Soaring Refiner Margin Launch No-Moat Ampols Q2 2022. FVE Increases to AUD 34.50

Business Strategy & Outlook:

Ampol owns and operates a major refined petroleum product import terminal at Kurnell in Sydney and a refinery at Lytton in Brisbane. Annual refining capacity fell by half to 6.0 billion liters, about one third of company marketed volumes, when Kurnell closed. Kurnell refinery was shut in 2014 because of operational issues and unfavorable demand for the product mix. Refineries and finished product import terminals are integrated with pipelines, distribution, and marketing. The national service station network exceeds 2,000, including 350 jointly branded Ampol/Woolworths (ASX: WOW) sites. Strong growth in transport fuels reflects favorable market attributes. Australia’s relatively sparse rail network and low population density favor trucks for distribution of goods. Pandemics notwithstanding, volumes in the Australian liquid fuels market grow at close to growth rates in gross domestic product, with solid increases in diesel and jet fuel consumption offsetting a slow decline in petrol.

Ampol’s extensive network and comprehensive product offerings provide some competitive advantage. A very efficient supply chain makes Ampol an effective competitor. Still don’t see this as sufficient to justify a moat rating other than none. The closure of refining sees Ampol’s business rest largely on fuel distribution. In this space, it wrestles with expert competition in BP, Shell, and Mobil. Potential long-term threats include substitution of diesel for alternative fuels such as liquid natural gas, or LNG, and electricity. In the case of LNG in particular, Ampol is likely to participate in any shift via its logistics network and filling stations. Ampol maintains a market-leading 35% share of all transport fuels sold. Ampol substantially rests on its competitive supply chain now that Kurnell has been converted into an import terminal. Competitive pressures in the refining segment meant Ampol could not earn its cost of capital on Kurnell. The highly profitable and fast-growing marketing segment can enjoy increased investment that was previously wasted in laggard refining. Ampol successfully completed an NZD 2.0 billion bid for New Zealand peer Z Energy in first-half 2022.

Financial Strengths:

Ampol completed a NZD 2.0 billion or NZD 3.78 per share cash offer for Z Energy via scheme of arrangement in first-half 2022. Company viewed this as a sound move on its part given compelling value. Ampol funded the acquisition in accordance with its existing capital allocation framework, including an adjusted net debt/EBITDA target of 2.0-2.5 times. Ampol will have to sell down some New Zealand assets to meet NZ competition guidelines. This includes the Gull network. Z Energy had NZD 608 million net debt at end March 2021, net debt/EBITDA of 2.67 quite high versus Ampol’s AUD 724 million at end December 2021, but this in the context of a low growth company focused on yield. Ampol’s standalone leverage was conservative at 18.6% (ND/(ND+E)) and annualized net debt/EBITDA is just 0.8. Company expected Ampol’s post acquisition gearing to temporarily increase to around 35%, ignoring potential for an equity raise or asset sell down. While this is manageable and within Ampol’s target net debt/EBITDA range of 2.0-2.5, current strong cash flows courtesy of refiner margins will be more than welcome. The balance sheet is in reasonable shape to fund a minimum AUD 100 million investment in new energy and decarbonization projects.

Bulls Say:

Ampol is well placed, with a leading market share in transport fuels. This position is backed by an extensive distribution network.
Australia’s demand for transport fuels is growing at close to GDP rates.
Closing the highest-cost Kurnell refining operations materially improved return on invested capital.

Company Description:

Ampol (nee Caltex) is the largest and only Australian-listed petroleum refiner and distributor, with operations in all states and territories. It was a major international brand of Chevron’s until that 50% owner sold out in 2015. Caltex transitioned to Ampol branding due to Chevron terminating its license to use the Caltex brand in Australia. Ampol has operated for more than 100 years. It owns and operates a refinery at Lytton in Brisbane, but closed Sydney’s Kurnell refinery to focus on the more profitable distribution/retail segment. It successfully completed a NZD 2.0 billion bid for New Zealand peer Z Energy in first-half 2022.

(Source: Morningstar)

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