Daily ShareChat: NZ Refining

By Jenny Ruth

Tuesday 2nd March 2010

NZ Refinings's 81% fall to $23.6 million in annual net profit was not unexpected and follows the company's guidance that it would operate at a loss in the second half, says McDouall Stuart.

"Closer inspection reveals the extent to which the refining market has deteriorated," it says. First half revenue was $182 million while second-half revenue was just $68 million and the second-half loss was $28.9 million.

Refining margins dropped from $US12 a barrel at the beginning of 2009 to about $US1 a barrel by the end of the year while the New Zealand dollar climbed from 50 US cents in early 2009 to more than 70 cents.

"We do not see the situation changing in the short to medium term," the broker says. New refining capacity in Asia has dramatically lifted supply-side pressure while demand has yet to recover to pre-global financial crisis levels.

At an analysts' briefing last week, NZ Refining said its price floor agreement with its customers, also its major shareholders, means any loss won't be greater than $37 million, regardless of margin or exchange rate.

With the NZ dollar at 70 US cents, it needs a refining margin of just above $US4 a barrel to break even and, if the refining margin averaged $US3.50 it would need the NZ dollar to be 60 US cents to break even.

BROKER CALL: McDouall Stuart rate NZ Refining as sell.

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