WEEKLY STOCK COMMENT: Z ENERGY (ZEL)
Roy Davidson, 9 March 2017
Z Energy (ZEL) has over 200 retail service stations across the country, a national network of around 90 truck stops, storage terminals and distribution infrastructure (either wholly-owned or shared with the other integrated operators), a 25% shareholding in Loyalty New Zealand (which operates Fly Buys), and a 15.5% stake in Refining NZ.
In 2010, Shell sold its New Zealand downstream oil business to a joint venture between Infratil (IFT) and the New Zealand Superannuation Fund. The Shell brand was replaced with ‘Z’, a distinctive Kiwi brand. ZEL is a leader in the transport fuels market, supplying approximately 30% of New Zealand’s total transport fuel requirements. Its operations span all aspects of the refined product supply chain in New Zealand, from importing crude oil and arranging its refining, to importing and distributing refined products to customers and businesses. ZEL is not involved in oil exploration or extraction. In 2013, IFT and the New Zealand Superannuation Fund sold down 60% of Z Energy in an IPO, retaining 20% each. In September 2015, IFT subsequently sold its entire 20% stake, while the Super Fund reduced its holding to 10% of the company.
ZEL has shown consistent growth over the last five years. Industry margins have improved as key industry participants have asserted the need for a return on their investment in infrastructure and working capital. Overall industry volume growth is flat with the continuation of the 35-year trend of declining petrol consumption and growing diesel consumption, but ZEL expects higher fuel margins to remain. It is notable that while margins appear high, they are significantly lower than before Challenge and Gull’s entries in 1998/99.
In June 2015, ZEL announced it had entered into an agreement to acquire Chevron NZ for $785m. Chevron NZ operates the Caltex service stations (supplying 136 independently owned stores and 10 company owned stores), has 10 terminal assets, a network of truckstops, a lubricants business, and an AA smart fuel relationship with Progressive Enterprises. The purchase increased ZEL’s market share from 28% to 49% and result in cost synergies in the range of $15-25m per annum.
ZEL’s competitive position is based on its nationwide scale, the efficiency of its assets and operations, and its integration across all parts of the transport fuel supply chain. ZEL has strong management and a leading market position in the New Zealand transport fuels industry. It is entering a positive cash cycle as capex declines from its peak, meaning dividend growth is likely over the next three to four years, even if earnings are a little static (excluding the Chevron NZ acquisition).
Risks to ZEL include; 1) decreased fuel demand, 2) increased competition, and 3) regulation.