Viva Energy’s 2Q22 operational update confirmed the cash bonanza it will likely report at the half yearly result in August. Refining margins are stratospheric and although retail margins will have been curtailed by rising fuel prices recently, there is a big surplus of free cash on the way.
VEA indicated its (unaudited) 1H22 Group EBITDA would be approximately $604 million, an increase of 140% over the same period last year. In the company’s May trading update, it noted that the April refining margin of US$26.40/bbl had contributed to a refining margin EBITDA of ~$308 million for 4 months. This represented 92% of 1H22 consensus forecast GRM at the time.
Refining margins have persisted at extraordinary levels with 2Q22 GRM reported at US$30.80/bbl taking the 1H22 average GRM to US$19.10/bbl. This compares to 1H21 average GRM of US$6.60/bbl.
Group fuel sales volumes are 5.2% ahead of last year for 1H22 and will continue to grow as Liberty volumes will contribute full retail margin from 2025 onwards.
Investment view
The recovery in volumes from COVID impacts is supplementing the massively strong refining margins coming through. Just how long these heightened margins can be sustained is not easily answered but is seems clear the long term average of about US$10/bbl will rise, supported by the government’s cap and collar program and the vast reduction in global refining capacity generally. The latter certainly affects the refining margins achieved in Australia while the former provides clear support on the downside. Despite the wildest dreams of the utopian greenies, demand for refined petroleum products in Australia is going up and certainly not going away any time soon.
The outsized earnings numbers that will tumble out of VEA’s 1H22 result in late August will make a mockery of the implied trading metrics on VEA currently. If a US$12/bbl mid-cycle refining assumption is adopted, and that is not a stretch, consensus forecasts of 6.4x EV/EBITDA and 10x PE ratio on FY23f earnings will be well short of reality.
The potential implications for shareholders could be a much higher dividend (and yield) and perhaps other forms of capital management.
In our view, the current share price is sceptical of a prolonged period of above average refining margins. Refining is certainly subject to volatility, and we acknowledge the concern, but the goal posts have shifted.
Risks to investment view
The price of crude oil can be volatile, and it affects not only refining margins but retail and commercial demand for refined products. Economic activity also determines the level of demand for VEA’s products, so if this turns negative, it would affect earnings.
Recommendation
We have retained our Buy recommendation.
FIGURE 1: VEA GROUP EBITDA (RC) – 1H22 UNAUDITED
