The Viva Energy Group Ltd (ASX: VEA) share price is up by 4.14% this morning after a reported 32.6% fall in profits for the half year ending 30 June 2020.
COVID-19 restrictions have had a significant impact on demand for fuel, which has impacted Viva’s bottom line. Viva supplies approximately one quarter of Australia’s liquid fuel requirements and travel restrictions mean demand for both automotive and aviation fuels has been in decline.
What did Viva Energy report?
Viva Energy reported fuel sales were impacted by border closures and ‘stay at home’ restrictions. Total sales volumes were down 10.5% on 1H2019, although did improve in May and June as restrictions eased. During 1H2020, sales of jet fuel have fallen by as much as 75% due to closures of domestic and international borders. Diesel sales were less affected throughout this period as a result of continued economic activity and a strong agricultural season.
Despite these significant impacts, non-refining earnings before interest, taxes, depreciation and amortisation (EBITDA) increased by more than 14% over the half due to improvement in retail fuel margins and relatively strong performance in non-aviation commercial segments.
CEO Scott Wyatt said, “The diversity of our retail and commercial business has provided resilience in extraordinary circumstances and we are well positioned to deliver further growth as restrictions continue to ease and the economy recovers.”
Refining business struggles
The refining business has been challenged in 2020 with oil markets and refining margins impacted by global events. As a result, the Geelong refinery moved to reduce production and bring forward major planned maintenance in April. While Viva believes this produced a superior outcome compared to a full shutdown over the period, the refinery nonetheless recorded losses of $49.4 million in 1H2020.
Refining margins are expected to remain uncertain as demand recovers over the remainder of 2020 and 2021. Viva has acknowledged that the operating losses of this part of the business are unsustainable. It is assessing the short and long term viability of this part of the business and has vowed to provide regular updates on refining performance.
Profits and dividends
The drop in sales volumes flowed through to profits, with underlying net profit after tax (NPAT) falling 32.6%. Nonetheless, the balance sheet remains robust with a net cash position of $480.9 million. This follows the divestment of the company’s stake in the Viva Energy real estate investment trust (REIT) earlier this year.
Taking this into account, Viva has maintained a dividend for 1H2020 with a payout ratio of 60% of distributable NPAT. It also intends to return all remaining proceeds from the divestment of the Viva Energy REIT to shareholders via a capital return and special dividend.
At the time of writing, the Viva Energy share price is up 4.14% to $1.88 per share.
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Motley Fool contributor Kate O’Brien has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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