The potential closure of the Lytton refinery, should Ampol decide within weeks that an exit is appropriate, is the superior outcome for Ampol shareholders from a returns perspective, and would lead to a multiple re-rating, according to Macquarie.
The conclusion of Ampol’s review comes amid what the broker speculates is increased government support to keep Lytton open, and possibly even a net present value-positive outcome. Six Australian refineries have closed in the past 15 years. “The closure of Lytton is not a question of if, but a question of when,” the broker said.
But total shareholder return and return on capital employed are the measures that matter when it comes to Ampol’s incentive structures and both stand to improve without Lytton, even though the absence of refining income would lower group earnings. Scope one and two emissions would fall by 85 per cent.
Since refining is so capital intensive, the broker also concludes that Ampol would become a more attractive business from a takeover target perspective and its capital management prospects improve: Ampol has $648 million in franking credits.
On Macquarie’s numbers Lytton is only worth $91 million or 38¢ a share, downgraded from its previous assumption of $231 million or 98¢ a share. Still, Lytton breaks even at $US5 or $US6 a barrel, superior to the old Kurnell refinery in terms of profitability, and it supplies half of Queensland’s fuel needs making it a comparatively more difficult call to shut it down.
The broker has a $31.50 price target on Ampol shares, reduced by 9 per cent on the Lytton valuation downgrade and lowered earnings forecasts out to 2024.