Ampol Fired Up On Buoyant Refinery Margin

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Refinery margins are the headline news of Ampol’s half yearly results, with record Lytton margins in the half supporting strong group earnings.

-Ampol delivered a record June half performance
-Amid continuing tightness in the market, record refinery margins at Lytton made a key contribution
-Margins should continue to provide benefit near-term as global growth capacity fails to meet demand

By Danielle Austin

Ampol’s ((ALD)) Lytton refinery returned record margins in the June half, driving segment earnings up 806% on the previous comparable half and providing a substantial contribution to group financials. The company attributed the strong margin increase to ongoing tight global markets.

The company highlighted a global reduction in capacity in recent years, combined with demand growth in post-covid markets, and tight supply given sanctions on Russian exports and export quotas issued by China, have driven up refining margins across the industry.

Noting refining margins have increased materially in recent weeks, following a decline in July, company management anticipates global growth capacity remains below requirement to meet demand, and expects margins to remain elevated as a result. Market experts have estimated global demand to reach 5,600 thousand barrels of oil per day in FY23.

Group-wide, Ampol delivered a record June half, with earnings of $734m and net profit of $471m seeing the company declare a $1.20 per share dividend.

Acting on growth strategy with acquisitions and divestment

The June half saw Ampol complete the Z Energy acquisition as well as the Gull divestment. The company has confirmed it is in advanced discussions to divest -NZ$130m of Z Energy property into a property trust, expected to complete in the third quarter.

Z Energy was able to provide a two-month contribution to full year results, and the addition is anticipated to provide annual synergies of NZ$60-80m. The acquisition feeds into Ampol’s growth strategy, prioritising growth in its international portfolio.

Of the four FNArena database brokers to update on Ampol following the company’s first half results release, three are equivalent Buy-rated and one is equivalent Hold-rated. Between them these brokers have an average target price of $35.43, ranging from $31.93 at the lower end to $40.00.

Ord Minnett (Buy, with a target price of $39.00) remains positive on Ampol, anticipating a post-covid economic activity recovery will be a driver for the company’s near-term earnings.

The broker finds improvement in regional refining margins, and the federal government's fuel security subsidy, decrease downside risk, while noting potential upside to forecasts from refinery margin upgrades and growth in fuel volumes. Ord Minnett notes the clean energy transition remains the primary risk to the industry, but Ampol has begun evaluating potential clean energy businesses.

Noting first half group earnings of $734m represented a 15% beat to Macquarie’s forecasts, and a 14% beat to consensus, this broker (Outperform, with a target price of $40.00) lifted its earnings per share forecasts 7%, 6% and 9% through to FY24 to account for higher refining margins.

The Macquarie analysts find Ampol is deleveraging more rapidly than anticipated following the Z Energy acquisition, enabling capital allocation choices for the company. This broker expects Ampol can continue to find opportunity in commodity volatility as the clean energy transition continues.

Describing Ampol’s outlook as solid, Credit Suisse (Neutral, with a target price of $31.93) highlighted a slower than anticipated recovery in fuel volumes, attributed to underperformance by EG Group and lower aviation fuel volumes, as well as price impacts on retail sales. This broker expects tightness in refining capacities to continue to benefit refining margins over the forecast period.

Credit Suisse also noted a lift in net debt in the half, driven by an increase in working capital to $840m. Expecting this to partially unwind in the coming half as fuel prices moderate, alongside proceeds from the Gull sale, this broker estimates Ampol will finish the year with net debt equal to 1.5x annual earnings, which it anticipates could bring capital management into play.

Given the in-line outlook provided by the company, Credit Suisse has made minimal changes, updating forecasts by -1.5%, 3.3% and 3.6% through to FY25.

Having concluded that Ampol's resilience in refining margins might last longer and benefit earnings, UBS has lifted forecasts in ongoing support of the broker's Buy rating, with its price target improving to $39.80 from $39.60.

Morgan Stanley has yet to update post FY22 result, but rates the stock Overweight with an Attractive industry view, underpinned by a $39 price target.

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