Fuels refiner and supplier Viva Energy has outlined a tough outlook for retail earnings in the second half as it battles fierce competition to win greater market share through its reworked Coles Alliance deal.

Viva warned that if lower than average retail margins since June 30 persisted for the remainder of the half, underlying earnings were unlikely to improve from the $283.3 million performance during the first half of 2019, which was down 9 per cent on the prior year.

It blamed the challenging first-half retail result on increased competition, oil price rises and a lower Australian dollar.

“We’re seeing a change in competitive dynamic through the course of this year which has had an impact on retail market margins,” Viva chief executive Scott Wyatt noted, referencing the ­acquisition of Woolworths Petrol by Euro Garage late last year and its own changes to pump pricing.

JPMorgan said the retail earnings guidance for the second half marked a 13 per cent decline on its $326m forecast and a 6 per cent fall on the prior period.

“While a slight improvement on the first half of 2019, which was a 9 per cent decline on the prior period, it suggests that the benefit of access to the Coles Express ­retail fuel margin has been reinvested into price or has been offset by operating de-leverage,” JPMorgan analysts wrote. “Questions exist on the volume assumptions within that guidance, the outlook for the 2020 financial year, the broader rationale for acquiring the retail fuel margin, and whether Viva, as well as Coles Express, should have stepped in earlier when volumes and brand equity were deteriorating significantly in 2018.”

Viva in February reworked a decade-long deal with Coles so it could gain control over setting fuel prices in an effort to resurrect the underperforming petrol unit which has suffered from high pump prices trimming sales and eroding its market share.

Viva now sets the retail price of fuel, collects the full retail margin and gains a royalty on convenience store sales.

Coles, which previously set the retail price, has no exposure to fuel price movements but instead receives a commission per litre from Viva based on fuel volumes sold.

Underlying earnings fell 35 per cent to $171.6m in the first half, at the upper end of prior guidance of $150m-$180m issued in June.

Viva — which floated on the ASX last year in a $5 billion deal — saw its shares fall 7.9 per cent to $2.10 yesterday. It declared an interim dividend of 2.1c a share.

Viva’s assets include the Geelong refinery, one of only four in Australia, and a network of more than 20 fuel-import terminals through which it supplies a quarter of the nation’s refined fuel needs. It supplies fuel to 50 airports across Australia and also operates 1100 petrol stations.

Mr Wyatt also hit back at Treasurer Josh Frydenberg’s calls for companies to prioritise investment over capital returns. He noted the company’s heavy investment in its Geelong refinery and suggested the Coalition should instead focus on helping business by cutting energy prices.

“Energy costs are also important to tackle and that impacts our business in Geelong. Our energy costs have increased by nearly 50 per cent,” Mr Wyatt said.

Extracted from The Australian