Viva Energy anticipates a significant decline in its earnings for the first half of 2023 compared to the previous year. The company’s dominant refinery business has experienced weaker margins, which outweigh the strong demand for aviation fuel. Viva projects that its earnings before interest, taxes, depreciation, and amortisation (EBITDA) on a replacement cost basis will amount to $360 million, a decrease from the record $611 million reported in the same period the previous year.
This result indicates a decline in the refining boom that Viva has benefited from in recent years. If this trend continues, the company will need to expedite its plans to generate more revenue from other divisions.
Viva’s oil refining activity decreased by nearly 25% during the six months ending June 30 compared to the same period in 2022. The decline was partly attributed to a recent accident during maintenance, where a crane fell at the Geelong refinery, causing a compressor to drop. Viva expects repairs to be completed by September, but the refining division is expected to incur losses of up to $30 million in July and August.
In addition to refining less oil, Viva also experienced a significant decrease in margin per barrel. Refining margins fell approximately 46% year-on-year and experienced an even more severe decline of 86% in the second quarter of 2023 compared to the same period in 2022.
The decrease in refining margins was anticipated by Viva due to global energy disruptions caused by Russia’s invasion of Ukraine and China’s zero-COVID strategy. These disruptions had previously benefited Viva and its competitor, Ampol, but the recent downturn in refining margins has raised concerns about their future viability.
Australia’s refining capacity has been declining for over a decade, and the pandemic exacerbated the situation by reducing the demand for jet fuel and decreasing the use of petrol and diesel. In May 2021, the Australian government provided financial support to Ampol and Viva Energy to ensure continued production amid concerns about energy security. However, both companies are no longer eligible for the subsidies due to a rapid turnaround in the market.
Despite reporting strong sales in its petrol station division, Viva still expects weaker revenues overall. Sales from its petrol stations increased by nearly 4%. The company also experienced robust demand for aviation fuel, despite the ongoing cost of living crisis, leading to a 15% rise in revenues from its commercial and industrial division.
To mitigate the impact of weaker margins, Viva has accelerated its expansion into convenience retail. In April, the company announced its acquisition of OTR, a network of 205 On the Run outlets, for $1.15 billion. This move aligns with Viva’s strategy to diversify its earnings and protect against the rise of electric vehicles (EVs). Viva hopes to attract customers to its convenience stores and potentially offer EV charging services, a model popular in Europe and the United States. However, the widespread availability of rooftop solar in Australia may lead many EV drivers to prefer recharging their vehicles at home.
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