Z Energy gives upbeat outlook despite sharp fall in margins, blaming rising crude prices

Fuel giant Z Energy said margins were expected to recover despite a sharp fall in the first three months of 2021. Photo / Dean Purcell

Z Energy shares jumped as the fuel retailer resumed dividend payments, gave an upbeat assessment of new industry legislation and predicted margins on fuel would recover from their current multi-year lows.

The Wellington-headquartered company, which also operates the Caltex brand, delivered a net profit after tax of $57 million for the 12 months to March 31, which it said was an increase of 165 per cent on the previous year.

Z Energy declared a final dividend of 14 cents per share, at the top end of a range it indicated in March when it announced it had struck a deal with its lenders to allow it to resume distributions.

It also predicted earnings would increase in 2022 and it expected to pay dividends of 19c-23c.

The company agreed to suspend dividend payments when it raised almost $350m in 2020 to shore up its balance sheet. On Thursday it said it had hit its target of stripping $48m in costs from the business.

The results came as the company faced analyst concerns about fuel margins, with the Government passing legislation in 2020 aimed at boosting competition for wholesale supplies.

Retail margins for fuel dropped to the lowest level in more than five years in April, according to figures on the Ministry of Business, Innovation and Employment website.

Z Energy said that in the first half of the year margins had been flat on the previous years, but in the past six months were 4.9 cents per litre down on a year ago, with all of this coming from the final three months of the year.

However the company predicted the fall was temporary, with the fall driven by the recent rise in crude oil prices.

"Z does not consider this margin reduction to be structural, as it is consistent with other periods of margin compression from material input cost increases," the company said, adding that margins in April had recovered as crude prices had plateaued.

Z Energy was also positive about the impact of the Fuel Industry Act, the Government's response to its investigation into the retail fuel market which included the introduction of terminal gate pricing.

Z Energy chief executive Mike Bennetts said the changes, along with other contract changes, would open the wholesale market to greater competition.

"The uncertainty resulting from recent government interest in the fuel industry has now concluded," Bennetts said.

"Z is well positioned to respond positively to industry changes from the regulations that support the new legislation."

Shares in the company jumped close to 5 per cent and were up 9c or 3.4 per cent at $2.75 at 1pm.

On April 28, shares in the company closed at $2.54, the lowest since the company floated in 2013.

In December, Z Energy revealed it was in a major contractual dispute with the New Zealand Refinery Company over fixed fees, as the Marsden Point refinery attempted to undertake a plan to cease refining and become an import terminal for refined product.

On Thursday Z said negotiations were ongoing and expected to be concluded in May, as it repeated its view that the refinery should transition to an import terminal.