New Zealand Professional Investment Services Firm

Forsyth Barr

We are proud to be a New Zealand owned firm, with 21 offices throughout the country and over 300 employees. We assist personal, institutional and corporate clients providing a full range of investment services.

Forsyth Barr is a foundation New Zealand Exchange firm (NZX) and accredited market participant. We have been confirmed by the Financial Markets Authority as a Qualifying Financial Entity (QFE).

Research is the cornerstone of our advice. We have one of New Zealand's leading teams of analysts. Our global affiliations ensure comprehensive research coverage of all major investment markets.

New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

Channel Infrastructure NZ Ltd / Equity Bottom-Up

<h2>Refining NZ<br>Customer Costs Continue — July/August 2020 Operating Performance</h2>
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<p><strong>NEUTRAL</strong></p>
<p>Refining NZ's (NZR) operating statistics for July/August 2020 show that processing fees before top-up payments were negative for the refinery, with the reported processing fee of NZ$23.7m equivalent to the fee floor. The top-up payments from NZR's customers means it continues to operate cash neutral, although we estimate the effective top-up payment for this period was ~NZ$31.5m due to the -US$4.18/barrel July/August 2020 gross refining margin. NZR has indicated it expects the fee floor will be in operation for the remainder of the year, and as we await the outcome of the strategic review we maintain our NEUTRAL rating and make no changes to forecasts.</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/160/546/original/image_15455506021600734318107.png?1600734321" class="editor-image img-responsive" data-smartkarma-image-id="160546"></figure>
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<h3>Grim throughput and refining margins, but&nbsp;NZR&nbsp;protected by the fee floor arrangements</h3>
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<p>As anticipated, NZR continued to operate at fee floor levels through July/August 2020, with a record low gross refining margin (GRM) of -US$4.18/barrel. July/August 2020 is the first period where both the Singapore complex benchmark GRM and NZR's uplift have been negative at -US$2.46/barrel and -US$1.72/barrel respectively. Not helping the GRM was the six week shut down period (enabling customers to rebalance inventory), resulting in refinery throughput dropping to a record low 1.77m barrels, compared to 7.42m barrels during the same period last year. NZR's underlying processing fee was ~-NZ$7.8m (i.e. before the fee floor top payment).</p>
<p>NZR's top-up payments ensured its processing fee equalled the fee floor of NZ$23.7m. NZR continues to operate on a cash neutral basis and keep debt stable at NZ$249m.</p>
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<h3>No change to forecasts as focus remains on Strategic Review outcomes</h3>
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<p>NZR has indicated that it expects to operate at the fee floor for the remainder of the year, which is consistent with our assumption that it receives the NZ$140m processing fee floor for FY20 and continues to run at a dialled-down mode in the near-term. The main focus for the refinery remains the outcome of its Strategic Review, with the first stage focussed on operating the refinery on a cash neutral basis expected to be announced to market in early October (a week or two later than expected). However, the second stage of the Strategic Review looking at the possible conversion of NZR to an import terminal is the key part of the review, and until then NZR remains in a holding pattern from an investor's perspective.</p>
<p>We make no changes to our forecasts, and there remains a wide range of possible value outcomes from the second stage of the Strategic Review.</p>
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<div><strong>Andrew Harvey-Green</strong></div>
<div><a href="mailto:andrew.harvey-green@forsythbarr.co.nz" target="_blank" rel="noopener">andrew.harvey-green@<wbr>forsythbarr.co.nz</a></div>
<div>+64 4 495 8185</div>
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<div><strong>Scott Anderson</strong></div>
<div><a href="mailto:scott.anderson@forsythbarr.co.nz" target="_blank" rel="noopener">scott.anderson@forsythbarr.co.<wbr>nz</a></div>
<div>+64 4 914 2219</div>
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Refining NZ Customer Costs Continue — July/August 2020 Operating Performance

NEUTRAL
Refining NZ's (NZR) operating statistics for July/August 2020 show that processing fees before top-up payments were negative for the refinery, with the reported processing fee of NZ$23.7m equivalent to the fee floor. The top-up payments from NZR's customers means it continues to operate cash neutral, although we estimate the effective top-up payment for this period was ~NZ$31.5m due to the -US$4.18/barrel July/August 2020 gross refining margin. NZR has indicated it expects the fee floor will be in operation for the remainder of the year, and as we await the outcome of the strategic review we maintain our NEUTRAL rating and make no changes to forecasts.


Grim throughput and refining margins, but&nbsp;NZR&nbsp;protected by the fee floor arrangements


As anticipated, NZR continued to operate at fee floor levels through July/August 2020, with a record low gross refining margin (GRM) of -US$4.18/barrel. July/August 2020 is the first period where both the Singapore complex benchmark GRM and NZR's uplift have been negative at -US$2.46/barrel and -US$1.72/barrel respectively. Not helping the GRM was the six week shut down period (enabling customers to rebalance inventory), resulting in refinery throughput dropping to a record low 1.77m barrels, compared to 7.42m barrels during the same period last year. NZR's underlying processing fee was ~-NZ$7.8m (i.e. before the fee floor top payment).
NZR's top-up payments ensured its processing fee equalled the fee floor of NZ$23.7m. NZR continues to operate on a cash neutral basis and keep debt stable at NZ$249m.


No change to forecasts as focus remains on Strategic Review outcomes


NZR has indicated that it expects to operate at the fee floor for the remainder of the year, which is consistent with our assumption that it receives the NZ$140m processing fee floor for FY20 and continues to run at a dialled-down mode in the near-term. The main focus for the refinery remains the outcome of its Strategic Review, with the first stage focussed on operating the refinery on a cash neutral basis expected to be announced to market in early October (a week or two later than expected). However, the second stage of the Strategic Review looking at the possible conversion of NZR to an import terminal is the key part of the review, and until then NZR remains in a holding pattern from an investor's perspective.
We make no changes to our forecasts, and there remains a wide range of possible value outcomes from the second stage of the Strategic Review.



Andrew Harvey-Green
andrew.harvey-green@forsythbarr.co.nz
+64 4 495 8185





Scott Anderson
scott.anderson@forsythbarr.co.nz
+64 4 914 2219



Refining NZ: Customer Costs Continue — July/August 2020 Operating Performance