Broker's view: NZ Refining Company

GRANT DAVIES
Last updated 05:00 08/03/2014

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OPINION: Company: The New Zealand Refining Company

Sector: Energy Processing

Overview: Without wanting to be crude it's fair to say that the New Zealand Refining Company's (NZR) most recent result was less than refined. Terrible puns aside the result saw a 10 percent drop in the share price as the company's margins were squeezed by excess refining capacity worldwide and the strength of the New Zealand dollar. As New Zealand's only oil refinery the company has a big part to play in New Zealand's economy supplying the country with approximately half of our petrol, 80 per cent of our diesel and all of our jet fuel.

Pros: The location of the facilities at Marsden Point in Northland is the one major competitive advantage the company currently has. The company will also be buoyed by the recent announcement of a new working arrangement with Z Energy and BP.

This arrangement sees Z Energy and BP coordinate delivery of crude to the refinery to allow NZR to operate at more optimal levels. This positive move from Z Energy and BP comes on the back of support for the $365 million expansion to petrol-making facilities currently underway at Marsden Point.

Cons: NZR will be hoping the new facilities will lead to an improvement of its refining margin. This margin has been squeezed in recent years due to the current oversupply of refining facilities worldwide (the company is essentially a price taker on international markets).

This is not expected to change in the short term. Long term we should see less efficient refineries start to close which should allow margins to creep up. The strength of the New Zealand dollar has also worked against the company.

Price performance: Shareholders' will be very disappointed at recent returns with the company trading down 35 per cent in 2011, 9 per cent in 2012, 19 per cent in 2013 and a further 15 per cent so far in 2014.

Investment outlook: NZR has plenty of headwinds to contend with including the high dollar, low international margins and a newly announced discounted capital raising. However, investors with a long term outlook could pick up a cheap infrastructure asset as the company is currently trading below its asset backing and at its lowest levels for nearly 10 years.

*A Broker's View is written by Grant Davies, Authorised Financial Advisor at Hamilton Hindin Greene Limited. This article represents general information provided by Hamilton Hindin Greene, who may hold an interest in the security. It does not constitute investment advice. Grant Davies owns shares in NZR. Disclosure documents are available by request and free of charge through www.hhg.co.nz.

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