Ampol, a prominent player in the fuel and convenience retailing industry, is poised to achieve record-breaking earnings in 2023, thanks to the remarkable performance of its convenience retailing division in Australia and an improved outcome from its Z Energy subsidiary in New Zealand. This financial triumph is set to overshadow the challenges faced by the company’s sole refinery. Although the earnings outlook fell slightly short of expectations, the company’s shares saw a decline of 2.7% to $35 on Thursday, despite having reached a nine-year high earlier in January.
Ampol attributes its optimistic outlook to the consistently strong performance of its convenience retailing business in Australia, coupled with improved results from its Z Energy venture in New Zealand. This combined strength is expected to push earnings before interest and tax beyond the 2022 group record. Furthermore, the fuels and infrastructure division, excluding the Lytton refinery in Queensland, demonstrated robust performance, bolstered by gains in the trading and shipping sector during the September quarter.
However, the Lytton refinery faced challenges as earnings and fuel volumes suffered due to an unexpected outage at the facility in late December. Fortunately, normal operations have since resumed, although fuel production in the fourth quarter slipped to 1.43 billion litres, down from 1.58 billion in the same period of 2022. The refiner margin at the plant, representing the gross profit generated from converting crude oil into petrol, diesel, and jet fuel, averaged $US10.52 per barrel in the fourth quarter, a decline from $US11.76 per barrel compared to the previous year and lower than some analyst predictions.
Notably, RBC Capital Markets had anticipated a refiner margin of $US14.50 per barrel in the December quarter and higher throughput of approximately 1.565 billion litres, indicating a relative flatness compared to the third quarter. Energy analyst Gordon Ramsay from RBC described the trading update as “mixed,” suggesting that full-year EBIT might align with or slightly fall below consensus estimates of $1.308 billion. He emphasised that the convenience retailing business, Z Energy, and the non-refinery segments had likely outperformed expectations, hinting at a potential capital return to shareholders, a development eagerly awaited by the market.
Ramsay highlighted the superior quality of non-refining earnings, citing their stronger free cash flow conversion compared to the refining business. He believes this will bolster Ampol’s cash flows in the latter part of 2023, reinforcing the company’s potential for capital management during its full-year results.
On the contrary, E&P Capital reduced its assumption of a $1 per share special dividend to 50ยข per share, citing Ampol’s comments which suggested a roughly 3% improvement in EBIT in 2023 to approximately $1.31 billion, a figure slightly below their earlier forecast. JPMorgan also adjusted its 2023 earnings estimates in response to the outlook.
Ampol’s unaudited projection for higher EBIT in 2023 on a replacement cost and continuing basis marks a significant increase from the $1.27 billion earned in 2022, which had more than doubled compared to the previous year. CEO Matt Halliday attributed the narrowing margin to rising crude oil import premiums and reduced spreads for refined products, in contrast to the July-September period.
While the fourth-quarter refiner margin may have declined, it remains a far cry from the lows experienced during the COVID-19 pandemic, which placed the entire domestic refining sector under severe financial strain. In response, the government introduced a $2 billion “fuel security” package to prevent further refinery shutdowns, underlining the importance of Ampol’s resilience and adaptability in a rapidly changing industry landscape.
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