Viva Energy (ASX: VEA) is firing on all cylinders 

Behzad Golmohammadi Behzad Golmohammadi, September 29, 2022

Keeping Australia humming 

Viva Energy Group (ASX: VEA) is one of the largest energy companies in Australia, supplying about 25% of the country’s need for liquid fuel. Its major business segments are Retail, Fuels & Marketing (RFM) and Refining.  

 

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The RFM segment supplies fuel products through a network of approximately 1,330 service stations across the country under Shell, Liberty and other brands to retail operators as well as to wholesalers for commercial customers in different industries, including aviation, marine and manufacturing. 

The refining segment owns and operates a refinery in Geelong, Victoria, and offers gasoline, diesel, jet fuel and other petroleum products. 

 

Let’s take a look at Viva’s chart and see what moved its share price since the Corona Crash. 

 

Viva Energy

Viva Energy, Weekly Chart in Semi-log Scale (Source: Metastock)

 

An operational update for the first three months of CY21 notes encouraging recovery in the sales revenue as domestic travel resumes. (First Quarter Operational Update) 

The 1HY21 report shows strong recovery in the retail segment and the refining business returning to profitability. (Viva Energy Results – Half Year ended 30 June 2021) 

The FY21 report shows recovered sales revenues and earnings recovered to pre-COVID levels. (Viva Energy Results – Financial Year ended 31 December 2021) 

❹ Refinery margins expand as the gap between the international price of refined products and the cost of crude oil widens. (Refining update and financial performance to 30 April 2022) 

1HY22 results show an exceptional refining performance with 747% EBITDA growth on PCP. (2022 Half Year Results Presentation) 

 

COVID-19 hit Viva energy hard 

COVID-19 had immediate impacts on Viva Energy’s business as local demand for fuel products significantly reduced. The financial performance of Viva Energy started to improve in 2021 as the lockdowns started to ease. 

It also received $40.6m in Fuel Security Services Payment (FSSP) from the Federal Government as part of the country’s long-term fuel security package (FSP), which was designed to support Australia’s refining industry because of its importance to the country’s broader energy security.  

Under the grant, Viva Energy will receive a minimum payment of 1 cent per litre for the production of primary transport fuels (gasoline, diesel and jet fuel) refined from crude oil at the Geelong Refinery. 

 

The Government wants the Geelong Refinery to thrive 

Australia’s refinery industry has been facing structural challenges in recent years, predominantly from the competition from Asian refinery imports. Asian producers benefit from more advanced and larger plants as well as a cheaper workforce and thus can produce larger quantities at cheaper prices.  

This has seen the number of Australian refineries decline from 6 in 2011 to only two continuing refineries today, Ampol’s facility in Brisbane and Viva Energy’s Geelong refinery in Victoria, leaving the country predominantly reliant on product imports from international refineries for the country’s fuel requirements. 

The situation has forced the Federal Government to take actions to ensure the viability of the country’s remaining refineries as they play a critical role in providing national energy security through substantial inventory positions and crude oil conversion capabilities. 

 

Viva Energy’s margins have recovered above pre-COVID levels 

1HY22 results were extremely strong as the company mentioned seeing a significant and sustained widening of refining margins. The global demand for refined products rapidly increased as the world economy opened up in 2022, while the supply side kept tightening due to the impacts of sanctions on Russian oil and reduced exports from China. 

During the reporting period, the Geelong refinery maintained its operations at near-capacity and took the most out of the current favourable business environment. The segment recorded a 747% EBITDA growth on PCP to $371m. 

 

The Retail segment is gaining prominence 

The retail, fuels and marketing segment showed an EBITDA increase of 14% on PCP to $253m. Retail sales volume increased by 1% as the soft market demand was more than offset by higher fuel prices. 

The company announced the acquisition of Coles Express in September 2022, which increases the retail segment’s share of Viva’s total revenues. The Coles Express is an established and profitable business, and the company expects it to have an EPS accretion of 11% to 18% and further earnings potential from convenience sales growth and synergies.  

 

Retail margins increase when refinery margins shrink 

What’s interesting about Viva Energy is that its retail margins increase when the fuel prices come down, which can partially offset the impacts of reduced refinery margins. The looming recession can decrease the demand for refined products. But we think the supply side will remain tight as long as the sanctions on Russian oil and reduced China exports remain in place, essentially limiting the downside to Viva’s refinery margins. 

 

Viva Energy’s share price is on an uptrend (Target of $3.00) 

VEA’s share price is currently retracing towards its long-term trendline (the blue line on the chart), where it will likely complete the leg C of an ABC Zigzag at $2.45 (shown on the chart). Therefore, we think prices near $2.40 are attractive with a target price level of $3.00. 

 

Stop loss at $2.40 

A confirmed break below $2.40 would suggest that the uptrend is broken. It may increase the chances of seeing lower prices in the short term. 

 

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