Infratil, Super Fund get bargain with Shell purchase at bottom of economic cycle

Tuesday 13th April 2010

The Infratil/New Zealand Super Fund joint venture that bought Royal Dutch Shell Plc’s local downstream assets gained an “extremely cheap” entry into the industry, according to brokerage McDouall Stuart.

The purchase at just under $700 million has been made at the bottom of the economic cycle, and both Infratil and the Super Fund are longer term participants willing to see through that cycle, said John Kidd, head of research at McDouall Stuart.

Shares of Infratil slipped 1.1% to $1.76, having reached an eight-month high yesterday. The shares have climbed 12% this year, outpacing the NZX 50 Index’s 1% gain. The company is rated a ‘buy’ based on the consensus of six recommendations compiled by Reuters.

The exit of Shell from downstream activities “represents all integrated oil super majors across the world retreating from the forecourt,” Kidd said. New Zealand is a small, mature market, where the majors could present a good case for diverting “lazy capital,” and there are rumours that at least one other oil major is actively looking to exit its downstream businesses, he said.

“There are questions who can buy though, as they’re complex asset suites with investments along the supply chain,” he said. For example, the JV vehicle Aotea Energy’s purchase includes 95 truck stops, specialist aviation and marine supply facilities, 25% of Fly Buys, 12 storage and distribution facilities and a 25% share of the coastal shipping network that supports the national fuel distribution chain. That’s in addition to 17.1% of New Zealand Refining and 229 retail forecourts.

“There’s not a large number of natural buyers for the complex suite, though perhaps more who would take part of the infrastructure or supply chain,” Kidd said.

It is well-known within the industry that oil products generate a minority of an oil company’s downstream earnings, and that Infratil has already indicated that a lack of retail investment has been notable over the past decade.

“What are they going to do over time to add further value to the retail side?” Kidd said. “The joint venture is prepared to spend money to make it more appealing, and there’s a real opportunity there.”

As a NZ-owned entity, Aotea Energy, and with Shell possessing the largest market share in petroleum product sales, there may be an opportunity to provide a kiwi-oriented brand. Though not suggesting Kiwifuel as a brand, the New Zealand market has seen an example in the growth and popularity of Kiwibank, Kidd said.

“This is a good NZ Inc story,” he said. “Through commercial means, part of a multinational has been bought out and is back in the local fold with a cornerstone stake and the largest market share.”

Businesswire.co.nz

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