Stock of the Week Caltex (CTX)

Caltex CTX ASXCaltex (CTX) is Australia’s leading transport fuel supplier and a convenience retailer and the only integrated oil refining and marketing company listed on the ASX.

CTX operates two major refineries, at Kurnell in Sydney, and Lytton in Brisbane. CTX also operates a convenience store network in association with service station sites.

Caltex supplies about one-third of transport fuel in Australia, and is a net importer of petroleum products.

Though CTX has suffered in recent history over refiner margin pressure, the company recently reported 1H10 operating profit of $149 million, at the top end of company guidance.  CTX was one of the hot stocks in the weeks that followed, with the market giving its tick of approval to the results.

We last covered CTX last year when we rated the stock a Sell. The stock subsequently fell from $10.12 to $6.18 in less than two months, but we have now upgraded the stock to a Buy rating on the improving outlook.

About the business

CTX’s business value chain incorporates supply, refining, logistics and marketing.

In terms of supply, CTX buys crude oil and refined products on the international market. Caltex sourced some 72 million barrels of crude and refinery feedstocks in 2008.

CTX is Australia’s leading oil refiner. Combined production at its Kurnell refinery in Sydney and Lytton refinery in Brisbane comprises approximately 50% petrol, 30% diesel and 15% jet fuel.

The remainder of the production consists of fuel oil, waxes and lubricants, bitumen, sulphur, LPG and other gasses.

CTX further supplies products via a network of pipelines, terminals, depots and a company-owned and contracted transport fleet.

Caltex Marketing encompasses a range of downstream activities from retail service stations operations to equity and non-equity resellers and direct sales to corporate customers.

Caltex Star Mart, StarCard, StarCash, Vortex Premium, Bio E10 Unleaded, Havoline and Delo are leading sub-brands, each with significant and growing market shares in their respective product categories.

Oil uptrend

Lately we have seen surprisingly strong demand for oil in OECD advanced countries, particularly in the third quarter, and as such the International Energy Agency (IEA) has raised its forecasts for oil demand this year and next.

Global oil demand will increase this year by 300,000 barrels per day to 86.9 million barrels per day (mbpd), and by the same amount next year to 88.2 mbpd, giving annual gains of 2.5% and 1.4%.

The IEA has put OECD oil demand this year at 45.8 mbpd, a rise of 320,000 bpd from 2009.

Even for countries outside the OECD area, total demand was put at 41.2 mbpd in 2010 for a gain of 1.8 mbpd or 4.7%, quickly approaching the historical record reached in 2004.

Data from China suggested that oil demand surged by 8.5% in August on a 12-month basis, more than twice as fast as back in July.

The demand is clearly a strong positive for refiner CTX going forward.

Aussie influence

From 2004 to mid-2007, CTX was a strong performer, gaining on its various businesses and a strong market for oil.

The company then suffered difficulty over 2008 on a low Aussie dollar, oil price volatility, and the global economic slowdown.

A low Aussie dollar is no longer a problem for CTX, with our currency reaching parity with the US dollar on 15 October for the first time since exchange controls ended in 1983.

A stronger Aussie dollar reduces the cost of the oil that refiners like CTX need, but it can also erode their refining margins.

Fortunately, CTX and its peers are not worried over the accelerating AUD’s impact on refiner margins as hedging will cushion the impact.

A hearty half

On 23 August, CTX reported 1H10 operating profit of $149 million, at the top end of company guidance for $130-$150 million.

On a historical cost basis – including the value of stockpiles – CTX’s net profit fell 61% on the prior year to $141 million, in line with guidance of $125-$145 million.

A stronger Aussie dollar across the half lowered CTX’s refiner margin but a sharp fall in the value of the currency at the half’s end generated a foreign exchange loss on US dollar payables of $36 million.

CFO Simon Hepworth noted regional refiner margins remained fairly strong in July and August, despite oversupply and demand shortage fears.

CTX declared a half dividend of 30 cents per share, above market expectations.

The group gave little guidance but noted excess regional refining capacity continues to damp margins and that fuels demand.

With the Aussie dollar, oil prices and demand all finally working in CTX’s favour again we believe the company is on the mend and it will be one of the stocks to watch in coming months.

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