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Understanding Financial Results

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Understanding Financial Results
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Historic Cost versus Replacement Cost Basis

Caltex reports its results for statutory purposes on a historical cost basis. We also provide information on our financial results on a replacement cost of sales operating profit (RCOP) basis. The RCOP result removes the impact of fluctuations in the US$ price of crude and foreign exchange on cost of sales. Such impacts constitute a major external influence on company profits.

RCOP restates profit to remove these impacts. The Caltex RCOP methodology is consistent with the basis of reporting used by other refining marketing groups.

As a general rule, an increase in crude prices on an Australian dollar basis will create a gain for Caltex. Conversely, a drop in crude prices on an Australian dollar basis will create a loss. This is a direct consequence of the first in first out costing process used by Caltex in adherence to accounting standards to produce the financial result on a historical cost basis. With Caltex holding approximately 45-60 days of inventory, revenues reflect current prices in Singapore whereas first in first out costings reflect costs some 45-60 days earlier. The timing difference creates these impacts on cost of sales, referred to as "inventory gains and losses". To remove the impact of this on earnings and to better reflect the underlying performance of the business, the RCOP methodology calculates the cost of goods sold on the basis of theoretical new purchases instead of actual costs from inventory. The cost of these theoretical new purchases is calculated as the average monthly cost of cargoes received during the month of those sales.

Replacement Cost Earnings Before Interest and Tax

The breakdown of RCOP shown here represents a management reporting view of the breakdown and, as such, individual components may not reconcile to statutory accounts.

For the year ended 31 December.

Millions of dollars 2015
2014 2013 2012 2011
Caltex Refiner Margin 757 876 640 787 485
Transport Fuels Marketing Margin 999 839 714 678 643
Lubricant and Specialties Margin 65 95 136 127 111

Non-fuel income

184 185 175 184 180

Operating expenses

(941) (1,145) (1,053) (1,002) (999)
Other (87) (55) (61) (18) 22

RCOP EBIT (excluding significant items)

977 795 551 756 442

Significant items

141 112 26 (441) (1,594)
Total RCOP EBIT (including significant items) 1,118  907 577 315 1,152

Caltex Refiner Margin (CRM)

CRM represents the difference between the cost of importing a standard Caltex basket of products to eastern Australia and the cost of importing the crude oil required to make that product basket.

The CRM is calculated in the following manner:

Weighted Singapore product prices (standard Caltex basket of products)
Less: Reference crude price (from 1 January 2011 the Caltex reference crude marker is Dated Brent)
Equals: Singapore Weighted Average Margin (Dated Brent basis)
Plus: Product quality premium
Crude discount
Product freight
Less: Crude premium
Crude freight
Yield Loss
Equals: Caltex Refiner Margin

Note that from 1 January 2011, Caltex changed its reference crude marker to Dated Brent following a period of comparative substantial volatility in the APPI Tapis crude benchmark. As a result of this volatility crude producers increasingly moved to the use of Dated Brent as the relevant marker for pricing sales of crude on either a term or spot basis. As the proportion of crudes priced off the Dated Brent benchmark had increased to represent more than half of our monthly requirements, Caltex has moved its calculation of Singapore Weighted Average Margin to a Dated Brent basis effective 1 January 2011. Similarly the calculated crude discount/premium will reflect the difference between the prices paid by Caltex for its crude requirements and the average of the Dated Brent price for the relevant period.

The Caltex Refiner Margin earned for the year ended 31 December is the total of the product of each month's average unit lagged Caltex Refiner Margin (US$/bbl) and CRM Sales from Production which is then converted to Australian dollars using the prevailing average monthly exchange rate. Investors and analysts can track the monthly realised Caltex Refiner Margin and CRM Sales from Production figures on this website or via the ASX releases published on the ASX website.

   Lagged* CRM (US$/bbl)  CRM Sales from Production (ML)
Month 2015
2014 2015 2014
January 15.14 7.03 534 953
February 13.18 7.92 479 789
March 20.03 9.03 487 996

April

No monthly CRM release was provided as Caltex's Lytton refinery was closed for its major 5 year Turnaround & Inspection

May

No monthly CRM release was provided as Caltex's Lytton refinery was closed for its major 5 year Turnaround & Inspection
June No monthly CRM release was provided as Caltex's Lytton refinery was closed for its major 5 year Turnaround & Inspection
 First half average        

July

16.50 11.49 434 951

August

18.29 9.77 503 836
September 18.05  15.80 514 740
October 16.23  16.48  580 719
November  14.42 15.33  462 471
December 14.05 13.43 554 499
Second half average 16.23 13.72 508 703
Full year average        

*Caltex uses a rolling 7 day average of the international benchmark prices to calculate wholesale petrol prices. This smooths out daily movements as a result of price volatility. This means there is usually a lag of about a week between movements in international benchmark prices and wholesale prices here in Australia. As the Australian dollar price of crude rises the lag has the effect of reducing the Caltex Refiner Margin. Conversely, as the Australian dollar price of crude falls the lag has the effect of increasing the Caltex Refiner Margin.

Transport Fuels Marketing Margin

Transport fuels comprise petrol, diesel and jet. The transport fuels marketing margin is based on the average net margin over Import Parity Price (due to Australia requiring to import a significant proportion of its transport fuel needs) in Australia. Import Parity Pricing refers to the landed cost of refined fuel to import terminals around Australia. It includes:
  • the benchmark price for refined fuel
  • the 'quality premium' for specific Australian and State fuel standards freight
  • exchange rate
  • wharfage, insurance and loss.

Caltex sells approximately 15 billion litres of petrol, diesel and jet each year.

Lubricants and Specialties Margin

Lubricants and specialties products include finished lubricants, base oils, liquefied petroleum gas, petrochemicals, bitumen, wax and marine fuels. These products are either imported or are bi-products from the refining process which are transferred internally to our Marketing business at Import Parity Pricing or purchase cost. The total earnings from this part of the business are dependent on sales volumes and the average net margin achieved over the price our Marketing business paid for the products.

Non-fuel Income

Non-fuel income includes royalties paid to Caltex by franchisees based on turnover, convenience store income from company operated stores, franchise fees, royalties, property, plant and equipment rentals, income from the company's fuel card (Starcard) and the company's share of profits from non-controlled equity distributors.

Other

Other margin includes gross margin other than CRM. The largest component of "other" is the foreign exchange impact on crude and product payables. An appreciating dollar has a positive impact on the business in that it creates a short-term benefit due to a realised exchange rate gain on US dollar denominated payables. In the short term, any gain or loss resulting from the impact of changes in the exchange rate on the monthly crude and product payables outweighs the refiner margin impact. In the longer term, the reverse is true.

Caltex has a foreign exchange risk management program in place aimed at reducing the impact of movements in the AUD-USD exchange rate.

To explain the impact of the exchange rate on US dollar payables, when Caltex purchases crude oil or petroleum products, the cost in A$ is recorded in its accounts at the time the cargo is loaded by converting the agreed US$ price (oil is traded internationally in US$ per barrel) at the current exchange rate. However, when payment is actually made, the cost in A$ may have changed due to a change in the exchange rate. If the actual cost is less than the amount recorded in the accounts, the difference is added to earnings as an exchange rate gain, and vice versa. Caltex purchases approximately 6 million barrels (bbl)of crude and product per month and over multiple cargoes (usually about 10 to 15) per month.

A simplified example is provided below :

Assumptions

CRM US$7/bbl 
Crude US$100/bbl 
AUD/USD exchange rate 100 cents falling to 90 cents
Buy 6 million bbls per month

 Month 1

     USD ($m) AUD ($m)
CRM  6 million bbls x $7 42  
  @ 100 cents   42
  @ 90 cents   46.67
Result is an increase in the CRM of A$4.67 million.
Payables Exposure of 6 million bbls x $100 600  
  @ 100 cents   600
  @ 90 cents    667

Realised loss on payables is $67 million and after hedging 50% is reduced to $33.5 million.

In this example, it would take 7 months for the CRM benefit to offset the realised loss on payables.  Note, however, exchange rates move continuously and it is longer term trends that are important.

Definitions

Barrel (per barrel) or bbl

A measure used for oil production and sales.  One barrel equals approximately 159 litres.

Caltex Basket of Products

The Caltex basket of products reflects the combined typical yield of petrol, diesel, jet and fuel oil from Caltex's two refineries at Kurnell and Lytton.   The Caltex yield is approximately 50% gasoline, 30% diesel, 17% jet and 2% fuel oil.

Dated Brent

Dated Brent is the price for prompt shipments of Brent crude as reported by price agencies.  It is the price benchmark for the vast majority of crude oils sold in Europe, Africa, Middle East and now the Asia Region, and one of the most important benchmarks for spot market prices.

Quality Premium

A quality premium is added to product prices to take into account Australia's high fuel standards (particularly around the gasoline specification) when compared to the rest of the Asia Pacific region.