Flagging off the first delivery...
It was a year in which the company strengthened its foundations with the completion of the Clean Fuels Project, fuels terminals upgrades and benefits starting to flow from refining and supply chain improvement projects.
The company recorded an increased full year profit after tax of $430 million on a replacement cost of sales operating profit (RCOP) basis for the year ended 31 December 2006 (2005: $414 million excluding significant items).
This profit equates to approximately 2.2 cents per litre on average for all petroleum products sold.
Earnings benefited from stronger refiner margins with the Caltex Refiner Margin* averaging US$10.13 a barrel in 2006, up from US$8.40 a barrel in 2005 as a result of strong demand and tight supply.
2006 earnings were affected in the first half of the year by a delay in completing the Clean Fuels Project, which resulted in lower refinery production and increased fuel imports for the half but did not affect supply to customers. It is estimated that RCOP after tax in 2006 would have been higher by approximately $80 to $100 million if the delay had not occurred.
The strong operational performance in the second half enabled Caltex to increase its year on year underlying profit.
The refineries set new records for production and utilisation to achieve a record full year production of all products of 11.9 billion litres, up from 11.6 billion litres in 2005. This included increased production of high value transport fuels (petrol, diesel and jet fuel) to 10.2 billion litres (2005: 10.0 billion litres).
The marketing business in 2006 achieved stable transport fuels sales and margins in a challenging environment. Petrol sales volumes were affected in the first half of the year by higher pump prices that were mainly the result of the large increase in crude oil prices. Sales recovered in the second half of the year when pump prices eased, enabling a slight growth in petrol sales volumes for the full year in a market that shrank in 2006.
Non-fuel income in 2006 was higher than the prior year due to continued growth in the convenience retail business and higher StarCard sales. In 2006, Caltex strengthened its leadership in the national convenience retail market by increasing its market share to 32%.
The retail network is benefiting from a centralised logistics system launched in 2006 and improved buying arrangements for goods that are part of the Caltex Woolworths venture.
The Board declared a final dividend of $129.6 million or 48 cents per share fully franked, making a total year dividend of 80 cents per share after 32 cents per share paid in September 2006 (2005 total dividends: 46 cents per share).
This payment reflects the company’s stated dividend policy of lifting ordinary dividends to 40 – 60% of the RCOP (after tax excluding significant items) from 2006, when the high capital commitments of the Clean Fuels Project were completed.
To ensure security of supply and meet Australia’s expanding need for imported fuels (which represented over 25% of domestic sales in 2006), Caltex is investing in a program to improve supply chain infrastructure. The program was launched in 2006 with the completion of upgrade and expansion projects worth $17 million at a number of fuel storage and distribution facilities in Victoria, Queensland and the Northern Territory.
In 2006, Caltex also saw good progress with major refining and supply development programs which are designed to improve operational efficiency and profitability.
The refining performance improvement program which runs from 2004 to 2009 was successful in delivering further benefits in 2006. During the year a number of smaller projects were completed as well as the program’s first major project, a $4 million bitumen tank.
The Caltex supply group is working on a number of initiatives for supply chain management from crude oil purchasing through to product delivery at terminals. These include significant improvements in information integration, refinery scheduling and supply planning. In 2006, new processes and data management technology for crude oil delivery and refining were introduced as the first stage of a wider integrated refinery scheduling project.
Caltex has been producing cleaner fuels which are contributing to cleaner air in urban areas following the completion in May 2006 of the company’s $500 million Clean Fuels Project. This project upgraded the company’s two refineries to enable them to meet the Government’s new cleaner fuels standards for diesel with a maximum of 50 parts per million sulfur and petrol with a maximum of 1% benzene.
The refineries are also now equipped to produce fuels to the tougher standards regulated for 2008 and 2009. Already the Lytton refinery is producing diesel with 10 parts per million sulfur, well ahead of the 2009 deadline, and Caltex’s premium unleaded petrol with a maximum of 50 parts per million sulfur is attracting an early incentive payment for producing to 2008 standards.
The four year Clean Fuels Project was a major milestone for Caltex and its design and construction partners at a time of unprecedented worldwide demand for engineers, construction workers and equipment fabrication facilities.
2006 was also a landmark year for biofuels with Caltex establishing the country’s largest network of sites selling biofuels. The company met its target commitment for 2006 under the Australian Government’s Biofuels Action Plan and will continue to meet its annual target commitments through to 2010.
By the end of 2006, Caltex’s E10 (which contains 10% ethanol) was on sale at 132 metropolitan and regional sites from Canberra to Cairns. New Generation Diesel enhanced with 2% biodiesel was launched by Caltex in October 2006 and is being rolled out from Caltex’s Newcastle terminal to over 160 service stations in New South Wales.
Caltex must constantly move to stay competitive and be well prepared to meet changes in consumer preferences and emerging shifts in oil industry supply and demand.
We are focusing on opportunities to purchase and process a broader range of crude oils, adjusting our refineries to meet the growing demand for diesel and high octane fuels and expanding our sale of biofuels. In convenience retailing we are working on the next generation of stores and meeting the changing demands for lines such as fresh foods.
These are some of the strategies and responses we are developing in line with our vision for Caltex to continue as a strong company for the future. In serving its employees, business partners, customers and shareholders, Caltex is committed to doing what it says it will do.
The Board acknowledges the strong contribution of Mr David Reeves who resigned as Caltex Managing Director and Chief Executive Officer in May to take up a new role in Chevron Corporation in North America. Mr Reeves joined Caltex in August 2003.
The Board expresses its appreciation to Mr Ken Watson who retired from the Board in April after 10 years service and Mr William Hauschildt who retired from the Board in June after 20 months.
The Board welcomes the appointment of Mr Trevor Bourne as a director in March, Mr Brant Fish who was appointed a director in June and Ms Colleen Jones-Cervantes who was appointed an alternate director in June.
Our sincere thanks go to employees, contractors, franchisees and resellers for their contributions during 2006 and their strong commitment to making Caltex the Australian oil refining and marketing company most admired for its people, partnership and performance.
RFE Warburton AO
CHAIRMAN
DF King
MANAGING DIRECTOR AND CEO
* The Caltex Refiner Margin (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 calculation represents: average Singapore refiner margin + product quality premium + crude discount/(premium) + product freight - crude freight - yield loss.