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2/11/2018 — Oil and Gas
Z Energy downgrades guidance
By Simon Hartley

Z Energy Ltd (NZX & ASX: ZEL) has downgraded its full year financial expectations as higher global oil prices and weak New Zealand dollar undermine profits.

Z's profit decline comes at a time when motorists have been paying record pump prices across the country, in excess of $2.50 per litre.

Revenue for Z's half year result to the end of September rose from $2.12 billion a year ago to $2.67 B. Its reported replacement cost of earnings before interests, tax, depreciation and amortisation declined 21%, from $221 million a year ago to $175 M, while replacement cost after-tax profit slumped 31%, from $105 M a year ago to $72 M.

Z's Ebitda guidance range for the full year was downgraded from $420 M-$455 M to $400 M-$435 M.

Z's chief executive Mike Bennetts said the trading environment was the “most challenging” since Z Energy started operating eight and a half years ago after acquiring Shell’s retail assets.

The recent record high price came from a combination of crude oil prices rising by 25%, a 9% weakening in the New Zealand dollar against its US counterpart and increased Government fuel taxes, both nationally and regionally, he said.

“These sustained high prices have resulted in a decrease in retail demand,” he said.

Forsyth Barr broker Damian Foster said the half year result was weak and Z had underperformed against last year by about $44 M. He said $26 M was due to lower margins, which would continue as the main threat for the remainder of the trading year.

Another $27 M was because of a Refinery New Zealand maintenance outage and extra fuel imports, compounded further by an earlier $5 M pipeline outage “effectively a $32 M hit,” which was higher than Z's $20 M prediction.

“There's no doubt that this is a disappointing result,” Foster said. He said “most disappointing” was the 12.5 cents per share dividend, which while 2.1¢ higher than a year ago, did not support Z's earlier dividend guidance of 50¢-55¢ for the full year.

Z's ability to pay more than 50¢ was now “a big if,” Foster said.

Craigs Investment Partners broker Peter McIntyre said relative to the new, downgraded, guidance, which implied a dividend in a range of 45¢-50¢, against Craig's estimated 50¢.

“This was a noisy result, competitive pressures are worse than expected. But the share price reflects more negative outcomes than what has been reported,” McIntyre said.

Z's shares fell 4.75% following the announcement to $5.81, which was 16.7% down on a year ago.

During the half year Z sold 1.96 B litres of fuel, similar to the same period a year ago.

Bennetts outlined Z's profit margins, saying replacement cost after-tax profit per litre fell from 5.3¢ a year ago to 3.7¢. Z's fuel unit profit margin declined from 17¢ per litre last year to 15.5¢; which was the margin before operating costs and corporate tax was applied.

He reiterated yesterday that Z's “financial returns are not excessive given the complexity of the business” and were on a par with overseas fuel companies.

Two Government reports during the past year on fuel pricing were inconclusive and early last month Prime Minister Jacinda Ardern said motorists were being “fleeced”; to a backdrop of Government and regional taxes being increased at the time.

Ms Ardern has prioritised passing of the Commerce Amendment Bill to amend the Commerce Act to allow the Commerce Commission to undertake market studies, with the fuel markets a “priority area,” she said in early-October.

*Simon Hartley is senior business reporter and assistant chief reporter for the Otago Daily Times.

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