Ampol chief executive Matt “Doc” Halliday has emerged from his gunfight with the federal government over the future of the group’s Lytton refinery with two big victories for investors – one now and one in the future.
Ampol will receive a support payment of up to $108 million during periods where low refining margins are low, plus a further $125 million to help Australia upgrade to the ultra-low sulphur petrol we should have shifted to years ago. Then there’s another $40 million to be collected as part of a support program announced by the Morrison government last year.
Not only does the support package keep Lytton open and saves 550 jobs, but more importantly for investors it removes the biggest source of volatility in Ampol’s earnings.
The structure of the support package means taxpayer support ramps up when refining margins are low and gradually falls as refining margins rise, thereby giving Ampol none (or very little) of the downside and all of the upside from margin movements.
Tying the company’s fortunes to those of the country is arguably the best way to extract taxpayer support to fund an energy transition Ampol cannot avoid.
Halliday says that over the cycle, this will make Ampol’s earnings higher than they would have otherwise been.
But more than that, he argues the reduced earnings volatility will lower Ampol’s cost of capital and allow it to take on more debt, which can be used to both increase investment as required and meet investors’ long-standing calls for better shareholder returns.
This should lead to a re-rating for Ampol’s shares, Halliday says.
“I don’t think any of the benefits are in our share price at the moment – if anything, there is negative value [to Lytton] in our share price.”
Halliday’s second big win is the flexibility this deal delivers as Ampol navigates the energy transition.
Shifting to ultra-low sulphur petrol is a good first step and the government’s bet that it will take between 10 and 20 years to fully transition to electric vehicles sadly looks reasonable, given its apparent lack of interest in providing incentives to accelerate the shift.
But Halliday says the government also remains keen to work with Ampol on the country’s future energy needs. The Lytton site, he says, is a “privileged asset” with critical manufacturing capacity, port access and physical infrastructure that will be needed as the Australian economy transitions.
The “flexibility to repurpose those competitive advantages for a hydrogen future” is just one example that could be explored over the coming years, Halliday says.
“It’s critical that this is an orderly transition and we need to work with the advantages we have as a company. I think that goes for the country as well.”
That sentiment’s right, but it’s also smart for Ampol investors. As Monday’s deal shows, tying the company’s fortunes to those of the country is arguably the best way to extract taxpayer support to fund an energy transition Ampol cannot avoid.
Halliday has already got a brilliant deal from the government, but there might be still more to come.