Z Energy today narrowed its profit guidance. Photo / File
Z Energy today narrowed its profit guidance. Photo / File
Z Energy has cancelled its final dividend, stopped non-essential capital spending and is in talks with its banks for more working capital flexibility as it negotiates the Covid-19 lockdown and volatile oil and foreign exchange markets.
New Zealand's biggest fuel seller today narrowed its profit guidance, putting operating earnings for the March year just ended in the bottom half of the reduced guidance the firm provided in December.
It said earnings before interest, tax, depreciation, amortisation and changes in financial instruments will fall to between $355 million and $365m, compared with the $350m to $385m signalled on December 13. That guidance was a cut from the $390m to $430m signalled in September.
Z noted that the new guidance includes $27m of provisions for Covid-19 costs already incurred, as well as further virus-related provisions.
Z shares were unchanged at $2.97, having fallen about 54 per cent the past 12 months.
Chief executive Mike Bennetts said retail competition had remained tough in the March quarter, but the firm had been able to moderate some of that impact. Lower crude oil prices in January and February had also helped keep earnings – before the Covid-19 impacts - within the firm's December guidance range.
Z Energy operates the Z and Caltex retail chains and is a major jet fuel supplier. It also owns about 15 per cent of the Marsden Point oil refinery, which is currently operating with about a third of its usual staff on-site as it cuts fuel processing to a minimum amid the national lockdown.
Unusually low processing margins saw Z make payments to the refinery in the March quarter under the fee-floor guarantee the major customers provide, the company said.
The sharp fall in crude oil prices in early March had boosted the firm's replacement cost earnings but that had adverse impacts on cash flow as inventory purchased at higher prices was then sold at lower prices.
Bennetts said that that underlying oil price volatility had been compounded by currency movements, particularly the decline in the New Zealand dollar exchange rate from 64 US cents early last month to the recent low of about 55 US cents.
He said the firm's existing working capital facility had withstood that early March decline, but the firm is now in "constructive" talks with its banks to secure additional headroom to accommodate any further commodity price and exchange rate movements.
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Bennetts said trading conditions are unprecedented and the outlook is hard to assess, either by local historic experience or the lockdowns being seen overseas.
Fuel demand in New Zealand's more export-led economy may develop differently during the lockdown than in overseas markets.
Bennetts noted that for the first week of the lockdown, Z's retail fuel volumes were materially above normal for the first two days of the week but down 80 per cent in the second half, while store sales were about 40 per cent lower.
"These are more extreme than many other markets in a similar lockdown where fuel sales are typically down 40-60 per cent," he said in a statement.
Given that environment, the firm is bringing forward cost-cutting initiatives, halted non-essential capital spending and has cancelled the final dividend it would normally pay in May.
The company paid a 16.5 cents per share interim dividend in December - $66m - and had then been expecting to pay out about 40 cents for the full year.
Bennetts said the firm recognised the consequences the final dividend cancellation would have for many shareholders and the decision was not taken lightly.
"Considering the potential consequences of Covid-19 to New Zealand, the Z board believes it is prudent to conserve this cash and take actions to reduce operating expenses. When the time comes, we can accelerate out of the current situation and help get New Zealand moving again."
