CHI - Channel Infrastructure Ltd (NZR)

[Mya]

It's not a guaranteed permanent thing but sounds like it'll be at least a year. They aren't going to commit to anything permanent until they've made internal decisions on the future of the refinery, but perhaps the reduction in domestic demand of jet fuel for the next 1-2 years was enough to tip the already struggling NZR over the edge.

[Scrunch]

It's not a guaranteed permanent thing but sounds like it'll be at least a year. They aren't going to commit to anything permanent until they've made internal decisions on the future of the refinery, but perhaps the reduction in domestic demand of jet fuel for the next 1-2 years was enough to tip the already struggling NZR over the edge.

A long article about NZR covering the new CEO's transition to NZ including discussion about the potential future options.
https://www.msn.com/en-nz/money/news...cid=spartanntp

[Joshuatree]

Thanks Scrunch a good read.Refineries fallen on hard times.Some desirable land there.

Options
Improve current refining model

After refinery business model, {including processing and distribution agreements}

Separate refining and infrastructure assets{change structure and funding}

Convert to an import terminal {new commercial arrangements}

[peat]

yes a good read , thank you
The refinery has a good chance of being mothballed by the seems , and it looks like shes the one brought in to do it. her teeth aren't as big as Jacindas but still a bit scary.
I cant imagine Labour throwing any money the refinery's way even on the basis of security of supply though because they have been so anti fossil fuels. Lots of people are still buying petrol and diesel vehicles though and hoping to run them for 10 years or more so eco is all well and good but unless the costs of EV's themselves come down people will still keep using ICE and its oil derived combustants.
Batteries are getting cheaper thought it seems see the link I just posted in Tesla thread.

[Mya]

So NZR are undertaking a strategy review currently and are planning on having a decision made by the end of June. They are considering 4 different options (continue as usual, 2 different options of reduced operations including an on/off rotating shift roster, and last option of turning the plant into a terminal). The smart money at the moment is on one of the reduced operations options going forward to tread water until jet fuel demand starts to pick up again after the border opens.

[Sideshow Bob]

Not great reading.

https://www.nzx.com/announcements/353536


RNZ Operational Update - March-April 2020

22/5/2020, 9:33 amMKTUPDTE

HIGHLIGHTS
• The Company operated on a cash neutral basis during the COVID-19 lockdown and continues to plan to run cash neutral through FY20.

• Refining NZ responded quickly to the COVID-19 situation to agree arrangements with customers to operate the refinery on a rotating basis in response to significant fuel demand reductions.

• COVID-19 customer arrangements have been extended to the end of August 2020.

• Gross Refining Margin (GRM) was USD 0.67 per barrel and Processing Fee revenue was NZD 23.7 million, predominantly Fee Floor payments of NZD 20.1 million.
• Refinery throughput for March/April was 4.7 million barrels (33% lower than January/February). Refinery to Auckland Pipeline (RAP) throughput for March/April was 2.0 million barrels (44% lower than January/February).
• Process and personal safety performance remained excellent with no Tier 1 or Tier 2 process safety events or recordable injuries.
• Refining NZ deferred all non-essential activity due to the current environment. Capex estimates for 2020 reduced from $70 million to $40 million, including deferral of the maintenance turnaround of the main crude distiller and the gasoline manufacturing unit until March 2021 (from May 2020).

• Refining NZ net debt was $252 million as at the end April reflecting cash neutral operations at the Fee Floor since moving to operate the refinery on a rotating basis.
• Refining NZ extended and expanded its bank facilities in March and its total available debt funding facilities amount to $400 million (including the Company’s $75 million subordinated notes on issue) with no significant maturities until March 2022.
• Workstreams for the major Strategic Review are ongoing and proceeding to schedule. Refining NZ expects to provide an update on the Strategic Review process in June 2020.
COMMENTARY
Refining NZ agreed with its customers in March to change the way it operated the refinery in response to the unprecedented fuel demand reduction, which was caused by global COVID-19 travel and transport restrictions. The refinery’s processing facilities have been operated on a rotating basis through April to enable production at substantially lower rates.
New Zealand refined fuel demand fell to approximately 20% of pre-lockdown levels during Alert Level 4 COVID-19 travel and transport restrictions. Gasoline and diesel demand recovered during Alert Level 3 and then further into Alert Level 2 to be circa 60% and 80% of pre-lockdown demand respectively at the date of this Update. However, jet fuel demand remains low at approximately 25% of pre-lockdown levels. Refining NZ has adopted strategies aimed at minimising jet fuel production while meeting gasoline and diesel requirements.
 
The COVID-19 mode of operating has been extended to the end of August. This includes several weeks in July and August when all the processing units will be put on standby to balance fuel supply across the country.

The refinery throughput was 4.7 million barrels during March/April. The GRM was low at USD 0.67 per barrel, reflecting a weak Singapore Dubai complex margin of USD 0.19 per barrel and the impact of the rotating mode of operation. The Company’s Processing Fee revenue was NZD 23.7 million, predominantly made up of Fee Floor payments of NZD 20.1 million.
During the Level 4 lockdown period, Refinery to Auckland Pipeline (RAP) throughput was less than 30% of pre-lockdown levels. RAP throughput during Level 2 restrictions has recovered to approximately 60% of pre lockdown levels.
As part of the Company’s response to COVID-19, all major maintenance was suspended, except where required to maintain Refining NZ’s uncompromising focus on health and safety. The main change has been the deferral of the main crude distiller and gasoline manufacturing unit maintenance turnaround, which is now scheduled to occur in March 2021. Meanwhile, a partial catalyst change on the hydrocracking facility was completed as planned in March and other critical maintenance activities were completed in April, to enable the continued safe operation of plant until the rescheduled turnaround date.
As a result, capex guidance for the year has been reduced from $70 million to $40 million. The Company operated on a cash neutral basis during the COVID-19 lockdown and continues to plan to operate cash neutral through the year, when factoring in the Processing Fee Floor and reduced RAP income. Net debt was $252 million at the end of April. Refining NZ extended and expanded its bank facilities in March and its total available debt funding facilities amount to $400 million (including the Company’s $75 million subordinated notes on issue) with no significant maturities until March 2022.

The refinery continued to operate as an essential service throughout COVID Alert Levels 3 and 4. Refining NZ established a Co-ordinated Incident Management System structure to implement business continuity plans during this time and this continues at Level 2.
Refining NZ’s excellent health, safety and environment performance continued in March and April, with no Tier 1 or Tier 2 process safety events. There were again no recordable injuries and the recordable injury frequency is 0.28 per 200,000 work hours.
Workstreams for the major Strategic Review announced to the market on 15 April 2020 are ongoing and proceeding to schedule. Refining NZ expects to provide an update on the Strategic Review process in June 2020.

[traineeinvestor]

Not great reading.

https://www.nzx.com/announcements/353536


RNZ Operational Update - March-April 2020

22/5/2020, 9:33 amMKTUPDTE

HIGHLIGHTS
• The Company operated on a cash neutral basis during the COVID-19 lockdown and continues to plan to run cash neutral through FY20.

• Refining NZ responded quickly to the COVID-19 situation to agree arrangements with customers to operate the refinery on a rotating basis in response to significant fuel demand reductions.

• COVID-19 customer arrangements have been extended to the end of August 2020.

• Gross Refining Margin (GRM) was USD 0.67 per barrel and Processing Fee revenue was NZD 23.7 million, predominantly Fee Floor payments of NZD 20.1 million.
• Refinery throughput for March/April was 4.7 million barrels (33% lower than January/February). Refinery to Auckland Pipeline (RAP) throughput for March/April was 2.0 million barrels (44% lower than January/February).
• Process and personal safety performance remained excellent with no Tier 1 or Tier 2 process safety events or recordable injuries.
• Refining NZ deferred all non-essential activity due to the current environment. Capex estimates for 2020 reduced from $70 million to $40 million, including deferral of the maintenance turnaround of the main crude distiller and the gasoline manufacturing unit until March 2021 (from May 2020).

• Refining NZ net debt was $252 million as at the end April reflecting cash neutral operations at the Fee Floor since moving to operate the refinery on a rotating basis.
• Refining NZ extended and expanded its bank facilities in March and its total available debt funding facilities amount to $400 million (including the Company’s $75 million subordinated notes on issue) with no significant maturities until March 2022.
• Workstreams for the major Strategic Review are ongoing and proceeding to schedule. Refining NZ expects to provide an update on the Strategic Review process in June 2020.
COMMENTARY
Refining NZ agreed with its customers in March to change the way it operated the refinery in response to the unprecedented fuel demand reduction, which was caused by global COVID-19 travel and transport restrictions. The refinery’s processing facilities have been operated on a rotating basis through April to enable production at substantially lower rates.
New Zealand refined fuel demand fell to approximately 20% of pre-lockdown levels during Alert Level 4 COVID-19 travel and transport restrictions. Gasoline and diesel demand recovered during Alert Level 3 and then further into Alert Level 2 to be circa 60% and 80% of pre-lockdown demand respectively at the date of this Update. However, jet fuel demand remains low at approximately 25% of pre-lockdown levels. Refining NZ has adopted strategies aimed at minimising jet fuel production while meeting gasoline and diesel requirements.
 
The COVID-19 mode of operating has been extended to the end of August. This includes several weeks in July and August when all the processing units will be put on standby to balance fuel supply across the country.

The refinery throughput was 4.7 million barrels during March/April. The GRM was low at USD 0.67 per barrel, reflecting a weak Singapore Dubai complex margin of USD 0.19 per barrel and the impact of the rotating mode of operation. The Company’s Processing Fee revenue was NZD 23.7 million, predominantly made up of Fee Floor payments of NZD 20.1 million.
During the Level 4 lockdown period, Refinery to Auckland Pipeline (RAP) throughput was less than 30% of pre-lockdown levels. RAP throughput during Level 2 restrictions has recovered to approximately 60% of pre lockdown levels.
As part of the Company’s response to COVID-19, all major maintenance was suspended, except where required to maintain Refining NZ’s uncompromising focus on health and safety. The main change has been the deferral of the main crude distiller and gasoline manufacturing unit maintenance turnaround, which is now scheduled to occur in March 2021. Meanwhile, a partial catalyst change on the hydrocracking facility was completed as planned in March and other critical maintenance activities were completed in April, to enable the continued safe operation of plant until the rescheduled turnaround date.
As a result, capex guidance for the year has been reduced from $70 million to $40 million. The Company operated on a cash neutral basis during the COVID-19 lockdown and continues to plan to operate cash neutral through the year, when factoring in the Processing Fee Floor and reduced RAP income. Net debt was $252 million at the end of April. Refining NZ extended and expanded its bank facilities in March and its total available debt funding facilities amount to $400 million (including the Company’s $75 million subordinated notes on issue) with no significant maturities until March 2022.

The refinery continued to operate as an essential service throughout COVID Alert Levels 3 and 4. Refining NZ established a Co-ordinated Incident Management System structure to implement business continuity plans during this time and this continues at Level 2.
Refining NZ’s excellent health, safety and environment performance continued in March and April, with no Tier 1 or Tier 2 process safety events. There were again no recordable injuries and the recordable injury frequency is 0.28 per 200,000 work hours.
Workstreams for the major Strategic Review announced to the market on 15 April 2020 are ongoing and proceeding to schedule. Refining NZ expects to provide an update on the Strategic Review process in June 2020.

I agree that it's bad but the "cash flow neutral" point meant it wasn't quite as bad as I expected and leaves open the possibility of a return to profitability if/when refining volumes and margins improve (even if they end up well short of pre-Covid19 levels for some time, especially jet fuel). We also have a time line for an update on the strategic review.

Disclosure: a holding which started small and got smaller

[SailorRob]

It's not cashflow neutral at all, only because of a massive subsidy from owners/customers. So in fact burning cash just technically not their own.

[Waikaka]

I have been thinking about the implications of Covid on NZR.

Structural changes to refining market around the world so unfortunately I think it is an increasing possibility that NZR will stop the refining and become a solely distribution business. Really dependent on how the major shareholder/customers feel for medium term subsidising the refining and suspect they are not that happy. Also likely that at least medium term the volumes to be distributed will be reduced with decreased jet fuel demand so even that part will have reduced earnings.

Unfortunate this whole palaver will involve lots of redundancies at a bad time for individuals but as a shareholder as least the distribution side of the business will have a lot more stable earnings. However the value of the business as a whole is significantly reduced.

240 million in debt, bunch of assets on the book but worth less in a fire sale.

I have bought a bit more in the mid 70s but probably best to wait for the decision in June for a bit more certainty.

I spit balled what the distribution business might be worth:
Distribution earnings
2016 $23,329,000.00
2017 $23,094,000.00
2018 $44,845,000.00
2019 $37,347,000.00

average earnings of $32,153,750.00

What sort of multiple to earnings would a boring infrastructure company be worth?

[SailorRob]

I have been thinking about the implications of Covid on NZR.

Structural changes to refining market around the world so unfortunately I think it is an increasing possibility that NZR will stop the refining and become a solely distribution business. Really dependent on how the major shareholder/customers feel for medium term subsidising the refining and suspect they are not that happy. Also likely that at least medium term the volumes to be distributed will be reduced with decreased jet fuel demand so even that part will have reduced earnings.

Unfortunate this whole palaver will involve lots of redundancies at a bad time for individuals but as a shareholder as least the distribution side of the business will have a lot more stable earnings. However the value of the business as a whole is significantly reduced.

240 million in debt, bunch of assets on the book but worth less in a fire sale.

I have bought a bit more in the mid 70s but probably best to wait for the decision in June for a bit more certainty.

I spit balled what the distribution business might be worth:
Distribution earnings
2016 $23,329,000.00
2017 $23,094,000.00
2018 $44,845,000.00
2019 $37,347,000.00

average earnings of $32,153,750.00

What sort of multiple to earnings would a boring infrastructure company be worth?

That's earnings before maintenance expenses, and for distribution business CAPEX is still pretty big with tank maintenance. Those are not the numbers i'd be applying the multiple too.