Summary

  • Oil market has been one of the hardest-hit markets, owing to the COVID-19 outbreak and its aftermaths as travel ban and nationwide lockdown, impacting the demand for retail fuel considerably, especially for jet fuels.
  • West Texas Intermediate crude oil even slipped below the level of zero in April 2020, and sellers were ready to pay buyers for some crude oil purchase.
  • Z Energy Limited (NZX: ZEL), a New Zealand fuel distributor, registered a 53 per cent drop in revenue and a 60 per cent decline in RC EBITDAF for the first quarter of FY21.
  • ZEL plans to trim its cost structure to weather the storm.

Oil market has now entered a phase of consolidation with both supply and demand scenario keeping balance, leading to a narrow range in trading in the oil market with Brent Crude oil futures hovering in the range of USD 41 to USD 44 a barrel.

Though the market is under consolidation, many industry forecasters estimate that the oil market would witness improvement in 2021 and 2022.

To Know More, Do Read: OPEC and Allies Ease Supply Cuts, Market Goes Range-Bound; Things You Should Know

In the wake of a plunge in oil prices, many NZX-listed oil stocks have seen a considerable sell-off on the exchange over the market estimation of falling earnings of such companies due to oblique oil demand and weak prices.

Also Read: Oil Crisis: Should you Buy or Sell Some Oil Stocks?

Some of the domestic petroleum suppliers such as Z Energy Limited (NZX:ZEL) are now reporting results of their first quarter of FY2021, which are further reflecting upon the negative impact of the recent oil plunge.

RC EBITDAF Declines by 60 Per Cent While Revenue Plunges 53 Per Cent

Z Energy reported an RC EBITDAF of $38 million for the first quarter of the financial year 2021 ended 30 June 2020, down 60 per cent from $95 million in the previous corresponding period (or pcp).

  • Q1 FY2021 RC EBIDTAF included $11 million RC EBITDAF loss for April when the country was in alert level 4 (AL4) and alert level 3 (AL3) lockdown.

Marketing volume of the Company took a considerable hit of 39.0 per cent against the same period a year ago, reaching 595 million litres.

  • The recently imposed lockdown across many nations along with travel restrictions severely impacted jet fuel demand, which remained one of the hardest-hit segments across the globe.
  • Other marketing volume categories, including the Jet Fuel product segment of the Company registered a decline of 53.0 per cent during the June quarter against pcp.
  • The petrol marketing volume declined by 40.8 per cent, while the diesel volume went down by 19.5 per cent against pcp.
  • Furthermore, ZEL suggested that the convenience store average weekly sales, on a like for like basis, declined by 2.5 per cent against pcp

Owing to the decline in retail sales, the quarterly revenue of Z Energy took a hit of 53 per cent against pcp to stand at $594 million.

  • Furthermore, fuel margin declined by 32 per cent to stand at $112 million.
  • The Company reported an RC NPAT of $15 million, down by 144 per cent against pcp.

However, ZEL reduced its operating expenses by 18 per cent for the first quarter of FY2021, and further plans to trim structural costs for long-term sustainability.

  • ZEL is targeting $48 million of structural operating cost reductions while planning for an additional $26 million of one-off cost reductions in FY2021, which is to be split between the cost of goods sold and operating expenditure.
  • In Q1, operating expenses remained $18 million low against pcp, in line with the target of $14 million.
  • ZEL suggested that cost-out program is on track to deliver the expected cost reductions.

Snippet of the cost-structure of the period is as below:

Current Market Conditions and Balance Sheet Flexibility

ZEL raised $347 million of capital in May 2020, enabling the Company to repay $180 million of term debt during June 2020. The peak draw of $225 million during the quarter was in the month of April, and as a result of trading conditions and active management of working capital, the facility was undrawn at the end of June quarter with total cash on hand of $169 million.

During the June 2020 quarter, the retail network, including Foodstuffs, reported a decline of 33.6 per cent on a y-o-y basis, while the Caltex network witnessed a volume decline of 45.6 per cent over the same period.

  • Furthermore, commercial volumes were negatively impacted by the COVID-19 related lockdown; however, ZEL suggested that aviation, marine and bitumen commercial volumes are recovering back to PCP levels.
  • ZEL also suggested that discounting continues to be a significant factor in retail trading with well-over 90% of 91 Octane retail fuel volume, being sold on a discount to Notional Main Port Price between 15 cents per litre and 20 cents per litre.

Terminals Strategy

  • During the last quarter of the financial year 2020, the Company decided and executed to maintain its own private stocks of product in Whakat? / Nelson outside of the ‘Declared Shared Storage’ system under the National Inventory Agreement, and in 1QFY2021, negotiated ex-terminal bilateral agreements with other major industry participants.
  • The Company further suggested that operating decisions around other terminals are going on and are consistent with the Fuel Industry Bill legislation currently before Parliament.

Despite all ongoing progress and several cost reduction initiatives, the Company has timed its first-half earnings expectations, which as per the Company, should now stand in the range of $85 million to $100 million. The 1HFY21 RC EBITDAF forecast is based on assumptions that NZ remains at alert level 1, with reduced Refining NZ production and historically low refining margins.

ZEL would disclose the FY2021 guidance with the first-half results, provided an expected reduction in uncertainty for some forecast variables around alert levels, refining production, and refining margins.

ZEL stock last traded at $2.950 on 24 July 2020, up by 0.34 per cent against its previous close on the exchange.

(Note: All currency in NZD unless specified otherwise)

 

 


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