Z Energy is willingly sacrificing petrol sales volume for improved margins, with intense competition and high fuel costs to motorists contributing to a 42 per cent drop in after-tax profit for the six months to September 30.
Z reported earnings after tax for the first half of the current financial year of $24.9 million, compared with $43 million in the same half a year earlier, although current cost operating earnings before interest, tax, depreciation, amortisation and adjustments for the fair value of financial instruments rose 17 per cent to $96.8 million.
Reported statutory earnings, which are made volatile by changes in the value of fuel inventories held at balance date, came in 91 per cent lower at $2.1 million, but are not regarded as a reliable indicator of earnings.
Z is not altering its ebitdaf earnings guidance for the full year of $185 million to $200 million, despite total revenues for the first half of $1.49 billion coming in below the $1.55 billion for the same period a year earlier, and less than half the $3.18 billion recorded for the latest full financial year.
Operating costs of between $280 million and $290 million are also expected for the full year, up from guidance of $260 million and $270 million guidance previously given, and recorded costs of $250 million last year.
The company was spending more on marketing to combat competition, and identified both crude oil supplies and capital recovery charges as risks for the full year result.
However, retail margins improved to 2.6 cents per litre of petrol and diesel sold, compared with 2.4 cents per litre in the same half last year, said Z's chief executive Mike Bennetts said.
"Volume loss will not be recovered as focus is on optimising retail margins, growing non-fuel income and high grading the commercial portfolio, while not eroding integrated value."
Total sales volumes for the year are now estimated to total 2.45 million litres, compared to previous guidance of 2.6 million litres, with competitors taking larger shares of both the petrol and diesel markets over the last six months in an environment of overall decline, reflecting high fuel costs.
The company also expects to save $5 million a year by signing new contracts for supply of petrol and diesel from a Korean refinery, and will release $84 million of capital and a $27 million gain to Z through the sale and leaseback of 44 retail service stations, following an initial eight stations so treated.
Total revenues were also affected by temporary retail outlet closures as the company completed its rebranding exercise, as it shifts from the Shell brand to the indigenous Z brand, reflecting its ownership by Infratil and the New Zealand Superannuation Fund. The result releases a share of earnings for Infratil of $7.9 million, compared with $18.3 million in the same period last year.
Gross margins improved at the Marsden Point oil refinery in the second quarter after a weak first quarter, giving margins for the first half of $7.39 a barrel, above previous guidance of $7 a barrel for the current financial year. However, the outlook remains volatile, with margins likely to fall away in the second half at the refinery, where Z is 17 per cent shareholder.
Crude oil prices for the year as a whole are now expected to average $137 a barrel, the same as last year, compared with a previously expected $156 a barrel, assisted by ongoing strength in the value of the New Zealand dollar.