UPDATE: NZ Refining shares climb to 22-month high as margins improve

Tuesday 20th January 2015

Shares of New Zealand Refining climbed to a 22-month high after the Marsden Point refinery operator flagged a return to annual profit in 2014 after widening margins, cheaper crude oil and a favourable exchange rate turned around the company's performance from the middle of the year.

The Whangarei based company said net profit was between $9.5 million and $10.5 million in calendar 2014, turning around a loss of $5 million a year earlier. NZ Refining reported a first half loss of $7 million, and its profit matrix projected an annual loss of as much as $23 million if margins and the exchange rate continued to work against the company.

The shares climbed 9.2 percent to $2.50, the highest since March 2013

The result "represents a major improvement over the company's half year result and is significantly better than the profit matrix published at the start of the year," the company said in a statement. "The expected FY 2014 result has been driven by the company's 2014 margin initiatives, a gross refinery margin of US$9.98 for November/December (the highest in five years), excellent operational and cost performances, favourable crude prices and an improved USD exchange rate."

The stock is rated an average 'buy' based on four analyst recommendations compiled by Reuters, with a median target price of $2.64.

"The very rapid turnaround in refining margins, coupled with the weaker kiwi, is the key," said Matthew Goodson, managing director at Salt Funds Management. "The kiwi/US exchange rate has retreated back from its recent highs, and they are clearly a beneficiary of that."

NZ Refining has been on a drive to improve its margins after its oil company customers had to make top up payments as the collapse in global refining margins was exacerbated by costs associated with a longer than expected maintenance shutdown. Those margins have improved in recent months as the price of crude oil, an input cost for the refinery, have tumbled.

"The million dollar question is what happens next, and forecasting refining margins is exceptionally difficult," Goodson said. "Historically what we have seen is excess capacity getting built in the Asia Pacific region which is why NZ Refining has been a very poor performer in recent years."

The company has some exposure to falling oil prices although it was largely hedged against price movements, Goodson said, but it could benefit from falling petrol prices increasing consumption, which in turn would help with overcapacity and flow through to margins.

In a separate statement, NZ Refining reported throughput of 7.1 million barrels in November/December at a gross refinery margin of US$9.98 a barrel, taking the annual total to 39.7 million barrels at a gross refinery margin of US$4.96/barrel.

That delivered processing fee income of $168.4 million in the year, allowing the company to fully repay its oil company customers and shareholders who had made top-up payments of $36 million in the first six months of the company's financial year.

The processing fee paid to the oil companies sees them get a rebate of 30 percent of the gross refining margin, and has come under attack by minority shareholders who have faced significant falls in the share price.

BusinessDesk.co.nz

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