This story was originally published on October 13, 2021. Check out a quick update at the end of the story
The takeover of Z Energy by Australia’s biggest transport fuel company risks two Kiwi dreams: having a big, successful, locally-owned petrol retailer, and that company being innovative in the transition to green fuels.
Ten years ago, Mike Bennetts made an announcement. The then chief executive of Greenstone Energy – the company used by the New Zealand Superannuation Fund and infrastructure company Infratil to buy the New Zealand assets of Shell – said the company’s 226 service stations would be re-branded as Z Energy.
“Z is the first letter of the last word of the country to which our business is solely committed,” Bennetts said. “The Z brand will provide a visual point of difference and customers will know they’re supporting a Kiwi company.”
Not any more. A binding scheme of arrangement for a $1.97 billion takeover was announced yesterday, although there are several hurdles, including Ampol selling its Gull stations and getting approval from the Commerce Commission and the Overseas Investment Office. Still, if the takeover deal with Aussie fuel giant Ampol goes ahead, Z Energy will become Ampol’s New Zealand arm.
Your local petrol station will likely continue to trade as Z Energy. Ampol chief executive and managing director Matt Halliday has talked about “light touch integration”, and Gull service stations remained Gull after Ampol (then known as Caltex Australia) bought the Kiwi arm of that West Australian petrol retailer.
Z might also have the same leadership – at least for a while. Halliday told Newsroom he had been “impressed with the professionalism of the Z management team and people in the business more broadly” and would be keen to retain staff not just in the short term, for the transition to Ampol, “but in the longer term”.
Still, under Ampol’s ownership, whatever the branding and the leadership, Z Energy won’t be the “world class Kiwi company” it talks about on its website – that locally-owned, NZX-listed business with 40 percent of the market, more than big international players Mobil and BP.
“I’m gutted this has happened,” Grant Swanepoel, lead analyst for Z Energy at investment and advisory company Jarden, told Newsroom, talking abut the prospect Z Energy will leave the NZX. “I was involved in the listing right at the start – I feel part of their journey.”
For Bennetts too, emotions are mixed.
“There are moments when you see this isn’t good, and that’s a natural human reaction,” he tells Newsroom. “But I can see a heck of a lot of benefits from being a significantly scaled-up trans-Tasman and regional downstream fuels player.”
The benefits include fuel supply security once New Zealand’s only petrol/diesel/aviation fuel production facility at Marsden Point closes, Bennetts says.
(The Refining NZ board is expected to make a decision over the next month or so on turning the refinery site into an import and storage terminal only.)
Who or what is Ampol?
Ampol is one of the biggest Australian retail brands you might never have heard of – at least until it first bid for Z Energy in early June. The company handles 20 billion litres of fuel a year (Z’s total volume is 3.3 billion litres), including 6.5 billion litres traded overseas. It has more than 700 Ampol branded service stations in its network (as opposed to 250 Z stations) and it has a trading and shipping business in Singapore it uses to source fuel from overseas, as well as a strategic partnership in the Philippines.
But the reason you may never have heard of Ampol before is that it’s an old company rebranded last year as an even older company.
Ampol was founded in 1936 as the Australian Motorists Petrol Company, but in 1995 merged with Caltex Australia, part of the US multinational Chevron.
At that time all the Ampol stations were rebranded Caltex.
Chevron sold out of Caltex Australia in 2015, but allowed the company to continue to use the Caltex brand under licence. The back-to-its roots-after-25-years re-rebranding as Ampol is a result of Chevron deciding to come back into the Australian market via a purchase of the Australian assets of Argentinian-turned-Swiss petrol storage and retail company Puma Energy. Chevron wants to rebrand Puma stations as Caltex, so all existing Caltex stations in Australia have to be Ampol by 2022.
Clear as mud? One more fun fact for the mix is that Chevron sold its New Zealand Caltex petrol stations to Z Energy in 2016 but also allowed them to continue to trade as Caltex under licence. The Caltex NZ stations are also part of the Ampol deal but Ampol says it’s too early to say what will happen to the Caltex NZ brand if the takeover goes ahead.
Too cheap or too expensive?
Both Bennetts and Halliday are talking up the financial benefits of the deal for Z and Ampol shareholders. Z’s investors get an offer which is a premium on where the shares have been for the last 18 months, though considerably less than their historical value over the last five years.
Z Energy 5-year share price
The deal also doesn’t take into account any potential upside from the company’s ‘turn-our-performance-around-by-focusing-on-the-basics’ plan announced at its investor day on July 28.
However, given continuing Covid-related falls in demand for fuel, a $88 million financial loss last year, and four profit downgrades in the last two years, the latest in March 2021, shareholders might be happy to take the offer.
From the Ampol side, the company may be taking advantage of the fact oil company stocks are cheap worldwide. A Financial Times article noted how hedge funds have been quietly scooping up the shares of “unloved oil and gas companies discarded by environmentally minded institutional investors, and are now reaping big gains as energy prices surge.”
Ampol is also following a strategy common in the oil industry: get big or get out, according to the Australian Financial Review.
Matt Halliday is paying “a big price for a business that has frankly been a serial disappointment,” the AFR says, with the deal valuing Z higher in terms of its value-to-earnings multiple than Ampol.
Instead, Ampol will be counting on extracting “a fat pool of synergies from the deal”, the AFR says.
There are the normal economies of scale – potentially up to $80 million, Halliday says. But most importantly there’s the chance for Ampol to take advantage of New Zealand becoming an import-only market with the closure of the Marsden Point refinery to sell a whole lot more fuel here.
An Australian government refining support package of up to $A108 million a year will see Ampol able to keep its Lytton refinery in Queensland open until at least 2027, but Ampol’s bid is contingent on Refining NZ making the decision to close New Zealand’s only petrol/diesel plant.
Transitioning to a low-carbon economy – or not
Then there’s this other part of the deal – the impact of a takeover on both companies’ nascent moves towards green fuels.
Both sides are talking up the benefits – Bennetts emphasising Ampol’s expertise in early stage green hydrogen, Halliday talking up the possible benefits of scale for Z Energy’s foray in biofuels, though without any specifics.
It’s a tough one. While Ampol has made some moves towards decarbonisation, promising a minimum $A100 million spend on ‘future energy’ projects by 2025, the focus is largely on the relatively easy job of taking carbon out of its own operations, not the massive task of moving its customers away from fossil fuels.
“How can we enable our customers to use less of our products? And then how do we sell to our shareholders a business strategy which is to sell less stuff and pressure the Government to force us to sell less stuff?”
– Mike Bennetts, Z Energy
It’s the same at Z Energy. Mike Bennetts talks about the paradox of cutting 40,000 tonnes of carbon out of the company’s operations – from its fleet, for example, and electricity efficiency moves at its retail outlets – whilst doing virtually nothing about the nine million tonnes of CO2 being generated when its customers use Z-pumped fossil fuels.
It’s the 251:1 paradox, Bennetts told Stuff’s climate change editor Eloise Gibson last year.
“We’ve done what we can to be carbon neutral, but it’s the products we sell. How can we enable our customers to use less of our products? And then how do we sell to our shareholders a business strategy which is to sell less stuff and pressure the Government to force us to sell less stuff?”
Halliday also talks about his company playing a “key role in energy transition”, but doesn’t appear to feel the same urgency Bennetts does.
Launching the Ampol decarbonisation strategy in May, Halliday warned Australia’s geography, demographics and reliance on transport and heavy industries meant the company wasn’t planning any radical moves on the environment – change would be slow.
“An orderly transition will take time, and we expect traditional liquid fuels to play a key role in Australia’s energy mix for years to come and for demand to remain resilient until at least 2030. However, we also know our customers’ needs are changing and they are seeking lower emissions alternatives. Accordingly, we must continue to evolve, innovate and adapt to help them deliver viable low emissions solutions for the future.”
It’s a view that leaves environmental commentator and Newsroom columnist Rod Oram furious – and worried.
“It’s classic fossil fuel company greenwash and delay,” he says. “Ampol just wants to sell as much petrol into New Zealand as possible. It’s just going to be a cost cutting, margin-squeezing, fossil fuel pumping company – the rest is greenwash.
Oram says Ampol’s lack of progress and commitment simply reflects the view of the Australian government.
“Ampol is in a country that has made itself a pariah in global climate change circles because it won’t even put a price on global emissions.”
“Z has sunk almost all of its innovation, energy and capital into optimising its fossil fuel legacy rather than making its clean energy future. Where it has tried to be bold it has failed.”
– Rod Oram
Not that Oram has much sympathy for Z – or the New Zealand Government. He recently wrote a Newsroom column slating both for lack of action on transitioning to green fuels.
“Z has got bigger and better in its fossil fuel business with the acquisition of Caltex NZ in June 2016,” he says. “But it has sunk almost all of its innovation, energy and capital into optimising its fossil fuel legacy rather than making its clean energy future.
“Where it has tried to be bold it has failed.”
Oram is referring mainly to Z Energy’s approximately $50 million investment in an Auckland biofuels plant over the past seven years; a plant that has never been financially viable.
Bennetts acknowledges the problems, but also the role of the Government, which has never been prepared to put money into biofuels, or even introduce policy settings that promoted alternative fuels.
(See Newsroom’s story Z hibernates beleaguered biofuels).
“It’s been very challenging for us to find the sweet spot between what shareholders are looking for, what customers want and what Government wants,” Bennetts says.
“Sometimes you make an investment, but there’s a long term benefit, and that’s not what investors want. And if we had been more profitable, we would have been able to invest more than we have.”
Ironically for Z’s seven-year struggle with biofuels, the Government’s Sustainable Biofuels Mandate, due to be announced by the end of the year, could include support for local production.
Jarden’s Grant Swanepoel says Z Energy’s July 28 investor day strategy presentation may have been a cunning way for Bennetts to set out some directions for the company that Ampol would need to follow up on, in order to win regulatory approval for the deal.
“Part of the OIO [Overseas Investment Office] process has wording that talks about the deal going ahead needing to be equally or more beneficial for New Zealanders than if the deal didn’t go ahead,” Swanepoel says.
“The Z presentation contained quite a lot of ESG [environmental, social, governance] commitments – more than I was expecting on the day. They were trying to position themselves as part of the solution, not the problem.”
“I think Z was putting a line in the sand to make sure Ampol knew what they were getting into.”
– Grant Swanepoel, Jarden
By the end of July, Z executives were already well aware of the interest from Ampol, Swanepoel says.
“I think Z was putting a line in the sand to make sure Ampol knew what they were getting into.”
The theory is not impossible. Bennetts is in many ways an unlikely oil man, despite all the years in the industry. He is the convener of the 104-member Climate Leaders Coalition, an organisation set up in 2018 to get New Zealand CEOs leading the response to climate change.
And he left BP at the end of 2008 because “what mattered to BP conflicted with my personal values”, he says. It took a recruiter to twist his arm to get him to take another oil job – with Z Energy.
“I don’t want to be the guy about whom people say… why didn’t they push harder?” he told Eloise Gibson last year.
A backwards step
Rod Oram, however, thinks the Z-Ampol deal is a retrograde step for New Zealand’s climate change future.
“I’m angry about this. Ampol is not going to be a leader in transitioning to alternative fuels – there is not a whiff of any serious ambition there.” Oram would like to see the Government stepping in and declaring Z a strategic asset and not for sale.”
“This is the worst outcome. As long as Z was New Zealand-owned, there was an opportunity that if the Government got its act together on energy transitions, Z could play a role.
“But now even if the Government did, Ampol wouldn’t be prepared to stump up to invest in this transition.”
(For more on the climate implications of the Z-Ampol deal, see Jonathan Milne’s Newsroom story here.)
UPDATE: The Commerce Commission published its statement of preliminary issues on the sale of Z Energy to Ampol on November 18. It received two main submissions, both dealing with Ampol’s undertaking to sell Gull after any merger, either by trade sale or IPO. At the moment, the Commerce Commission is scheduled to give a decision on the takeover on January 18, though it says this deadline could be extended as the investigation continues.