Z Energy identifies $10-$15 mln additional synergy benefits from Caltex integration

Wednesday 19th October 2016

Z Energy said it has identified $10 million to $15 million of additional savings from the integration of the Caltex and Z businesses, while the sale of an Auckland retail site for $23 million will be used to repay debt.

The Wellington-based service station operator gave the updates as part of a presentation it hosted for institutional investors. The additional synergy benefits bring the total to be achieved in the 2018 year to between $40 million and $45 million, it said.

The transport fuel company bought Chevron's Caltex and Challenge! brands for $785 million this year, making it the country's biggest petrol retailer, but the regulator approval required it to sell 20 sites. The deal gave Z about 49 percent of the retail transport fuels market. Z shares, which listed in August 2010, have soared 112 percent in the past five years. They were recently up 0.3 percent at $7.80. The company is scheduled to release its first-half results on Nov. 10 and said it will update its guidance for the full year at the same time.

Z has committed purchasers of 19 of the sites it is required to sell and has disposed of one by surrendering its lease commitment. The impact of the divestment is estimated to be about 68 million litres of fuel, or about $15 million a year, it said.

The company has no plans to divest its $250 million of property assets, either by sale and leaseback or an initial public offering. It said the 59 retail sites and 18 truck stops were typically high-volume sites in the nation's biggest cities. The property amounts to about 8 percent of Z's market capitalisation of about $3.1 billion and would be "sub-scale for an IPO", it said. Over the medium term it was likely to have more attractive funding options than a sale and leaseback deal, it said.

Z affirmed its expectation that net debt would peak at 44 percent of total assets in the 2017 year before retreating to 39 percent in 2018 and 34 percent in 2019.

"We are option rich," the company said in its presentation slides. "In a world of uncertainty and volatility allowing ourselves time to realise value and reduce debt will provide greater optionality and resilience as we orientate ourselves to an increasingly dynamic energy market post-2020."

The company also set out to scenarios for how New Zealand's energy demand may evolve in coming years. The 'Kayak' future, which has characteristics such as "individualistic, volatile, unconstrained, autonomous", population and energy growth adding 0.4 percent to energy demand by 2030, with an increase in kilometres driven, 33,000 extra electric cars and an 11 percent reduction in energy demand due to efficiencies. The "Waka" future, with characteristics such as "for the greater public good, interdependence, coordination and harmony", would see energy demand reducing by 0.4 percent by 2010 in the face of population and energy growth, kilometres driven would decline 10 percent and electric vehicles on the road would surge by 475,000.

Under the Kayak scenario economic growth and population growth would be faster, while the Waka scenario would see a weaker track of economic growth as some energy and carbon intensive industries exit New Zealand The carbon price would reach $18 a tonne under Kayak and $60/tonne under Waka.

Z says its "house view" is that global mass adoption of electric vehicles "is inevitable" although the timing is difficult to predict given uncertainties about how technology will develop and the scope of regulatory intervention.

"Z is monitoring the two main signposts to watch for as tipping points for exponential EV uptake - regulatory intervention and battery development," it said. "Z is also maintaining a watching brief on speculative technology that could see a more aggressive reduction in demand for fossil fuels over the long term horizon -autonomous vehicles and electric powertrain adoption in the heavy vehicle task."

Among the presentation slides, Z estimates that the whole industry has increased its investment in loyalty and reward programmes by about $50 million since 2014 and their use has become embedded. The company is a member of FlyBuys, airpoints and the AA Smartfuel rebate programme. It noted that as a brand Z ranked fourth in the 2016 Colmar Brunton corporate reputation index, behind Air New Zealand, Toyota and AA Insurance.

BusinessDesk.co.nz

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