Australian motorists are getting back on the road quicker than previously thought at the same time as petrol retailers move to rational pricing.
Investors have always liked “rational markets” which explains why Viva Energy shares surged 16 per cent on Tuesday after a profit upgrade partly driven by less competition in retail fuel.
Cynics will point to the 30¢ a litre increase in petrol prices during the long weekend earlier in June and say Viva Energy and its peers have been exploiting their position as suppliers of an essential service.
But Viva Energy’s chief executive, Scott Wyatt, told an investor call on Tuesday the improvement in retail fuel margins in the half-year to June – compared with the previous year – reflected the upheavals of 2019.
Viva Energy is the exclusive supplier of Shell fuels and lubricants in Australia through a network of more than 1290 service stations.
Bank of America analyst David Errington suggested on the investor call that retail profit margins had risen by about 8¢ a litre and market dynamics were working in the company’s favour.
“My observation is the cycle has certainly got longer and it takes a lot longer for the price to come down, a lot quicker to go back up, which is a competitive dynamic,” Errington said.
“It’s just not lower crude oil prices, it’s more rational competition.”
Wyatt said 2019 had been a tough year because of the transition of retail pricing from Coles to Viva Energy.
He said the big pullback in earnings in 2019 was because of “a combination of the investment that we made of improving our price competitiveness and obviously a real deterioration in market conditions”.
“Obviously it’s good to see retail margins have improved since that time and we saw that hitting at the back end of last year and that really has continued through this year,” Wyatt said.
“And there’s no doubt that retail margins have been supported – have benefited – from the sharp falls in oil prices that occurred through the first half of the year.
“And that’s the natural delay or lag, I guess, and then that ultimately is reflected in retail pump prices.
“We’re now seeing the reverse as prices increase and there’s compression of retail margins as well. So that’s just the normal dynamics of the retail market.
“But I think it’s a rational market.
“I think obviously every player in the market has seen the sorts of volume declines that we’ve seen and that has obviously been supportive of all competitors to be rational in terms of pricing, because obviously there’s significant costs that still need to be paid, such as leases and wages and so on across the business.”
Australian Competition and Consumer Commission chairman Rod Sims will be very interested in Wyatt’s comments, given he has the job of keeping a close watch on fuel price movements.
Viva Energy’s profit upgrade was partly owing to the decision to reduce the cost and elongate the timeframe for major maintenance of the residual catalytic cracking unit during 2020.
Total capital expenditure is expected to be between $85 million and $100 million, down from between $110 million and $140 million as previously announced.
The share price will be underpinned by the commencement of the previously announced on-market buyback, the first tranche of which will be $50 million.
Viva Energy has called for expressions of interest for commercial involvement in the company’s LNG supply and storage operation in Geelong as it attempts to share the risks involved.
“I think the interest will come from a number of areas,” Wyatt said.
“Obviously there will be potential partners that have existing gas demand in Victoria and are looking to support that through a facility like ours.
“I think there’s potentially also producers in Australia that are looking at ways to get their gas into market in Victoria and that’s another potential partner and potentially also in the area of technical support as well.
“So those are the sorts of players we will be talking to a bit more formally through the EOI process. The Geelong energy hub is very much a Viva Energy vision.”
Viva Energy’s profit guidance was about 31 per cent above consensus in the market, according to Baden Moore, an analyst at Goldman Sachs.
He said weekly fuel volumes were recovering at a pace ahead of expectations as restrictions were relaxed and traffic recovered.
But Moore said the first-half 2020 EBITDA guidance of $257.5 million to $287.5 million was marginally softer than Goldman Sachs’ forecasts.
He said net profit guidance of $20 million to $50 million would drive consensus upgrades on both a half and full-year basis.
Extracted from AFR