Ampol expects record year for earnings as transition accelerates

Ampol is accelerating its transition away from being just an oil refiner, flagging record annual earnings thanks to a strong performance from its retail convenience business.

Ampol expects to post record annual earnings as its retail convenience offering sees strong growth, guidance that illustrates the company is accelerating its transition away from just an oil refiner.

Ampol said it expects earnings before interest and tax to be “slightly ahead” of the record 2022 despite a material reduction in oil refining following unplanned maintenance and a fall in margins.

The company said refinery volumes for the fourth quarter totalled 1,428m litres, down on the 1,580m litres in the prior three month period. Ampol said margins at its Lytton Refinery averaged $US10.52 per barrel in the quarter, well down on the $US11.76 per barrel for the fourth quarter in 2022.

Soaring refinery margins have underpinned Ampol and smaller rival Viva Energy in the past few years, capping a remarkable turnaround for Australia’s domestic players.

In May 2021, the Morrison government said it would pay Ampol and Viva Energy to keep producing in a bid to protect Australia’s energy security.

The policy safeguarded the futures of refining in Australia as both businesses have come under sustained pressure from larger Asian refineries and Covid-19 lockdowns.

Australia’s refining capacity has been falling for more than a decade.

RBC Capital Markets analyst Gordon Ramsay said the earnings outlook supports Ampol's rationale for its 2021 acquisition of New Zealand’s Z Energy for $NZ1.97bn ($1.84bn).

“We view the non-refining earnings as higher quality with generally a stronger free cash flow conversion compared to the refining business. This supports Ampol’s cash flows for the second half of 2023 and underpins our view that Ampol is positioned for capital management at its full-year result,” said Mr Ramsay.

Citadel Magnus, which has a positive rating on the company, said any uplift in refinery margins would improve the company’s dividend outlook.

“We modestly reduce our special dividend assumption for end 2023 to 50c per share, but we remain conscious that it could be higher given the balance sheet flexibility above,” Citadel Magnus analysts Adam Martin and Branko Skocic said.

“We still assume another special dividend of 50c per share in 2024.”

Z Energy has about 200 Z-branded fuel shops and 133 Caltex service stations, which Ampol is looking to profit from amid a rise in electric vehicles which threatens to uproot traditional petrol stations.

Ampol hopes to lure customers with its convenience offering, a strategy also targets by rival Viva Energy.

Ampol in 2023 took a look at purchasing 7-Eleven, though it is believed to have shelved talks after they dragged.

Analysts said the acquisition would have been particularly difficult anyhow.

7-Eleven also has a fuel supply agreement with Mobil that it can’t exit until 2034, so that means Ampol would not have the benefits of supplying the business with fuel.

Any Ampol acquisition would likely have been heavily scrutinised by the Australian Consumer and Competition Commission.

Ampol shares closed down 2.5 per cent on Thursday at $35.07 each, in line with the broader sector.

The company is due to announce its full-year results on February 19.