Chevron Departure To Reinvigorate Caltex

This story features BEACH ENERGY LIMITED. For more info SHARE ANALYSIS: BPT

-Caltex can review capital management
-Increased demand likely for CTX stock
-Caltex seen fully valued
-Beach's position on NTNG restored
 

By Eva Brocklehurst

Long-time major shareholder in Caltex ((CTX)), Chevron, plans to sell its 50% stake to a range of Australian and global investors. Media reports suggest the underwritten price is $34.20 a share. The company does not expect the sale will have an impact on its operations but brokers find there are myriad implications, both for short term trading in the stock and for the long-term growth options in front of Caltex.

The sale will allow Caltex pursue more growth opportunities, Morgan Stanley contends. Caltex was previously constrained as a domestic refiner and marketer of energy products. The broker suggests Caltex could leverage its strong brand beyond selling petrol and diesel and review its capital management strategy, particularly regarding franking credits. Moreover, there is potential to expand into other regional markets which offer faster growth rates.

Chevron's exit is timely, as each company diverges in its corporate objectives. Still, Chevron will remain a critical supplier to Caltex. Australia's rising need for imported fuel is reducing the barriers between owning refineries and terminals. Morgan Stanley suspects this alters market dynamics in ways which are yet to play out but it should be to the advantage of Caltex in an open market.

Brokers do ask the question as to whether the exit was timed to ensure a maximum price. Caltex has performed strongly in recent years but Morgan Stanley notes first half growth looks flat and may temper market expectations. The broker retains an Underweight rating while considering the exit of a long-standing shareholder to be a key event that requires reconsideration of the opportunities and risks for Caltex. Morgan Stanley expects an update on trading conditions for the first quarter at the AGM in May.

The sale was not unexpected, given comments regarding divestment by Chevron recently, but now that it has occurred JP Morgan expects increased index weighting and investor demand for Caltex. As many domestic institutional investors have been underweight the stock, active investor demand may increase as the larger free float would amplify the size of the portion with an underweight position.

JP Morgan also notes there is increased chance of a redistribution of franking credits. Any change in the shareholder domicile away from US-based Chevron, possibly with more domestic shareholders, would increase the value and likelihood of such occurring. JP Morgan retains a Neutral rating and notes the business repositioning is ongoing, which should deliver significant benefits in the medium term. Drivers include leveraging Caltex' infrastructure network and the retail brand.

The current share price is ahead of the broker's valuation and, although capital management options will improve following the Chevron sale, a more attractive entry point is awaited. FNArena's database contains five Hold ratings and two Sell. The consensus target is $32.43, suggesting 5.3% downside to the last share price. Targets range from $25.30 to $38.55.

With Chevron out of the way, Caltex has more options to transform itself. Despite suspicions that a sale of the stake would be forthcoming, Macquarie observes the share price fell only slightly relative to the ASX200, so the market was not pricing in Chevron's stake as an overhang on the stock. Macquarie also suspects Caltex could now be an option for more active investors who have large cash balances and what to secure a market weight in what will now be a more material index stock, which also offers a reasonable defensive yield.

It may take some time for the market to absorb such a large block of shares, and this could weigh on the price in the near term, but a more open register will allow for larger acquisition possibilities and more tax-efficient capital returns, in Macquarie's opinion. Caltex screens well on near-term multiples and yields, particularly as supply chain restructure and cost efficiencies are delivered over the next few years.

Irrespective of this situation, Chevron's exit has confirmed a view that the stock is fully valued and, while liking ungeared free cash flow yields, Macquarie believes these fail to reflect the structural headwinds that face the broader Australian fuel industry. For this reason the primary valuation methodology employed for Caltex is discounted cash flow.

As a corollary to the decision to sell out of Caltex, Chevron has also announced it will not participate in stage 2 of the Nappamerri Trough natural gas (NTNG) project in the Cooper Basin. This has implications for Beach Energy ((BPT)), with that company's original equity position in PRLs 33-49 of 100% and ATP855P of 64.9% now restored.

The relinquishing of Chevron's stake means Beach Energy's net resource grows to 2.77tcf from 1.96tcf. Beach is now proposing a minimal work program over the next 12 months until it secures another partner. The decision was a surprise to Macquarie, who had anticipated Chevron would be willing to commit to the second phase. Against the backdrop of the Caltex divestment this appears to Macquarie as a portfolio decision, rather than a reflection of the results of the project.

Following Chevron's withdrawal Macquarie considers there are few catalysts for Beach over the next few months and it could now prove a more likely takeover target, although it also has predator potential as well. Nonetheless, the broker's rating is downgraded to Neutral from Outperform, with a $1.20 target.
 

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