Caltex (CTX) is Australia’s leading transport fuel supplier and convenience retailer and the only integrated oil refining and marketing company listed on the ASX.

CTX operates two major refineries, at Kurnell in Sydney, and Lytton in Brisbane. The company’s products include petroleum motor oil lubricants diesel and jet fuel. Caltex also operates convenience stores, fast food stores and service stations throughout Australia.

Caltex supplies approximately 35% of all transport fuels in Australia, and is a net importer of petroleum products.

1H Results

CTX's 1H12 results were a marked improvement on the first half in 2011. On a replacement cost, basis EBIT was 329 million, a jump of 70%. EPS was 74 cents a share, compared to 43 cents per share in 2011.

The result was underpinned by CTX's marketing division which supplies and distributes transports fuels. The major drag on the result was its refining business, specifically the Kurnell refinery.

Closing down Kurnell

On July 26 2012 CTX announced that following a major review of its operations it would be closing down refining at its Kurnell plant. The site will be converted to a major import terminal, which is expected to begin by the end of 2014.

The new terminal will be supported by a long-term product supply agreement with Chevron. As Chevron own 50% of CTX we believe this agreement will be on beneficial terms to CTX.

The conversion is expected to cost approximately $430 million, of which the company has already raised the cash via a subordinate notes issue. We like this decision as it reduces the company's exposure to refining earnings volatility and asset concentration risks.

Outlook

Last Friday the group reported an increase in August refining margins. The un-lagged margin increased to US$17.35 a barrel, 42.33% higher than July's figures.

Margins were supported by strong regional demand, whilst supply continued to be impacted by continual regional shutdown activity. We believe that the improvement in margins and the de-risking of its earnings via the shutdown of the Kurnell refinery will continue to drive the share price.

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