Viva shares surged on renewed fuel deal with Coles

Viva Energy shares have jumped 13pc after it gained the right to set fuel prices in a renewed partnership with Coles.

Viva Energy CEO Scott Wyatt at the Geelong refinery.

Supermarket giant Coles has revealed earnings will plummet from its convenience business this year, resulting in the renegotiation of its fuel alliance with oil retailer and refiner Viva Energy.

With fuel volumes continuing to lag, Coles expects earnings from its convenience arm to slump 62 per cent to $50 million for the 2019 financial year, from $133m in 2018.

A reworked decade-long deal will see its partner Viva gain control over setting fuel prices in an effort to resurrect the underperforming petrol unit which has suffered from high pump prices trimming sales and eroding its market share.

Viva will now set the retail price of fuel, collect the full retail margin and gain a royalty on convenience store sales in a deal which will see it make a one-off $137m payment to the supermarket retailer.

Coles, which previously set the retail price, will have no exposure to fuel price movements but will instead receive a commission per litre from Viva based on fuel volumes sold.

Fuel volumes declined 16 per cent to 62.4m litres a week in the December half, compared with 74.1m litres a year prior — and down from a 100m litre a week peak — emphasising the need to restructure the alliance.

“Obviously, over the last couple of years, things have become more difficult and we’ve seen declining volumes and earnings from this division,” Coles chief executive Steven Cain told analysts on Wednesday. “We have noted that fuel volumes continue to decline significantly. And it became obvious to us that it wasn’t a sustainable situation.”

The two companies are targeting a turnaround in fuel volumes to 75m litres a week within the next two years, which will enable Coles to maintain annual earnings at around $50m.

“The objective of this deal is to clearly grow volumes again in the business and get to a

sustainable and growing level of profitability for both businesses,” Mr Cain said. “What we’re doing is becoming a commissions agent that derisks fuel pricing for us and it puts them in

control of what our customers pay, which over time we expect to be more competitive than when we are today.”

Still, Coles’ decision to reset the deal was met with a mixed response from investors with the company’s shares falling 2.5 per cent to $12.41 on Wednesday.

While the trading update was below expectations, Macquarie said the deal struck by Coles “short circuits” the poor trajectory of the business given ongoing fuel volume declines.

It expects 2019 through 2021 earnings per share to fall between 6 per cent and 7 per cent due to a lower convenience performance and the “new profile” of the alliance.

“While positive that a circuit breaker has occurred to offer some certainty, the profit hole is larger than expected at $100m or around 7 per cent of earnings before interest and tax,” Macquarie analysts said.

Viva, whose shares soared 13.8 per cent to $2.19, said the new structure would allow it to reinvest and become more competitive.

“It realigns the accountability so it plays more clearly to our core strengths,” Viva chief executive Scott Wyatt told The Australian. “We’re much better placed to optimise fuel volumes and margins across the retail network while also leveraging our supply chain and refinery.”

Viva’s assets include the Geelong refinery, one of only four in Australia, and a network of more than 20 fuel-import terminals through which it supplies a quarter of the nation’s refined fuel needs. It supplies fuel to 50 airports around Australia and also operates 1100 petrol stations throughout the country.