NZR
29/04/2015 17:30
MEETING
PRICE SENSITIVE
REL: 1730 HRS The New Zealand Refining Company Limited
MEETING: NZR: Refining NZ Annual General Meeting 2015
Refining NZ Annual General Meeting 2015
29 April 2015
Chairman's Address
It is a pleasure to welcome you to this Annual Meeting of Refining NZ
shareholders. A particular warm welcome to those of you who supported us
during the 2014 equity raise.
Before I review the Company's performance in 2014 I wish to acknowledge that
having announced my retirement from the Board in December last year, this is
my last meeting as Chairman and an Independent Director of Refining NZ.
In my ten years as an Independent Director, six of which have also been as
Chairman, I have seen the Company grow its capacity and capabilities, notably
through Future Fuels, Point Forward and Te Mahi Hou, three major undertakings
for the refinery that amount to a combined investment of around $735 million.
On a personal note, I am proud to have helped shepherd these major
investments and at the same time, have always been impressed by the 'can-do'
attitude and mettle of our employees and contractors, and their clear
commitment to Refining NZ. I wish them and the Company, well for the future.
The Board at its meeting today appointed Simon Allen as the Company Chairman.
Simon will take the opportunity to address shareholders later in the meeting.
I wish to also draw shareholders attention to item three on the meeting
agenda.
Further to the resolution proposed by shareholder, Mr Bryan Halliwell, the
Company received late last week, a letter Mr Halliwell sent on the 9th of
April to 50 of the Company's shareholders, not including the four major
shareholders. The letter is a repeat of past claims and offers little that is
new.
Turning to the resolution itself, the Company notes that the matters it
raises, along with the supporting statement are equally not new and the
Independent Directors remain of the view that the need to deal repeatedly
with the arguments presented by Mr Halliwell is a waste of company resources
and time. The Independent Directors note that none of the organisations
approached by Mr Halliwell (which includes the Financial Markets Authority
and others that have contacted the Company) intend to take action with
respect to his claims about the Company's processing arrangements with its
oil company customers.
Shareholders will be aware that these arrangements are reviewed annually by
management and by the Independent Directors, with the Independent Directors
determining whether an external review is required, typically conducted every
two to three years.
In September 2014 an external review of the processing arrangements was
carried out by independent industry consultants, Hale and Twomey, after the
Independent Directors determined that a review was required. This was the
third such review in the last five years, with reviews carried out by
independent oil industry expert, Pervin & Gertz in 2009 and 2012.
Hale and Twomey concluded that the current processing fee structure and split
of gross refining margin provides an appropriate balance between Refining
NZ's return and customer competitiveness. They also found that alternative
structures were unlikely to provide the same balance and alignment or be
sustainable over the typical business cycle for refineries.
In addition to the Hale and Twomey review, the Company's external auditors,
PwC and internal auditors, BDO have audited the underlying detail of the
processing fee calculations, which include the Company's processing fee
calculations. In considering the accuracy and integrity of the processing
fee BDO found that the processing fee formula was applied to all users in
accordance with the processing agreement. Their audit also concluded that the
internal control environment over the processing fee calculation was robust.
Taking all of this into account the Independent Directors disagree with the
resolution put forward by Mr Halliwell and have advised shareholders to vote
against it.
In the interests of all shareholders, the Company has previously posted a
full copy of the Hale and Twomey report to the Company's website, while the
executive summary from each Pervin & Gertz independent review is available to
shareholders upon request. A letter from the Company's independent auditor
BDO summarising their review of the processing fee calculations is also
available on the Company's website.
To the Company's financial results.
A combination of 'self-help', an excellent operational performance in the
second half of the year, and an improving business environment saw Refining
NZ report a net profit after tax of $10 million for the year ending 31
December, 2014.
This turnaround on the $5 million net loss after tax the prior year,
vindicates the measures taken as part of the Company's strategic action plan
to counter weakened refinery margins and a strong New Zealand dollar.
This result owes much to Refining NZ's employees and contracting community
whose commitment to the plan has seen the Company through an extremely
difficult business environment, particularly in the first half. On behalf of
my fellow directors, I wish to extend the Board's thanks to Sjoerd and his
management team, employees and contractors for their contribution throughout
the year.
We had fully expected 2014 to be volatile.
Consequently, the Company's series of initiatives were squarely focused on
improving our margins by generating more of the high-value products from the
same barrel of oil, and managing the Company's cost base through remaining
focused on sensible cost practices.
The 'self-help' action plan proved critical to the operation of the refinery
and set the stage for capitalising on the improved margin and forex in the
second half of the year.
During 2014 the Company's borrowings peaked at $342 million. However, an
excellent operational performance and improving margins in the second half
saw borrowings reduce to $316 million at the year-end [2013: $228 million]
The major shift in refining fortunes during the year was triggered by the
decline in crude oil prices despite the strong demand for product.
Relentless output growth from the US driven by shale oil, and sustained OPEC
production has driven crude oil prices to their lowest levels in six years.
The fall to around USD 50 per barrel by the end of the year has made the
Company more competitive against imported product by lowering the inventory
cost for our customers.
The fall-off in the number of new US drilling rigs indicates that lower crude
prices are impacting investment in oil. However, market expectations are that
a corresponding return to higher crude prices will take time to eventuate.
The state of refinery margins had a significant impact on the Company's
financial performance in 2014.
The Company's average GRM achieved for the year was US $4.96, which was
higher than the previous year [2013: US$4.58]. The GRM averaged USD 1.66 in
the first half as a result of a marked decline in the benchmark Singapore
Complex Margin, but reached an average of USD 8.24 in the last six months of
the year. A particularly strong November-December processing period saw the
Company post a GRM of USD 9.98 per barrel, the highest in any reporting
period in the last five years.
Excluding the March-April shutdown, the Company maintained its uplift over
the benchmark Singapore Complex Margin, normally USD ~3.00-4.00, and in the
second half improved to average USD ~5.90. The healthier refinery margins
have held up in the first quarter of 2015, it remains to be seen whether
these higher margins can be sustained across the remainder of the year.
The strong New Zealand dollar weighed on the Company's first half year
performance, but waned in the second half to average USD 0.82 for the year
[2013: USD0.82].
The Company's strategic 'self-help' initiatives lifted the Company's
performance markedly in 2014.
The margin improvements from a series of initiatives carried out on the
hydrocracker unit, were completed successfully and delivered US$0.68 per
barrel, ahead of our target of US$0.66 per barrel.
The Company remained focused on managing cost, ending the year at a total of
$142 million, in part, as a result of achieving $3 million more cost savings
than the $7 million cost promise made to the market at the start of the year.
This result was also assisted by 'one-off' items, which included reviews of
inventory and of the Company's defined benefit scheme.
Modern procurement practices contributed to this improved cost saving, with
the development of strategic alliances enabling the outsourcing of non-core
parts of the organisation: maintenance to Maintenir; internal audit to BDO;
IT to Revera; and process control to Honeywell.
Te Mahi Hou is well advanced with $303 million invested to date and around
$60 million to be spent, prior to commissioning.
In August the project reached a million hours without a lost time injury, a
credit to the many employees and contractors working on the project, given
the sustained period of construction in the last 12 months. Of particular
note was the success of the 'heavy lifts window' in October, when all major
heavy structures and modules were in lifted into place, safely and ahead of
schedule.
Earlier this month the Company confirmed that Te Mahi Hou which was due to
"go live" late December 2015, is now expected to complete early to
mid-November. The recognition for the expected early delivery goes to the
highly professional team who've leveraged their major project know-how to
co-ordinate engineering design across three separate locations, secure
critical components from across the globe and "package" them at Marsden Point
through excellent project management and construction.
Improving process and personal safety underpins the safe and reliable
operation of our refinery and we continue to engage our employees and to
invest in making the refinery a safe place to work. Chief Executive, Sjoerd
Post will have more to say about the Company's 2014 safety performance in his
address to this meeting.
The 2014 result highlighted the robustness of the Company's processing
arrangements. The weakening margin environment in the first half of the year
saw the Company rely on a pro-rata floor payment of $36 million from oil
company customers, but by capitalising on the healthier margins in the second
half the Company was able to pay back the floor in its entirety by the year
end.
This was only the second time that the floor has been invoked since the
processing arrangements were agreed in 1995. The floor was put in place to
counter the type of conditions the Company has experienced in the last 18
months and it remains a unique and enduring mechanism in the refining sector.
The Company's return to profitability represents a remarkable turnaround in
12 months. However, we are conscious that year-end borrowings have pushed
gearing to 33% when our targeted ratio, outlined in the Company's dividend
policy, is 10-20%, and that further investment is required to successfully
complete TMH.
Bearing this in mind, the Directors resolved to not pay a final dividend to
shareholders. As no interim dividend was paid, there is no dividend payment
to shareholders this year.
We appreciate that not paying a dividend is both disappointing and
frustrating for shareholders - the Board shares this frustration and will
look to reinstate dividends at the earliest opportunity.
In 2014 there were a number of changes to the Board.
In December, the Board appointed Simon Allen to succeed my Independent
Director role. Simon is a professional director and joined the Board having
chaired the Financial Markets Authority since its establishment in 2011 and
the NZX from 2001 until 2008.
In November, ExxonMobil director, Kim MacMillan resigned and was replaced by
Stuart Brown. A qualified solicitor specializing in tax law, Stuart has
worked in private practice, as a senior tax advisor for Esso Australia and
since 2000 has held senior tax roles in ExxonMobil.
Further to the announcement about directors fees made at the half year, BP,
ExxonMobil and Z Energy have confirmed that the waiving of the fees for a
second director is henceforth permanent. Retaining a second director is a
mark of these shareholders' commitment to Refining NZ, maintains valuable oil
industry expertise and ensures continuity of director experience, for which
the Board is highly appreciative.
Looking ahead
In February this year, we issued our profit matrix for the coming year which
sets out our profitability expectations based on a series of foreign exchange
and refiners' margin scenarios. A copy of the matrix issued as part of a
presentation to investment analysts on the 20th of February is available on
the New Zealand Stock Exchange and the Company website.
The Company's performance in 2014 has proven that by sticking to a robust
strategic plan of action there is much we can do to lift the refinery's
performance, particularly through harnessing the many business improvement
opportunities identified by our talented and committed employees.
I am also pleased to say that we have seen stronger margins during the first
part of 2015 and that we continue to benefit from a lower exchange rate
environment. The self-help I referred to earlier has set the company up to
deliver strong free cash flow and repay a further $50 million of debt during
the first four months of 2015. End April borrowings stand at $264 million,
$77 million lower than its peak, representing a gearing of around 27 per
cent.
The Directors are confident that the refinery's strong cash generating
ability, exemplified by the excellent second half financial performance, sets
a solid platform for the Company to complete TMH and to continue to explore
other attractive and profitable, future growth opportunities and perhaps more
importantly, reinstate dividend payments to our shareholders.
David Jackson
Chairman
Refining NZ
End CA:00263671 For:NZR Type:MEETING Time:2015-04-29 17:30:20
