Rod Oram Ora
Z Energy’s share offer is happily free of political baggage.
THE IMMINENT float of Z Energy will be a welcome addition to the NZX. It will offer investors a successful company, another sector and a stake in the economy they can relate to as consumers.
Even better, Z, like recently listed Synlait Milk, is an ambitious company with a strong business model. The two are forcing the pace of change in their established sectors, thereby offering growth prospects for their investors.
Thankfully too, both new listings come without any of the economic and political baggage dogging electricity generators in their increasingly crowded and confused sector of the stockmarket.
But Z Energy and Synlait Milk are still complex companies. They are hard to understand, and they come with economic and strategic risks. Investors need to make thoughtful choices about their investment in them versus alternatives. For example, is Synlait Milk a better play on the dairy sector than the Fonterra Shareholders’ Fund?
So investors need excellent analysis. But with Synlait Milk and Z, investors are once again in the dark. Analysts involved in the two floats are in a blackout period forced on the New Zealand market by United States rules.
The problem for investors with these two companies is not as acute as with Mighty River Power. The latter was beset by the economic shock of Tiwai Point, the political one of the Labour/Greens industry reform proposals and hype by MRP’s seller, the Government.
The Government, regulators, the NZX, investment banks and the financial sector in general should be ashamed of themselves. MRP was floated at $2.50 a share but once the blackout was over, three of four muzzled analysts said they did not expect the share price to recover to that price for at least a year.
All the players involved are passing the buck, scrambling for feeble excuses. If they were serious about growing investor involvement and confidence in the stockmarket, they would front up to their failings.
Analysis is particularly important to investors in Z because the company has changed fundamentally in its short life.
It began three years ago as the New Zealand subsidiary of Shell, which Inftrail and the Superannuation Fund acquired from its Anglo-Dutch parent. It was a typical hollowed-out local subsidiary of a multinational. Its business model was derived from its global parent’s strategy, with little accommodation to the NZ market; and senior management, other crucial skills and accountability lay overseas.
To remedy these defects and to maximise Z’s potential, the two investors had to create a new company. To lead the work they hired Mike Bennetts, a Kiwi with a 25-year career with BP overseas, as chief executive.
Wisely, the new management and their colleagues have built a company that plays to the particular opportunities of the NZ market rather than replicate overseas models.
Some of the changes are obvious to customers, such as the rebranding and investment in retail outlets and the services they offer. But that is only possible because of far deeper changes Z is pushing through in the oil industry’s supply chain in New Zealand.
For decades, four multinational oil companies had enjoyed a very cosy relationship sharing ownership of the Marsden Point refinery and using each other’s storage and distribution facilities downstream. But the result was a lack of real competition between them, and inefficiencies and under-investment in the supply chain.
Z has made big changes. Independent from ownership by an oil company, it can negotiate overseas more competitive procurement of crude oil and refined products; it is competing more vigorously in the NZ market; it has increased investment in storage and distribution and charges its competitors economic rates for using them; and it is leading the drive for more investment and more effective relationships among the partners in the refinery.
The work is paying off. While the country’s petrol use is declining 2 per cent a year, thanks to more efficient engines, a slight drop in distance travelled and a switch to diesel, Z forecasts its petrol volume will grow 4 per cent in the current financial year. National diesel volume is growing 2 per cent a year, but Z forecast its volume will grow 4 per cent this year.
The re-engineering of the company is flowing through to profits. Its margin on fuels rose from 12c per litre in 2011 to 15.3 cents in 2013, and the prospectus forecasts 16.5c in fiscal year 2014.
Z also has a more thoughtful and ambitious view about the future of fuels than its competitors, thanks to being freed from ownership by an oil company with all the inherent constraints of strategy and mindset.
Its strategy is to provide fossil fuels as efficiently as possible but also to play a leading role in the long, difficult shift to alternatives. For example, it is piloting programmes to help large commercial users save fuel. It says it is happy to sell them less fuel if it can share in some of the savings by a small increase in its margin.
Likewise, it is exploring biofuels such as tallow-based diesel and it is exploring with Norske Skog turning wood waste into liquid fuel. They are investing in a $13.5m, 14-month project at the Kawerau paper mill, with half the money coming from the government’s Primary Growth Partnership.
By making the most of conventional fuels while creating opportunities in alternatives Z is making an important contribution to the NZ economy. Infratil and the Super Fund deserve credit for taking a big risk buying Shell NZ, setting it on this course and returning ownership, control and the profits to New Zealand.
If the float goes to plan, the two partners will have roughly doubled their money in three years. While that is far too rich a reward, Z’s strategy and prospects still leave an upside for sharemarket investors.
Hopefully, Z’s success will encourage Infratil, the Super Fund and like-minded investors to bring some other key assets back into NZ ownership and turn them too into powerful agents of economic transformation.