Caltex shuts down refinery until margins recover

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Caltex shuts down refinery until margins recover Caltex shuts down refinery until margins recover Caltex shuts down refinery until margins recover Caltex shuts down refinery until margins recover Caltex shuts down refinery until margins recover

Paul Hunt

Senior Journalist: Oil & Gas, Policy.

Paul Hunt

 AUSTRALIAN refiner and fuel retail giant, Caltex has slashed capital spending by A$50 million and closed its only refinery until fuel demand recovers.

The S&P/ASX 50 lister cited the current "unfolding COVID-19 crisis" and "broader dynamics in the global fuel marketplace" for its decision to cut capital expenditure from $300 million to $250 million for the year, and warned further cuts could be on the way in months to come. 

Caltex will also close the Lytton refinery until refining margins increase and will bring forward maintenance and work programs across the facility to May. 

"This decision will result in an improved economic outcome and protect cash flows, while demonstrating our ongoing commitment to the Lytton refinery," Caltex interim chief executive officer Matthew Halliday said. 

The company hopes the measures together will protect the business which is facing a evaporating demand.

The two primary benchmarks of oil, Brent Crude and West Texas Intermediate, have fallen around 60% in recent weeks as increased production from Saudi Arabia and Russia have seen an oversupply in the global market.

Caltex believes low crude prices would offer some meaningful insulation, and reduce the group's working capex requirements. 

However, simultaneously, demand for fuel has withered, as governments take strict measures to stop the spread of the COVID-19 pandemic, grounding airline fleets and forcing citizens to remain at home. 

"By taking this action now, we will continue to ensure the safe and reliable supply of high-quality transport fuels," Halliday said. 

The move to shutter its only refinery and cut capex by a sixth, comes just a week after the fuel supplier released guidance warning the impact of flight cancellations both domestically and internationally would see demand for its jet fuel fall by up to 90%. 

While the company expects to take a big hit to its jet fuel business, it is also staring at retail domestic slumps in demand. 

Caltex has seen nationwide retail gasoline demand fall 50% and diesel demand drop 30% compared to last year.

Today Caltex said it was unable to provide production guidance due to the rapidly evolving macro outlook.

The group has roughly $2.7 billion of available debt facilities and $1.5 billion of undrawn facilities and cash. It also has no debt facilities which mature this year, something analysts say give the fuel supplier some headroom. 

RBC Capital Markets said in a note today the company remained in a "sound position."

Analyst Ben Wilson believes further downward flex on capital budgeting from the revised $250 million guidance is possible while the group has $4 billion of available liquidity.

"While demand for most of its products continues to take a significant hit from COVID-19 related demand pressures, we believe that these are predominantly short-term issues that Caltex will be able to work through over time," Wilson said. 

Wilson went so far as to say the prospect of a takeover is still a possibility, but that the likelihood of a near-term agreement would be challenged by "external market forces."

RBC maintained an ‘outperform' recommendation.

The market seemed to agree, with Caltex rising 5.8% in the green to $24.34 per share at close. 

Canadian Alimentation Couche-Tard third and final offer of $35 per share was rejected by Caltex earlier this year. 

 

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