Lytton Refinery Upgrade And EV Expansion Will Meet Future Cleaner Energy Demands

Key Takeaways

• Upgrading the Lytton refinery for ultra-low sulfur gasoline can enhance revenue and margins amid growing demand for cleaner fuels.
  
• Expansion in premium sites and new infrastructure, including EV charging and renewable fuels, aligns with market trends and boosts long-term growth potential.
  
• Operational issues, market challenges, high leverage, and slow EV progress threaten Ampol's profitability and revenue growth if not addressed effectively.

Catalysts

Ampol Limited purchases and sells petroleum products in Australia, New Zealand, Singapore, and the United States.

• Ampol's strategy to upgrade the Lytton refinery to produce ultra-low sulfur gasoline is expected to yield a premium in the market, potentially enhancing the company's revenue and improving margins as demand for cleaner fuels increases.
  
• The consistent execution of Ampol's convenience retail strategy, including the expansion of premium sites and enhanced store offerings, is projected to sustain or enhance revenue growth in both Australia and New Zealand, boosting overall earnings.
  
• The focus on cost reduction, including a $50 million productivity program, suggests potential improvements in net margins as operational efficiency increases and costs are streamlined across the company.
  
• Ampol's ability to leverage new infrastructure, like the roll-out of EV fast-charging networks and renewable fuels, aligns with evolving consumer and regulatory demands, offering long-term revenue growth potential as these markets mature.
  
• The expected recovery in refining margins, supported by global market tightening and reduced processing capacity, could enhance Ampol's revenue and earnings, particularly impacting the profitability of its cyclical refining operations.

Ampol Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Ampol's revenue will decrease by 1.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 0.4% today to 1.8% in 3 years time.
• Analysts expect earnings to reach A$610.6 million (and earnings per share of A$2.56) by about April 2028, up from A$122.5 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting A$844.1 million in earnings, and the most bearish expecting A$536 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.0x on those 2028 earnings, down from 40.2x today. This future PE is greater than the current PE for the AU Oil and Gas industry at 14.5x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.8%, as per the Simply Wall St company report.

Ampol Future Earnings Per Share Growth

Risks

• Operational disruptions at the Lytton refinery, including unplanned outages and maintenance delays, have had significant negative impacts, which could affect future earnings if not resolved. (Earnings)
  
• Global refining market challenges, such as new capacity and weak demand, have adversely impacted Ampol's refining margins, particularly for the Lytton and F&I International segments, which may continue to pressure revenue. (Revenue)
  
• Ampol’s increased leverage, above the target range, and significant net borrowings could constrain financial flexibility and impact profitability if not managed effectively. (Net margins)
  
• Slow progress and challenges in EV charging infrastructure rollouts, compounded by slow EV adoption, risk delaying potential revenue growth from energy transition initiatives. (Revenue)
  
• Declines in total sales volumes, notably due to reduced opportunities in international markets, and shifting consumer preferences in retail may continue to pressure revenue streams. (Revenue)

Valuation

• The analysts have a consensus price target of A$30.764 for Ampol based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$35.0, and the most bearish reporting a price target of just A$23.7.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$33.7 billion, earnings will come to A$610.6 million, and it would be trading on a PE ratio of 15.0x, assuming you use a discount rate of 7.8%.
• Given the current share price of A$20.65, the analyst price target of A$30.76 is 32.9% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.