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Refinery announces slashed profit for year with reduced margins to continue

Tuesday 16th February 2010

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Decimation of the New Zealand Refining Company’s refining margins drove a sharp drop in profit for last year, with only a slight improvement in margins expected in the near future.

The Northland-based oil refining and distribution company saw refining margins slashed from US$12 per barrel to around US$1, and tax-paid profit in the year to December 31 plummeted to NZ$23.6 million from NZ$125 million a year earlier.

The result was widely anticipated, with NZRC announcing in August that it expected to operate at a loss in the second half of the year.

“Conditions were dominated by the global financial crisis, which saw demand for oil products falter just as new refinery capacity had come online,” NZRC chairman David Jackson said. “The resulting oversupply has continued to depress refiners’ margins with a number of major oil companies, including BP, Shell, Chevron and ExxonMobil declaring a significant downturn in profits.”

BP announced its lowest refiner’s margin in 15 years, and refineries in the UK, France, Spain, Japan and the U.S. have closed or reduced capacity. America’s largest refiner, Valero, closed its 185,000 barrels per day Delaware City plant last November.

The strengthening New Zealand dollar or weakening US dollar also resulted in lower processing fee income for NZRC.

Jackson said that despite two shutdowns last year, the refinery processed 37.9 million barrels of feedstock, compared to 39.2 million barrels the year before.

“We have seen a slight improvement in margins from late December through January 2010,” he said. “However the supply/demand fundamentals have not changed sufficiently to expect a sustained recovery in refinery margins at this stage.”

The refinery also achieved 1.5 million hours without a lost time incident for the year.

Negotiations are ongoing with an Infratil/New Zealand Superannuation Fund consortium to purchase Shell New Zealand’s 17% stake in the refinery.

There will be no final dividend because of uncertainty over margins, the continued exchange rate volatility, the need for $44 million of non-discretionary capital expenditure during 2010, as well as the expected change in shareholders which potentially could affect imputation credit continuity.

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