Strategic logic fuels Ampol’s race for scale in Z Energy takeover

Ampol CEO Matthew Halliday at a service station in Sydney. He says of Z Energy: ‘It’s a mini Ampol, a highly comparable business model.’ Picture: Toby Zerna

There were 16 days between the announcement on May 17 that the Australian government would support Ampol’s Lytton refinery to ensure it stayed open, and June 3, when the Ampol privately lobbed its first bid to take over its New Zealand equivalent, Z Energy.

Monday’s public $1.91bn takeover offer for Z has strategic logic at both corporate and government levels, harking back to Closer Economic Relations. It involves fuel security but it is also about who controls the pace of orderly energy transition, both top of mind for CEO Matt Halliday and his chairman Steven Gregg.

Ampol’s half-year profit result showed the rebrand is working well at the bowser and demonstrated a quick rebound from lockdowns. Halliday says states which hit vaccination targets should not wait for laggard states to open back up.

The logic of the Z takeover is compelling. New Zealand’s last refinery is set to close and it is looking to friends for security of supply in an increasingly insecure world. Ampol’s considerable trading and shipping footprint, enlarged by Z Energy, makes it an ideal partner.

That footprint means Ampol can take advantage of the short in the market: high import demand from New Zealand and Australia can be matched with Asian players who are long refined product. And Halliday says Lytton will have an important part to play. “If you have a strong infrastructure position you are able to extract more value from that short. The refinery at Lytton is an important part of that equation where we can blend and we can parcel with Lytton as part of that supply chain.”

There may be carping about government subsidies supporting an Ampol takeover but without them, Lytton faced closure and politically that was untenable for the government and for Australia’s fuel security.

Over the past six months, Gregg and Halliday have strengthened the balance sheet with a $300m share buyback. And that strength was boosted by the Lytton deal, which put a floor under refining earnings.

Halliday insists the bid was a stand-alone decision, but he agrees the Lytton deal adds value. “Ensuring that Lytton could continue operating does underpin fuel security. I think that is something that is part of the proposed acquisition Ampol would be bringing to New Zealand.”

Ampol shares fell 4.8 per cent on Monday, partly because the Z Energy bid signals the board, having paid a dividend, now wants to invest in growth.

Halliday says he is confident about regulatory approval for the deal, which might involve selling all or part of Gull New Zealand. This is tricky for analysts as any sale will affect the equity raising by Ampol for the takeover, which may well also involve offering script.

Finally, there were also questions about whether the deal synergies will really bring value.

“We wouldn’t be moving forward unless we could see a strong strategic rational and a strong value equation for our shareholders,” Halliday said. “It’s a mini Ampol, a highly comparable business model. They are going through the closure of the refinery in New Zealand to a full import model; that’s a model we understand well and believe we can deliver value into.”

There were no questions on the analyst call about energy transition, where both Ampol and Z have work to do.

Z Energy and its customers account for about 9 per cent of New Zealand’s carbon emissions. But it has gone into biofuels and petrol customers are invited to offset emissions with tree planting.

Ampol’s transition strategy (announced three days after the Lytton refinery deal with the government) committed $100m by 2025 towards future energy plays, including electric vehicle charging infrastructure and developing green hydrogen.

Ampol is committed to net zero emissions from its operations by 2040 and Halliday insists that a takeover would only improve its position. “The scale means that sharing of capability across both side of the Tasman, leveraging the fuel security aspect and that connection with the energy transition, I think we’re well set to play an important role for New Zealand,” he said.

The pace of energy transition is getting faster, however. Both Ampol and Z Energy know only too well that Aussie and Kiwi take-up of electric cars lags other western countries, despite the New Zealand government waiving road charges for EV drivers. But the transport sector is in the crosshairs as COP26 in Glasgow approaches and Australia no longer has a traditional car industry to protect.

In Britain the government has banned combustion engines in cars from 2030, which has accelerated the plans for the rollout of charging stations across Europe.

It seems improbable that the Australian government would follow Britain with a similar ban, but an Ardern-led New Zealand government is harder to predict.

Would Ampol be ready for a fast-tracking of EVs? “It’s a good question,” said Halliday. “We’ve done a lot of modelling around long-term volumes. We have real ambition but there are bottlenecks that need to be addressed right through the value chain to make charging work, to make hydrogen work. The scale that we would have as a trans-Tasman leader (gives) us further momentum.”

As Halliday said on Monday, these six months have been pivotal. The review of Lytton, the government support, Ampol’s investment in transition and the bid for Z all happened within three weeks in a complex landscape.

Until January this year, the market was still speculating that Canadian giant Couche-Tard might return to make another bid for Ampol itself. The low profile chairman Steven Gregg is proving to be a canny operator in the hot corporate market this year, having also reset the ground rules at Tabcorp with the demerger of keno and lotteries.