CHI - Channel Infrastructure Ltd (NZR)

[Nor]

Why do we need to invest in a cheaper import capacity when, as you admit, capacity to 100% import does not exist, and so the refinery is vital? Cheaper for everyone except the shareholders that is who are expected to write off a perfectly good refinery which the country is currently dependent on and build something else.
You suggest the companies might just shut it down.
You want me to forget the agreements and concentrate on the economics, but in the next sentence you want me to go back to the cap and floor. A bit circular. Like this discussion is becoming.

[SailorRob]

Why do we need to invest in a cheaper import capacity when, as you admit, capacity to 100% import does not exist, and so the refinery is vital? Cheaper for everyone except the shareholders that is who are expected to write off a perfectly good refinery which the country is currently dependent on and build something else.
You suggest the companies might just shut it down.
You want me to forget the agreements and concentrate on the economics, but in the next sentence you want me to go back to the cap and floor. A bit circular. Like this discussion is becoming.

No, the companies WILL shut it down, very soon. There is no other option.

No I meant without the NZR facility the capacity doesn't exist, with it there is plenty of import capacity as we will find out soon. They could go to an import facility to supply Auckland and Northland right now and more capacity isn't too hard to bring on nor too expensive (all of which we will find out over the next 12 Months).

The shareholders are not expected to write off the Refinery. They HAVE already written it off. The price to book will immediately tell you this. They just haven't written it off enough but that will come.

[Sharp737]

Why do we need to invest in a cheaper import capacity when, as you admit, capacity to 100% import does not exist, and so the refinery is vital? Cheaper for everyone except the shareholders that is who are expected to write off a perfectly good refinery which the country is currently dependent on and build something else.
You suggest the companies might just shut it down.
You want me to forget the agreements and concentrate on the economics, but in the next sentence you want me to go back to the cap and floor. A bit circular. Like this discussion is becoming.

Nor, what people are not factoring in here is what if the margins suddenly increase back to very profitable levels again? It means we are in the MONEY again. Like if there is huge political uncertainties overseas, or wars etc. and things start turning to custard. Some might say "yeah right" BUT things can change very quickly! Yes we are on a course at the moment that looks like a terminal only BUT and there is still a BIG BUT I believe....time will tell

[SailorRob]

Nor, what people are not factoring in here is what if the margins suddenly increase back to very profitable levels again? It means we are in the MONEY again. Like if there is huge political uncertainties overseas, or wars etc. and things start turning to custard. Some might say "yeah right" BUT things can change very quickly! Yes we are on a course at the moment that looks like a terminal only BUT and there is still a BIG BUT I believe....time will tell

Things can change very quickly, if margins improve it will make very little difference however.

The entire point is that returns have not been generated over the entire 13 or so year cycle, when margins are high it all goes back into the plant.

If margins improve significantly then the cash will be put aside for the conversion or maybe they would be stupid enough to complete the 2022 shutdown which would destroy all the cash and try and continue but obviously that wont work for long.

Nothing will go to shareholders that's for sure. You'll never get anywhere predicting global macro events, the best chance of making money would be to take me up on the wager you offered regarding the Refinery closing but I never did hear from you.

Nor there are such once in a lifetime incredible opportunities out there right now, you've read this entire thread, if you put that kind of effort into something else that's actually worthwhile it would be rewarding.

Refinery shares could go back to $1 or more in a heartbeat. No argument there.

Money placed on red or black on a roulette wheel could double too. Speculation is not investing.

If you can read a cash flow statement then you could read 13 of them. And if you do that, we would not be having this discussion.

[Nor]

Yes when I read through the thread I noted how quickly things can change even just in the normal course of business. Wars and revolutions a (deplorable ofcourse) bonus. Recover in Asia could come very soon.

[Nor]

Things can change very quickly, if margins improve it will make very little difference however.

The entire point is that returns have not been generated over the entire 13 or so year cycle, when margins are high it all goes back into the plant.

If margins improve significantly then the cash will be put aside for the conversion or maybe they would be stupid enough to complete the 2022 shutdown which would destroy all the cash and try and continue but obviously that wont work for long.

Nothing will go to shareholders that's for sure. You'll never get anywhere predicting global macro events, the best chance of making money would be to take me up on the wager you offered regarding the Refinery closing but I never did hear from you.

Nor there are such once in a lifetime incredible opportunities out there right now, you've read this entire thread, if you put that kind of effort into something else that's actually worthwhile it would be rewarding.

Refinery shares could go back to $1 or more in a heartbeat. No argument there.

Money placed on red or black on a roulette wheel could double too. Speculation is not investing.

If you can read a cash flow statement then you could read 13 of them. And if you do that, we would not be having this discussion.

Well actually we would be having this discussion. In fact those poor results are the reason we're having this discussion.
Returns have not been generated because the agreements prevent it. Returns are capped and not inflation adjusted. Under a different operating model they could make a profit every year. Cost plus a margin. And/or ownership of the crude and products is another obvious model. Nevermind how much it costs overseas the motorist is not going to put his car on a boat to fill up. We will have to disagree about whether nz has capacity to import all it's requirements in finished form at present. But if it did there would be little point in converting Marsden, may as well just close it down, and nobody would even notice.

[SailorRob]

Well actually we would be having this discussion. In fact those poor results are the reason we're having this discussion.
Returns have not been generated because the agreements prevent it. Returns are capped and not inflation adjusted. Under a different operating model they could make a profit every year. Cost plus a margin. And/or ownership of the crude and products is another obvious model. Nevermind how much it costs overseas the motorist is not going to put his car on a boat to fill up. We will have to disagree about whether nz has capacity to import all it's requirements in finished form at present. But if it did there would be little point in converting Marsden, may as well just close it down, and nobody would even notice.

Nor just WOW.

ANY business can make a 'profit' under an agreement of cost plus a margin. How is this relevant at all? Who is going to sign an agreement like that?

Look, you could give the refinery away free, to operate under a new structure with NO debt and then negotiate new agreements as both parties mutually agree too, (that's how agreements work) and it would still not be able to generate profit just like most Refineries in the world right now. And I doubt it could over the cycle.

Profit is a measure of how efficiently the company can import oil and refine and distribute here vs the same company owner being able to send oil to a Asian refinery and ship product here and distribute.

The oil companies would have no interest in shutting down the Refinery if it was profitable under any agreement. They would change the agreement.

Your argument is that the oil companies could give Refining NZ an above market fee and then they would be profitable. I'm beginning to think this is a wind up!

Cost plus a margin!

While they're at it why don't they start manufacturing cars as well at Refining NZ all we need is an agreement where someone pays us out manufacturing costs plus a margin and we'll be profitable.

I'll be happy to start a business to manufacture anything of your choice if you'll agree to pay my costs plus a margin, hell forget the margin just pay my costs. Forget the profit at lest we'd generate jobs and would be fun for me.

Have your lawyer draw something up, maybe you'll supply my capital to?

Regarding the capacity, I said without the Marsden Point terminal we don't have the import capacity currently, but with it we do. So I mean without the Refinery but using the Jetty and Pipeline we have plenty of import capacity. We have already run the country on full import this year, granted with reduced demand.

So the option as you say of shutting down the whole operation is not viable, you need the terminal and pipe.

[Nor]

My argument is not that the oil companies could give Refining NZ an above market fee. My argument (right or wrong) is that if they chose to, or had chosen to in the past, they could or could have demanded it. Based on limited import capacity.
If you think that we currently have import capacity taking Marsden into account how do you explain the need to spend millions to convert Marsden to an import terminal?

[SailorRob]

My argument is not that the oil companies could give Refining NZ an above market fee. My argument (right or wrong) is that if they chose to, or had chosen to in the past, they could or could have demanded it. Based on limited import capacity.
If you think that we currently have import capacity taking Marsden into account how do you explain the need to spend millions to convert Marsden to an import terminal?

Perhaps they could have held them to ransom like that however they would be holding themselves to ransom as they are the owners too.

It's like saying that a port or airport can charge above market fees as they are a monopoly, doesn't work for a number of reasons and ultimately the NZ fuel user would be paying - would not go down with regulators.

'You have to use us so this is what you're going to pay' type of scenario, not impossible I agree but unlikely to be sustainable. Competition if nothing else would soon have sorted that type of behavior out.

There is sufficient capacity right now to import and supply Auckland and Northland and this is one of the options, the rest of the country can also be supplied now as well however it's not as efficient.

The explanation of the need to spend more to gain greater capacity is purely a because a good return on invested capital could be earned as with the greater efficiency more market share could be supplied through Marsden Point.

Often millions is spent on things when sufficient capacity already exists because the new capacity is cheaper. There wasn't a capacity issue before Gull came along for example, the investment from Gull was not because of lack of capacity.

Look there are too many moving balls to invest here, all speculation.

And as always look at the insiders!

[Waikaka]

Honestly finding this NZR thread a bit strange. Not my favorite stock but still feel like someone has to do some research on this company rather than just letting the generalisations fly, if I were to para-phrase them they would be something like this:

1) The company is run for its major shareholder customers, minor shareholders lose out when times are good with a crazy favourable processing fee arrangement
2) Refining crude on a beach in Northland is not economic or efficient
3) Profits are plowed back into expensive plant upgrades that destroy capital

Are all these things correct? Well....... yes but then on the flip side it is damn cheap and:

1) Despite all these issues the company has returned significant dividends over the years

Dividend Amount
2019 Interim dividend 2 cents per share
2018 Final dividend 4.5 cents per share
2018 Interim dividend 3 cents per share
2017 Final dividend 12 cents per share
2017 Interim dividend 6 cents per share
2016 Final dividend 6 cents per share
2016 Interim dividend 3 cents per share
2015 Final dividend 20 cents per share
2015 Interim dividend 5 cents per share


2) While manufacturing is hard, dangerous, dirty and expensive and the major customer shareholders get a sweet heart deal, NZR can still make significant free cashflow. I believe that if we can just keep the company processing for the next few years then see no reason why we cant be expected to return to a period like 2015-2019.

3) Yes when you do something hard, that needs skilled fabricators, engineers, operators and tangible assets then you have to plow significant earnings back into plant and people. I don't mind this as long as they also return dividends which they have been pretty good at over the years.

On a separate side note that I shouldn't really bring up, I think it is more important than ever that NZ is self sufficient in some critical things. Over the years NZ govt officials have thrown plenty of cash down the drain at Marsden point primarily because they used to view refining and manufacturing in general as a strategic asset. NZ needs all the high value jobs it can get and internal security of making our own things.


My summary is that refining is costly, hard and complicated but recent history suggests that NZR has the ability to reward shareholders. Covid is making heaps of uncertainties but I am figuring Mr Market may have overreacted in the case of NZR and that if they can just keep refining for the next few years and things go back to near normal then the price is so cheap that there is little downside.