Profit Guidance Sends Caltex Share Price into Nosedive

Fuel supplier and convenience retailer Caltex Australia Ltd [ASX:CTX] has had its share price value cut by almost a quarter this morning. At time of writing, shares were down 22.02% or $5.94 to trade at $21.04.

This morning’s drop in price is the lowest it’s been since June 2014. Shares in the fuel retailer have been in a steady decline over the past 18 months despite low oil prices.

What’s the damage?

In their unaudited profit guidance released this morning, Caltex have forecast some worrying figures. Core business operations, fuels and infrastructure guidance has been set for $190–$210 million, a stark difference to the $314 million seen at the end of the previous half year.

Excluding their fuel refinery arm, Lytton Caltex, the company forecast $190–$200 million in earnings before tax, which included a $40 million impact from the repricing of a fuel contract with Woolworths Group Ltd [ASX:WOW]. This figure is still down about $9 million from figures in 1H CY2018.

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The biggest shock comes from profit guidance for the Lytton Oil Refinery located near the port of Brisbane. Expected earnings before tax are given in the range of $0–$10 million, a massive downgrade from the previous corresponding period of $105 million.

According to Caltex, Lytton earnings in 1H 2019 were significantly impacted by US$2 per barrel lower external refiner margins and the previously disclosed outages.

The company’s convenience retail business sector is also expected to underperform by last year’s standards. Caltex has forecast earning between $75 and $85 million, down from $161 million reported in June last year.

Total convenience retail fuels sales volumes are expected to be 2.4 billion litres in 1H 2019, 1–2% lower than the fuels sales in 1H 2018, compared with a 2–3% reduction in industry retail volumes. Retail shop earnings are expected to be largely in line with the prior year.

Caltex Managing Director and CEO Julian Segal said difficult macroeconomic conditions and a slow Australian economy have hampered company performance.

Despite the prevailing negative conditions and heightened fuel competition, Caltex has gained market share in the retail market and held market share in wholesale markets by leveraging our fuel supply chain expertise and our national retail network. Our strategy continues to drive earnings from improvements in the supply chain, with a renewed focus on fuel supply and our convenience retail offer.

An ominous sign for fuel retailing?

CTX’s profit guidance paints a bleak forecast for fuel retailing in the country. Weaker domestic economic activity has impacted domestic demand, including from the transport, agriculture and construction sectors. Combined with a lower external refiner margin, this has created difficult market conditions for both sales volumes and margins.

According to Caltex, total Australian fuels sales volumes are expected to be 8.2 billion litres in 1H 2019, 2% lower than the 8.4 billion litres in 1H 2018. Total fuels sales volumes are expected to be approximately 9.7 billion in 1H 2019, 5% lower than 10.2 billion litres in 1H 2018.

This indicates that Caltex has been able to maintain its market share in the declining market — a small consolation prize for Caltex investors.

With oil prices becoming increasingly volatile, companies like Caltex will find it increasingly difficult to expand their refiner margins.

Current oil prices are a far cry away from the highs we saw in 2008 (reaching a record high of US$145 per barrel) and are still trading well below the 2014 peak of $100 per barrel.

Nevertheless, if fuel retailers like Caltex believe the price of oil is negatively impacting their margins, then they are going to continue to feel the squeeze with OPEC hoping to see prices return to $70 by Q3 this year.

The likelihood of this occurring seems low at the moment, as the oil producing nations continue to bicker about production cuts.


Ryan Clarkson-Ledward,
For Money Morning

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Ryan Clarkson-Ledward is an Editor at Money Morning.

Ryan holds degrees in both communication and international business. He helps bring Money Morning readers the latest market updates, both locally and abroad. Ryan tackles all the issues investors need to know about that the mainstream media neglects.

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