Z Energy shares hit 5-year low after earnings guidance cut

Z Energy dropped its earning guidance from $390m-$430m to between $350m and $385m. Photo / File

Z Energy shares are trading at a five-year low after the company cut its full-year earnings guidance and warned that the level of competition in the retail fuel market appears to be a structural change.

The shares dropped as much as 17.3 per cent after the company surprised investors with a downgrade eight days after confirming its guidance in the wake of the Commerce Commission's final report into competition in the sector.

Chief financial officer Lindis Jones said the timing reflected low retail margins in the second half of November - the lowest this year- which had persisted for the first two weeks of December.

While there had been a belief that some of the recent competitive behaviour may have been related to the commission's inquiry, he said there has been no change since the regulator's final report last week.

Gull and Mobil appear to be the most aggressive, he said, and Z is now finding it more profitable to compete for volume.

"We're not seeing any response to any price leadership we are showing in the market," he told analysts on a conference call.

"On Monday we tried to lead a price increase of 3 cents that was not followed."

Z, the country's biggest fuel retailer, today cut its annual earnings guidance by about $40 million, citing tough retail competition and a contraction in margins expected at the Marsden Point refinery.

The firm says its earnings before interest, tax, depreciation, amortisation and changes in financial instruments for the year ending March 31 will be between $350m and $385 million, down from the $390m to $430m signalled in September.

It also lowered its expected dividend to 40 cents, down from the 48-to-50-cent range provided three months ago.

Jones said that, given the range of uncertainties, the company had been keen to be clear on the dividend payout, which is after the firm's ongoing debt repayments.

Z shares dropped to $4.01, taking their loss so far this year to 27 per cent. They were recently at $4.26 and a close at that level would be the lowest since November 2014.

The downgrade is the firm's second in three months and is ironic given the Commerce Commission's belief that the sector may continue to earn excessive returns without changes it has recommended to increase competition for wholesale fuel supplies.

Last week, Z chief executive Mike Bennetts said the commission might have formed a different view had it considered current year earnings, rather than the 2016-2018 period it examined.

In May, the country's biggest fuel retailer had expected earnings this year of $450m to $490m, up from the $434m of ebitdaf reported for the year ended March.

When it cut that estimate in September, it cited a sharp increase in discounting in July and August, related to the exit of the firm's Caltex business from the AA Smartfuels discount programme. Z relaunched its Pumped discount scheme across both its brands on Aug. 1.

Jones said more than 7 cents a litre has come out of fuel prices in the past year. That has taken out about $150m of the firm's margin – of which up to $30m has or will be clawed back.

Some of that saving has been from cost-cutting during the year and more of that will be needed, given the structural change underway, he said.

"We are working on a more structural response."

Complicating the picture is a drop in refining margins, in-part due to changes in emissions standards on shipping fuels which will increase demand for low-sulphur products but slash demand for traditional fuel oil.

Jones said the combination of low margins in retailing and refining was unprecedented

Z owns about 15 per cent of the Refining NZ, operator of the Marsden Point oil refinery.

Z said lower refining margins accounted for about $20m of the forecast reduction since May. The firm has also allowed for a potential $10m earnings impact as it responds to changes in global fuel demand due to new emission standards for shipping companies next year.

Jones said global refining margins near US$2 a barrel risk triggering a price floor that requires it and the other fuel processors to cover costs at Marsden Point.

The company had been expecting to see an increase in prices for diesel, jet fuel and other middle distillates, yet it hadn't happened.

"There's no reason to say that it won't" and low margins for fourth months would be unlikely, Jones said.

Refining NZ shares fell 3.6 per cent to $1.90.

In a separate announcement to NZX, Refining NZ observed that the firm's processing fee revenue for 2019 already exceeds the price floor.

Z Energy had originally been expecting margins of about US$8 this year. Marsden point's margins for the 10 months through October averaged US$5.85, down from US$6.31 for calendar 2018.

Last month, the refiner reported a weakening in margins in October as prices for high-sulphur fuel oil fell ahead of the new MARPOL shipping standards taking effect in 2020.

Diesel margins had also remained flat, despite expectations for an increase in demand by year-end as shippers start switching to cleaner fuels to meet the new standards.

Today, Refining NZ observed that leading international consultants are still picking a "significant increase" in marine diesel demand this year or early next year.

It has also broadened the range of crude oil it processes to reduce its exposure to the MARPOL changes.

The refinery's 1995 processing agreement protects Marsden Point and its customers from extreme swings in global margins. Processors effectively guarantee the plant's operating costs when margins are low, but never pay more than US$9 a barrel to process their crude when margins are high.

The price floor has been called on only twice: for all of 1999, and during the first half of 2014. Higher margins in the second half of 2014 saw customers repaid their earlier contributions.