Caltex Australia Limited: Refining And Marketing Of Petroleum Products In Australia

Background of Caltex Australia Limited

Caltex Australia Limited is a petroleum company that began its operations long back in 1940s when all-Australian oil importer Ampol was listed on Australian Securities Exchange (ASX). Both the companies opened their refineries in 1950s and 1960s and became tough competitors in oil market industry of Australia. Later on, the company acquires Golden Fleece but still it was relatively small on global grounds. Caltex and Ampol decides to get merged in 1995 and as a result of which, the company became the largest refiner in Australian market. It is the only firm that operates independently within its industry and all the decisions are taken by the management and board in Australia (Caltex. 2018).

The company operates convenience stores in the country and is indulged in the refining and marketing of petroleum products across the nation. It basically operates through two segments named as Supply and Marketing, and Lytton. The first segment is an integrated transport fuel supply chain that provides the refined products to international markets. In addition, the chain sells out the fuels and lubricants of Caltex along with the store’s goods in global market through the national network of Caltex (Reuters.com. 2018). The Lytton segment of the company is operating in Brisbane and is engaged in engaged in the refining of crude oil into petrol, jet fuel, diesel and various others fuel products like Liquid Petroleum Gas (LPG). Caltex follows five values that help the company to achieve success. It focuses on collaborating and expanding their networks, innovating new ways, being accountable for their actions, personalize the customer experience and working with integrity and ethically in the industry (Reuters.com. 2018).

As of now the firm has 3500 employees working across Australia and is listed on ASX. It is traded on the stock exchange with a ticker CTX.AX. Its current share price is $ 33.11 per share with the market capitalization of $8.642 billion. Steven Gregg is the Chairman and independent director of Caltex and Julian Segal is the chief executive officer and managing director of the company (Yahoo Finance. 2018).

Analysis of the financial statements deals with the critical review and examination of the company’s financial so to judge its performance from all the aspects. It also helps in taking the suitable business and economic decisions. However, such analysis is performed by using various techniques such as ratio analysis, vertical and horizontal analysis and many more. These techniques measure the performance and position of the company from every financial aspect. In case of Caltex, the firm generates its revenue mostly from the sale of its goods and petroleum products. Apart from them, its revenue comprises of rental income received from the leased sites and the franchise income recognized according to the agreement. Moreover, its total interest bearing borrowings increases over the year.

The current financial performance of Caltex is been analysed on the basis of the data provided in its annual reports.

(Source: Caltex. 2017).

The above abstracts of the annual report state that after-tax profit of Caltex was $619 million in year 2017. As compare to 2016, the profit was up by 1.5% reported with a net loss of $14 million in significant items. From supply and marketing segment, the firm earn an EBIT of $733 million which was 3.4% more than the previous year. Moreover, the acquisitions done by Caltex in the second half of the year added $22 million to the amount of earnings before income and tax. On the other hand, another segment Lytton recorded an EBIT of $308 million which was 50% more than 2016. This has shown that the segment has performed well operationally and is continue to set high refiner margins. In addition the company is focused on increasing its international trading and its expertise with Gull New Zealand (Caltex. 2017).

Operations of Caltex Australia Limited

(Source: Caltex. 2017).

The above abstract is taken from the income statement of Caltex that showcases its revenue, net profit and the income earned by the company. A 19% increase was there in the total revenue of the firm. This is primarily due to the upsurge in the prices of world petroleum products that lead to the increase in crude oil prices and results in high refiner margins. Total expenses has also shown a rise of 20% due to the increase in replacement cost of goods sold which was a result of high prices of refined products. Net finance cost decreases by 8% reporting a $6 million fall during the year. The main reason for such reduction is the low interest rates on the borrowings (Caltex. 2017).

(Source: Caltex. 2017).

The balance sheet abstract shows an increase in working capital worth $199 million in 2017 because of the higher volume of trade sales outstanding during the year. Property, plant and equipment also rise by $127 million which includes the capitalized interest and the cost of major cyclical maintenance. Rising goodwill from the acquisitions added up to the intangible assets with the amount of $322 million. Furthermore, the net debt of the company reported an upsurge of $360 million and its other non-current assets and liabilities fall by $10 million.

(Source: Caltex. 2017).

It can be observed from the above abstract that the operating cash inflow reduces by $193 million. Reason being, the collection from the customer was used to set off the high payments made to suppliers, governments and employees. The cash outflow from investing activities shows an increase of $443 million which is due to the acquisitions done by the business such as Gull NZ. As far as financing activities are concerned, it has also shown an outflow which reduced by $455 million due to the dividend payments made during the year. On a whole, a net decrease in cash worth $200 million was reported in 2017 (Caltex. 2017).

This section provides the details about the market performance and predicts the situation of economy in coming future. The outlook determines the expected demand, productivity and the success factors which help the company to grow and perform better in upcoming years.

(Source: Caltex. 2017).

The above graph shows the past performance of the Australian fuel market and the future outlook of the same. It provides details about the growth in demand of fuels for the years starting from 2012 to 2017 and 2018 to 2022. It can be observed that the demand for premium petrol was 3% in the past five years and the same will reduce to 0.9% in the next five years. Similar trend is been noticed in the demand of Diesel. It was 3.4% during 2012 to 2017 and the same will fall to 1.6% in the coming years. Furthermore, shift in the consumers preferences towards diesel vehicle, reduces the demand for the petrol over the years. It is expected that diesel and jet market will continue to grow in future.

Values of Caltex Australia Limited

(Source: Caltex. 2017).

The Middle East has added the complex refining capacity over the past five years which results in the growth of products like Diesel and Jet. Such surplus will increase with the introduction of additional capacity by 2025. The demand for diesel could enjoy an upsurge once the new IMO regulations on bunker fuel came into effect from 2020. It is forecasted that the jet demand will see a strong growth due to the increasing hub for air travel. However, due to this, its surplus will likely to shrink more. On a whole, company can experience growth in future.

(see appendix for calculations)	2017	2016	Industry average
Return on assets	10.65%	11.73%	3.64%
Return on equity	20.98%	21.81%	5.95%
Net profit margin	2.90%	3.40%	-6.76%
Gross profit margin	10%	11%	44.75%
Expense ratio/Cost to Income ratio	6%	6%	N/A
Cash return on sales	3%	5%	N/A
Earnings per share	$237.4 per share	$231.6 per share	-$0.28 per share
Price earnings ratio	0.1434 times	0.1315 times	0.397times
Earnings yield	697.21%	760.34%	N/A
Dividends per share	$61 cents	$52 cents	N/A

These ratios determine the amounts of profit generated by the company from various sources during the particular financial year. Analysis of such ratios helps the investors to examine the position of company’s profitability within the industry in which it operates.

• Return on assets: It measure the amount of return generated by the company from its total assets. In other words, the ratio generally reflected the money earned from the capital invested on the assets. Generally, for companies a high ROA is suitable and favourable.

As per the calculation done above, the ROA of Caltex was 10.65% in 2017 and 11.73% in 2016. The overall effect is that the ratio reduces but the ratio is more than the industry average of 3.64%. This reduction was due to the fact that change in company’s total assets was more than the changes in its profit. Moreover, the amount of its average total assets increases in 2017 as compared to prior year.

• Return on equity: It identifies the returns offered by the organization to its investors and shareholders on the capital invested by them in the business. Companies having high ROE are tending to be more profitable than the ones with low ROE (Camilleri & Camilleri, 2017). 

In case of Caltex, the ROE reduces from 21.81% to 20.98%. Although both the profits and equity has increased in the year but still the ratio reduces because the increase in net profit was only $9 million whereas the equity reported the change of $298 million. This clearly shows that company did not have enough profits to distribute them to its shareholders. However, the ratio was way more than the industry average of 5.95%.

• Net profit margin: It expresses the profit as a percentage of company’s total sales. In other words, it shows the proportion between the net income and revenue of the company.

In 2016 and 2017, the NPR of Caltex remains very close because of the minor increase in its net margin. However, it reduces in 2017 because of the significant increase in its sales. The industry average is negative and the company is already above the benchmark.

• Gross profit margin: It also expresses the profitability position of the company but measure the amount which is earned from the revenue after deducting the cost of sales.

The same trend follows in GPR of Caltex as it shows a reduction of 1% over the years. Reason being the same, the ratio was 11% in 2016 and 10% in 2017. Moreover, the company is far away from the industry standard of 44.75%.

• Expense Ratio: This ratio identifies the proportion between the expenses and revenue of the company. It indicates the portion of revenue covered by the operating expenses.

Caltex’s expense ratio remains almost same during the past two years that is 6%. This is because of the significant increase in its operating expenses and revenue (Godwin & Alderman, 2012).

• Cash return on sales: This ratio measures the cash generated from operating activities against the net sales of the company.

In case of Caltex, the ratio reduces from 5% to 3% because of the reduction in the amount of cash flow made by the operating activities of the firm. It decreases from $928,202 to $735,052 in 2017.

They measure the performance of a corporation within the market in which it operates. They evaluates the trend in company’s share prices and help the investors in taking better decisions (Jenter & Lewellen, 2015).

• Earnings per share: It shows the earnings made by each share of the company.

The EPS of Caltex shows the upward trend and was increased to $237.4 per share in 2017. This was due to the overall increase in the net profit of the entity and a minor reduction in its number of ordinary shares. Moreover, in both the years the ratio was way more than the industry average which is in negative.

• Price earnings ratio: It reflects the amount the investors wish to pay for per dollar of earnings.

Financial Performance of Caltex Australia Limited for the Year 2017

The price multiple of Caltex shows a slightest increase from 0.1315 times to 0.1434 times in 2017. This was due to the noteworthy increase in company’s EPS and its share prices. However, the ratio did not touch the benchmark set by the industry (Penman, Reggiani, Richardson & Tuna, 2017).

• Earnings yield: It reflect the portion of each dollar earned by the company, invested in a stock (Gibson, 2011).

It can be observed that the earning yield of the company reduces to 697.21% from 760.34% during the past two years. The reason behind this is that both the market price and EPS of Caltex rises simultaneously.

• Dividend per share: It measure the dividends paid by the firm on each share. High amount of dividends shows that company has enough earnings for making regular payments to its shareholders.

Caltex’s DPS increases from 52 cents to 61 cents reflecting that company is focused on maintain its profitability by making high net profit during the year.

(see appendix for calculations)	2017	2016	Industry average
Asset turnover	3.67 times	3.45 times	0.59 times
Cash return on assets	0.13 times	0.18 times	N/A
Fixed Asset turnover	5.90 times	5.68 times	N/A

These are those ratios which measures the competency of the firm to make turnover by utilizing their assets effectively and efficiently. They identify the amount of earnings made by a company from its total assets.

• Asset turnover ratio: It shows the capability of the company to make revenue by utilizing all its assets efficiently.

The ratio in case of Caltex increases from 3.45times to 3.67 times due to the significant upsurge in firm’s revenue. Moreover, its total assets has also increased during the year and the ratio is way more than the industry average of 0.59 times (Bragg, 2012).

• Cash return on Assets: This ratio measure the performance of the company within the industry. It evaluates the firm’s cash flows against its average total assets.

This ratio decreases from 0.18 times to 0.13 times because of the overall reduction in the cash flow from operating activities (Bragg, 2012).

• Fixed assets turnover: It identifies the amount of revenue generated by the fixed assets of the company.

The same trend follows and the ratio rises from 5.68 times to 5.90 times in 2017. This is due to the overall increase in Caltex’s fixed assets and revenue during that year.

(see appendix for calculations)	2017	2016	Industry average
Current ratio	1.16:1	1.43:1	1.34:1
Quick ratio	0.44:1	0.71:1	1.05:1
Receivables turnover	93.54 Days	91.60 Days	10 days
Average collection period	14.24 Days	14.54 Days	N/A

The financial health of a company is evaluated by calculating its liquidity ratios. These indicators help in knowing the potentiality of the firm to meet its short term obligations.

• Current ratio: This ratio shows the capability of the firm to pay off its current liabilities with current assets. As per the calculations, it can be observed that the CR of Caltex reduces from 1.43:1 to 1.16:1 in 2017. Moreover, the ratio was also less than the industry benchmark. This is because the current liabilities of the company have shown a huge increase as compare to its current assets. This boosted up the ratio on whole (Saleem & Rehman, 2011).
• Quick ratio: It is also a liquidity ratio which measures the ability of an entity to meet its short term obligation with its quick assets. In case of Caltex, same trend is followed and the ratio falls from 0.71 to 0.44 also less than the benchmark. Reason being, the huge amount of inventory recorded in 2017 (Zainudin, Zainudin, Hashim & Hashim, 2016).
• Receivables turnover: This ratio shows how efficiently a firm converts its debtors to cash. The ratio increases from 91.60 days to 93.54 days due to the increase in amount of debtors. Moreover it is more than the industry average also (Jindal & Jain, 2017).
• Average collection period: The ratio indicates the number of days a company takes to collects its receivables. The collection period for Caltex remains almost same for the two years that is 14.24 days and 14.54 days respectively.

(see appendix for calculations)	2017	2016	Industry average
Debt to equity ratio	104.49%	88.69%	44.05%
Debt ratio	51%	47%	N/A
Equity ratio	49%	53%	N/A
Cash debt coverage	26%	19%	N/A
Interest cover ratio	14 times	13 times	N/A

These ratios evaluate the capital structure of a company and measure its solvency position.

• Debt to equity ratio: It shows the proportion of debt taken by the company against its equity. The D/E ratio of the company has increase from 88.69% to 104.49%, due to a huge upsurge in company’s borrowings or liabilities. It also reflects high risk and is way more than the industry benchmark (Ferrarini, Hinojales & Scaramozzino, 2017).
• Debt ratio: It determines the extent of firm’s assets that are financed through debt. It also rises from 47% to 51% showing heavy component of debt and indicating that most of Caltex’s assets are financed through debt. 
• Equity ratio: It shows the amount of assets financed by shareholder’s equity. This ratio reflected a reverse trend and is reduced from 53% to 49%. This was due to the fact that change in company’s total equity was less than the increase in its total assets (Levi & Segal, 2015).
• Cash debt coverage ratio: It shows the relationship between the operating cash flow and average total liabilities. It increases over the years and indicates that the firm has better liquidity position. It can meet its liabilities with the cash generated from its operations.
• Interest coverage ratio: It measures the number of times; company has made interest payments from its EBIT. Caltex’s ICR rises from 13 to 14 times due to a reduction in its interest expense during the year (Vogel, 2014)

From the above report, it can be recommended that Caltex Australia Limited has performed better in 2016 as compare to 2017. Except from the efficiency factor, the other aspects such as liquidity, profitability and gearing has been reduced in the past year. In addition, its overall debt portion has also increased which makes the company more risky. Furthermore, as per the forecast made for economic outlook, the company can succeed in future as the market for diesel and jet will grow stronger in coming years. Talking about the acquisition, the company should focus on increasing the revenue from the acquisitions such as Gull NZ. Moreover, its merger with Ampol makes it the largest refiner of Australia.

In order to get succeeded and enjoy growth, Caltex should focus on increasing its profitability position and liquidity along with reducing its financial risk. The company should make more revenue from its inventory and debtors so that more availability of cash can be there to meet the long term and short term debt. In case the company become insolvent, then it has to follow the principles of objectivity, integrity, confidentiality, professional competence and behaviour. All such ethical considerations are required to be kept in mind at time of becoming insolvent.

As the business operates in dynamic environment, its financial performance is highly affected by the changes in political competitive environment. Modifications in government policies and improvement in competitor’s strategies do impact the position and performance of Caltex. External factors like economic conditions of the market such as inflation, interest rates and many others are required to be considered. Moreover, the prevailing competition and the demand of company’s products should also be considered while analysing the performance. From the overall analysis, it will be recommended not to invest in Caltex, as the company has low profitability and high financial risk. Furthermore, its liquidity position is also very weak in past year as compare to the year prior to that.

References

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