Growing EV Shift Will Expose Legacy Refining To Mounting Risks

Key Takeaways

• Transition to electric vehicles and alternative fuels threatens core fuel sales, undermining future growth as demand for petrol and diesel declines.
  
• Reliance on ageing refinery assets and rising compliance costs increase earnings volatility and may compress margins amid intensifying competition and stricter regulations.
  
• Retail integration, strategic acquisitions, and refining upgrades are expected to deliver cost savings, margin growth, and support earnings resilience as market conditions and regulations evolve.

Catalysts

Operates as an energy company in Australia, Singapore, and Papua New Guinea.

• The accelerated adoption of electric vehicles, both globally and in Australia, is likely to result in a long-term structural decline in demand for petrol and diesel, which make up a large portion of Viva Energy Group's revenues. This trend risks significant erosion of future fuel sales volumes and core earnings, especially as the transition to EVs becomes government mandated and supported by infrastructure investments.
  
• The ongoing expansion of renewable energy infrastructure and the increasing market share of alternative fuels such as hydrogen and biofuels threaten the continued dominance of traditional oil products. As a result, Viva Energy's top-line revenue from conventional fuels is set to experience persistent declines, undermining medium
• and long-term growth potential.
  
• Heavy reliance on ageing legacy refining assets, particularly the Geelong refinery, exposes the business to risks of unplanned outages, substantial maintenance-related capital expenditures, and possible future asset write-downs. These factors increase earnings volatility and may compress net margins as regulatory and operating costs rise over time.
  
• Intensifying decarbonization policies and heightened public and regulatory scrutiny are likely to impose increased compliance costs and tighten emission standards. This scenario will raise SG&A and operational costs, weighing on net margins and potentially reducing free cash flow available for dividends or growth investments.
  
• Intensifying global competition from integrated majors and new, low-cost entrants-especially importers from Asia and the Middle East-could erode Viva Energy's market share in both wholesale and retail channels. This is likely to pressure both revenues and EBITDA margins as market dynamics shift away from domestic standalone refining and distribution.

Viva Energy Group Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Viva Energy Group compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Viva Energy Group's revenue will decrease by 3.2% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -0.3% today to 0.5% in 3 years time.
• The bearish analysts expect earnings to reach A$135.9 million (and earnings per share of A$0.09) by about August 2028, up from A$-76.3 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 30.2x on those 2028 earnings, up from -44.5x today. This future PE is greater than the current PE for the AU Oil and Gas industry at 15.6x.
• 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 8.41%, as per the Simply Wall St company report.

Viva Energy Group Future Earnings Per Share Growth

Risks

• The company's large-scale investments in retail integration, OTR conversions, and strategic acquisitions are expected to deliver substantial synergies and cost reductions, with management targeting $90 million in synergies and $50 million in additional cost savings by 2026, underpinning EBITDA and earnings growth as integration is completed.
  
• Early results from Express-to-OTR store conversions show significant improvement in convenience gross margins per store-up by 30 to 60 percent-with positive indications for fuel volumes and ex-tobacco sales, suggesting that the retail transformation program could drive a strong uplift in network revenues and margins over time.
  
• Long-term growth in commercial and industrial fuel demand, especially in resilient sectors like aviation, agriculture, defense, and mining (which are difficult to electrify soon), continues to underpin volume growth and revenue stability, as evidenced by commercial sales and EBITDA rising by 5 percent in 2024 and a healthy project pipeline.
  
• Recent and ongoing investments at the Geelong refinery (ultra-low sulphur gasoline, biofuel capability, and co-processing of recycled feedstocks) position the company to benefit from regulatory requirements for cleaner fuels and potential government support, supporting net margins and reducing earnings volatility as fuel standards tighten.
  
• The gradual normalization of inflation and easing cost of living pressures, combined with a robust platform for operational efficiencies and the ability to pass through costs as retail conditions improve, could drive a rebound in both retail and refining profitability, supporting future earnings and share price resilience.

Valuation

• The assumed bearish price target for Viva Energy Group is A$2.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Viva Energy Group's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$3.4, and the most bearish reporting a price target of just A$2.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be A$27.3 billion, earnings will come to A$135.9 million, and it would be trading on a PE ratio of 30.2x, assuming you use a discount rate of 8.4%.
  
• Given the current share price of A$2.11, the bearish analyst price target of A$2.0 is 5.5% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• 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.