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Z Energy targets $40-$50 mln operating earnings uplift by 2018

Thursday 3rd April 2014

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Z Energy is targeting an increase of $40 million to $40 million in annual operating earnings by expanding its network of outlets, get customers buying its food and coffee more, refocusing its commercial diesel operation, and squeezing margin from improved refined product pricing.

In a presentation for institutional investors to be presented this afternoon, the chief executive of the NZX-listed transport fuels supplier, Mike Bennetts, outlines a refreshed Strategy 2.0, four years on from the sale by global oil giant Shell of its New Zealand downstream operations to local investors.

Bennetts also confirmed earnings before interest, tax, depreciation and amortisation for the financial year that ended March 31 of between $205 million and $215 million, unchanged from indications at the half-year profit announcement.

Also unveiled is a brand-defining decision to invest $21 million in a bio-diesel plant, using inedible tallow produced as a by-product of the meat industry, to produce up to 20 million litres of low-carbon bio-diesel annually for blending with traditionally refined product.

Bennetts said in a statement the "economics around bio-fuels remain very challenging and we have worked this project non-stop for four years to get to this point", allowing the bio-fuel product to be offered at "a similar price to mineral diesel."

Its success would depend on whether customers were willing to "value a cleaner, more sustainable alternative", with a 5 percent blend likely to cost around 1 cent a litre more than conventionally refined product, reflecting more the higher cost of production than any attempt to extract brand margin, Bennetts told BusinessDesk.

Z will also offer a 20 percent blend for commercial customers, with half current production volume already contracted to a small number of commercial users, and a 5 percent blend will be for sale to motorists off Z petrol station forecourts in the upper North Island.

The bio-fuel's properties will meet European and US standards, and have no impact on engine performance.

If demand is sufficient, the plant at the Wiri tank farm site south of Auckland could be doubled in size for $2.5 million additional capital expenditure. At this stage, the 20 million litres of production is a tiny proportion of Z's total annual diesel sales of up to 1.4 billion litres, although a 5 percent blend would stretch through some 400,000 litres of product.

The tallow-based feedstock is described as a "first generation" bio-fuel operation and would be the first in New Zealand to operate without requiring a government subsidy. Z is also investigating a second generation project involving wood waste with Norske Skog under the government's Primary Growth Partnership research scheme.

That investigation was about five months away from completion, with investment decisions further into the future, Bennetts said.

"Green considerations (are) now driven by consumers not oil supply constraints," say slides for the Z presentation, which acknowledges that traditional oil-based products will be part of the transport fuel mix for decades to come and that "meaningful penetration by electric vehicles is still 10-20 years away."

However, Z expects consumer concerns about climate change and the environment will come off the back-burner as economic conditions improve, having slipped off the agenda for many people following the global financial crisis.

The bio-fuels investment does not feature as a driver of EBITDA over the next four years, with the focus for an uplift of $40 million to $50 million by the 2018 financial year focused on opening around five new and three refurbished retail sites, improving and driving sales of food and beverage offerings, and refocusing its commercial diesel offering.

It would also seek improved margin from better refined product pricing following a joint move with BP on crude imports for processing at the Marsden Point refinery.

Slides from the presentation show the extent to which Z has ceded market share for improved margins, with a loss of 10 percent of its 2010 market share in exchange for a $50 million uplift in earnings.

While that has not all been achieved by improving fuel margins, the slides show the average margin on commercial diesel sales between the 2011 and 2014 financial years has grown from grown from 6.7 cents per litre to 7.8 cents per litre.

Bennetts said Z also had options to engage more vigorously in discounted, bulk sales, with opportunities arising in the next two years for major petrol and diesel contracts.

These included supply to Gull, a cut-price competitor of Z's.

Z hadn't participated in bids to supply Gull in the past, but could choose to do so if it had concerns about market share, said Bennetts.

The company's shares fell 0.8 percent to $3.91 today, and have gained 5.6 percent this year.

 

BusinessDesk.co.nz

Bond Offer: Infratil Ltd, 7.2 year & 10.2 year unsecured unsubordinated bond


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