A major blackout and poor refining performance have forced petroleum company Viva Energy to drop its earnings forecasts, wiping $770 million off its value on Monday.
The market reacted negatively to the news, with the share price falling to its lowest point since listing in July. It dropped more than 16 per cent from its $2.05 closing price on Friday to $1.66 after the announcement on Monday.
The petrol refiner has had a significantly weaker than expected second half of 2018, as higher crude oil prices slimmed its refining margins and the company lost fuel production due to blackouts in late August.
“The power outage in Victoria took out about a week’s worth of production out of the system,” Viva Energy chief executive Scott Wyatt said.
Oil prices have been rising steadily this past year, reaching a four-year peak of $US86 a barrel in October, but have since slumped by more than a fifth down to $US66.
Due to this, it has dropped its refining margins from $US9.2 a barrel to $US8 per barrel for the remainder of 2018, earning $US1.2 less for each barrel of fuel.
The lower performance has forced Viva to revise down by nearly a third, from $217 million to $150 million, the refining business guidance in its prospectus when it listed on the ASX in July,
Viva Energy now expects its 2018 earnings to fall by 10 per cent from $605 million to $543 million, while profit is tipped to drop almost 14 per cent from $324 million to $280 million.
“We’re taking a conservative view to the end of the year,” Mr Wyatt told Fairfax Media.
“The way to look at this is as a refining performance update which has largely been driven by factors outside our control.”
While fuel retail volumes have been relatively stable, high oil prices and a weak Australian dollar have cut demand levels.
Viva said its alliance with petrol retailer Coles Express was one of the drivers for a fall in fuel sales.
Viva owns 1165 petrol stations across Australia, including around 1000 under the Shell brand. Of these, 714 are operated as Coles Express. It also operates Liberty Oil petrol stations – a brand that is half-owned by Viva, and Westside.
The relationship between Viva and Coles Express accounts for around a quarter of Viva’s earnings.
The two businesses have reportedly been in a stand-off, as Coles faces rapidly declining fuel sales volumes, which have fallen by a third over the last two years.
“The volume growth expected in the retail business and, particularly, the Alliance [with Coles Express] during the second half of 2018 has not materialised,” Viva Energy said.
Mr Wyatt said as part of the relationship, while Viva leases the land and petrol stations, Coles operates them and sets prices at the pump based on Viva wholesale prices. Viva also takes a margin from the pumps.
Coles has pushed its pump prices up to accommodate for the wholesale price and Viva’s margins, making it the most expensive petrol retailer in Australia.
However, despite falling volumes, Mr Wyatt is confident in continuing the relationship.
“The relationship with Coles started in 2003 and runs to 2024, and both of us can extend that for another five years and we expect that it will run to 2029,” Mr Wyatt told Fairfax Media.
He also noted Viva’s plans to expand its Liberty and Westside petrol stations.
Viva Energy declined to comment on its forecast guidance for the first half of 2019, saying it was too early to outline performance.
Viva was the worst performer on the ASX on Monday, down more than 12 per cent, although the share price had recovered slightly by the end of trading, rising to $1.80.
Extracted from The Sydney Morning Herald