March 6, 2012 | Vol. 62, No. 06

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Dear PEI Member:

We had the unique opportunity to meet with more than 200 members and their customers in February at various industry meetings, including annual conventions sponsored by the Western Petroleum Marketers Association (WPMA), Petroleum and Convenience-Store Exposition of Mid-America (PACE) and the Southeast Petro-Food Marketing Expo (SE Petro). Based on what they told us, here's our take on the prospects for the rest of the year―and a little beyond.

Members and their retail customers are more bullish on the prospects for the industry than at any time since the recession began in late 2007. In fact, only one member―a distributor in the Southeast―even mentioned the word "recession" in conversation. We were surprised to find out that 2011 was the best year in a decade for a few manufacturers. More than a handful of distributors, rep firms and service contractors also mentioned that they climbed out of the economic doldrums last year and posted excellent sales and profit numbers. Over half of the manufacturers we met with have added to and/or bolstered their product offerings during the past 12 months.

The rising sea evidently has not lifted all ships. Except for a few bright spots here and there, California is still in the toilet and Florida's petroleum marketers may just now be finished licking their wounds after experiencing longer-than-expected post-tank-replacement syndrome. New convenience store entrants into the Florida and Carolina markets should help business in the Southeast.

Although the regulations concerning diesel exhaust fluid (DEF) went into effect in January of 2010, indications are that a tipping point has been reached, in both the commercial and retail sectors of the industry. The movement from jugs to mini-bulk to bulk―particularly underground―solutions has accelerated as more trucks and diesel-fueled automobiles require DEF. And the prospects for DEF storage and dispensing business only improve as time goes on.

There is a buzz in the industry about compressed natural gas (CNG) refueling. We could go on and on recounting what members told us about CNG fueling prospects while attending PEI's CNG Fueling Station Design & Construction Course February 23-24 in Las Vegas, but we will resist the urge. Suffice to say, as soaring gasoline and diesel fuel prices continue to make headlines, and CNG retail prices average just $2.39 per gasoline gallon equivalent, CNG as a way to power truck fleets―and passenger vehicles?―must be considered. By the way, PEI's May CNG Fueling Station Design & Construction Courses in Chicago and Baltimore are sold out.

Business Conditions

Acquisitions

PEI's RP1200

More Industry News »

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E15 is the industry's 900-pound gorilla. As we said in the last TulsaLetter, E15 is a subject that significantly complicates the lives of petroleum marketers everywhere. They don't want to think about it, much less plan for it. PEI distributors tell us that going through the hassle and expense of equipping a station to handle E15 is NOT a subject of discussion with their customers at this time. Liability issues still have to be resolved, and marketers must be convinced that they can make money selling the product before E15 can be sold. With the price of oil up and the price of ethanol down, E15 may be more economically attractive than before. Ultimately it may not be the price of ethanol, but the value of the RIN (renewable identification number) that will incentivize marketers to go with E15. Time will tell.

Other takeaways from our conversations:

There are finally some new stations being built after years of almost no new retail construction. Some petroleum marketers are responding to their competition, while others are seeking new markets.
Retail fuel margins were great in 2011. Higher-than-normal margins and the availability of cheap capital to credit-worthy borrowers should drive more consolidation on the retail side in 2012.
The service side of the industry is good to very good―but not great―for most service contractors. The recent PCI upgrades are still under normal or extended warranty, hurting parts sales. Some marketers, reluctant to turn loose of their money, are still bagging nozzles rather than fixing their dispensers. But old equipment continues to age and stations must remain operational to attract customers to shop inside the store, so the service end of the business continues to be a consistent bright spot for most PEI contractors.
Past due accounts are making life tough on everyone. Manufacturers tell us that they have not seen their accounts receivable this bad for decades. Equipment distributors are being strung out by everyone―service firms, installation contractors and end-users.
PEI members in California are mildly optimistic about the prospects for outfitting and building hydrogen stations as new rules passed by the California Air Resources Board (CARB) mandate that 15 percent of new cars sold in the state by 2025 run with zero emissions or near-zero emissions. The result would be some 14 million electric, plug-in hybrid and hydrogen cars on California roads within 13 years. Today, 10,000 such vehicles operate in the state.
Sales and installation of equipment to commercial and manufacturing accounts have increased and continue to command higher gross margins.

BUSINESS ACQUISITIONS
ACCENT Environmental Services, Inc., Lufkin, Texas, has purchased the assets of Sumney Pump, Beaumont, Texas. Steve Stokes and Donis Robison will co-manage the Beaumont facility for all UST work under the ACCENT brand.
Global Partners, a publicly traded master limited partnership based in Waltham, Massachusetts, has completed the previously announced acquisition of Alliance Energy LLC. Alliance's portfolio includes approximately 540 gasoline stations in New England, New York, New Jersey and Pennsylvania. Alliance owns or has long-term leases on approximately 253 sites and has supply contracts for the remaining stations.
Carroll Fuel Company, Baltimore, Maryland, has acquired High's of Baltimore, which directly operates 48 High's Dairy Stores in Maryland.

EPA RESPONDS TO QUESTIONS ABOUT PEI'S RP1200
Carolyn Hoskinson, Director of EPA's Office of Underground Storage Tanks (OUST), emailed underground storage tank stakeholders March 1 to update them on OUSTs activities on the proposed changes to the UST regulations. She commented that OUST had received "a number of questions" about PEI's Recommended Practices for the Testing and Verification of Spill, Overfill, Leak Detection and Secondary Containment at UST Facilities (PEI/RP1200). "When final," Hoskinson wrote, "RP1200 could be used to comply with some of the requirements in EPA's proposal."

DEATHS
John A. Savage III, founder of Savage Associates, Inc., Watchung, New Jersey, died March 3 at his home in North Wales, United Kingdom. He was 99. In 1948 he designed for Shell Oil the first petroleum bottom loading system that standardized the sequence of operation currently used worldwide. In 1976 he marketed and installed the first activated carbon absorption system for gasoline vapor processing at marketing terminals, a standard now used throughout the world. Savage Associates is led today by his sons, Brian and Greg, and grandsons, Mark and Ben.

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The TulsaLetter (ISSN 0193-9467) is published two or three times each month by the Petroleum Equipment Institute. Robert N. Renkes, Executive Vice President, Editor. Opinions expressed are the opinions of the Editor. Basic circulation confined to PEI members.