Refining margin boost for Caltex

A revival in the refining margin enabled Caltex's first-quarter net profit to surge to $190 million from $106 million a year earlier, boosted by inventory gains of $46 million, up from $37 million.

The earnings recovery comes in the wake of its decision to close its Kurnell refinery in Sydney from late next year, with the site to be converted to an import and distribution centre of refined oil product.

Earnings volatility from refining, combined with the poor operating economics of the plant, prompted the board to end refining in Sydney, joining Shell, which is to close its smaller Clyde refinery.

Along with buoyant sales of higher-margin petroleum products, Caltex's first-quarter earnings benefited from a turnaround in the performance of its refining and supply unit, which posted a profit before interest and tax of $43 million in the March quarter, a turnaround from the loss of $60 million in the same quarter last year.

The earnings rebound was underpinned by the net refining margin, which more than doubled to $US13.60 a barrel from $US6.10, it said.

The end of refining at Kurnell will free up significant cash, since Caltex will no longer need to invest heavily in capital works and ongoing maintenance at the ageing plant.

The prospect of higher dividend payouts in the future has pushed the shares higher since the start of the year, rallying from around $18 in late February to more than $22 for a time a few weeks later.

The shares gained 32¢ to close at $21.67 on Thursday.

Addressing shareholders at Thursday's annual meeting, Caltex chief executive Julian Segal said the company had a range of growth options to pursue.

"We will continue to focus on expanding our infrastructure to support our strong supply, distribution, sales and marketing capability," he said, "along with modest acquisitions as opportunities are identified."

Despite the strong first-quarter profit, investment bank Citi told its clients on Thursday it would maintain its "sell" recommendation on Caltex shares, which trade at a 45 per cent premium to its estimate that they are worth $14.70.

"Its [2015] price/earnings ratio of 14.2 times post-Kurnell closure is not attractive in our view compared to various retail/industrial [comparative companies], particularly considering there are execution risks, given earnings post Kurnell's closure will retain some volatility from [its Brisbane refinery at] Lytton, and also with potential for increased marketing competition," it told clients.

"We maintain our sell recommendation."

Deutsche Bank is also wary of Caltex shares at present levels, with a 12-month price target of $16.85. "Key risks include refiner margins, foreign exchange and operating cost reductions," it told clients.