Viva Energy chief executive Scott Wyatt has shrugged off market worries that the embattled Geelong oil refinery represents a “black hole” for earnings and voiced optimism the plant will stage a turnaround from last year’s $95.1 million loss with the help of the federal government’s support package.
The Geelong refinery, whose loss dragged the whole company into the red in 2020, was brought back from the brink of closure by an emergency production subsidy provided by Canberra that started on January 1 and is intended to preserve domestic oil processing capability to help fuel security.
A longer-term support package is under negotiation that will start on July 1 and looks set to save at least that refinery, if not all the country’s other three.
Mr Wyatt described the government’s fuel security package as “really a critical piece of the jigsaw for refining”, while warning that if the Geelong plant’s performance doesn’t turn around then “you change the business model and that refining segment disappears”.
“If we didn’t have the [support measures] we probably wouldn’t have a refining business,” he said.
“It has the potential to return to a positive contributor which I think will really turn around the performance that we saw in our group business last year.”
But Bank of America Merrill Lynch analyst David Errington isn’t convinced, even amid expectations that the ongoing subsidy under discussion with federal Energy Minister Angus Taylor’s office will be larger than the 1¢ per litre interim payment.
“As a shareholder [Mr Taylor]’s going to have to come up with something sweet, a lot of sugar to get me across the line on refining there,” Mr Errington said, comparing the bleak performance of refining over recent years with gains in the rest of the business including retail.
“It does look to be a black hole to me,” Mr Errington said.
Viva may stand to secure more than the 1¢ a litre it anticipated from the six-month interim production payment, given it is the only one of four refiners to have accepted the subsidy. The initial design of the $83.5 million program envisaged the total sum being shared between participants, meaning that any refiner that didn’t take the subsidy and closed their plant instead left more for the others.
However BP and ExxonMobil have since decided to close their respective plants in Kwinana, Western Australia and Altona, Victoria, while Ampol hasn’t accepted the subsidy as it completes a full review of its Lytton plant in Brisbane.
Mr Wyatt said it was still unclear what that would mean for the payment to Viva, but rejected the suggestion that the company could be in for a windfall.
“I wouldn’t call it a windfall, I would see it as additional confidence and support for us to continue with not just refining through the course of this year but also the major capital spend that we still need to make in 2021,” he said, pointing to major maintenance work required at Geelong that was deferred last year after COVID-19 hit.
“Potentially it does help, it will provide additional support that we need to refine beyond the middle of this year,” he told The Australian Financial Review.
A spokesman for Mr Taylor said the government could not confirm applicants or the final value of support until the grant agreements were finalised.
Viva will pay no final dividend after its benchmark net result swung to a $35.9 million loss in the 12 months ended December 31 from a profit of almost $136 million the previous year. The loss was in line with guidance it gave in December.
Shares in Viva, which owns the former Shell refining and petrol station network in Australia, were up 4.6 per cent at $1.737 in mid-afternoon trading.
Historical cost net income, the bottom line figure which is less closely watched by the market as it includes the value of inventories, was a loss of $36.2 million, on revenues that dropped 25 per cent to $12.41 billion.
The loss at the Geelong refinery in 2020 compared with a profit of $117 million for the plant in 2019. Earnings before interest, tax, depreciation and amortisation for the non-refining businesses climbed 16.5 per cent to $614.5 million, with a gain in retail earnings only partially offset by a drop in earnings in the commercial business.
“We are working to return the Refining business to positive earnings in the short term, and aim to achieve minimum sustainable returns over the long term,” Viva said.
Viva’s plans include the development of an LNG import terminal at Geelong and early plans to develop low-carbon energy at the site, including solar power and potentially hydrogen. France’s Engie, Japan’s Mitsui and Viva’s part owner Vitol joined the LNG import project late last year.
Mr Wyatt said engineering design work on the LNG import project, costing $250 million-$300 million, has started, ahead of a targeted final go-ahead in the June half of 2022 and start-up in early 2024.
The Geelong project is “advantaged” compared with rivals such as AGL Energy’s proposed Crib Point LNG import venture because of the site’s existing industrial use, meaning environmental approvals should be more straightforward, he said.
Other elements of the Geelong Energy Hub initiative are less advanced, although Viva signed an alliance earlier this month with Hyzon Motors, a supplier of hydrogen fuel cell trucks and buses.
Extracted from AFR