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NZ Refining expansion best option, but "no game-changer": Craigs

Thursday 26th April 2012

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Investing $365 million at the Marsden Point oil refinery over the next four years is better than a lesser $105 million refit, but it won’t be a “game changer” for the country’s only oil refining facility, says Craig’s Investment Partners.

In a note to clients ahead of tomorrow’s high-stakes shareholder vote at the New Zealand Refining annual meeting in Whangarei, analyst James Schofield says the refinery remains “at the mercy of global petroleum markets.”

The note gives an insight into the reluctance of at least two of the five major shareholders in the refinery to commit funds to the $365 million Continuous Catalyst Regeneration Platformer (CCR) project, when a $105 million upgrade would secure its future beyond 2015 by replacing its obsolete platformer unit.

NZ Refining’s board and senior management have been doing the rounds locally and internationally of shareholders, both small and large, seeking support for the CCR proposal after revealing that two unnamed shareholders had opposed the CCR decision.

BP and Mobil, holding between them 43 percent of the company, are believed to be the hold-outs, with Z Energy and Chevron (owner of the Caltex retail brand), holding 30 percent, making no comment.

Z is understood to support the proposal, while 12.7 percent owner Chevron’s announcement today it would spend $4 million to bring storage tanks back into commission at Timaru could be read either way.

While Mobil is known to be seeking an exit from the New Zealand market, a Chevron spokesman said the company was “here to stay. We’re investing in our network.” Another key shareholder, at 8 percent, is Garlow, related to a Canadian family trust. 

The remaining 19 percent of the share register is in the hands of retail shareholders, with virtually no institutional interest in the refinery, whose volatile earnings and dividend rates have made it unattractive.

The New Zealand Superannuation Fund is exposed to the refinery through its half-share of the joint venture with Infratil, with which it owns 17 percent shareholder Z.

“Whilst an incremental positive, (CCR) will be crowded out by whatever the 2016 global refining environment dictates,” said Scholfield in his note. “Refiners are classic price takers. Refining NZ is no different. Singapore-derived margins and FX (the exchange rate) will remain the key.”

The refinery’s earnings have see-sawed in the last five years, with refiners’ margins dropping as low as US$1 a barrel in 2009, recovering to above US$7 a barrel, and recently plummeting to what Craigs says are “the worst levels since 2004” outside the second half of 2009.

If refining margins achieved in January and February this year had continued, NZ Refining could expect to lose $20 million this year, and the refinery’s earnings guidance ranges between a $49 million loss and a $161 million net profit.

Craig’s own forecast is for a $19 million net profit. Meanwhile, the refiner is planning to aggressively pay down the $365 million debt required to fund the CCR project, and cut dividends in the meantime.

NZ Refining “hopes to ‘fully’ repay by 2020,” the Craig’s note said. “The only certainty of CCR is that 2012 to 2018 dividends will be cut as capex ramps up,” said Schofield.

About a third of the expected uplift from CCR would occur anyway with the $105 million “Re-Life” project, which the refinery will pursue if it loses tomorrow’s vote to modernise more of the plant, with major gains in environmental and energy efficiency, delivering significant value with oil over US$100 a barrel.

However, with global refinery capacity over-supplied, the Marsden Point refinery would remain at the mercy of global margins, even if its remote location meant it would likely remain competitive with international refineries because of the transport cost savings it offers.

“Our preference would be to delay investment until there is greater confidence for the global refining outlook,” said Schofield. “But one of the two options must be started now to sustain refinery operations beyond 2015. Given that binary choice, we prefer CCR,” said Schofield. NZ Refining shares rose 1.1 percent to $2.75 on the NZX and have fallen 2.9 percent this year.


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