Pump Up Your Income Stream with Gas Station Play

Posted On December 11, 2015 9:18 am

Applying a covered call to this high dividend payer will boost your returns to over 20% annually even if the stock does nothing.

The crash in the price of oil has hit energy stocks hard. The SPDR Energy Select (XLE) has declined some 25% in past six months with some individual names losing as much as 50% over the same time period. But most of the large integrated energy companies, such as ExxonMobile (XOM) or Chevron (CVX) are trading above their September lows even as oil has slipped to new lows below $40 a barrel.

But recently the subsector of Master Limited Partnership’s (MLP) have imploded with the Alerian MLP ETF (AMLP) has tanked some 30% in the last month and is down over 42% from its May highs.

MLPs are designed to be tax efficient by passing most of their earnings along to unit holders in the form of distributions. This usually results in a very attractive yield. They also tend toward “toll road” businesses such as pipelines in which they sign long term contracts which were tied to volume, not the price of oil.

While the amount of gas and oil flowing through the tubes and being pumped at the station has been stable, actually up slightly year-over year, the growth through capital spreading and acquisitions needed to maintain distribution (dividends) has dried up.

Hence concerns over the sustainability of distributions has weighed on the sector. Some smaller names had already cut or suspended payments but on Tuesday Kinder Morgan (KMI), the granddaddy of MLPs, suspended its dividend sending shock wave through the industry. But as GuruFocus discussed this may have proved to be a wash-out buying opportunity.

Going Downstream for Income Stream

In fact there is one sub sector of the MLP subsector that I feel has been unduly punished over recent weeks and now offers a great buying opportunity. One area of the energy industry that is reaping huge benefits; the gas stations. Large energy companies have traditionally spun off their weaker businesses to boost profit margins. While oil was above $100 per barrel it was the processing and gas stations, known as the “downstream” that got jettisoned.

Over the past two years several refineries went even further, spinning off the retail arms into individual stocks. Now as oil prices fall, those gasoline sellers are outperforming their parent firms.

CrossAmerica Partners (CAPL) was the result of such shedding of downstream assets. .  It was formed in 2012 as drop down from parent CST Brands (CST) which itself was formed from a spinoff of Valero (VLO). Cross America nearly doubled its size by merging with Lehigh Partners in August of 2014. It is now one the largest independent retailers of motor fuels and convenience stores in North America It delivers fuel to over 1,100 locations, including major brands such as ExxonMobil, Chevron,Valero and Gulf stations and 7-11 stores. It owns more than 670 sites in sixteen states.

The company collects leasing fees for the properties and a percentage of sales. It also has contracts, typically 10 years, to supply fuel to the sites. This combination should provide stable cash making and leaves it relatively insulated to commodity price.

In fact the drop in gas prices has led to a slight increase in profits as miles driven is trending higher as is spend at the attached convenience locations. It also has some exposure to real estate which has turned from a negative to a positive.

It reported third quarter earnings early November it showed increases in revenues and profits across its various segments; Operating income for the wholesale segment increased $6.4 million or 41% primarily driven by an increase in rental income, income from CST Fuel Supply and a decline in operating expenses, cash flow increased 32% and the Distribution Coverage Ratio increased to 1.35 from 1.31, meaning the it seems safe.

Which is astounding given the yield is now whopping 10.1% given recent decline in the stock price.

As you can see CAPL shares have been trending lower for a while. But after a recent spike down on the Kinder news it has jumped back above resistance and offers a good risk/reward entry point near the $23.50 level.


At this point this seems a perfect case in which you “get paid to wait” in that even if stock goes nowhere.

Covered Call to Boost Income

Remember you need to own the shares to collect the distribution. So while owning calls might provide leverage or stock price gains you forgo the yield. I want to employ a covered call strategy to further boost the income, and provide some downside protection. This is done by purchasing the shares and simultaneously selling call options to collect premium.

With shares trading around $24 one can sell the April $30 call for $0.60 a contract.

If the stock stays still the call will expire worthless and you collect that $0.60 of premium. One could then proceed to sell slightly out of the money calls on a quarterly basis.

If the stock were to merely stay still one would collect approximately $2.40 in option premium and $2.10 of distributions. This is $4.60 or a 20% annual return even if the stock does nothing.

Of course is shares both up and down during the course of the year you’ll also capture capital gains for even more profits. As shares move up (or down) one can adjust the strike price of the calls being sold to keep that income flowing.

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About author

Steve Smith

Steve Smith have been involved in all facets of the investment industry in a variety of roles ranging from speculator, educator, manager and advisor. This has taken him from the trading floors of Chicago to hedge funds on Wall Street to the world online. From 1987 to 1996, he served as a market maker at the Chicago Board of Options Exchange (CBOE) and Chicago Board of Trade (CBOT). From 1997 to 2007, he was a Senior Columnist and Managing Editor for TheStreet.com, handling their Option Alert and Short Report newsletters. The Option Alert was awarded the MIN “best business newsletter” in 2006. From 2009 to 2013, Smith was a Senior Columnist and Managing Editor for Minyanville’s OptionSmith newsletter, as well as a Risk Manager Consultant for New Vernon Capital LLC. Smith acted as an advisor to build models and option strategies to reduce portfolio exposure and enhance returns for the four main funds. Since 2015, he has worked for Adam Mesh Trading Group. There, he has managed Options360 and Earning 360, been co-leader of Option Academy, and contributed to The Option Specialist website.