Z Energy posts $58m first-half loss as Covid-19 dents demand for fuel

Wednesday, 4 November 2020

Z Energy, the country’s largest fuel retailer, made a first-half year loss of $58 million from a profit of $28m last year, after it reduced prices to counter a slump in demand for fuel during the Covid-19 lockdown.

The energy company sold 23 per cent less petrol in the six months to September 30, but the impact on diesel was more muted, down 4 per cent, as essential services continued and businesses were more active once out of alert level 4.

Demand for jet fuel slumped 72 per cent as travel restrictions impacted on international and domestic flights, while demand for fuel oil dropped 79 per cent due to a decline in cruise ship visits.

To counter the slump in demand, the owner of Z and Caltex service stations cut its prices, which reduced its profit margin on fuel by 23 per cent. While jet fuel demand is yet to recover, retail and commercial diesel volumes are back to normal levels.

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To bolster future profits, Z Energy is cutting costs, taking $22m of structural operating costs and $14m of one-off costs out of the business in the first half of the year. The company said it is on track to reduce structural costs by $48m for the full year.

“We expect the second half of this financial year to be materially different to the first half,” chief executive Mike Bennetts said.

“We’ve proven we’re operationally and financially resilient to all but the most extreme impacts of Covid-19. Our focus for the second half is cementing the structural costs savings already identified while we continue to vigorously compete in both retail and commercial markets,” he said.

Chief financial officer Lindis Jones said Z Energy expected its 2022 results to benefit from $60m of cost savings as a result of the changes.

“The cost savings achieved not only help mitigate the financial impacts of Covid-19 this year but result in embedded efficiencies that will generate substantial, ongoing savings in future periods.” Jones said.

The company received a $3.4m Government wage subsidy, but said before applying, it had already cancelled $8m of employee bonuses and the final dividend for last year, which was expected to be around $90m. It made three Covid-related redundancies.

Marginal service stations are more likely to close due to lower fuel margins and reduced sales volumes due to Covid-19, the Bennetts said.

Z Energy raised $347m from its shareholders in June, which was used to pay $180m of bank debt, and it set aside $150m for the repayment of retail bonds due in November next year.

The equity raise and suspension of dividends until after September next year were conditions imposed by its bankers. Dividends were expected after its 2022 first half year.

Following the capital raise, the business has performed above expectations as alert levels haven’t lasted as long nor been as severe as expected, Bennetts said.

“We remain alert to the potential of additional and ongoing Covid-19 outbreaks like that seen in August, but believe we are otherwise well placed to benefit from the economic recovery in domestic tourism and commercial activity driving volume and market share increases,” he said.

“Our data indicates that Z’s market share is increasing,” he said.

Bennetts said he expects to post pre-tax profit on a replacement cost basis of between $235m and $265m for the full-year. On that basis, first-half profit fell 48 per cent to $95 million.

Z Energy shares rose 1 per cent to $2.93 shortly after the share market opened on Wednesday. The shares have slumped 33 per cent this year.