Earnings Call: H1 2021

Aug 18, 2021

I would now like to hand the conference over to Ms. Naomi James, CEO. Please go ahead. Good morning, everyone, and welcome to Refining and Z's 2021 Interim Financial Results Briefing. I'm Naomi James, CEO of Refining and Z, and I'm joined by our CFO, Denise Jensen. I hope you're all keeping safe and well at home in your bubbles during this lockdown. Denise and I are thinking that there must be something about the timing of our results having done our last full year results in February when Auckland has been locked down. Before getting started, I draw your attention to the disclaimer upfront in the presentation on Slide 2. The briefing today will effectively be divided into 2 parts. The first, the briefing on our 2021 interim performance and the NA strategic review update on the import general conversion. Please turn to Slide 4 in the investor pack. Starting first with our performance in the first half, where the refining in Z team has delivered what we set out to achieve. In short, that was to operate cash neutral at the free floor, while providing the time and space to assist the import terminal option, negotiate commercial arrangements with customers and to ready our community and workforce for this change. We will go through the detail as we walk through the pack, but in summary, we have maintained our focus on safe operations and meeting our customer commitments. We have completed a major turnaround and the 4th statutory inspection of the CCR unit safely on time and below budget. And we continued our financial discipline to maintain cash neutral operations at the fee floor. This has enabled us to look to the future as an infrastructure business, negotiate a commercial agreement, which was competitive for our customers and also delivered fair value for shareholders from our infrastructure. We now have a mandate to progress to an import terminal model, having received strong shareholder support with 99% of shareholders voting in favor of the proposal, including each of the oil company shareholders. Please turn to Slide 5. This slide shows a snapshot of some of our key metrics. Our personal safety performance was strong. We delivered to customer plans And with the simplified refinery changes where we reduced capacity, changed maintenance philosophy and reduced headcount, we were able to fund the turnaround and maintain cash neutral operations at the feed floor with net debt closing flat at $230,000,000 Now to run through the details of our 3rd half twenty twenty one performance. Starting with safety in Slide 6, safety as we always do. We had no recordable cases in the first half of twenty twenty one, which means that we have not had a recordable personal safety incident for over 18 months. This is an outstanding result and more noteworthy for the fact that we completed a major turnaround during this period, a real testament to the skill and commitment of our people and the safety culture on display every day at our site. 2 process safety incidents were recorded in the period, with both being responded to quickly, resulting in no significant damage to the plant. The company recorded several unauthorized releases outside of consent where non compliant firefighting foam was used during recent fire turning exercises. With the company undertaking an independent investigation and taking prompt action to mitigate the effects of the discharge, further strengthen on-site control and undertaking testing to determine if any further treatment or remediation is required. From testing results to date, we have found that concentrations of contaminants discharged to the harbor were insignificant, and we are obtaining advice on what further remediation might be required on-site. During the period, we were granted a 35 year resource consent to operate both the refinery and import terminal operations at our Mardin Point site. As part of the re consenting process, the company undertook an extensive assessment of the environmental impacts associated with continued operations at Mardin Point, including the effects of our activities on the harbor, land, inequality and the surrounding community. Since this time, we have been engaging openly with our Inuit partners to share the active management plans that we have in place to ensure that we do not have a negative impact on our surrounding environment. The conditions of our consent include protections to maintain the high standards that we have in place. And for many of our team based up at Marathon Point, this is our community too. So we have a strong personal commitment to preserving and protecting the natural environment around us. Turning to Slide 7. The simplified refinery was implemented from the start of this year, reducing refinery capacity by around 18%. This change, coupled with the impact of the 4 week maintenance turnaround, which impacted operational availability, reduced the refinery throughput by around 15% compared to the previous corresponding period. Demand for jet fuel remains weak at around 40% of pre COVID levels due to the travel restrictions, which continue to impact upon wrap throughputs, although gasoline and diesel demand prior to the current lockdown had recovered to pre COVID levels. In terms of the impacts of this current lockdown, which of course is not covered by the period we're discussing today, it's simply too early to tell what effect this will have on demand at this stage. Turning to Slide 8. Very little has changed in the border environment in which we operate. Refining margins continue to be weak and excess refining capacity in the Asia Pacific region remains. While refining margins remain volatile, we have seen limited improvement in the supplydemand balance, and expert analysts agreed that we should not expect a significant improvement in margins in the near term. The Singapore complex margin averaged negative US209 dollars per barrel, with the uplift earned by Refining NZ strong at US5.28 dollars per barrel due to lower fuel and loss compared with the previous corresponding period when the plant was operated on a cyclical basis, coupled with a lower fuel oil make in the current half and a cheaper crude state relative to the Dubai benchmark. The refinery earned an average GRM for the year of US3.19 dollars per barrel, which was below the fee floor throughout the half, and our customers made fee floor top up payments of $29,000,000 in the first half. GRM has now remained below the fee floor throughout the 18 months ended 30 June 2021, and our customers have made C4 subsidy payments amounting to around $118,000,000 over this period of time. I will now hand over to Denise to take us through the financials. Thank you, Naomi, and good morning, everybody. So let's pick up on Slide 9 and start with a snapshot of the financial results. Processing fee revenue was at the C4, as Naomi has mentioned, for the 6 months ended 30th June 2021 as it was in the previous corresponding period. Total refining revenue was down around $6,000,000 due to the constrained supply of natural gas in the New Zealand market, which, of course, we procure on behalf of our customers. Although pipeline volumes were down by 5%, infrastructure revenues were up by $2,500,000 due to an additional $5,000,000 revenue earned from the import of refined products into Maison Point by our customers during the 4 week maintenance turnaround. Our total revenue was in line with the corresponding period. Adjusted EBITDA, which really means EBITDA adjusted for noncash items, was up 70% or $15,000,000 higher, reflecting the impact of the simplification changes we have made at the start of the year, and I'll come back to this shortly. CapEx was largely the same as the previous corresponding period at around $21,000,000 of which $12,000,000 was spent on the maintenance turnaround, including the 3rd statutory inspection of the CCR unit. And of course, as Naomi mentioned, that was completed below budget. The changes we made to the operating model, coupled with strong financial discipline, enabled us to maintain cash neutral operations at the seafloor with net debt closing at 230,000,000 dollars Overall, we report a net loss after tax of €4,900,000 compared to the loss of €186,000,000 in the previous year, which, of course, included a noncash impairment of the signing asset of around €158,000,000 dollars So now if we could just turn to Slide 10. This slide really provides a waterfall between EBITDA for the 6 months ended 30th June 2021 to the previous corresponding period. And you'll see that overall EBITDA has increased by 169 percent or around $26,000,000 due to the successful delivery of our plans. You can see the split between the margin and volume impacts on refining revenue, noting that the margin was higher in the current period, but still below the fee floor as it was in the corresponding prior period. Our customers provided $29,000,000 with the fee floor subsidy payments, increasing the gross refining margin by around US2.27 dollars per barrel, which, of course, protected us from the full impact of that weaker business environment. To see the benefit of the refinery simplification on our cost base, with savings of around $14,000,000 due to reduced variable costs, primarily electricity, and the impacts of other changes such as the campaign maintenance approach that we have adopted that and also the 25% reduction in our staff numbers on-site. As Naomi mentioned earlier, the refinery simplification really was necessary to enable us to maintain net cash neutral operations at the seafloor. In parallel, we've also undertaken a balance sheet optimization project, which included making offers to pensioner members of both our defined benefit pension plan and our post retirement medical schemes to convert the benefit entitlements for cash lump sums. A large number of our pensioners chose to accept the offer on an actuarial mutual term, which reduced the overall gross balance sheet liabilities by around $22,000,000 which resulted in a settlement gain of around $9,000,000 being reported in EBITDA, which is really due to the difference between the lower risk free discounting rate used for financial reporting purposes. And on that, I'll hand back to Naomi to provide a strategic review update. Thanks, Denise. We'll now move into the second achieved in the last 6 months to progress strategic review outcomes. We reached in principle agreement in February with BP followed by Z Energy in May and then well progressed now with Mobile. We received strong shareholder support at the special meeting held on 6 August with 99% voting in favor of the proposed import terminal model, including Noble, BP and Z Energy, our oil company shareholders. This gives us a mandate from shareholders to finalize customer negotiations and for the Board to proceed to a final decision. Since the date, we have announced this morning that we have received consent from all of our lenders for the conversion and signed facility agreements to secure the funding for conversion costs. These are subject to satisfaction of conditions precedent such as signing of terminal services agreements with each of our customers and a final investment decision by the Board. Santander Engineering and development and detailed planning work is now well progressed with a strong focus as we prepare for a final decision on supporting our people through the change. We have also completed our initial assessment of potential mark and point repurchasing options with a number of options being progressed, and we'll talk to this more shortly. This means we remain on track for a final investment decision around the end of September this year, which would enable a conversion to occur by mid-twenty 22. Turning now to Slide 13. This slide presents the stages of our strategic review to this point as well as those still to come. The key aspect for us to finalize before our final investment decision is taken is negotiation of binding terminal services agreements with our customers consistent with the terms approved by shareholders as well as the detailed planning required to confirm conversion plans and timing. And we are working to complete both of these by around the end of September. Once a final investment decision is made, the next phase is being focused on running the refinery through to closure and processing and cleaning out the product on-site as well as undertaking the work needed for commencement of terminal operations and preparing our organization and workforce to operate as a terminal, decommission the refinery and support the transition of our staff through this change. Following the refinery closure, the decommissioning works will continue for around 2 years and terminal upgrade works for 5 to 6 years. We understand that the transition to an import terminal under this time will involve significant change for our highly capable employees who have been committed to operating the refinery safely and to a high standard over many, many years. And I want to once again thank our whole team for their professionalism and dedication to maintaining safe operations throughout this period of change for us all. We remain focused on supporting our workforce through this transition and are continuing to work with members of the refinery transition working group, including central government, Northland's councils and regional development authorities, Ewing and unions to put in place the plans needed to support this transition. Turning to Slide 14. We have now completed our initial assessment of the range of opportunities to repurpose the Marden Point site. There is a very long list of opportunities raised, and we have focused on those opportunities that have near return potential, including to create jobs and economic development in Northland as well as those opportunities to utilize Markham Point's unique capabilities to support the decarbonization of transport fuels over time. We're continuing to negotiate with customers additional private storage arrangements, which would increase our utilization of existing tank capacity at Marsden Point and provide incremental returns to shareholders. We also remain ready to support any government measures to support minimum stockholding levels in New Zealand. We are also exploring opportunities for other imports into Martin Point, such as very low sulfur fuel oil and bitumen. And we have recommenced work on our Murangarara solar project to determine the best approach to secure competitive long term electricity supplied to the terminal. We are engaging with the New Zealand government in relation to their proposed biofuels mandate and the opportunity to manufacture sustainable aviation fuel at Marston Point in the future, which will be needed to decarbonize Volvo Aviation as well as opportunities to use Mardin Point infrastructure to support biofuel imports. And longer term, we're partly interested in the potential for hydrogen production, import for storage at Marston Point, looking at the opportunity to do that at Marston Point with its export and import capacity and proximity to the largest population base in New Zealand. Each of these opportunities is likely to involve partnership with us as we reposition our company as an infrastructure business, underpinned by long term customer contracts and a disciplined approach to investment. And each of the opportunities have different time horizons, giving our company a long term feedback contributing to New Zealand's energy needs. That concludes our formal presentation for today. And I will now hand back to the operator for questions. Thank Your first question comes from Andrew Harvey Green from Faucette Barr. Please go ahead. Good morning, Naomi and Denise. A couple of questions from me. First one is actually just around the discussions with the customers and I guess in particular mobile, the one we still haven't heard from. And is it right probably for us to assume that unlikely to have an imprint pull agreement announced from them, it's going to be going straight to the sort of formal TSA agreement? And in timing, I got the sense you're talking about the back end of September. So we shouldn't necessarily expect any announcement until then. Andrew, yes, thanks for the question. So in terms of will there be a term sheet or do we go straight to general services agreement? I'd just say there, watch the space. We obviously don't comment on specifics of customer negotiations as they're continuing. But what I can say is we're working with all 3, including mobile, to get to a point where we've got those detailed bonding terminalling services agreements in place by the end of September. And so to the second part of your question, the timing one and when that's all likely to come together, both the customer agreements as well as a board decision, I think your assumption there is right that that will happen at the same time when we've been able to finalize all the aspects. And what we are working to, timing wise right now, is around the end of September. So call back in September, start of early October. Okay. That's great. Just a couple of things. I guess when the results itself, the CapEx number seems to be a little bit lighter than what I was looking for for the first half. And I think some a chunk of that's due to the usage coming in below budget. Are you able to just give an idea of what Kirk Xfer is left to go for the rest of this year? In terms of just operating the refinery there? I think we have passed that one to yes, I'm not pass that one to Denise to respond them. Yes. Good morning, Andrew. Look, you're right. I mean, we were very pleased that the budgetary turnaround did come in under what we were expecting from a budget perspective. As I sort of look forward to the balance of the year, obviously, we'll be spending this in the second half given that we don't have that major turnaround. And the results, we do say that we would spend about $12,000,000 on that turnaround in this half. So I would sort of guide you towards at least somewhat we spent in the first half. And if you adjust for that turnaround, that would be what we're planning for. Got it. That sort of sounds around about 10 ish based on what you did in the first half to non turnaround there? Maybe slightly higher than that, Andrew, I think. Yes. 2nd question, our next question I just had was just around the redundancy costs and I guess the treatment of the defined benefit obligations and the accounting around that. I'm right in saying that all of those costs, all the cash has gone out and those redundancy costs are sort of built into that gain that we had because it looked like there wasn't much in the OpEx side of things to show up for that. Just on the defined benefit, obviously, there's look, sitting within the defined benefit itself, there are cash reserves and investments to enable those liabilities to be paid out from the fund itself. Now really what flows through the P and L into EBITDA, it's because we have a different discounting rate for, obviously, what was actuarially neutral for the members as they were paid out via complete entitlements on the fund, and it's based on long term investment rates being the discounting factor that's applied, whereas for accounting purposes, we have to apply a risk free rate, which is significantly lower than that. Hence, when you reduce the liability, you get a flow through into the P and L, which is a settlement gain. So the redundancy costs on I think that's a separate question. So the redundancies that were made as part of the simplification changes at the start of the year were actually provided in the full year results in 2020. And obviously, some of those net cash flow paid out from the company earlier on in this year. Okay. That makes sense. And finally, one is that I'm afraid another accounting on AAMI, the next shift in terms of going through your accounts. I'm right in saying that the impairment that will go against the refinery, that will be based on the FID decision. So assuming that goes through to point to a conversion, that impairment will take place this financial year as opposed to the next financial year? That's right, Andrew. So I think at the moment, the final investment decision really is the trigger to record an impairment of those refining assets. And as we sort of announced and detailed in the conversion proposal that was presented to shareholders, we will actually, at the same time, be looking to revalue the infrastructure assets, if you like, that would fit within channel infrastructure. So there was as a final business decision is made in September, there will be some work to be done to flow that through in the current year's financial results. That's true. Okay. That was all I had. Thank you. Your next question comes from Neville Lewis from Jarden. Please go ahead. Good morning, team. Can you hear me? I can. Hi, Neville. You're coming through here. Yes. Very good. Thank you. Okay. Just 2 from me. And the first one really is just to confirm that you expect to continue cash neutral operation for the rest of the year. I think that's implied in what you said. But also that if you do proceed to FID, the cash neutral operation will continue through up to the point of conversion mid-twenty 22? Yes. So the thing I think to highlight there, Neville, and why we are yet to give guidance around this is from a refinery operations perspective, that absolutely is the case. What we will start to see post FID is increasing spend in preparing for terminal operations. And just as we finalize those plans, we'll get to that clearer view on the exact timing of that spend profile. So I think we've given a view in the explanatory booklet on sort of pre conversion, post conversion splits and things like that. We're just continuing as we finalize the detailed planning to get the cash timing and profile for that finalized. Right. But it's in terms of how we think about it, it's clean and correct to think of it as sort of cash neutral operation for the refinery and all any additional costs during the period between now and the 2022 has been included in the costing for the $200,000,000 to $220,000,000 CapEx you've already outlined as indicative for the conversion cost? Yes. Great. Great. That's useful. And the second question is in respect of the sort of the private storage option, which appears, but I guess as applies to but I don't know there are as well. The near term CapEx outlay opportunities, obviously, you've got bank support for the conversion, but it's limited to the conversion. What is your thinking now about the financing of those potential near term expansion options around storage and the NRR? So really what we're looking to do there, Neville, is first, get to a final view on the level and timing of that spend. We've indicated on private storage in the shareholder materials that we've seen that at the most up to $60,000,000 if all customers were to take that up. That is spread over a period of time. And with those customer negotiations are also ongoing, so we don't have a final view on how much of that might ultimately be required or when. So once we have come to a conclusion on that, we will look at what's the best funding options for that. We've had some preliminary discussions with lenders on that, but keeping sort of an open mind just as that comes together and reaches a conclusion in the negotiation. And we're in the right, a bit too early to tell there. I think, Neville, we've obviously previously with that project, looked at doing more of a sort of an off balance sheet financing type structure. There's also partnership options with that project. So step 1 is really getting clear on the best electricity supply options, whether that's contracting the market or doing something ourselves. And then we'll follow the questions around commercial structure, ownership structure and funding, but we've still got a little bit to go before debt to that stage. Great. Just some follow on on that. In terms of the private storage, I mean, what is your equivalent FID time frame for that, do you think? And when would the completion of that project, however it turns out, when would that be likely? Yes. It is still very much work in progress level. They as it really depends on how much capacity is required and therefore which tanks are involved and the level of conversion works involved. But it's certainly fair to say those tanks will become available after the commencement of import terminal operations. We'd expect certainly within a year of that, But the exact timing is very dependent on finalizing how much capacity is needed and then matching our infrastructure plans to those requirements. Right. And I guess just the last follow on to that. I form the impression that the last discussion of this that the banks probably would limit their lending to the extent of the conversion. But you said you are having discussions, active discussions with them regarding the private storage options. So it's still on the table where those could be get funded. Yes. We certainly haven't we'll leave that out. And the key thing much like, obviously, what we've done with the base shared terminal is making sure we've got contracts that are going to underwrite the return on those investments. And so once we get clear on that, from a customer perspective, I think there'll be a range of options for funding it, and we'll work through what we think is the best way to go. Okay. Thank you. That's all There are no further questions at this time. I'll now hand back to Ms. James for closing remarks. Thank you. And Denise and I would like to thank all of you for your time this morning. Stay safe. Take care in this period of lockdown, and thank you very much for joining us today. Thanks all. Bye for now. That does conclude our conference call today. Thank you for participating. You may now disconnect.