, we’re up 26 percent year over year.”

Low gas prices also have shuffled the inventory at dealerships as Americans renew their love affair with big vehicles. Honda said it expects more than half its U.S. sales this year will be light trucks and SUVs. With demand for small cars shrinking, “We are making a big push into trucks,” Jeff Conrad, Honda’s U.S. sales chief, told The Wall Street Journal.

Then there are companies tied to the auto industry. With people driving more on cheaper gas, tire companies should do better, right? Sort of. Hazelwood-based Community Wholesale Tire, one of the largest tire distributors in the Midwest, sold 5 percent more tires in 2015, but revenue increased less than 2 percent, and tire sales for the industry increased only 1 percent. “Soft demand in China and Europe pushed global tire prices downward throughout 2015,” said President Phil Berra, whose family owns the company.

Enterprise Holdings Inc., the rental car giant owned by the Andy Taylor family, reported a 9 percent increase in revenue to $19.4 billion in 2015, making it the largest privately owned company in St. Louis. “When gas prices go down, we see an increase in customers driving larger vehicles,” Enterprise spokeswoman Christine Cavallini said. “In general, we know rental car customers are driving more, as the rental car industry continues to grow.”

Results were largely flat at packaging companies, which use petroleum to make containers. Revenue was up less than 1 percent at Alpha Packaging, to $244 million; down 4 percent at Pretium Packaging, to $265 million; and up 2 percent at Tricor Braun. Alpha’s vice president of marketing, Marny Bielefeldt, said even 1 percent growth was surprisingly strong, given that the prices the company can charge are tied to petroleum prices.

Even companies not directly tied to gas prices, such as Panera Bread Co. and Isle of Capri Casinos Inc., can be impacted. “When we leave the gas station with more money in our pockets, we might say, ‘Let’s go to lunch.’ Ditto for Isle of Capri,” said Ken Crawford, an analyst at Argent Capital Management. “But MasterCard could be hurt because it gets a percentage of the amount we pay for gas using a credit card. They also could benefit because maybe we make more purchases in total.”

Lower natural gas prices also have been a mixed bag at natural gas utility Laclede Group Inc. because of unseasonably warm weather. “Lower natural gas prices means they are paying less near term but charging us the same,” Crawford said. “The same is true for Ameren, which uses natural gas to generate electricity.”

But warm weather means we use less. Net income was $46.9 million at Laclede for the quarter ended Dec. 31, down from $47.1 million a year earlier, with results that were impacted “by the unseasonably warm weather and the current market dynamics of expanding gas supply and low price volatility and basis differential,” CFO Steve Rasche said.

Oil stocks are not only declining but having a cascading effect. “What’s interesting is the overall stock market has now fallen more than the energy sector, and bank stocks have fallen even more than that, partly because they lent so much money to the energy industry,” David Wessel of the Wall Street Journal and the Brookings Institution, said in a Feb. 11 interview with NPR.

Argent’s Crawford sees it, too. “Analysts and investors are afraid the banks have lent to oil companies and oil service companies and will end up with bad loans,” he said. The same is true for life insurance companies, which are being asked how many of their bonds are energy-related. “In my world, everyone is asking, ‘What is your energy exposure?’”

Oil and gas trends: An opportunity for Emerson

Emerson, the St. Louis-based industrial equipment manufacturer, is adjusting its business model to take advantage of oil and gas trends and helping large energy companies adjust theirs.

Automation is becoming increasingly important at Emerson, which consists of five business segments: Process Management, Industrial Automation, Network Power, Climate Technologies, and Commercial & Residential Solutions, with total sales in fiscal 2015 of $22.3 billion.

“Our business will be two-thirds Process Management because of the growth opportunities,” said Steve Sonnenberg, president of Emerson Process Management, which had $8.5 billion in sales in 2015.

Tumbling oil prices have added to energy industry problems. Even before that, many large projects were in crisis because of overspending and costly delays, Sonnenberg said in a phone call from Houston, where Emerson sponsored the CERAWeek energy conference this week attended by 3,000 energy executives, the Saudi oil minister and the president of Mexico.

Historically, oil and gas companies have been slow to change. But the projects in crisis and oil prices are forcing their hand, and that’s the opportunity for Emerson.

“Their biggest problem is unplanned shutdowns because of equipment failures, each costing millions of dollars,” Sonnenberg said. “Our technology can detect when equipment will fail.”

Large capital projects take an average of 53 months to complete at the worst-performing companies, compared with 27 months at the best-performing companies.

“It takes twice as long and costs twice as much,” he said. “Automation is the key, and Emerson is in the business of automation.”

This week, Mexican oil and gas giant Pemex and French energy company Engie announced they have selected Emerson for an $8.9 million automation project.

The short term is difficult for Emerson, Sonnenberg said, “but longer term, we are very optimistic because these companies have to make changes, and they are looking to the new technologies that we have.”

Baird analysts seem to agree. In a note to investors Feb. 3, they said Emerson’s “underlying results continue to be negatively impacted by lower oil prices, a global slowdown in industrial spending, and deterioration in emerging markets (particularly China).” Still, the company’s “strong financial profile mitigates downside potential for the stock.”