The Marsden Point oil refinery is to undergo its third major upgrade in seven years, with the board of New Zealand Refining signing off a $425 million project today, despite also announcing a 40 percent drop in profit for the year to December 31.

The company is also in the hunt for a new chief executive, with the announcement that the incumbent, Ken Rivers, will return to Britain this year and a replacement to be announced in the next six months.

The upgrade project requires approval from shareholders at the annual meeting in April, but is assured since the major petrol retailers own the bulk of the company and are represented on the board of the country's only refinery.

Volatile refining margins towards the end of the year were mainly to blame for the drop in net profit to $34.5 million, although average margins across the whole 12 months at US$6.11 were roughly comparable with US$6.17 margins recorded in the previous year.


"Overall, our net profit after tax was in line with the profit matrix issued in our 2010 annual report. While volatile refiners' margins can quickly impact our business, this result highlights our continued ability to withstand variable and challenging business conditions," said chairman David Jackson in a statement to the NZX.

A persistently weak American dollar also hurt the refiner throughout the year, with an average New Zealand dollar cross-rate of 79 US cents across the year. Earnings before interest, tax, depreciation and amortisation were $132.2 million, compared with $156.7 million in the previous financial year.

It was too early to tell whether a recovery in margins seen in the early part of the current financial year would be sustained.

"The directors consider the fundamentals of the business to be sound and capable of weathering volatility," said Jackson. "The business is strongly cash generative, well-structured, with a strong balance sheet.

"We continue to make headway even in the most challenging business environment."
Jackson announced the upgrade despite also identifying refinery over-capacity as an ongoing issue for the industry globally, reflecting weak economic growth.

"Rationalisation and the emergence of new and efficient refineries means that over-capacity will remain an issue for some time."

However, the upgrade at Marsden Point would "deliver higher margins as a result of improved energy efficiency, reduced fuel losses and better product yields" for the refinery, which was strategic importance to the New Zealand economy.

It would deliver "a significant increase in intake volumes and refining margins" and would help deal with bottlenecks which had slowed production at times last year.

Jackson also foreshadowed a review of processing arrangements by the independent directors later this year, including considering the "need to trigger an external assessment."

Z Energy, the downstream fuels business formerly owned by Shell New Zealand, is by far the largest user of the refinery, generating $92.4 million of total revenue through the refinery last year of $277.9 million. Z owns 17.1 percent of the refinery, compared with 23.7 percent and 19.2 percent owned by BP and Mobil respectively.

Profit attributable to investors fell $5.77 million after accounting for a non-cash $39.46 million actuarial loss on the value of the company's pension scheme, offset by deferred tax of $11.2 million. The pension scheme value fell principally because the assumed discount rate was cut, and also because of lower returns from investment.

NZ Refining shares were trading 1.39 percent higher than yesterday, at $2.92 apiece, following the announcements.