Viva profit drops as refining struggles

Angela Macdonald-Smith
Aug 26, 2019
AFR

Petrol and diesel supplier Viva Energy has given a cautious outlook for the second half after posting a 51.3 per cent drop in first-half net earnings, weighed down by difficult conditions in refining and weak retail margins.

The company, which listed on the Australian Securities Exchange last July, pointed to retail margins that remain lower than average so far this half, and an “extremely competitive” market in the commercial sector, while margins in refining are improving.

Underlying net profit totalled $78 million for the six months ended June 30, down from $129.6 million a year earlier but toward the upper end of Viva’s revised profit guidance in June of $60 million-$80 million.

Viva Energy’s Scott Wyatt said the refining environment is improving. Wayne Taylor

Group-wide earnings before interest, tax, depreciation and amortisation for the June half was $171.6 million, within the June guidance of $150 million-$180 million.

Viva, whose $5.15 billion float was last year’s biggest in the country, declared an interim dividend of 2.1¢ per share.

Chief executive Scott Wyatt was upbeat about the improving refining environment and about growth Viva is pursuing through its fuels retailing alliance with Coles, the Liberty business and in commercial markets.

“Refining margins have strengthened and we are seeing some very encouraging sales and customer engagement results through our Alliance platform,” Mr Wyatt said.

“Retail market fuel margins are currently low, but we remain confident about the long-term strength of the fuel and convenience business and the competitive strength of our network, our brand, and our operating platforms.”

Viva Energy chief executive Scott Wyatt is  leading the company through tough times in refining and retailing.

Viva’s retail business posted underlying gross earnings of $283.3 million, while the commercial business generated earnings of $155.6 million. Refining posted earnings of $18.4 million, at the upper end of guidance in June, when Viva warned profits could be as low as zero due to weak margins in Asia.

Viva noted the gross margin achieved at its Geelong refinery for converting a barrel of oil into a barrel of petrol, diesel and other refined products averaged $US5.1 a barrel in the June half, lower than the 2018 average of $US7.4.

But the refinery operated strongly, processing 21.4 million barrels of oil in the half, up from 19.1 million a year earlier. The availability of the plant was 94 per cent, up from 85.5 per cent in the June half of 2018.

The June half also saw record production of diesel, at 40 per cent of total production, up from 36 per cent in the same half last year.

Viva renegotiated the terms of its retailing alliance with Coles Express early this year, taking over control of pricing at the pump from March 1 with a commitment to provide more competitive prices.

It described the early results from the changes as “encouraging”, noting the volume of sales by the Alliance stabilised in the June half. Still, earnings in the retail business was impacted by lower retail market margins, mostly due to the rising price of oil and delays in passing that increase onto customers at the pump.

Viva said it remains committed to “competitive” retail fuel prices, in line with its aim to increase sales through the Alliance to 70 million litres a week and then to 75 million litres a week. But it said that retail fuel margins remain lower than average in the early part of this December half, citing heightened competition, oil price volatility and a lower Australian dollar, which has listed pump prices.

“If retail margin weakness persists in 2H2019, retail earnings are unlikely to improve from the underlying EBITDA result achieved in 1H2019,” it advised.

In refining, the Geelong refining margin rose to $US7.7 a barrel in July, but Viva said the margin and processing volumes for this September quarter would be impacted by maintenance work to be carried out in a unit in August.

Caltex’s refinery at Lytton in Brisbane has seen lower refining margins so far this year than last.

UBS’s sales desk said Viva’s retailing businesses is “continuing to do it tough” and voiced doubts that the outlook announced on Monday would be enough to turn around momentum, even if the outlook for refining margins is better.

Viva announced the acquisition of the Liberty wholesale business in the first half but is still awaiting approval from the competition watchdog, which delayed its decision from late June. The company said it expects a decision this December half.

Viva also released adjusted results after adopting new accounting standards for the treatment of leases. Those also showed a drop in earnings from the June half of 2018.