Will job cuts turn around flagging fortunes?

Caltex Australia Limited (ASX: CTX) has announced it will close its Kurnell oil refinery, and turn it into a major transport fuels (petrol, diesel and jet fuel) import terminal. More than 330 employees will lose their jobs, while up to 300 contractors could face the cut. Caltex said the refinery was old and relatively small and couldn’t compete against modern large scale, more efficient Asian refineries.

The refinery has been operating for 57 years, and Caltex said the Kurnell refinery was setup to process ‘sweet’ crude oil, but was increasingly handling ‘heavier’ crude oil imports, putting it at a competitive disadvantage.

Closure of the refinery will reduce the company’s exposure to volatile refining earnings, and cut capital expenditure as Kurnell needed significant capex to run safely and reliably. Caltex said Kurnell lost $208m last year and another $60m in the first three months of this year, which forced the company’s hand.

The company will spend $430m to close the refinery, and spend approximately $250m to convert it to an import terminal, beginning in 2015, once refining is halted in the second half of 2014, and work is expected to take several years.

To pay for the transformation, Caltex is reducing its dividend payout ratio from the current level of between 40 to 60% of reported earnings, down to a lower level of between 20 to 40%, while the conversion goes ahead, and will revert to the normal dividend payout ratio in 2014, following successful closure of the refinery.

Woolworths, which sells about a third of Kurnell’s output, said the closure would not affect its retail operations.

Last month Shell closed its smaller Clyde refinery in western Sydney, also converting it to an import terminal, with the loss of more than 220 jobs, and together with Kurnell, the two refineries represented 27% of Australia’s oil refining capacity.

More job cuts

Caltex is not the only company cutting staff. In tough times, companies look to reduce their costs, as revenues fall, and the most obvious target is employee costs.

Energy Resources of Australia (ASX: ERA) has warned of job cuts at its Ranger uranium mine, as the company suspends mining and begins underground exploration, after posting a $60m loss for the six months to June 2012. ERA has warned that the near term market for uranium remains challenging, but the longer term outlook is encouraging, with China expected to build many more reactors. Rio Tinto Limited (ASX: RIO) owns 70% of ERA.

164 jobs will also go with the closure of a Victorian aircraft engine overhaul facility co-owned by Qantas Limited (ASX: QAN). The company has blamed a decline in demand for engine overhaul services for the closure.

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Motley Fool writer/analyst Mike King owns shares in Woolworths. The Motley Fool‘s purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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