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Caltex profit finally strikes oil

The supplier of one third of Australia’s transport fuels, Caltex Australia Limited (ASX: CTX), has reported a massive improvement in earnings for the full year 2012. The company, which is in the process of shutting down one of its two refineries, reported an after tax profit of $57 million for the year, up from a loss of $714 million in 2011. The profit includes the impact of one-off ‘significant items’ of $309 million in costs relating to closing down Sydney’s Kurnell refinery, which in 2011 chalked up $1 billion in write downs.

The 2012 earnings, including the impact of significant items, put the company’s price/earnings ratio at a lofty 88.9; however, excluding significant items Caltex has a PE ratio of 10.9 – a reflection of the lower growth the company is expected to achieve over the coming years.

The huge write-downs on the Kurnell refinery are part of the company’s strategy to convert the unprofitable refinery into Australia’s largest import facility, allowing Caltex to bring in pre-refined oil products from lower-cost Asian refineries. The conversion should be completed in late 2014 and the change will allow Caltex to focus on its core profit driver: marketing and distributing oil products.

Unlike oil producers such as Woodside Petroleum Limited (ASX:WPL) and Oil Search Australia Limited (ASX: OSH), Caltex Australia does not conduct exploration or production, so the marketing, logistics, and sale of the company’s branded products make up the majority of revenues.

Marketing and distribution earnings (before interest and tax) increased 6% over 2011 to $736 million and is forecast to grow by around 5% per year going forward. According to Caltex the growth will be achieved through continued investment in retail stores, such as the service stations operated in tandem with supermarket retailer Woolworths Limited (ASX: WOW), as well as increasing sales in premium fuel types. Over the long term, lower exposure to volatile refining margins and higher margins on premium fuel products are hoped to drive revenue increases as the overall market for gasoline heads into decline.

Foolish takeaway

Caltex has earmarked a huge $550-600 million in capital expenditure for the 2013 financial year as well as cutting the dividend payout ratio. Both steps may be prudent for the company long term, but at the current share price of $18 investors looking to recover some of the cash they dole out at the pump may be best to stick to supermarket dockets for the time being.

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The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, 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.  This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool writer/analyst Regan Pearson doesn’t own shares in any companies mentioned.

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