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The energy space is undergoing metamorphosis due to the implications of the IMO 2020. IMO 2020 is giving edge to energy material suppliers such as Woodside Petroleum Limited (ASX:WPL) and Oil Search Limited (ASX:OSH) as the maritime shipment industry is trying to curb the sulphur content, which is providing the material supplier an opportunity to develop and secure offtakes for their LNG prospects amid shifting maritime fuel demand.
To Know More, Do Read: IMO 2020- A Double Edge Gizmo for Woodside Petroleum and Caltex Australia
While this could be beneficial for the energy material suppliers, the petroleum refining industry and players such as Caltex Australia Limited (ASX:CTX) are facing some tough time in keeping up with the demand of low-sulphur content fuel amid the lack of scalability.
However, both the refineries and material supplier are facing one common challenge, i.e., the drop in oil prices, against which both the sub-industry in Australia derive the selling price of their products.
Also Read: Crude Oil Under Supply Glut; A Speculative Ray of Hope for The Oil Market
Now that we have an idea of in and outs of the energy industry let us now take a look at how Oil Search Limited (ASX:OSH) and Caltex Australia Limited (ASX:CTX) are heading on the challenges and responding to the dynamic change in the industry instigated by the IMO Marpol Convention.
Also Read: IMO MARPOL Convention To be Implemented Soon; Impact on Stakeholders and LNG Industry
Oil Search Limited (ASX:OSH)
- Financial and Operational Highlights
OSH completed its financial year 2019 on 31 December 2019 and reported the performance of the period.
The company managed to generate a revenue of USD 1.58 billion during the period, which remained ~ 3.26 per cent up against the previous corresponding period (or pcp).
The cost of sales surged by 19.40 per cent against pcp to stand at USD 833.77 million, and the increase was majorly due to the 19.93 per cent increase in costs of production against the pcp. A significant increase in the transportation cost from USD 7 million to USD 29 million also contributed towards the higher cost of sales, along with the cost of gas purchase, and other production and transportation-related costs.
The spiked cost of good sales reduced the profitability for the period, and the 3.26 per cent increase in revenue resonated further in a gross profit of USD 751.03 million, down by ~ 10.32 per cent against pcp.
OSH reported an NPAT of USD 312.42 million, down by ~ 8.43 per cent against pcp.
The total production during the period also surged by 11 per cent against the pcp to stand at 27.9 million barrels of oil equivalent.
OSH realised 11 per cent lower average price against pcp on oil and condensate, which stood at USD 62.86 per barrel during the period, while the company also realised 5 per cent lower realised price against pcp on LNG and gas.
Performance Snippet (Source: Company’s Report)
The decline in net profitability was primarily due to the 11 per cent decline in the average realised price (oil and condensate), 5 per decline in the LNG and gas realised price, 27 per cent higher depreciation and amortisation charges amid increased production and implementation of the new IFRS 16 Leases accounting standard, and due to expensing exploration cost ( dropped by 29 per cent).
OSH announced a final interim dividend of USD 4.5 cents a share, which took the total dividend of FY19 to USD 9.5 cents a share.
- Development Activities
OSH and associated partners made good progress on the LNG expansion at the Papua New Guinea (or PNG) in 2019 concerning technical and commercial aspects; however, the PNG State Negotiating Team and the PRL 3 Operator and ExxonMobil could not ink the terms related to the development of the P’nyang field, which lead to the suspension of formal discussion on 31 January 2020.
But, both the parties, i.e., ExxonMobil and Total, have demonstrated interest for renewed discussions with the Government. Once the development discussion is concluded, OSH anticipates progress into the FEED phase.
Over the Alaska prospects, OSG had made material progress with the completion of inaugural drilling, which along with historical data helped in assessing a 46 per cent increase in gross 2C resources at the Pikka Unit, which now estimated to stand at 728 million barrels (371 million barrels net).
- FY20 Guidance
The production guidance is within the range of 27.5 to 29.5 million barrels of oil equivalent to the production cost of USD 11 to USD 12 per barrel of oil equivalent.
The layout of future guidance is as below:
(Source: Company’s Report)
The stock of the company last traded at $6.010, down by 2.27 per cent against its previous close on ASX, on 25 February 2020.
Caltex Australia Limited (ASX:CTX)
- Financial and Operational Highlights
CTX completed its financial year 2019 on 31 December 2019 and reported a weak performance for the period.
The Fuels & Infrastructure (excluding Lytton) EBIT fell by 7.09 per cent against pcp to stand at $380 million, while the Lytton EBIT fell drastically by ~ 56.52 per cent against pcp to stand at $70 million, which further led to a fall of 21 per cent in the Fuel & Infrastructure EBIT.
(Source: Company’s Report)
The Convenience Retail EBIT fell by ~ 34.52 per cent against pcp to stand at $201 million, while the group Replacement Cost of Sales Operating Profit (or RCOP) fell by ~ 26.51 per cent against pcp.
However, CTX managed to bring down the corporate cost to $44 million during the period, down by ~ 13.72 per cent against pcp, reflecting the company’s focus on reducing the cost.
Performance Snippet (Source: Company’s Report)
CTX mentioned that the current results reflected an unfavourable non-cash impact to NPAT of ~ $14 million from the adoption of AASB16.
The RCOP NPAT of $344 million remained the midpoint of the previous guidance range provided by Caltex, and the company suggested that the results were impacted by lower Lytton earnings, subdued market conditions, which led to the fall in refining and retail fuel margins, and repricing of the EG wholesale fuel supply contract.
The company declared a final dividend of 51 cents a share (fully franked) during the second half of the year 2019, representing a payout of 61 per cent of the RCOP NPAT for the second half.
The total dividend for the financial year 2019 reached at 83 cents a share (fully franked), reflecting a payout of 60 per cent.
- Plunge in Demand Amid Weaker Economy
CTX suggested that the Australian fuel demand fell by 0.9 per cent against pcp amid economic weakness, and the diesel volumes of the company plunged by 1.9 per cent against pcp, while the jet volumes fell by 4.7 per cent against pcp; however, CTX suggested that the company remained disciplined on shorter-term contracts where elevated freight costs could not be recovered and regained over 50 per cent of the lost volume by the year-end.
(Source: Company’s Report)
The stock of the company last traded at $34.150, down by 0.92 per cent against its previous close on ASX, on 25 February 2020.
