Australia | Nov 04 2008
By Chris Shaw
While some companies enjoy an earnings boost from a depreciating Australian dollar the same cannot be said for oil refiner Caltex ((CTX)). Yesterday, the company announced that earnings this year in terms of the replacement cost of sale operating profit will be impacted by around $200 million as a result of the rapid fall in the Australian dollar.
The reason, as Macquarie notes, is the company is exposed to a settlement gap as its oil payables are denominated in US dollars and settled in 30 days, so while the Australian dollar offers something of a natural hedge given its relationship to the oil price it is this timing gap and the sharp currency move that has lead to the earnings impact.
Longer-term, Deutsche Bank suggests a weaker Australian dollar actually is beneficial for the company given the translation into the local currency of US dollar per barrel refiner margins, but short-term the sudden shift in forex markets means a negative earnings effect that the company didn’t have a chance to hedge against.
Looking ahead, the key for the company remains the level of refining margins, which Deutsche Bank notes have been solid since Hurricane Ike hit the US a couple of months ago. Having averaged US$3.23 per barrel in both August and September, this margin has recovered to around US$7.00 per barrel, which is more in line with the broker’s forecast for 2008.
Next year, the broker predicts the margin will fall to around US$5.00 per barrel thanks to the combination of increased regional capacity and weaker demand, while UBS sees similar conditions, but is forecasting an average margin of US$6.00 per barrel next year.
Just how volatile this margin is can be seen from Macquarie’s point the company itself has guided to a full year margin this year of closer to US$10 per barrel, which would suggest there is some upside risk to earnings estimates if management’s forecast proves to be closer to the mark. The broker also points out September is a seasonal low point for margins and they should trend higher leading into Christmas as stocks build up ahead of the northern winter.
One issue is new capacity coming onto the market, as the Jamnagar refinery owned by Reliance Petroleum should be commissioned by the end of this year and given its capacity is equal to 77% of total Australian capacity, Deutsche Bank suggests it could place downward pressure on regional refining margins going forward.
The broker does point out this may be offset at least partially by increased demand from lower oil prices, as higher demand means higher refining volumes and this would flow through to the company’s bottom line.
Post the revised guidance from management, brokers have adjusted their earnings estimates for the company, with Deutsche Bank cutting its 2008 forecast in earnings per share (EPS) terms to 47c from 113c previously, while in 2009 it is forecasting EPS of 160c, only slightly down from its previous forecast of 162c.
UBS is close with its numbers, forecasting EPS of 51c this year and 162c next year, down from 84c and 176c respectively, while the FNArena database shows consensus forecasts of 106.5c and 147.3c for 2008 and 2009, though it must be noted not all brokers have yet updated their models for yesterday’s announcement from the company.
The changes to earnings estimates have impacted on price targets in the market, with Macquarie dropping its target to $12.99 from $19.72 and Deutsche Bank cutting its target to $10.60 from $11.90. UBS also lowered its target modestly, while the average price target according to the FNArena database is now $15.64, down from $16.05. (Same comment applies as the one about consensus forecasts earlier).
Today, shares in Caltex are weaker and as at 12.35pm the stock was down 60c or almost 6% at $9.46, which compares to a trading range over the past 12 months of $8.20 to $23.14.