Z Energy has posted a loss of $88 million for its FY20 result and is now on a mission to raise $350 million in capital.
It’s full-year result compares to a $186m net profit for the previous year and was significantly impacted by COVID-19 and the lower retail fuel margins and reduced refining margins.
Full-year EBITDAF of $366m was down $68m (15%) year-on-year and was in line with Z’s most recent earnings guidance.
Net operating cash flow was $159 million, down $110m (41%) year-on-year which was also impacted by Z paying a cash settlement for the CY19 Emissions Trading Scheme (ETS) obligation in the first half of FY20.
The board has cancelled the final dividend for FY20 and has provided no FY21 guidance. It will not pay another dividend until after September 30, 2021.
It says FY21 is “likely to be significantly impacted” by the effects of COVID-19 and there is now a “rigorous focus” on cash flow generation including operating cost reductions of between $74m-$96m.
Z chief executive Mike Bennetts says the full year result “highlights the competitive intensity of the retail fuel market in New Zealand and the severity of the low refining margins we saw in the last quarter.
“The COVID-19 global pandemic is presenting numerous operational challenges, not least a material decline in demand for product.
“Z continues to respond well to these challenges and has acted swiftly to reduce operating costs, increase cash flow and provide flexibility to the balance sheet that will position Z well for the expected improvement in post-Covid trading conditions,” he says.
Increased competition in the retail fuel market has also impacted the company and has slowed the rate of new to industry builds across the industry.
Historically low refining margins were experienced in the second half of FY20 and were further hit by lower fuel demand due to COVID-19.
Z has a 15.4% stake in Refining NZ, the country’s only oil refinery, and has a degree of exposure to the global collapse of refining margins.
Refineries in the Asia-Pacific region increased production ahead of changes in IMO shipping regulations last year, however the anticipated uplift in margins did not occur and the market was left with excess product, Z says.
The adverse impacts of Covid-19 on fuel demand have resulted in an oversupply of finished product globally, leading to a further decline in refining margins.
“Z is committed to working with Refining NZ to find a long term and sustainable outcome for supply of transport fuel to New Zealand. We’re supportive of the strategic review recently announced by Refining NZ and we look forward to participating in the review as both a customer and shareholder,” Bennetts says.
FY20 events
FY20 was also significant for the company due to its involvement in the Commerce Commission’s findings into the New Zealand retail fuel market and its final report in December last year.
Z says it disagrees with aspects of the profitability analysis but “participated in the process constructively and has been quick to enact the recommendations proposed by the Commission”.
These include displaying premium pricing on price boards and moving towards greater pricing transparency at the terminal gate. The Fuel Industry Bill is due to go before Parliament in the second quarter of 2020.
Towards the end of the financial year, Z also started to mothball its biodiesel plant in Te Kora Hou, in South Auckland. It says the plant has become financially untenable as the tallow commodity price was bid up by international producers of biodiesel operating from within subsidised markets.
Z says it will continue to use Te Kora Hou as an import terminal to honour its commercial commitments for the supply of biodiesel to its foundation customers.
The company says it will look to restart production of biodiesel if the economic and regulatory environment for local production of biofuels improves.
Outlook reflects uncertainty
Bennetts says the pandemic has created unprecedented conditions with a high degree of uncertainty for many businesses.
“The New Zealand lockdown and subsequent progression through alert levels has very significant implications for customer demand levels, the mix of fuel required and overall market competitiveness.
“Consumer demand has been meaningfully impacted during the lockdown period and the associated economic effects of COVID-19 on employment and income are likely to be much longer lasting,” he says.
The first four weeks of New Zealand’s level 4 lockdown has seen reductions of around 80% in retail fuel volumes, 85% decline in Jet volume, and approximately 60% volume decline in commercial fuels.
At level 3 lockdown, Z has seen volumes rebound from level 4 but retail volumes remain 45% below normal trading conditions compared to the previous year.
Commercial sector demand from construction, forestry and the primary sector has shown signs of recovery under level 3 but remains around 20% below previous volumes.
Aviation demand is expected to be significantly lower in FY21 than in previous years and the timing of any recovery for international jet travel is highly uncertain.
Z expects to see continued weakness in refining margins, with a global over-supply of various refined product, mainly jet.
“During the current volatile market conditions Z continues to work with Refining NZ to find the appropriate balance for refinery production whilst seeking to manage the risk associated with supply chain volumes and inventory.
“We’re taking a prudent view of demand forecast for FY21 due to the unpredictable consequences of COVID-19 related impact on demand. In response to this uncertainty Z will significantly reduce operating expenses, retain cash and raise equity capital to support a robust capital structure for the business.
“These actions will provide a solid platform for an anticipated return to more normal trading conditions in FY22,” Bennetts says.
Capital raising
Z has been granted NZX approval to undertake a placement of up to 30% of its ordinary shares. This allows Z to issue more of its shares through the placement than it would otherwise be able to without shareholder approval by ordinary resolution.
The waiver is conditional on certain matters, including that Z prioritises participation by existing shareholders, disclosure of information on the allocation policy used for the placement, and undertaking a share purchase plan in accordance with certain principles agreed with NZX.
Proceeds from the equity raise are expected to be used to pay down the bank term debt of $180m.
“Z has responded to the sudden and material change in business conditions resulting from COVID-19 by accelerating a comprehensive package of measures including significant one-off and structural cost reductions and a rigorous focus on capital expenditure,” Bennetts says.
“Together with the amended debt financing arrangements and the equity capital raising … these steps are intended to provide resilience to potential market conditions for the foreseeable future.
“Transport fuels play a fundamental supporting role in New Zealand economic activity and Z looks forward to meeting this need as economic activity recovers,” he says.
