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Top picks 2013: Susser Petroleum

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Top picks 2013: Susser Petroleum
Master limited partnership Susser Petroleum (SUSP +0.07%), which IPO'd in September, is our top conservative pick for 2013.

The partnership's principal business is distributing gasoline and diesel fuel to the convenience stores owned by its parent, Susser Holdings (SUSS +0.62%) and to independent filling stations that have contracted with Susser for their fuel supplies. Susser Petroleum distributes fuel to all of the 550 Stripes brand convenience stores operated by SUSS.

It also distributes to 80 independently operated consignment locations where SUSS sells motor fuel to retail customers and to more than 480 independently operated convenience stores and retail fuel outlets that Susser Petroleum refers to as "dealers."

Susser Petroleum also own the fuel distribution rights to substantially all of the new locations that Susser Holdings constructs or acquires in the future through a 10-year supply agreement signed as part of the spin-off.

Its third-party dealer distribution contracts also generally have an initial term of 10 years. They currently have an average remaining term of approximately five years

In addition to its fuel distribution revenue, the company earns rental income from convenience store properties that it leases or subleases to Susser Holdings and third parties.

We think the purchase and leaseback of Stripes stores from its parent should create a virtuous circle for Susser Petroleum, whereby its parent uses the proceeds to build more convenience stores that Susser Petroleum will then distribute fuel to.

Every new Stripes store by default expands Susser Petroleum's fuel distribution business. In addition, Susser Petroleum has a relatively low-risk business model that is largely devoid of commodity risk, as it buys fuel from independent refiners and major oil companies at one price and sells it to the filling stations at another price.

Fuel is typically bought and delivered within 24 hours, and any fuel that isn't is hedged. Meanwhile, its locked-in 3-cent margin with Susser Holdings, which accounts for approximately 68% of its motor fuel volumes, reduces margin volatility.

As investors become more comfortable with the MLP's business model and start to recognize its growth potential, we think the stock should get a lift. It enters the year yielding 7.0% based on its minimum annual distribution of $1.75 per share.

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