Retail play could put Caltex back in control of its destiny

Caltex CEO Julian Segal and CFO Simon Hepworth are taking a very disciplined and cautious approach to any potential acquisitions. (Sam Mooy)

Caltex Australia’s first-half results capture the reasons why Julian Segal is so keen to redefine the group and its strategies.

Given its composition, the result was very respectable, with earnings (using the replacement cost of sales version that excludes movements in the value of inventories) up one per cent to $254 million.

It is the influences beyond Caltex’s control, however, that coloured the result — the long-term decline in petrol volumes as vehicles become more fuel-efficient and the short-term fluctuations in refiner margins.

Segal and his team are highly-regarded by the market because of Caltex’s operational excellence.

In its core supply and marketing business, where they have focused a lot of attention in recent years on supply chain efficiency and taking advantage of the group’s separation from Chevron last year, there was strong growth, with earnings before interest and tax (EBIT) up $85m to $349m.

With that result, however, there was a 2.2 per cent decline in total fuel volumes as the long-term industry trend of lower volumes continues. Given the interest in hybrid and, in the longer term, electric vehicles, that’s a trend that could eventually accelerate quite abruptly and significantly.

Also within that business, however, net non-fuel income grew 14 per cent to $92m.

Caltex’s Lytton refinery’s EBIT was down from $154m to $92 million, even though sales were up about 20 per cent amid what the group described as a strong operational performance. The average realised refiner margin (essentially driven by Singaporean refiner margins) was $US10.10 a barrel, compared with $US16 in the previous corresponding period.

There are two broad strands to Caltex’s growth strategies.

One is to continue to invest in and hopefully acquire more volume for its core transport fuels business, pushing hard towards premium products. Caltex would like to leverage the extensive and very efficient supply chain and infrastructure it has developed after taking the best part of $100m a year out of its cost base.

The other, and the one that has generated the most interest, is leveraging the group’s retail network and the supply chain behind it. Caltex owns, controls or supplies nearly 2,000 sites, including 522 Woolworths-branded sites, of which about 800 are owned or leased. Its network has about three million customer transactions a week.

For quite some time now, Segal and his team have been developing a quite radical new strategy for the retail network to define convenience as something far more ambitious than the current offer, offering not just a broader range of foods items, including fresh and pre-prepared foods, but virtually any goods or services that consumers value and that the Caltex supply chain can deliver efficiently: from barista coffee, to parcels and dry cleaning and, eventually, self-driving cars.

The group is close to completing the analysis that will underpin its retail strategy but plans to have pilot sites up and running within the next 12 to 18 months. As one would expect from Caltex, the initial investment will be modest — less than $30m — but the potential is significant, given that only about 20 per cent of the current convenience spend occurs within the petrol retailing networks.

What the retail strategy offers Caltex is both growth and relatively stable and diversifying growth that is within its own control. That would help offset the volatility of its exposures to oil prices and refiner margins.

While Caltex is excited about the potential of the strategy, which could include stand-alone non-fuel sites, it is a cautious long-term game plan. That might change if a sensible acquisition became available that would enable Caltex to leverage its supply chain.

There’s been a lot of speculation recently that Woolworths is contemplating selling its petrol-selling network.

Caltex, which supplies the outlets, has made no secret in recent years of its interest in exploiting both its transport fuels and convenience supply chains by acquiring any chains that become available (the BP network is the one that has been most often referenced).

It would be the obvious buyer and, from Woolworths’ perspective, given that the companies have had a lengthy partnership, probably the friendliest party to sell to if it wants to retain the ability to use petrol to support its supermarket business.

There are, of course, other potentially interested parties. BP could be a candidate, as could global commodity trader Vitol, which bought Shell’s downstream businesses in 2014 or Trafigura’s Puma Energy, which has also been expanding rapidly here in recent years.

Caltex has the balance sheet and share market rating to support a major acquisition, with gearing of only 21 per cent (34 per cent including leases). That’s after its recent $270m buyback of capital.

The Woolworths network is speculated to be worth between about $1.2bn to $1.5bn, depending on how much competition there is for it, which is very doable for a company with a market capitalisation of about $9bn and Caltex’s balance sheet.

Segal and his chief financial officer Simon Hepworth, are, however, very disciplined. They’d prefer to invest in growth but, if an acquisition doesn’t present itself or the numbers don’t stack up, they’ve made it clear they will continue to return surplus capital to shareholders and maintain their focus on protecting returns on equity that have been in the mid-to-high teens in recent years. Last year the return on equity was a remarkable 19.5 per cent.