Recently listed fuels supplier Viva Energy has again downgraded its profit guidance for 2018, citing weakness in Asian refining margins, while cementing investors’ worries that earnings from refining this first half of 2019 may also miss prospectus forecasts.
While the margins are set in Singapore and are outside management’s control, the announcement marks another disappointment for investors in the country’s biggest initial share offer last year.
Shares in Viva, owner of the former Shell refinery in Geelong and its former network of service stations, dipped 0.8 per cent to $1.80, leaving them 28 per cent below the issue price in the $2.65 billion float last July.
Underlying earnings before interest, tax, depreciation and amortisation for the year ended December 31 in the refining business are now expected to be about $125 million, compared to the November guidance of $150 million, Viva said on Friday.
Investors were already voicing concerns about declining profits in Viva’s refining operations in November, when estimated EBITDA for 2018 was slashed from the $216.7 million given in the prospectus.
Rival Caltex Australia also gave a softer-than-expected profit guidance in December, and Viva releases monthly updates on refining margins, meaning the profit miss did not come as a big surprise to some market watchers.
Viva’s Geelong refining margin (GRM) was just $US3.30 a barrel in December, bringing the average margin for the past two months of the year to $US5.20 a barrel. That compares with Viva’s revised estimate in November of $US8 a barrel for November and December. Lower fuel volumes sold through Viva’s retail partner Coles were also a factor in November’s profit downgrade.
‘Since listing it’s been incredibly challenging’
The weakness in margins also signals that the prospectus estimate for margins for the first half will also be too optimistic. The prospectus assumed a refining margin for the first half of 2019 of $US9.70 a barrel, almost three times the average margin for December.
“Refining margins have continued to perform below the prospectus forecast in the month of January 2019 to date and, if these conditions were to persist, the prospectus forecast for 1H 2019 GRM of $US9.5/bbl would not be achieved,” it advised.
Viva investor Romano Sala Tenna at Katana Asset Management said it was hard to understand how the margins were so “out of step” with the prospectus forecasts.
“In management’s defence, we thought the numbers they used were quite conservative, but since listing it’s been incredibly challenging,” Mr Sala Tenna said.
“We map Singapore refiner margins and it’s the lowest we’ve seen it. We are trying to work out whether it’s a structural change or just a particularly nasty cycle.”
Margins have been particularly weak for gasoline, accounting for about 40 per cent of the output of the Geelong plant, which is understood to have only moderate scope to adjust its output to better suit market conditions.
A rapid rise in crude oil prices last year fed through to softer consumption for petrol, and refining stocks globally saw a sell-off in the latter part of the year.
Each $US1-a-barrel shift in the refining margin shifts EBITDA at Viva by $29 million and net profit by $20.3 million, before taking into account foreign exchange.
Extracted from AFR