Z Energy recouping refinery losses at the pump

Z Energy [NZX: ZEL] says margins on petrol and diesel have risen in recent months because fuel retailers who also own the Marsden Point oil refinery are trying to recoup up to $40 million they've had to pay to top up losses at the refinery caused by intense global competition and a prolonged shutdown.

Z's chief executive, Mike Bennetts, told BusinessDesk the impact of a global collapse in refining margins, exacerbated by the costs associated with a longer than anticipated shutdown at the refinery in March and April, would cost the NZX-listed fuel distributor between $10 million and $15 million, but that those losses were being clawed back as much as possible at the petrol pump.

Figures for retail importer margins - a proxy for profit margins at the petrol station pump - rose to 29.4 cents per litre for petrol and 34.4 cents per litre for diesel in the June quarter, compared with 27.2 cents and 29 cents respectively in the March quarter, according to the Ministry of Business, Innovation and Employment.

The company has not altered its profit guidance for the year of earnings before interest, tax, depreciation, amortisation and changes in the value of financial instruments of between $220 million and $240 million.

As owner of 15.6 percent of New Zealand's only oil refinery, Z is caught by arrangements that require refinery shareholders to top up the refinery's operating costs if its Gross Refining Margin falls below US$3 a barrel. In the March and April this year, Refining NZ reported negative GRM's of US$2.72, exposing Z to a monthly cost of around NZ$3.2 million in the three months to June, said Bennetts.

While most of that downward pressure on returns from the refinery reflected global over-supply of refining capacity, which is leading to refinery closures in Australia and further afield, the situation in New Zealand was exacerbated by the fact a planned shutdown for upgrades at Marsden Point continued for 22 days longer than anticipated.

That in turn led to the refinery stockpiling residues normally used in making diesel and fuel oil to the point where it ran out of storage capacity and forced to export residue in a low-value form at a cost to Z of between $4 million and $6 million.

"The importer margin is now higher than it has been because distributors sought recovery through their marketing margin," Bennetts said.

Unusually high exports can be seen in disclosures from Z today that show supply/export sales in the June quarter totaled $122 million, compared with $42 million in the same period last year, with some 60 percent of the increase attributable to forced exports of refinery residue.

While motoring advocates, such as the Automobile Association, were criticising the rise in retail importer margins, it reflected an attempt to recoup some of the losses suffered on the refinery operation, which is undergoing a $365 million major upgrade which, along with other incremental improvements, should improve GRM's by around US$1.76 per barrel once commissioned in December 2015.

The other refinery owners are BP (21.5 per shareholding), Mobil (17.4 percent), and Chevron, trading as Caltex (11.5 percent).

Bennetts acknowledged competing low-cost fuel retailer Gull, which imports all its fuel in refined form, is "cost-advantaged in this scenario because they import everything."

In Z's case, some 75 percent of its product comes from Marsden Point, which the industry in New Zealand has chosen to maintain and upgrade in part because of its importance to maintaining security of transport fuel supplies for the country.

Marsden Point remains one of the most competitive refineries in Australasia, producing fuels "at the top of the second quartile for its ability to process a complex variety of crudes, enabling it to gain more margin than others," said Bennetts.

The last time GRM's at the refinery had fallen below US$3 per barrel, sparking the "fee floor" provisions of its contracts with oil company owners, was in 1999.

(BusinessDesk)