Ampol has advised it will resume production at its only oil refinery in September despite dire refining margins in the wake of the COVID-19 shock that fuelled speculation the plant in Brisbane might be shuttered for longer.
The Lytton refinery will be restarted once an extended outage for maintenance work is concluded, Ampol, the former Caltex Australia, said on Tuesday. The plant has been shut since May, with Ampol having brought forward the timing of the work amid soft demand for transport fuels and to meet new physical distancing rules during the plant overhaul.
Ampol pointed to the benefit the plant would have through an integrated supply chain compared to importing petrol, diesel and other products, while adding that decisions whether to manufacture fuels at the plant or import them would hinge on the market conditions of the day.
The country’s four remaining oil refineries have been hit hard by the coronavirus pandemic, which has all but eliminated the market for aviation fuel and cut demand for petrol, with diesel holding up better.
Oversupply has also depressed refining margins, with margins for some types of crude falling into negative territory last week, according to RBC Capital Markets.
RBC analyst Gordon Ramsay has flagged the soft margins as a risk to Ampol’s ability to restart Lytton, given the plant only breaks even on gross earnings at margins of about $US5 a barrel, and has revised its assumption for the timing of a restart to January 1, 2021.
Mr Ramsay said on Tuesday the Lytton plant would be restarted in phases and there was the likelihood it would not initially run at full capacity.
He noted that fuel demand erosion in Australia peaked in April and was now growing back, with indications that national petrol sales were down only 11 per cent in July compared with a year earlier. Retail fuel margins meanwhile were “very strong” in April, while convenience retail sales are expected to have held up reasonably well in the June half.
“Ampol believes that market conditions for refining continue to be highly uncertain and Ampol will continue to review its refining operations and provide routine updates of its refining performance once operations recommence,” the company said, adding that the plant should be able to produce at full capacity by the start of October.
Shares in Ampol, which was the subject of an $8.8 billion takeover approach from Canada’s Alimentation Couche-Tard earlier this year, were up 4¢ at $29.79 in early trading. The company is now under the leadership of Matthew Halliday, who was appointed as chief executive in late June.
The news on the refinery restart comes as Ampol is preparing for a spin-off or sale of a stake in a portfolio of petrol station sites, which analysts expect to lead to a return of capital to shareholders. As reported by The Australian Financial Review‘s Street Talk column, Charter Hall Group, backed by Singaporean sovereign wealth fund GIC, has been in exclusive negotiations with Ampol since July on the stake, expected to be worth about $1 billion.
“Couche-Tard also continues to view Ampol as a strong strategic fit for its business and an important potential component of its Asian growth strategy, and hence we think there remains a strong likelihood of a resumption in deal talks once more certainty is apparent in economic outlooks,” Mr Ramsay said.