The Coming Gas Station Divestiture Rip Off

EXXON-Mobil intends to divest itself of gas station properties, claiming that they no longer meet the investment standards they require. That in itself is a bold face misrepresentation.It's a sham in as much as the control of everything sold through those properties plus the vertical integration prerogatives mean that Exxon-Mobile can take its revenues at any stage of its operations it chooses. E-M may at its option determine the net return at refinery and retailer levels and through the entire distribution system. The stations can handle only what E-M decides and at purchase and resale prices determined exclusively by E-M (except for pop, beer and redneck hats).

E-M has decided, therefore that it can realize investment returns on these properties with no immediate risk to itself. In any transaction there has to be serious risk somewhere. Here the real risk is that the retailer investor will in almost every instance be fleeced over the short term.

This is not a new phenomenon. I have seen it in the past. The ploy is subtle, and extreme vetting of the investment by the purchasing dealer is the only technique that may save from ruin.

Many of these will be bought by immigrant operators. They – God bless them – will probably make money in the short term. If they don’t count on long term capital value, they may come out whole or close to it.

The big risks will be the distributors who have many millions already invested in wholesale distribution assets, including some retail station properties. They have to be extremely wary how much of what they now have they put into harm’s way, This is going to be really tough,

What might these risks be? They arise in three categories. There is the risk category of the property itself. There is the risk category of the terms of the agreements reached that are ancillary to the property purchase (properties will not simply be sold leaving dealers with freedom to do with them as they please). And there are the risks associated with subsequent determinations by E-M (or any other refiner doing the same thing).

Property ownership risks include condition of the property and the proper function and governance of equipment fraught with potential environmental issues. Tanks, pumps, lines, dispensing pumps and weights and measures issues will now be the risks of the station owner and not that of the selling refiner. The sales/operating agreements will place those risks squarely on the new station owner with termination consequences that may be invoked without requirement of uniformity in their implementation.

Contract risks include the terms of compulsory supply and the standards of the products sold. Branded/unbranded products will have different chemical characteristics/formulae/additive packages. Pricing will be nonspecific. It will track what the refiner says the market requires. In this instance, pricing can and probably will be such that the gross margins of the station owners will be controlled. The station owner will be permitted a certain gross margin and that’s it. If he raises his retail prices, he will find that his costs rise to maintain the margin level that the refiner wants him to have. That’s how it works now and that isn’t going to change. The station owner will not have access to any free market supply opportunities when it comes to the products that are the core of the business. Ancillary services will not be permitted. Repair shops will no more be allowed post purchase than they are now. The refiners want these properties to be pumpers and nothing more to the greatest extent possible. Access to refiner credit card programs will be costly. While termination of supply arrangements may be subject to some notice and cure opportunities, termination of credit card machine rental agreements will be on short and arbitrary notice. The same will be true for equipment rentals. Any unpermitted product dispensed through branded retail pumps will be cause for immediate shut down of supply. An opportunistic dealer will find himself on the enforcement end of all sorts of “public policy” euthanasia.

You may rest assured that this plan does not include a possibility for dealers to become entrepreneurial – no matter what the sales pitch may say. Every operator will be required by contract and by circumstances to march in lockstep with refiner policies.

Some will try to become free enterprise operators. Some may succeed in that effort over a short period of time. Then the refiners will avail themselves of the rights provided for them under the PMPA (Petroleum Marketing Practices Act). There will be “the final solution to the maverick dealer problem” (actual language in a memorandum obtained in discovery).

The refiners, having realized the economic value of the real estate on their books in markets from which they wish to withdraw, will avail themselves of their options in the PMPA, and the station owners (dealers and distributors)in the withdrawing markets will find themselves without supply and with useless, worthless properties.

I have seen this happen in exactly the same way before. If you buy these properties, you had better write off the investment as fast as you can. Even then you probably won’t make it.

As for future resale value – FORGETABOUTIT!

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Related reading:

Exxon Mobil Selling Company-Owned Stations