NZ Refining turns to first-half profit on margin improvement that may not be sustained

New Zealand Refining, the oil refinery controlled by its major customers, turned to a first-half profit as its margins recovered while warning the improvement may not be sustained in the face of excess global capacity.

Profit was $5.3 million in the six months ended June 30, from a loss of $2.4 million a year earlier, when its refinery margin shrank and the high New Zealand dollar eroded its processing fee revenue. Sales rose 12 percent to $126 million, the Marsden Point-based company said in a statement.

The gross refinery margin (GRM) recovered to a "relatively healthy" US$5.27 a barrel in the first half from US$4.36 a year earlier. That's still below the average GRM of $5.77 a barrel achieved in full-year 2012, which itself was down from 2011's US$6.11.

Processing fees, the largest contributor to the company's operating revenue, rose to $93.9 million in the latest half from about $78 million a year earlier.

Weighing on NZ Refining's GRM were weak economic growth in Europe and slower than expected growth in China, said chairman David Jackson. Added to that, global refining capacity "remains ahead of forecast oil demand" and reduced forecasts for that demand are "clearly colouring market sentiment."

The company's processing fee revenue was also hurt by a kiwi dollar that averaged 82 US cents in the first half, up from 80 cents a year earlier.

While the company's margins continued to improve in July, the recovery isn't expected to be sustained, Jackson said.

"There is still an excess of capacity in global refining and this will drive further margin volatility while the relative strength of the New Zealand dollar continues to pressure our earnings," he said.

The shares last traded at $2.25 on the NZX, valuing the company at $630 million, and have declined 11 percent this year.

His comments were echoed by chief executive Sjoerd Post, who described refining in the Asia Pacific region as "ultra-competitive, with new capacity coming on stream and more to come."

NZ Refining can influence its customer choices by "continuing to produce high quality 'on spec' products", a focus on reliability and "being more competitive on price," Post said.

NZ Refining will pay a first-half dividend of 2 cents a share, unchanged from a year earlier.

(BusinessDesk)