Australia | Mar 06 2013
– Caltex is restructuring
– Will take time and money
– How will New Caltex fare?
By Greg Peel
It eventually gets a bit tedious listening to people whinge about the price of petrol at the pump in Australia, sourced from Singapore, rising, when the price of crude oil delivered to Cushing, Oklahoma, for US domestic consumption and benchmarked off the West Texas Intermediate futures contract, traded in New York, is falling. One might as well whinge that a high price for bananas must be a rip-off when the price of carrots is so low.
In the not too distant future, US domestic WTI crude will be exported as well as consumed in the US and that will help bring prices into line. But the price of WTI is more likely to rise to close the gap than the price of petrol in Australia fall.
It’s not much fun being a petrol refiner. The time lag between ordering crude supplies and distributing refined petrol (and diesel et al) and the high volatility of prices for both opens a constant opportunity for profit/loss fluctuations. Forward orders and hedging can be used, but hedging can also mean sacrificing profit opportunities. Currency fluctuations also spoil the mix. Caltex Australia ((CTX)) refines oil sourced from the Singapore distribution hub which is either Malaysian Tapis crude or Brent crude from the North Sea. At the time of writing, Brent is trading at a 22% premium to WTI. Tapis is trading at a premium to Brent.
Caltex is now undergoing a drawn out process of converting its Kurnell refinery in Sydney into a facility for the storage of imported fuels. Refining has done little more than lose money for the company in recent years, and at best refining profits have been volatile. Constant whinging from consumers and knee-jerk politically motivated petrol price investigations would imply a suspicion of super-profits being achieved in the refining game. If that’s the case, Caltex must be mad to close a refinery in the country’s biggest city. But there have been no super-profits, only average losses. The Caltex share price has doubled since the company announced its restructure plans.
The Kurnell conversion will cost a lot of money. In the meantime, Caltex is beefing up its marketing division to take on increasing competition in the fuel distribution business. (Competition? Thought they were all in cahoots?) Last week’s second half 2012 earnings release came in at the low end of management’s guidance range and thus mostly fell a little short of broker expectations. Worse still, the refining division posted a quite profitable result which surprised brokers. The first half only saw a break even result, although that was quite good in the scheme of things.
It seems that time lags and price volatility offered up a rare alignment of the stars for Caltex’s refining business over the period and the six brokers covering the stock in the FNArena database chorus as one, “unsustainable”. Says Macquarie, for one:
“With the full year result flattered by a $112m reduction in [depreciation] cost and $48m in reliability improvements, and margins expected to weaken as regional capacity additions more closely match demand growth following a heavy period of planned outages, we expect the refining segment will remain loss-making without a commitment to further improvements at “capitalising extreme growth rates in this area”.
Citi does not share Macquarie’s view of a shiny new Caltex down the track, albeit both have Sell ratings currently. A post Kurnell refinery closure picture is really not all that attractive, suggests Citi, given execution risks thrown up by the transition, the volatility of earnings the retained Lytton refinery will still provide and the potential for increased marketing competition. Citi actually dropped its target price post result, to $13.90 from $13.99 – 34% below the current traded price.
For Deutsche (Hold), those looking for yield from a more consumer staple-like business may be disappointed. And don’t forget CTX also sells fuel to heavy industry, such as mining, in which activity and thus energy demand has waned. Given the Kurnell transition will suck up a lot of cash, and given management’s desire to maintain a BBB+ credit rating, it is dividend payouts that must suffer, warns Deutsche.
Target prices in the FNArena databases range from $13.80 (Citi) to $21.50 (Credit Suisse) for a consensus price, if you call it that, of $17.83, which is 14.5% below the current traded price. Caltex has been a great stock for traders in the past several months but not a great stock for investors in recent years. “Date but don’t marry”?
It is a well-worn argument that if you are livid about banks making super profits out of your deposits and loans, why not buy shares in your bank? I have noted in recent articles that those worried about rising electricity bills might be well served buying shares in an electricity utility, and those worried about gas bills might wish to jump on the LNG bandwagon. Perhaps those worried about the cost of petrol might consider Caltex, if not as an investment, perhaps as a hedge.
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