For clients that have elected the “Blend” Australian equity option we bought Caltex (CTX).

Caltex is a transport fuel supplier, convenience retailer and an integrated oil refining and marketing company. It enjoys a strong market position, supplying over a third of domestic transport fuel volumes (including petrol, diesel and jet fuel) via a network of ~2,000 sites. Caltex is also a leading convenience retailer and one of the largest franchisors in Australia via its Star Mart stores. After significantly restructuring the refining business, the company now owns and operates a single refinery in Brisbane where it refines crude oil into petroleum products.

We are positive on the outlook for the company for the following reasons:

  • The sales product mix continues to improve as lower quality, lower margin fuels are displaced by higher margin premium grades of diesel and petrol where Caltex has a market leading offering in the Vortex range.
  • Increasing non-fuel income from a combination of further store roll-outs and an expanding & improving product range at retail outlets.
  • Further low risk investment in and/or optimisation of the supply chain (primarily driven by Ampol Singapore) as well as cost savings from the Tabula Rasa program.
  • The refinery in Brisbane is operating very efficiently with run-rate production well ahead of guidance. Sustained strong production drives breakeven costs lower and provides leverage to an improvement in refining margins or a weaker A$.
  • Possible M & A with existing site operators given Caltex wants to participate in any industry consolidation over the next few years.
  • In the absence of value accretive acquisitions, the potential exists for more capital management given balance sheet strength and a franking credit balance exceeding $1bn.

Any slowdown in the economy raises the risk of declining fuel volumes and increased competition especially in the commercial markets. In addition, there is inherent volatility in the company’s earnings due to the refining operations where margins are difficult to predict and have started 2016 weaker than last year.

To fund the purchase of Caltex we will be selling Iluka (ILU) given the upcoming departure of the highly regarded CEO in the second half of this year at a time when the mineral sands markets remain challenging with high stockpiles and demand subdued.

If you have any queries, please contact your Elston adviser.