Caltex Australia chief executive Julian Segal has declared his interest in pursuing Woolworths’ $1.5 billion petrol station business as the fuels supplier looks to expand and revamp its retailing offer.

Mr Segal said he couldn’t confirm the asset was for sale but noted Caltex’s “good relationship” with Woolworths through the pair’s retail alliance. As reported in Street Talk, Morgan Stanley was recently mandated to sell the business on behalf of the supermarket player.

“Obviously if the assets were for sale, given our relationship with Woolworths going back to 2003 then we would be interested,” Mr Segal said after announcing a flat first-half core profit for Caltex at $254 million, with gains in the marketing division offset by a slide in refining earnings.

Citigroup analyst Dale Koenders has pointed to Caltex as the only likely bidder of Woolworths’ petrol station division, which could be worth between $1.3 billion and $1.5 billion. The acquisition could increase earnings per share by 5-8 per cent depending on how much equity Caltex may need to raise and the company’s credit metrics.

Caltex chief financial officer Simon Hepworth said for smaller deals such as the $95 million acquisition of Scott’s fuel division in 2014, Caltex could “just sign a cheque” but one the size of $1.5 billion “would require a mix of debt and our friendly shareholders to contribute.”

“It is core business, so it is their bread and butter, and we would consider them the best operators of retail petrol sites in Australia. So it’s better in their hands than anybody else’s,” Mr Teh said.

“The key question is whether on a competition level, Caltex can structure a deal where the [Australian Competition and Consumer Commission] would be happy with the acquisitions.”

Marketing profits

Meanwhile, Mr Segal and Mr Hepworth defended Caltex’s improved profits from marketing after the ACCC found petrol retailers had lifted retailing margins to a record level, meaning consumers weren’t getting the full benefit of lower prices.

Earnings before interest and tax in supply and marketing, excluding one-off impacts, climbed by more than 10 per cent to $359 million in the half, while earnings from Caltex’s sole remaining refinery, in Brisbane, dropped 40 per cent to $92 million.

Mr Segal said competition in fuels retailing was healthy, and pointed to significant investments by Caltex in terminals, storage tanks and other infrastructure, amounting to close to $2.5 billion over the last few years.

“It’s wrong to focus on a margin without understanding the cash requirement and the cash return,” Mr Hepworth said. He noted that tightening rules on underground tank monitoring, vapour recovery and electronic board signs could involve an extra investment of up to $1 million for larger retail sites.

On average Caltex had seen profits from marketing of an average 3¢ a litre after tax in the June half, a number that falls to 2¢ a litre when profits from the Singaporean business that sources fuel were excluded.

Meeting expectations

Caltex’s profits came in within expectations. The bottom line result, which is less closely watched by the market as it includes the impact of changing oil prices on the value of inventories, declined 15 per cent to $318 million.

Caltex declared a first-half dividend of 50¢ per share, up from 47¢ a year earlier. The company completed a $270 million share buyback this year and Mr Hepworth said more capital could be returned to shareholders next year depending on the outcome on growth opportunities.

Shares in Caltex, which hit a record $38.64 in January, slipped 1.6 per cent to $33.69.

Caltex is meanwhile moving ahead with its pilot convenience store initiative, with stores to be rolled out in the next 12-18 months. They would include a barista coffee offer, fresh food and quick service restaurants and help close the gap between the convenience retail offering in Australia and in markets such as Britain.

While the company is continuing to invest in its own retail network, the pace of work has been “temporarily slowed” given the strategic review of the convenience retail strategy. The expected capital budget this year has fallen to $350 million-$400 million, down by $20 million-$40 million.

The success of rival Viva Energy in spinning off its petrol stations in a $1.5 billion real estate investment trust has triggered speculation that Caltex may make a similar move, but Mr Hepworth said he couldn’t see how value would be created given the impact on cash flows and the resulting lease liability.

Extracted in full from the Australian Financial Review.