Dollar drop too late for Caltex

The sudden drop in the Australian dollar has arrived too late for Caltex (CTX).

Last year it finally opted to shut down its Kurnell refinery in 2014, converting it into an import facility, after deciding the ageing facility could no longer compete with the rapid growth of capacity from new Asian mega-refineries.

Currency swings have always been a double-edged sword for Caltex. In the past six months, for example, the drop in the Aussie dollar has lifted short term costs for crude and product payables, eating into first-half earnings.

But the company expects that in the medium term, the weaker currency would boost the outlook for its refining margins.

While the shift out of refining is a deliberate attempt to stabilise earnings as it transforms itself into an importer and marketer, this will not make it immune from currency swings.

Caltex will need to rely more heavily on financial hedging as that natural hedge from refining diminishes.

The interim earnings, delivered this morning, came in at the higher end of the downgraded guidance of two months ago and was warmly received by investors.

On a replacement cost basis, the $171 million first-half result was down 13% on last year’s $197 million, impacted by short-term foreign exchange losses and an outage at its Brisbane refinery.

Exiting refining has been politically sensitive but ultimately inevitable given the size of the Austalian market.

Caltex, like Shell, ultimately will run marketing and distribution businesses in Australia, which could also deliver greater control over the two big retailers.

At the moment, Caltex delivers fuel to Woolworths and Coles, which then undercuts the refiner at its own retail operations through shopper discounts (see Our top 10 takeover targets).