Caltex warns of lower profit

The headline is ominous but the effect is mild. Caltex announced it would report lower than expected half year results from its refining business, a result of fluctuating oil prices and costs associated with the reconfiguration of the Kurnell refinery. Crucially, the marketing business, which includes the network of petrol stations that Caltex owns and supplies, is expected to tick along nicely with earnings up 7-8% in the first half.

As explained in Caltex: a fuel’s errand on 22 Oct 13 (Buy – $18.74), Caltex is closing its Kurnell refinery, a perpetual source of losses, and turning it into a fuel import terminal. The transformation will be completed by year’s end and our investment thesis remains on track.

The downgrade – half yearly results are expected to be $140-170m rather than the $195m previously flagged – are a result of losses worth $65-85m from refining. Yet that business will soon shrink dramatically. The marketing business, by comparison, should report EBIT of almost $400m. By closing Kurnell, Caltex is set to become a higher quality business. For that reason, we’d happily upgrade to Buy if the share price fell another 10% or so. For now, with the price steady since Caltex: Results 2013 from 11 Mar 14 (Hold – $21.62), we’re sticking with HOLD.