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Forsyth Barr

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New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

<h2>The Good Oil</h2>
October 2019 — ZEL’s Month to Forget
September 2019 was dominated by Z Energy (ZEL) related news flow, with its -$60m FY20 EBITDAF earnings downgrade a negative surprise, in addition to ongoing Commerce Commission fuel study consultation and the pipeline inquiry findings. Data points show gross refining margins have stayed firm (US$7.76/barrel), but fuel volume data (traffic and vehicle registrations) continue to show falling trends.
Regulator raps fuel companies
The major news stories for the month were ZEL’s FY20 earnings downgrade amidst stiff retail competition, the RAP pipeline inquiry finding the oil companies should have invested earlier into resilience, the Saudi oil facility drone attack and the ongoing ComCom retail fuel study. Whilst not helpful for ZEL’s earnings, the downgrade highlighted to the ComCom that retail competition is healthy. It also highlighted how poor MBIE importer margins are at picking up the increased margin pressure. Whilst diesel importer margins were soft in the September 2019 quarter (down -16%), petrol margins were only slightly down (-4%) on the prior quarter.
Industry volume growth continues to soften
Traffic data indicates a continued softening of growth. On a 12-mth rolling basis heavy vehicle growth is now under +2% at +1.7% and light vehicle growth is also +1.7%. Vehicle registrations continue to decline, with new commercial sales down -10.1% and used commercial registrations down -23.5% vs. pcp. However, SUV sales grew +6.0%, the only category to grow in August vs. the pcp. EV sales remain firm at 2.4% of total registrations, the second highest month on record. August EV sales were boosted by Tesla 3 sales finally coming through.
Gross refining margins (GRM) remain firm, limited sign of IMO impacts
We estimate that Refining NZ’s (NZR) GRM was US$7.76/barrel, up on the US$7.10/barrel NZR reported for the July/August 2019 period. At this stage the new low sulphur shipping fuel requirements, that come into force on 1 January 2020, do not appear to be having a big impact on refining margins. Whilst diesel crack spreads have lifted in the last two weeks, high sulphur fuel oil spreads have also remained strong.
Figure 1. Summary company valuation metrics
<table class="table table-striped">
<thead>
<tr>
<td>
&nbsp;
</td>
<td></td>
<td>
Target
</td>
<td>
Target
</td>
<td></td>
<td colspan="3">
1 year forward
</td>
</tr>
<tr>
<td>
Company
</td>
<td>
Price
</td>
<td>
Price
</td>
<td>
Return
</td>
<td>
Rating
</td>
<td>
EV/EBITDA (x)
</td>
<td>
PE (x)
</td>
<td>
Gr Yld (%)
</td>
</tr>
</thead>
<tbody>
<tr>
<td>
NZR
</td>
<td>
2.09
</td>
<td>
2.15
</td>
<td>
8.4%
</td>
<td>
NEUTRAL
</td>
<td>
5.1
</td>
<td>
15.0
</td>
<td>
6.0
</td>
</tr>
<tr>
<td>
ZEL
</td>
<td>
5.55
</td>
<td>
5.40
</td>
<td>
6.1%
</td>
<td>
NEUTRAL
</td>
<td>
7.8
</td>
<td>
14.8
</td>
<td>
12.0
</td>
</tr>
</tbody>
</table>
Source: Forsyth Barr analysis
<div class="content-highlight">
Investment View
We are NEUTRAL on both ZEL and NZR. ZEL needs to once again provide the market with confidence that its earnings are sustainable. In the meantime, we expect ZEL to trade sideways. Whilst NZR should benefit from shipping fuel changes, the medium-term outlook is less certain.&nbsp;
</div>
Andrew Harvey-Green
andrew.harvey-green@forsythbarr.co.nz
+64 4 495 8185

The Good Oil
October 2019 — ZEL’s Month to Forget
September 2019 was dominated by Z Energy (ZEL) related news flow, with its -$60m FY20 EBITDAF earnings downgrade a negative surprise, in addition to ongoing Commerce Commission fuel study consultation and the pipeline inquiry findings. Data points show gross refining margins have stayed firm (US$7.76/barrel), but fuel volume data (traffic and vehicle registrations) continue to show falling trends.
Regulator raps fuel companies
The major news stories for the month were ZEL’s FY20 earnings downgrade amidst stiff retail competition, the RAP pipeline inquiry finding the oil companies should have invested earlier into resilience, the Saudi oil facility drone attack and the ongoing ComCom retail fuel study. Whilst not helpful for ZEL’s earnings, the downgrade highlighted to the ComCom that retail competition is healthy. It also highlighted how poor MBIE importer margins are at picking up the increased margin pressure. Whilst diesel importer margins were soft in the September 2019 quarter (down -16%), petrol margins were only slightly down (-4%) on the prior quarter.
Industry volume growth continues to soften
Traffic data indicates a continued softening of growth. On a 12-mth rolling basis heavy vehicle growth is now under +2% at +1.7% and light vehicle growth is also +1.7%. Vehicle registrations continue to decline, with new commercial sales down -10.1% and used commercial registrations down -23.5% vs. pcp. However, SUV sales grew +6.0%, the only category to grow in August vs. the pcp. EV sales remain firm at 2.4% of total registrations, the second highest month on record. August EV sales were boosted by Tesla 3 sales finally coming through.
Gross refining margins (GRM) remain firm, limited sign of IMO impacts
We estimate that Refining NZ’s (NZR) GRM was US$7.76/barrel, up on the US$7.10/barrel NZR reported for the July/August 2019 period. At this stage the new low sulphur shipping fuel requirements, that come into force on 1 January 2020, do not appear to be having a big impact on refining margins. Whilst diesel crack spreads have lifted in the last two weeks, high sulphur fuel oil spreads have also remained strong.
Figure 1. Summary company valuation metrics




&nbsp;



Target


Target



1 year forward




Company


Price


Price


Return


Rating


EV/EBITDA (x)


PE (x)


Gr Yld (%)






NZR


2.09


2.15


8.4%


NEUTRAL


5.1


15.0


6.0




ZEL


5.55


5.40


6.1%


NEUTRAL


7.8


14.8


12.0




Source: Forsyth Barr analysis

Investment View
We are NEUTRAL on both ZEL and NZR. ZEL needs to once again provide the market with confidence that its earnings are sustainable. In the meantime, we expect ZEL to trade sideways. Whilst NZR should benefit from shipping fuel changes, the medium-term outlook is less certain.&nbsp;

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

The Good Oil: October 2019 — ZEL’s Month to Forget

Z Energy Ltd

The Good Oil: October 2019 — ZEL’s Month to Forget