How Parkland Fuel Corp. became Canada’s largest independent fuel distributor

Large integrated oil companies no longer see the marketing of fuel as a strategic necessity

August 05, 2013

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For years, Jack Donald walked around with a mutilated penny in his pocket.

In 1975, with his wife Joan, the wily former mechanic and Petroleum Hall of Famer bought the controlling share of Parkland Beef industries, a 5,000-head cattle feedlot in Lacombe, Alberta. The Donalds, veering from bovines to fuel soon after, created the beginnings of what is now Parkland Fuel Corp., known now for its green-and-gold Fas Gas Plus stations and related Short Stop convenience stores sprinkled across Western Canada.

Donald, now 78 and still running his own property company, was president and CEO of Parkland Fuel Corp. from 1977 to 2001. He had hack-sawed a one-quarter-sized wedge out of that penny. The remaining disc of copper left behind was his symbolic peace-maker with consumers rankled by the high price of g asoline at the time. He took that coin to service clubs and other meetings around Alberta explaining that the remaining three-quarters of a cent represented the puny profit Parkland, headquartered in Red Deer, was making on each liter of gas it sold then. At the time, says Donald, Canadian consumers were complaining fuel distributors “were ripping them off.”

Complaints about fuel prices haven’t changed much since, but Parkland, now the country’s largest independent fuel distributor and marketer, with a market cap of $1.25 billion, certainly has.

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The Penny that Jack Donald (left) used to illustrate Parkland Fuel’s tight margins helped inspire CEO Bob Espey’s Penny Plan for the company
Photographs Bryce Meyer

Regardless of what miffed motorists were saying then and still say today, margins on the retail end of the oil business – the service stations and bulk fuel distributors who supply trucking fleets and the like – have always been notoriously slim. (Today, though, it ranges between six and eight cents per liter for gasoline.) And few industries compete as fiercely for such narrow profits, says Parkland’s current CEO, Bob Espey. “Retail fuel is probably one of the most competitive markets, because you have full price transparency,” he says. “Where else do you drive down the street and see the price of a product multiple times during the day?”

While not yet as obvious in Canada as elsewhere in the world, integrated oil companies – behemoths like Royal Dutch Shell and ExxonMobil – have been rapidly closing or divesting themselves of their gas stations. The days where the major oil companies had wellhead to gas tank vertical integration are coming to an end. For the majors, the big money is in the upstream (finding and producing oil and gas) and midstream (refining) end of the oil business. Retail is, profit-wise, a poor cousin and a headache.

In 1989, there were more than 20,000 pumps across Canada. At the end of 2012, there were 12,285, according to MJ Ervin & Associates. Shell Canada Ltd. recently sold all of its service stations and convenience store operations east of Montreal, for example. Just 14 per cent of Canada’s gas stations are directly price-controlled by major oil companies, a two per cent drop from three years ago.

Retailing fuel has never been a core competency of big oil. Now they are getting out, explains Michael Ervin, president of the Calgary-based consultancy, “because integrated oil companies no longer see the marketing of fuel as a strategic necessity. They used to see it as a necessity when refineries were operating at far less than their optimal or full capacities. In that kind of operating environment, having a built-in, integrated marketing asset was providing an assured market for a lot of refinery production. That is no longer the case because refineries are operating at close to 100 per cent capacity.”

“Where else do you drive down the street and see the price of a product multiple times during the day?”

Though not particularly well known as a corporate entity, Parkland, with 1,179 employees around the country, has excelled at competing in this niche, growing into Canada’s largest independent fuel distributor and marketer. According to its 2012 annual report, 78 billion liters of fuel were sold in Canada last year. Parkland captured 5.2 per cent of that market.

Last year, through the 720 Fas Gas, Race Trac and Esso stations it now either owns or are dealer-operated around the country, Parkland Industries (renamed as Parkland Fuel Corp. at the end of 2010) pumped 1.8 billion liters of gasoline into motorists’ vehicles. Add the 1.5 billion liters of mostly diesel Parkland pumped into trucks and fleets through cardlocks and bulk fuel delivery, another 1.3 billion in home heating oil, propane and other fuels supplied around the country, and Parkland supplied Canadians with 4.6 billion liters of liquid energy. That earned the company $437 million in gross profits on $4.1 billion in operating revenue in 2012. It paid out $67.8 million in dividends to investors, a 12 per cent increase over the previous year.

Parkland has been impressing analysts with its high-octane performance. Calling its Q1 results “a big beat” on his forecasts, CIBC World Markets analyst Kevin Chiang praised Parkland for its well-disciplined and well-timed growth strategy, which has only accelerated as of late. Parkland has been seizing on a trend: The big boys are getting out of the service station business.

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Photograph Bryce Meyer

Espey is a former naval officer with an MBA from the Ivey School of Business who took over as Parkland’s CEO two years ago. He calls the downstream end of the oil business Parkland’s “sandbox.” It’s a place where Parkland plays better than the big kids in the oil business, who have by and large decided there are better places to deploy their capital than gas stations. Another thing about the major oil companies, adds Espey, is “the more they have to do detailed things with customers, the less that fits within their operating model. So that’s where we can come in. We can take it over. It’s our space.”

Parkland, says Espey, wants to be big oil’s distributor of choice when it comes to selling their end products, gasoline, diesel, bulk fuels, propane and lubricants. To that end, says the CIBC’s Chiang, Parkland has been busy buying up retail outlets and other fuel distribution channels around the country. “They have been a leader to consolidate this market. And despite what every company says, that they are disciplined in acquisitions and that they don’t want to pay too much, I would argue that Parkland has been quite successful in being disciplined around its acquisition strategy.”

Unlike branded dealer-owned service stations (think Shell, Petro-Canada and Chevron stations) who have to buy their fuel at fixed prices from a single supplier, Parkland is free to shop around and look for the best deals. Though it also now owns 24 Esso stations and supplies another 349 Esso dealers, Parkland buys fuel for them and its other holdings from every refiner in the country. It gives Parkland negotiating power with suppliers like Suncor, Exxon and Shell.

Retailing fuel has never been a core competency of big oil. Now they are getting out.

With its growing infrastructure, he adds, Parkland can solve refiners’ distribution issues better than other independent fuel marketers. It’s one of the only independents with its own storage terminals. And thanks to the $80-million purchase last December of Elbow River Marketing Limited, it has a fleet of 1,200 rail cars, some now being used to bypass the bottleneck in pipelines and ship crude for oil sands refiners, and extending Parkland’s supply capability in North America.

Well capitalized, and continuing to grow its brands, gas stations aren’t Parkland’s only channels of distribution. Aside from the familiar retail channel, the Fas Gas, Race Trac, Esso and some other lesser known branded stations such as Cango and Sunys in the east, Parkland has a bulk-fuel channel. It supplies home-heating fuels, propane, and, primarily, diesel to card-lock type trucking operations, fleets and even ships on the west coast through 119 commercial locations. Parkland is Shell’s largest distributor of branded diesel in Canada and the largest distributor of Shell-branded lubricants in North America. Parkland also has a wholesale channel supplying 100 other independent dealers with diesel, gasoline, propane, home heating oil and other products.

On May 13, Parkland made its first foray into Quebec, assuming the customers and assets of TransMontaigne Marketing Canada Inc. from financial services giant Morgan Stanley. That enhanced Parkland’s strategic supply infrastructure in central Canada. Says Espey, “We like to say our objective is to have a material supply advantage over any other independent in the marketplace.”

Parkland also has an advantage over other independents in that it supplies diesel and gasoline products, rather than just one or the other. The big-box retailers with stations, such as Costco and Safeway, focus on gas. A large independent like UFA, with mainly agricultural customers, focuses on diesel. “We come in and we have a very balanced barrel, and refiners like to produce both,” Espey says.

Last year Espey unveiled a five-year growth strategy called the Penny Plan, which, if successful, would increase Parkland’s fuel sales to seven billion liters of fuel a year and capture 10 per cent of the Canadian market by 2016. It would also, through improved operational efficiencies and increased economies of scale, save Parkland one cent per liter in costs. That could create $70 million in savings if Parkland reaches its sales goal in three years.

Still running through the company is the ethos of Jack Donald, who pulled Parkland into the fuel business and built it into a major company with only a high school degree, his mechanics certificate, and the kind of hard-earned experience that got a lot of oil under his fingernails. Now, as Parkland penetrates even more markets throughout the country, Donald looks at the company and says, “I am very proud of it. It turned out very well.” Parkland has merely been scaling up a strategy started by Donald, who built up the company and its Fas Gas brand both organically by building new stations, but also by buying up small independent stations and converting them over to Parkland brands.

“We are known in the industry in Canada as the go-to guys if you want to sell your business, so we do get unsolicited requests,” Espey says. “Ultimately everything is for sale.”

What’s in a name?

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Photograph Bryce Meyer

The first Fas Gas station was established in Red Deer in 1977 when a small station Jack Donald bought through his own private company two years earlier was traded to what was then called Parkland Industries Ltd. in exchange for shares. Donald got the Fas Gas name while on holidays in Texas and from his motel room balcony saw an abandoned gas station with the name on it. Liking the name and finding it wasn’t registered in Canada when he got back, he copyrighted it.

In those early days in Red Deer, when other stations closed at 7 p.m., Fas Gas stayed open until 11 p.m. In its constant search for an edge, Fas Gas, taking on municipal fire commissioners that argued it would be dangerous, had the first self-service pumps in Alberta. It also had the first keylock pumps.

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