CHI - Channel Infrastructure Ltd (NZR)

[hogie]

A recent news item has NZR pondering giving up refining and just using the facility for storage and distribution of refined products.

In the interests of a smooth transition to the changed realities of the brave new world Marilyn offers an out-there solution.

The refinery was built in the Think Big era to crack sour Iranian crude as part of the then mutton for oil trade.

Why not go back to cracking Iranian Sour? I am sure the Mad Mullahs would sell it cheap for the cash flow.

Of course Nutty Yahoo and the fervent Zionists who surround Donald Trump would be furious. But the key player Donald would be otherwise occupied pushing a cart around American cities crying "bring out your dead".

Boop boop de do
Marilyn

Perhaps the management are thinking "if Rio Tinto can hold the government to ransom, maybe we can too?"

[RTM]

A recent news item has NZR pondering giving up refining and just using the facility for storage and distribution of refined products.


Boop boop de do
Marilyn

I think you’ll find the press got their info from here.
https://www.nzx.com/announcements/351663

[macduffy]

Sorry, Marilyn, but the refinery was built long before the Think Big era which was in response to the oil shocks of the 1970's. New Zealand Refining Ltd was floated in the early 1960's. I know this because I worked on the IPO - in a very junior capacity!

[SailorRob]

Sorry, Marilyn, but the refinery was built long before the Think Big era which was in response to the oil shocks of the 1970's. New Zealand Refining Ltd was floated in the early 1960's. I know this because I worked on the IPO - in a very junior capacity!

Marilyn is technically wrong but practically correct.

[Waikaka]

Been picking up more NZR so it has been sneaking up in size in my portfolio. Currently about 8%. So always good to re-kick the tyres and put down some ideas.

First off seems sensible to idle the plant but keep it ready to restart when demand picks up again. Pretty impressed they can make that situation a "cash neutral spend rate". I see they have claimed $2,547,456.00 for 364 employees so am sure that will help.

I have always thought NZR was in a bit of unique position as the only refinery in NZ, a decent piece of critical infrastructure supporting everything from maintaining roads (bitumen) to sulphur for fertiliser and about 6.5% of Northlands GDP. So while some but not all Australian, USA and European refineries had been idled or decommissioned, the few survivors might have special status. But perhaps being squeezed by structural pressures (labour cost, plant upgrade costs and environmental regulations) in comparison with the Mega-refineries in Asia is just too much. The wording in the strategic review means it is worth looking at what that might mean.

So the meat of the recent 'strategic review announcement is here:

The Strategic Review will look at opportunities to improve the competitiveness of refining operations and options to separate the refining and infrastructure assets or convert to a fuel import business model. The review will also look at the capital structure required for the preferred option to maximise value for shareholders.

First off hard to see them doing anything to make it more competitive in any significant way. Seems like about 60% of the fixed running costs of the refinery are in labour costs and realistically they cant change that much.

Next is to separate the refinery from the infrastructure.
Not the preferred option for me but I can see the appeal. What infrastructure is left when you exclude the business of cracking crude?

A whopping 38% of NZ oil storage capacity is at Marsden in about 126 tanks. Sensible maintenance program in place.
There is the free hold land and foreshore leases.
Jetties and loading kit
RAP
and operates but doesn't own Wiri tank farm. Seems like the $500k expense is on the books of leasing the Wiri tank farm (might need to dig into this)

Adds up to $1,171,301 property and plant (how much would be property?)

From the 2019 annual report 'distribution' contributed 14% of total revenue but 35% of the earnings.

I suspect that turning it into an importing facility might well be a pretty profitable situation.

Subtracting debt off total assets still leaves a decent margin of safety at these prices so still happy to pick up a little more but will stop at 10% of portfolio because of ongoing uncertainty.

[Waikaka]

I suspect RAP as a monopoly piece of infrastructure might well end up with a controlled tariff as per when Firstgas bought the Maui Pipeline.

Might need to read up on it to try and get an idea of what the value of Oil Distribution co might be.

[SailorRob]

Been picking up more NZR so it has been sneaking up in size in my portfolio. Currently about 8%. So always good to re-kick the tyres and put down some ideas.

First off seems sensible to idle the plant but keep it ready to restart when demand picks up again. Pretty impressed they can make that situation a "cash neutral spend rate". I see they have claimed $2,547,456.00 for 364 employees so am sure that will help.

I have always thought NZR was in a bit of unique position as the only refinery in NZ, a decent piece of critical infrastructure supporting everything from maintaining roads (bitumen) to sulphur for fertiliser and about 6.5% of Northlands GDP. So while some but not all Australian, USA and European refineries had been idled or decommissioned, the few survivors might have special status. But perhaps being squeezed by structural pressures (labour cost, plant upgrade costs and environmental regulations) in comparison with the Mega-refineries in Asia is just too much. The wording in the strategic review means it is worth looking at what that might mean.

So the meat of the recent 'strategic review announcement is here:

The Strategic Review will look at opportunities to improve the competitiveness of refining operations and options to separate the refining and infrastructure assets or convert to a fuel import business model. The review will also look at the capital structure required for the preferred option to maximise value for shareholders.

First off hard to see them doing anything to make it more competitive in any significant way. Seems like about 60% of the fixed running costs of the refinery are in labour costs and realistically they cant change that much.

Next is to separate the refinery from the infrastructure.
Not the preferred option for me but I can see the appeal. What infrastructure is left when you exclude the business of cracking crude?

A whopping 38% of NZ oil storage capacity is at Marsden in about 126 tanks. Sensible maintenance program in place.
There is the free hold land and foreshore leases.
Jetties and loading kit
RAP
and operates but doesn't own Wiri tank farm. Seems like the $500k expense is on the books of leasing the Wiri tank farm (might need to dig into this)

Adds up to $1,171,301 property and plant (how much would be property?)

From the 2019 annual report 'distribution' contributed 14% of total revenue but 35% of the earnings.

I suspect that turning it into an importing facility might well be a pretty profitable situation.

Subtracting debt off total assets still leaves a decent margin of safety at these prices so still happy to pick up a little more but will stop at 10% of portfolio because of ongoing uncertainty.

How do you get cash neutral with a subsidy of 140 million dollars from the owners/customers. Granted it may not end up at the full 140 for the year but any cash neutrality is nonsense when you are including a subsidy. Furthermore the 100 million of depreciation every year is a very real cash expense, may be saved this year but it's just s deferral. So the cash neutral position is in reality a cash loss of between 1 and 200 million dollars.

[bull....]

Been picking up more NZR so it has been sneaking up in size in my portfolio. Currently about 8%. So always good to re-kick the tyres and put down some ideas.

First off seems sensible to idle the plant but keep it ready to restart when demand picks up again. Pretty impressed they can make that situation a "cash neutral spend rate". I see they have claimed $2,547,456.00 for 364 employees so am sure that will help.

I have always thought NZR was in a bit of unique position as the only refinery in NZ, a decent piece of critical infrastructure supporting everything from maintaining roads (bitumen) to sulphur for fertiliser and about 6.5% of Northlands GDP. So while some but not all Australian, USA and European refineries had been idled or decommissioned, the few survivors might have special status. But perhaps being squeezed by structural pressures (labour cost, plant upgrade costs and environmental regulations) in comparison with the Mega-refineries in Asia is just too much. The wording in the strategic review means it is worth looking at what that might mean.

So the meat of the recent 'strategic review announcement is here:

The Strategic Review will look at opportunities to improve the competitiveness of refining operations and options to separate the refining and infrastructure assets or convert to a fuel import business model. The review will also look at the capital structure required for the preferred option to maximise value for shareholders.

First off hard to see them doing anything to make it more competitive in any significant way. Seems like about 60% of the fixed running costs of the refinery are in labour costs and realistically they cant change that much.

Next is to separate the refinery from the infrastructure.
Not the preferred option for me but I can see the appeal. What infrastructure is left when you exclude the business of cracking crude?

A whopping 38% of NZ oil storage capacity is at Marsden in about 126 tanks. Sensible maintenance program in place.
There is the free hold land and foreshore leases.
Jetties and loading kit
RAP
and operates but doesn't own Wiri tank farm. Seems like the $500k expense is on the books of leasing the Wiri tank farm (might need to dig into this)

Adds up to $1,171,301 property and plant (how much would be property?)

From the 2019 annual report 'distribution' contributed 14% of total revenue but 35% of the earnings.

I suspect that turning it into an importing facility might well be a pretty profitable situation.

Subtracting debt off total assets still leaves a decent margin of safety at these prices so still happy to pick up a little more but will stop at 10% of portfolio because of ongoing uncertainty.

your certainly a die hard supporter.

anyway considering all there cap exp before was stay in business expense and not growth as they pedaled to the masses.
now they are throwing in the towel admitting defeat due to market conditions and the fact oil majors realise the current environment means they will be paying NZR floor subsidies for a long time (clearly the thousands they threw at there market experts to tell them everything was rosy was a waste of money) means they are conducting a strategic review under the banner of covid ( as good a reason as any) to work out what to do so the oil majors can get around there subsidy obligations.
The important thing to remember is the strategic review is for the benefit of the oil majors not small fry share holders.

[SailorRob]

your certainly a die hard supporter.

anyway considering all there cap exp before was stay in business expense and not growth as they pedaled to the masses.
now they are throwing in the towel admitting defeat due to market conditions and the fact oil majors realise the current environment means they will be paying NZR floor subsidies for a long time (clearly the thousands they threw at there market experts to tell them everything was rosy was a waste of money) means they are conducting a strategic review under the banner of covid ( as good a reason as any) to work out what to do so the oil majors can get around there subsidy obligations.
The important thing to remember is the strategic review is for the benefit of the oil majors not small fry share holders.

Dead right Bull. Return on Invested Capital over the 10 year cycle has been abysmal.

Using EBITDA in the annual reports is criminal for a business like this. Maybe EBITDAC is more appropriate, Interest, Tax, Depreciation, Amortisation and COVID!

[Waikaka]

Suppose that is part of the problem, has to be a remarkably unpopular business with perpetually disappointed shareholders to get this cheap.

Having had a review, plenty of risks but at this price I am happy to be rolling around by myself in the gutter with this one.

Some companies on the NZX I think are going to have seriously challenged balance sheets seem overvalued and I am honestly a bit lost with Covid's impacts on a range of companies in my portfolio.

However as long as the business is solid(ish) I am happy to keep modestly buying.