Caltex feeling pinch in margins in March quarter

Angela Macdonald-Smith
Mar 19, 2019
AFR
Fuels supplier Caltex has advised of a “challenging” first quarter, with a downturn in convenience retailing margins adding to the already known weakness in refining margins and a previously flagged disruption at its oil refinery.
Caltex shares fell 3.5 per cent after the company said the rapid rebound in crude oil prices and competition in fuels retailing would trim as much as $45 million off its convenience retail gross margin this March quarter compared with a year ago.
It also updated the market on refining margins, which improved from January but remained relatively frail.
Citibank analyst James Byrne said Caltex’s trading conditions guidance, which comes ahead of a $260 million off-market buyback, is softer than he had forecast.
“Caltex’s margin contraction appears to be worse than the broader retail fuel industry,” Mr Byrne said, calculating the supplier may have seen a shrinkage in its retail margin of 3.4¢ per litre compared with the March quarter last year, as opposed to about 2¢ a litre for the industry overall.
Rival Viva Energy saw a smaller dip in its share price on Tuesday, down 1.2 per cent to $2.52.
Caltex’s margin on processing a barrel of crude oil into a barrel of petrol and other fuels edged up to $US7.34 a barrel last month, but the year-to-date figure remains almost 25 per cent below that for the same two months last year, at $US7 a barrel. Sales from Caltex’s production at its Lytton refinery in Brisbane were 549 million litres in February, up from 466 million in January.
Unusually weak refining margins have affected the sector broadly in Asia for several months, causing some investors to question whether the market is experiencing a structural change or whether the typical rebound in the cyclical sector is still in the offing.
The softness means Caltex will proceed with the shutdown of a crude unit at Lytton to rectify performance issues that have dogged it since a power supply interruption in January.
That shutdown is expected to reduce production by 200 million to 250 million litres, with Caltex putting full-year guidance for output at 5.8 billion litres, down from 6.04 billion last year.
In fuels and convenience retailing, Caltex is guiding to an expected “total fuel and shop margin” of $160 million to $170 million for this quarter, some $35 million to $45 million less than in the first quarter of 2018. The “shop margins” are broadly in line with a year ago, adjusted for the late timing of Easter this year, with all the impact on the fuels side.
“While Q1 looks challenging, Caltex notes that short-term trading conditions are not necessarily a reliable indicator of the full-year result,” it said, pointing to movements in oil and fuel prices, and changes in competitors’ strategies as other factors.
Some Caltex investors already have voiced concerns about the pace of the convenience retailing revamp and the weakness of refining margins, although the sentiment was masked by enthusiasm for the capital return.
Chief executive Julian Segal brushed off the criticism of the retailing restructuring, saying it was “progressing well” and had “forward momentum”.