Thursday, August 28, 2008

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ConocoPhillips is latest to sell its gas stations

Big oil companies have been saying goodbye to the troubled business

By BRETT CLANTON Copyright 2008 Houston Chronicle

Aug. 27, 2008, 11:00PM

http://www.chron.com/disp/story.mpl/headline/biz/5971034.html

ConocoPhillips on Wednesday became the latest major oil company to exit the troubled gas station business and pass on the guardianship of familiar store brands to new owners.

The Houston-based oil company agreed to sell its 600 remaining stores to PetroSun Fuel, a privately held Seattle company, in an $800 million deal that puts a bookend on an effort announced in 2006 to unload the company's fuel stations.

The move follows similar ones recently by Exxon Mobil Corp. and BP, which announced plans to jettison U.S. gas stations amid higher fuel costs, increasing competition from low-price rivals and slumping profits.

It also heralds the end of an era in which the name on the big neon sign on the highway told drivers where their money was going.

Today, fewer than 2 percent of the 115,157 convenience stores selling motor fuels in the U.S. are owned and operated by major oil companies — although many retain the brand names, according to the Association for Convenience and Petroleum Retailing in Alexandria, Va.

"Every day it gets closer to zero," said Jeff Lenard, a spokesman for the trade group.

Most of the stations included in the ConocoPhillips deal are on the West Coast. Only one is in Texas.

All will continue to carry their Conoco, Phillips 66 or 76 brands.

But once the deal is closed, the stores will have a more distant relationship with their former parent.

ConocoPhillips will act solely as a wholesale fuel supplier to the sites, as well as to other stores that are not part of the deal, said Terry Hunt, a spokeswoman for the Houston-based oil company. She called the arrangement a "more sustainable business model."

With retail pump prices topping $4 a gallon earlier this year and still often more than $3.50, customers might assume gas stations are big moneymakers. But the slowing economy and falling U.S. fuel demand this year have made it difficult for retailers to raise prices enough to cover the wholesale price of gasoline they sell.

The convenience store association estimates that retailers made a penny or two per gallon in pretax profit last year, despite high pump prices. The group has not released profit estimates for 2008, when gasoline prices climbed still higher.

Bruce Bullock, director of Southern Methodist University's Maguire Energy Institute, said the deal announced Wednesday suggests ConocoPhillips and its rivals don't see the gas station business improving anytime soon.

"I think this is a pretty good indication that most of the companies continue to believe that prices are going to be either stable or increasing," he said.

On Wednesday, regular gasoline sold for an average $3.67 per gallon nationwide and $3.41 in Houston, AAA reported.

Amid higher prices, U.S. gasoline demand was down 1.5 percent during the first six months of this year, according to the U.S. Energy Department's Energy Information Administration.

If the trend continues, the U.S. could register its first full-year decline in gasoline demand in 17 years.

But Sam Hirbod, chief executive of PetroSun, said his company sees opportunity where the major oil companies see a drag on earnings.

"We are very much interested in participating in the consolidation that's happening in the retail gas station sector," he said, adding that his company is working on two other deals that could add as many as 200 more stores by next year.

The deal Wednesday will make PetroSun, which now has about 120 properties on the West Coast, one of the nation's largest independent petroleum and convenience store operators. The company agreed to acquire the ConocoPhillips properties through a newly formed affiliate called Pacific Convenience & Fuel.

The 600 stores in the deal are spread over 10 states and represent more than 1 billion gallons of fuel sales each year.

Most are in urban areas in California, Oregon and Washington. Others are in Denver, Salt Lake City and Albuquerque, N.M. A Dallas store is the only Texas site.

In Houston, ConocoPhillips sells fuel through Phillips 66 and Conoco stations, but the deal doesn't affect them because they are independently owned.

One way PetroSun aims to offset rising operating costs is by upgrading the ConocoPhillips properties with better in-store products and services, Hirbod said.

In some cases, that will include the addition of fresh deli sandwiches and salads, healthier snacks and perhaps even financial services, he said.

Yet SMU's Bullock said current market conditions will likely test any fuel retailer.

"It's a question of whether a company with a different focus can make money doing the same thing that someone else has already tried," he said. "My sense is that's going to be a tough road."


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