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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. RCOP excludes the unintended impact of the fall or rise in oil and product prices (a key external factor) and presents a clearer picture of the company’s underlying business performance. It is calculated by restating the cost of sales using the replacement cost of goods sold rather than the historic cost, including the effect of contract based revenue lags. I other words, 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.

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 2016 2015
2014 2013 2012 2011
Caltex Refiner Margin 543 757 876 640 787 485
Transport Fuels Marketing Margin 1,066 999 839 714 678 643
Lubricant and Specialties Margin 70 65 95 136 127 111

Non-fuel income

177 184 185 175 184 180

Operating expenses

(1,013) (941)   (1,145) (1,053) (1,002) (999)
Other (30) (87) (55) (61) (18) 22

RCOP EBIT (excluding significant items)

813 977 795 551 756 442

Significant items

0 141 112 26 (441) (1,594)
Total RCOP EBIT (including significant items) 813 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

The Caltex Refiner Margin is converted to an Australian dollar basis using the prevailing average monthly exchange rate.

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.

CRM is just one contributor to the replacement cost of sales operating profit (RCOP) EBIT earnings (excluding significant items). Other items contributing to the RCOP EBIT include Transport Fuels volume and margin, Lubricants and Specialties volumes and margin, Non-Fuel Income and Other Margin less Operating Expenses.

  Lagged* CRM (US$/bbl)   CRM Sales from Production (ML)
Month  2017 2016 2015
2014 2017 2016 2015 2014
January 12.43 13.52 20.36 7.53 501 494 534 953
February 12.71 8.44 5.31 8.13 425 435 479  789
March 11.65 9.74 20.66 10.50 534 514 487 996

April

15.32 8.37 n.a.* 10.51 525 554 n.a.* 957

May

9.94 8.84 n.a.* 9.70 529 444 n.a.* 862
June 13.55 11.60 n.a.* 8.67 504  484 n.a.* 992
First half average 12.59 10.10 15.44 9.17 503 488 500 925

July

14.67 10.30 17.54 13.58 481 579 434 951

August

  8.08 19.56 10.53   580 503 836
September   10.94 17.28 15.51   532 514 740
October   11.38 15.66 16.48   558 580 719
November    11.83 13.71 17.99   540 462 471
December   10.41 17.20 25.10   524 554 499
Second half average   10.49 16.83 16.53   552 508 703
Full year average   10.29 16.36 12.85 500 520 505 814

*No Monthly CRM Release was provided as Caltex's Lytton Refinery was closed for its major 5 year Turnaround & Inspection
1. Kurnell Refinery closed October 2014, leading to commensurate fall in CRM Sales from production

*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 16 billion litres of petrol, diesel and jet each year. This is complemented by around 300 ML in New Zealand following the purchase of Gull NZ (acquired July 2017).

Lubricants and Specialties Margin

Lubricants and specialties products include finished lubricants, base oils, liquefied petroleum gas and petrochemicals. These products are either imported or are bi-products from the refining process which are transferred internally to our Supply & 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 Supply & Marketing business paid for the products.

Non-fuel Income

Non-fuel income reflects the current predominant franchise model. Non-Fuel Income includes royalties paid to Caltex by franchisees based on turnover, convenience store income from company operated stores, franchise fees, property, plant and equipment rentals, income from the company's fuel card (Starcard) and share of profits from distributor businesses.

Other

Other margin includes gross margin other than CRM. The largest component of "other" represents a number of miscellaneous items that typically include foreign exchange impacts on crude and product payables and gains/losses on disposal of assets and subsidiary earnings.

With respect to foreign exchange, 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 on earnings.

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.