Viva Energy expects half-year earnings to slump

The refining boom that Viva has profited from in recent years has ended, possibly forcing it to seek revenues from new areas.

Viva Energy said it expects its 2023 first half-year earnings to nearly halve from the previous year, as weaker margins from its dominant refinery business outweighs strong demand for aviation fuel.

Viva said it expects earnings before interest, taxes, depreciation and amortisation on a replacement cost basis to total $360 million, down on the record $611 million that the company reported during the same period one year earlier.

The result hints that the refining boom that Viva has profited from in recent years has ebbed. Without a revival, it would force the company to accelerate plans to boost revenues from other divisions.

Viva said it refined 16.1 million barrels of oil for the six months over the six months ended June 30, down nearly 25 per cent from the same period in 2022.

Viva said refining had been disrupted by a recent accident during maintenance. In June, Viva said a contractor crane at its flagship Geelong refinery had fallen, leading to a compressor being dropped to the ground. Viva said on Thursday that it expects repairs to be completed by September, but its refining division will suffer losses of up to $30 million over July and August.

While refining less, Viva also critically earnt less margin per barrel of oil. Viva said refining margins fell nearly 46 per cent year-on-year.

The downturn was even more acute in the second quarter of 2023, with Viva reporting declines in margins of 86 per cent from the same three month period during 2022.

The weaker refining margins had been foreshadowed by Viva. Global energy supplies - upended by Russia’s invasion of Ukraine, that prompted the West to impose sanctions on Moscow, and China’s hard-line zero-COVID strategy - have begun to unwind.

The upheaval had aided Viva and smaller rival, Ampol. Both had signalled they may not be able to continue refining before their fortunes had turned.

Australia’s refining capacity has been falling for more than a decade and the pandemic worsened the situation. It severely reduced the demand for jet fuel, cut the use of petrol and diesel, while driving down refining margins.

Their future was only secured in May 2021 when the federal government said it would pay Ampol and Viva Energy to keep producing amid heightened fears about Australia’s energy security.

The scheme pays both Ampol and Viva Energy when refining margins are weak, and the subsidies aided both in the short term before a rapid turnaround in the market made both ineligible.

The expected weaker revenues comes despite Viva reporting strong sales from its petrol station division. Viva said sales from across its petrol stations rose nearly 4 per cent.

The company reported even stronger demand for aviation fuel as demand for international travel soars despite a cost of living crisis.

Viva said revenues from its commercial and industrial division rose 15 per cent as a result.

Despite the uptick in retail and aviation, the result will intensify pressure on Viva to accelerate its push to diversify its earnings.

To shelter the impact of weaker margins, Viva has accelerated its push into convenience retail.

Viva in April said in April it had reached an agreement to buy OTR, which operates a network of 205 On the Run outlets, for $1.15 billion from Peregrine, owned by the Shahin family.

The deal is part of Viva’s strategy of bolstering its revenues while simultaneously sheltering it from the rise of EVs.

Demand for EVs is expected to soar over the coming years, a trend that threatens to uproot Australia’s traditional petrol network.

Viva hopes that it can lure customers to its convenience stores, potentially supplementing the offer with EV charging - a model widely used in Europe and the United States.

However, Australia - with its abundance of sunlight and rooftop solar - means many EV drivers could opt instead to recharge their EVs at home.

Viva shares are 1.4 per cent higher in afternoon trade.

Originally published as Viva Energy expects half-year earnings to slump