Caltex Australia

Earlier this year Caltex wrote down the value of its major refining terminals by $1.5bn to just $340m due to the high Aussie dollar, high running costs and cheap imports primarily from Singapore. Refineries in Australia have reportedly dropped from eight 10 years ago to just five, and refining capacity has dropped by a third. That's an industry in decline if ever there were one.

Caltex is now focusing on oil retailing and distribution, which is less capital intensive than running oil refineries. Over the past five years Caltex has struggled to produce a scrap of free cashflow, and was forced to raise more debt to fund the closure of the Kurnell refinery, as we discussed in Old-time banker studies Caltex Notes on 6 Aug 12 (Avoid – $100).

It remains to be seen whether Caltex can transform into a more profitable and reliable business, but we are unlikely to be interested in upgrading Caltex unless the company was trading below book value–about half the current share price. AVOID.