Viva Energy: Fuel Volumes Up Despite High Oil Prices and Soft Seasonal and Economic Conditions

Our AUD 3.35 fair value for no-moat Viva Energy VEA stands. Australia’s second-largest retailer of refined fuel reported relatively strong third-quarter 2023 fuel sales, up 4.7% over the previous corresponding period, and in line with the June 2023 quarter. This is a creditable outcome given strength in the oil price and generally softer seasonal and economic conditions.

We increase our 2023 EPS forecast by 10% to AUD 0.22, and our DPS forecast to AUD 0.16. The dividend equates to a healthy 5.8% fully franked yield at the current share price. Viva shares are down 12% since our August 2023 note and at AUD 2.74 are materially undervalued, in 4-star territory. Softening in Singapore Brent crack spread futures likely features, with quotes out to January 2024 at less than USD 5 per barrel, versus around USD 13 per barrel in the September 2023 quarter. Viva’s Geelong refinery margin is set with reference to the Singapore benchmark, on average having achieved a slight premium to it.

Third-quarter commercial and industrial fuel volumes increased 8% on the PCP to 2.7 billion liters, with margins maintained. This, and a 1.5 percentage point increase in convenience gross margin to 33.7%, countered a 3% decline in convenience fuel volumes to 1.1 billion liters.

The weak point for the quarter was refining, with crude oil intake down 40% to 6.1 million barrels due to extended maintenance. And despite a reasonable Geelong refiner margin of USD 8.50 per barrel, unaudited third-quarter 2023 refining EBITDA is estimated at a AUD 20 million loss. Positively, processing has been progressively restored and Viva is working to normalize refining and reduce shipping and operating costs which were elevated due to the maintenance. Refining on average has delivered around a third of group EBITDA, though with considerable volatility. Its relative importance should lessen upon completion of Viva’s AUD 1.15 billion acquisition of OTR Group to less than 20% of group EBITDA on average.