Z Energy is accelerating work on new services and cost-saving initiatives in the face of a “very tricky” crude oil market.
The company had been “caught short” by the rapid jump in oil prices and the fall in the kiwi dollar during the six months through September, chief executive Mike Bennetts said today.
While those impacts, and an unplanned extension of a shutdown at the Marsden Point oil refinery were beyond its control, risks in the crude market may persist and the company needs to move faster on projects it already has underway, Bennetts said.
“The world is a very tricky place right now” and oil prices could rise rapidly or fall away.
“We want to be good for all seasons,” he said. The company needed to “up the pace” on customer experience and productivity initiatives.
Z Energy shares fell as much as 7.7 percent today after the firm cut its full-year earnings guidance for the second time in five months and delivered a lower-than-expected first-half dividend.
Bennetts told analysts and journalists that the company had known it would face a high crude oil price environment at some time but had thought it would be most likely in 2020. New international marine fuel standards from January that year may limit fuel oil use and could potentially increase global demand for low-sulphur diesel.
The company had been aiming to roll out a series of new services and initiatives during the remainder of this year and next to be ready for that, he said. These include Fastlane – where a customer can pull into a service station, fill up with petrol and just drive off, with on-site cameras picking up the vehicle registration number and sorting the payment automatically.
Other initiatives underway but previously not detailed include new customer analytics capabilities so Z can better target offers and products.
The company today cited the roughly $180 million a year it spends on “reasonably blunt” discounts and loyalty benefits. Targeting that spend where it will be most effective for different types of customers could save more than $10 million a year by not “over-rewarding” some customers for their loyalty.
“I’m very confident that this will turn up,” Bennetts said. “By this time next year we will have predictive analytics on the way we engage with some of our customers.”
Those efforts to insulate the company from a high price environment are effectively a year late and are being accelerated, Bennetts said.
Z last year launched a range of initiatives under its Strategy 3.0 banner aimed at delivering $15 million to $19 million of earnings improvement in the current period. About $5 million of that was achieved in the first half and Bennetts said the company is on track to deliver $16 million to $18 million for the 12 months.
The company is also working on the potential to take more fuel oil from the Marsden Point refinery after the 2020 marine fuel changes. Fuel oil then may have very little value but may offer Z an opportunity given it has a bitumen business that may be able to absorb some of that product.
Z is forecasting full-year earnings before interest, tax, depreciation, amortisation and changes in financial instruments of $400 million to $435 million. That is down $50 million on its original forecast in May.
The 12.5 cent first-half dividend, while up 20 percent, was still below the 17 or 18 cents investors could have expected under the firm’s new dividend policy.
Despite repeated questions from analysts, chief financial officer Chris Day resisted guiding them on the likely level of the second-half dividend.
The company remains committed to a pay-out ratio of 90 to 100 percent of underlying free cash flow, subject to business performance.
But Day said the company felt “bitten” by the change in market conditions having previously offered very precise guidance on the dividend, and the second half is still uncertain.
The company has reasonable confidence in the lower half of its earnings range, given the increased gains it expects from its strategy projects, the new supply arrangement it has with supermarket chain Foodstuffs, and the fact no maintenance is planned at the Marsden Point oil refinery this year, he said.
The company also expects to sell $40 million of property to help fund its other capital activities.
But the forecast assumes Brent oil prices of US$80 a barrel and a New Zealand dollar exchange rate of 65 US cents for the rest of the period and neither of those are fixed.
The kiwi dollar was recently at 65.47 US cents, while December Brent was trading at US$75.46 a barrel.