Viva Energy Group Limited (VEA) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Viva Energy Australia Full Year 2021 Results Call. [Operator Instructions] I would now like to hand the conference over to Scott Wyatt, Chief Executive Officer. Please go ahead.

Good morning, and thank you all for joining us today to discuss Viva Energy's Full Year Results for 2021, which, of course, follows the guidance that we provided in December. My name is Scott Wyatt, Chief Executive Officer of Viva Energy. And on the call with me today is Jevan Bouzo, our Chief Operating and Financial Officer; and Lachlan Pfeiffer, our Chief Business Development and Sustainability Officer. I would like to begin this morning by acknowledging the traditional owners of the lands on which we are collectively gathered for this call and pay my respects to their elders past, present and emerging. I'd like to now turn to Slide 5 of the presentation. Given the challenges arising from the pandemic, I'm delighted with the performance of the company during 2021 and with the results that we are reporting today. We have experienced strong growth across all parts of our business, including an 8% increase in Retail fuel sales volumes, a 39% improvement in commercial earnings and a strong return to profitability at Geelong Refinery during the fourth quarter. The federal government Fuel Security Package has, of course, transformed the outlook for our refining business and provides a foundation to progress our broader vision for the Energy Hub. In this regard, we have made excellent progress on our proposed LNG terminal and received funding from the federal government to construct 90 million liters of diesel storage, which will commence this year. We have more plans for this part of our business and have also announced an emissions and reduction commitments as part of our broader energy transition strategy, which we shared with you in November last year. Overall, we have delivered a strong financial performance in 2021, made excellent progress on our strategic priorities, and we're well placed to benefit from the broader market recovery in the year ahead. Our strong financial position has enabled us to complete a further $100 million capital return and an $18 million on-market buyback during 2021 and with the combined interim and final dividend to deliver a full year fully franked dividend of $115.5 million or $0.073 per share. Now turning to Slide 6. Let me take a moment just to reflect on our safety performance. Last year, we recorded 4 high potential process safety incidents, including 3 at Geelong Refinery and 1 at our fuel terminal in Sydney as a result of failure in customer equipment. There were minimal consequences from these incidents, and we have captured learnings, which have informed our broader safety programs. Notwithstanding these incidents, I'm really pleased with the continued reduction in underlying loss of product containments, which, of course, are a key indicator of process safety risk. We invest heavily in our reliability programs to minimize the risk of these sorts of incidents, and this is a key driver of continuous long-term improvement in this area. Our total reportable injury frequency rate, which measures the number of injuries per million hours worked, was elevated compared to prior years. Higher levels of construction, maintenance and operational activity across the business has contributed to an increase in musculoskeletal injuries, which forms the majority of these personal injuries. Our renewed focus on improving manual handling techniques and risk management and routine operational tasks has helped to reduce injury frequency in recent months, and this will remain a priority for the year ahead. Of course, I'm particularly proud of the way we continued to care for our employees and contractors to minimize the impact of COVID on people and our operations. We have a very high level of voluntary vaccination across our work groups and minimal infection within the workplace. I'm very proud of the way we've maintained safe and reliable supply for our customers throughout the pandemic. Turning to sales performance on Slide 7. I'm also very pleased with the recovery and share growth that we have seen in both retail and commercial during 2021. Throughout the pandemic, we have maintained a strong focus on core marketing businesses with total petrol and diesel sales lifting by 8% and 14%, respectively. While jet share has declined slightly, this market continues to be heavily impacted by border closures. And recovery has, of course, been slower than expected. Turning to Slide 8. We have seen a strong recovery in regional refining margins, driven by both actual and expected recovery in global oil demand, together with reductions in refining capacity from permanent closures and maintenance activity across the region. This continues into 2022. However, increases in crude premiums for the crudes processed at Geelong is having a dampening effect. Geelong production in 2021 was strong with major maintenance deferred from 2020 now complete and a relatively quiet year ahead. Improvements in domestic demand have allowed Geelong to return to a more normal production mode and better optimize the production slate. Availability has been excellent at more than 94%. Turning to Slide 9. I'd like to discuss now the progress we've made on our strategic priorities. As I mentioned before, the federal government's Fuel Security Package materially transforms the outlook for our refining business. The fuel services security payment, in particular, underpins future earnings until 2028 to 2030 by providing direct financial support when margins fall below an agreed level. This reduces downside earning risk while maintaining the opportunity benefit from upside when refining margins are stronger, as we saw in quarter 4. It provides confidence to invest in major upgrades to the refinery, which will improve the quality of our product and the reliability of the facility and to progress our broader vision to transform the site into a modern Energy Hub. We have now completed front-end engineering design for the LNG project and have progressed to the regulatory approval phase. I'm very pleased to have Woodside join with ENGIE, Mitsui, Vitol and VTTI as one of our partners and that we have entered into a heads of agreement with Hoegh to provide the necessary floating storage regasification unit. We continue to explore the feasibility of establishing a hydrogen production and refueling site supported by behind-the-meter solar and have received a grant from the federal government to establish 90 million liters of diesel storage, as I mentioned earlier. We are also expecting to receive up to $125 million of funding to upgrade the refinery to produce petrol to support lower-emission fuels from 2025. We have also made commitments to reduce our own emissions and achieve net zero across our refining business by 2030 and across the whole group by 2050. In summary, we are very excited about the foundations we've laid in 2021 and the opportunities that lie ahead. Let me now hand over to Jevan to talk in a little bit more detail about our financial performance.

Thanks, Scott. I'll kick off on Slide 11. 2021 has been a good year. Our EBITDA (RC) doubled to $484.2 million. After a challenging 2020, we set out a number of priorities as part of our pathway to recovery. Scott has already covered these in the earlier slides, and it's great to see a lot of these bearing out in our financial results for the year. We grew our retail, fuels and marketing business by about 3% to EBITDA of $404.8 million despite temporary impacts in retail. Refining EBITDA was positive $103.4 million after a large loss in 2020, reflecting both the introduction of the fuel security payments and a return to stand-alone profitability in the fourth quarter. Corporate costs were up marginally, and our underlying free cash flow was up $174 million to $261.1 million, supported by strong cash generation across all segments. Importantly, we resumed paying dividends during 2021 with a full year dividend of $115.5 million, up $100 million from the prior year. On Slide 12, we've set out the updated segmentation changes for the full year. Many of you will remember, we made these changes at the half year to more clearly show the true underlying cash generation of the business. A short summary for the full year is set out on this slide. We allocated actual lease costs to each relevant segment rather than in depreciation and finance costs under the new accounting standards. As a result, our underlying EBITDA is referable to net debt, excluding lease liabilities. We've allocated supply, corporate and overhead costs to better -- provide better transparency of retail fuels and marketing profitability with refinery-related costs allocated directly to the refining segment. The wholesale business with sales to independently branded operators and regional businesses was moved from retail to commercial within the RFM segment. Finally, we've aligned the underlying NPAT with the previous definition of distributable NPAT. This removes the need for a separate distributable NPAT calculation, and dividends are now determined with respect to underlying NPAT (RC), which relates more directly to the free cash flow of the business. The complete reconciliation between previous and current reporting is included in the appendix. Turning to Slide 13. We've set out the group EBITDA waterfall. On this slide, I'll take a moment to talk to the performance of each of the segments, starting with Retail. Sales volumes began to recover from the lows of 2020. However, due to lockdowns in our 2 biggest markets in the second half of 2021, we're still yet to see a full year post-COVID impact. The rising oil price tends to compress retail margins, and this had the greatest impact to retail earnings in the second half as well. Despite these temporary impacts, we continue to deliver our marketing plans, which have no doubt contributed to the improvements in market share that Scott covered earlier and will set us up well for a further recovery going forward. In Commercial, I'm really proud of the significant improvement in underlying EBITDA. This came from a combination of sales growth, a disciplined approach to new business and contract rollovers as well as strong management of our supply chain through a particularly uncertain period. We are yet to see a sustained recovery in aviation, and I look forward to this when border restrictions relax further. The refinery result was driven by a strong rebound of refining margins. However, this is a large figure due to the low lows of 2020. We received temporary production payments during periods of low refining margins throughout the year with a return to profitability in the fourth quarter. Production levels were up, offsetting increases in freight and energy costs. Across each of the segments, including corporate, we allowed a bit of costs back into the business as we started to return to more normal levels of activity, at least for part of the year. Foreign exchange was a bit of a headwind and mostly affects refining margins, which are U.S. dollar denominated. And the majority of the JobKeeper program did not carry into 2021. Overall, a great recovery in underlying EBITDA to $484.2 million with further opportunity in a post-COVID environment in each of the segments. On Slide 14, we have set out a breakdown of net cash flow for the year, which totaled $47.7 million. We managed the cash position well over the year with working capital outflows mostly offset by inventory gains following increased oil prices. When adding back the one-off items and returns to shareholders, our underlying free cash flow was $261.1 million, a great result that highlights the strong cash generation of the business. Turning to Slide 15. We have set out our capital expenditure profile. The underlying business capital expenditure for the year was $171 million and represents a return to an almost normal level of activity. You'll see from the bar chart on the left that a significant level of underlying business capital expenditure was deferred in 2020, and we expect to catch some of this up in 2022, along with an allowance for investment in a number of growth opportunities. We spent $14 million on Energy Hub projects and expect this to increase substantially in 2022 as we approach FID for a number of major projects such as the strategic storage, ultra-low sulfur gasoline upgrades and the LNG terminal. Overall, we provide guidance of $230 million to $240 million of underlying business capital expenditure, along with Energy Hub projects expected to cost $100 million to $110 million. I'm pleased that we have a strong balance sheet to manage this, which I'll cover in a couple of slides. On Slide 16, we've set out the final dividend position for 2021. Splitting out our dividends, as we do now, the Board has determined a payout ratio of 60% for a retail, fuels and marketing NPAT of $65.2 million in the second half, delivering a fully franked dividend of $0.025 per share for the 6 months ending 31 December 2021. We assessed the full year performance of the refinery, particularly the return to profitability, without temporary production payments or fuel security payments in the fourth quarter. And the Board determined a dividend of 60% of NPAT was appropriate. The refining dividend is assessed annually and equates to a fully franked dividend of $0.007 per share for the year. The combined total second half dividend is $0.032 per share, which will be payable to registered shareholders on the record date of 8 March 2022. Turning to Slide 17. We've set out our strong balance sheet position. In line with our capital management framework, we returned $183 million to shareholders during the year, including $66 million in the first half dividend, a capital return of $100 million and $18 million of the $40 million on-market buyback. After returning $118 million to shareholders, we ended the year with net debt of $95.2 million, a little better than where we started at the beginning of the year. We have an ambitious capital program ahead of us and have set a target to add more than $50 million of new earnings. Our balance sheet remains strong and has plenty of capacity to support this. I'd now like to hand back to Scott to cover the outlook and priorities for 2022.

Thanks, Jevan. Well, these are really pleasing results, and we're very excited about the opportunities in the year ahead. If you recall, last year, we set out our longer-term strategy for each of the key businesses and our approach to the energy transition, which is summarized on Slide 19. In summary, our strategy is to continue to outperform in our core business, leverage diversity to develop growth pathways and acquire the capability to accelerate proven business opportunities. As Jevan just mentioned, we expect to achieve more than $50 million from new earnings streams over the next 3 years and have already made serious progress in many of these areas, as I've touched on earlier in the presentation. Our approach to the energy transition, which we've set out on Slide 20, is to leverage our position as a significant and established energy supplier to play a key role in serving the nation's energy security agenda while concurrently developing and integrating new energies as they are commercialized and demand is proven. Australia, of course, is a large and diverse country with traditional energy resources typically located far from the demand centers. The majority of the country's oil, both crude and refined, is sourced from overseas. And increasingly, gas has to be transported from gas fields in the north of the country to demand centers in the south. Our refinery in Victoria services the country's largest contiguous market with Victoria, South Australia and New South Wales all receiving production from Geelong. The refinery takes crude oil and local -- from local gas and condensate fields and has dedicated port capability to receive oil and refined products for processing and storage through our refining infrastructure. Supplying 10% of the country's liquid fuel requirements and 50% of Victoria's, the Geelong refinery is well placed to service the nation's fuel demand well beyond the end of this decade, displacing imports should demand decline from long-term impacts of energy substitutions. Fundamentally, we provide an important base level of energy security while the undertakes -- the country undertakes a broader energy transition. We believe the same can be said for natural gas. Victoria and other southern states are facing a significant decline in natural gas supply as traditional gas fields reach their end of life. Gas substitution policies are important and under development, but the execution and success of these will take many, many years to deliver and certainly well beyond the end of this decade. In the meantime, people will continue to need gas to heat homes, cook and underpin many industrial businesses and jobs. Our LNG terminal can be quickly connected to the largest gas market in Australia, bring gas from other parts of the country and overseas to fill the looming shortfall and eventually be taken away once the facility is no longer required sometime in the future. The state's energy security position is secured without any additional local gas fields developed or pipelines required to be built. We support both energy security and the energy transition in a sensible and most economic way. Of course, we also have an important role to play in developing and commercializing new and emerging energies. We are particularly focused on helping our customers reduce their own emissions and introducing hydrogen for commercial road transport such as buses and trucks. Pure battery vehicles are not suitable for these applications due to the weight of the battery and the charging times required. Hydrogen replaces the battery, which reduces the payload impact and greatly improves refueling times with an experience that is similar to traditional fuels. It is a product that we are already familiar with and will integrate well with our traditional service stations and refueling facilities. With Australia's broader investment in hydrogen production, our role is to integrate this with traditional fuels to provide a complete energy solution and provide home-based and on-road and refueling infrastructure. Although this remains an emerging energy, we are very excited about the opportunity that this presents, and we are assessing the feasibility to develop our first commercial venture at our Energy Hub in Geelong. We are committed to being an active participant in the energy transition by extending our role in energy security and leveraging our capability and customers to build new energies. Now turning to Slide 21. Let me just provide a brief update on our LNG terminal. Australia and Southern states are forecast to experience shortfalls of gas as early as next year. In Victoria, more than 2 million households and 65,000 businesses rely on gas. Our proposed gas terminal in Geelong provides the most efficient gateway to supply gas into the Victorian Transmission System, as I mentioned earlier. It is now the most advanced gas terminal project in Victoria with a final investment decision expected in the third quarter of this year. Our project partners, including Woodside, ENGIE, Mitsui, Vitol and VTTI, bring substantial international experience with LNG regasification terminals. And the commercial model we are pursuing is a combination of typical midstream infrastructure style return with the opportunity for significant upside via direct participation in the gas market. Viva Energy's environmental effects statement submission is now with the Victorian government, and we expect it to be open for public submission in the first quarter. Slide 22 provides a brief update on the minimum stockholding obligations, which are being introduced by the federal government. These MSO settings are currently the subject of discussion with government, and it is not yet clear what the overall impact on the industry will be. However, we expect them to support our commitment to continue operating Geelong Refinery and believe we will be compliant from the commencement. We do expect a secondary trading market for storage is likely to develop to cover market participant shortfalls, and we will be watching this with interest. We will keep you informed of this policy as it is developed. Looking to the year ahead, there are a number of key priorities and milestones we aim to achieve in 2022, set out on Slide 23. This includes reaching FID on the gas terminal and on the first hydrogen refueling station. We also aim to materially progress our emerging carbon solutions business and continue to extend our Liberty Convenience expansion. Of course, there are other areas we are exploring. And as mentioned earlier, we expect to deliver more than $50 million a year from new earnings streams over the next 3 to 5 years. Looking ahead to 2022. On Slide 24, we are expecting to benefit from continued recovery in retail and aviation fuel sales as markets settle and travel resumes. There may be some ongoing disruption as the country continues to deal with the pandemic, but it is our belief that there is sufficient commitment to living with COVID amongst government and the community. And the days of extended periods of lockdowns are now behind us. Inflation and the higher oil prices are likely to provide some headwinds through the year and will require careful management to control costs and manage exposures. Fortunately, the majority of our contracts provide for regular cost pass-through in line with inflation. High demand for oil is lifting crude premiums in the early part of this year, as I mentioned earlier, and geopolitical factors are likely to continue to drive some uncertainty and volatility. The Fuel Security Package provides considerable protection from these forces within our refining business, and there remains considerable upside driven by recovery in global oil demand and refinery capacity reductions. Overall, I'm very optimistic about the year ahead and have the confidence that we are well placed to both benefit from any recovery and navigate challenges in the same way we did in 2021. On that note, let me now open for questions.

[Operator Instructions] The first question comes from Adam Martin from Morgan Stanley.

Scott, Jevan, just perhaps you could touch on cost inflation, labor availability and particularly, obviously, around Geelong gas or LNG imports as well, how you're thinking about that. But maybe you could touch just the broad business and then also that project, please.

Jevan, can I get you to pick that up? I really struggled to hear that. We've got quite a scratchy line at my end. So I'm not trying to -- did you hear the question?

Yes. Scott, let me have a crack at the cost inflation point first across the business, and then maybe Lachlan can talk to some of the costs around the LNG import terminal and how we're thinking about that over the forward period. Thanks for your question, Adam. I think we are seeing challenges with labor availability and cost inflation in the market no different to any other business. Scott touched on it in his closing comments on the final slide. We are fortunate that in our sector, a lot of our commercial contracts and large customer arrangements are based on formula prices associated with underlying commodity price and provide for costs pass-through in line with inflation. And so I think that's a real positive. Truck driver availability in the sector and general availability of staff across all segments remains a challenge, and it's something that we're working pretty hard to manage. But I think the team are doing a pretty good job of managing that. Across the business, we probably will see a little bit of cost creep back. And as I touched on some of the segment performance, I mentioned that we've seen a little bit of that in 2021 already as we return to a more normal level of activity, particularly from years like 2020 when we cut a lot back to manage a pretty uncertain environment. I might pass over to Lachlan to just talk to some of the LNG import terminal costs profile and the outlook for that project.

Yes. Thanks, Jevan, and thanks for the question. So cost base for the LNG project, very much a stage story in the sense that we're currently in the period, obviously, before FID and moving through the regulatory approvals this year. You would have seen there's a sort of an overall CapEx number in the presentation for Energy Hub projects, which currently, most of the costs are capitalized and relatively modest and what we would consider appropriate in terms of a run rate spend to be incurred before we get to FID. And then once we get past that stage gate, we'll obviously be talking much more clearly around full year expected costs to get to the commissioning stage and then run rate going forward from there. So it's a bit of a stage story and managing cost as appropriate before we hit that commercial approval stage.

Okay. And just second question, just on the Alliance volumes. How are they tracking? How is that recovering? And are you still sort of on that $70 million medium-term guidance? Or yes, perhaps you could just touch on that, please.

Adam, that was in relation to retail volumes?

Yes. Particularly around the Alliance, just given the different margins in the business just from the Alliance.

Yes. Yes. So I mean in terms of Alliance volumes, obviously, we saw some -- as we sort of indicated, saw some good recovery as the sort of restrictions relaxed in the back half -- back end of last year. January is traditionally relatively quiet. We're still -- I think we're still seeing, at the market level, subdued volumes on the back of people continuing to work from homes, particularly in major centers and probably an element of self-imposed isolation, I guess, is the -- we sort of moved through this Omicron peak, which is subduing volumes to some extent. But obviously, as we seem to be moving now into a phase where there's more encouragement to get back to work, obviously, removing masks in office will make a bit of a difference, too. So as we sort of head into March, sort of quite optimistic about retail volumes moving further ahead, recovering further. As we sort of indicated in our pack, despite that, we've seen -- we've performed very well, I think, throughout the course of last year and certainly happy with how we're performing as we enter a recovery phase across all the channels. And we've seen good growth year-on-year and also some good market share gains as well, both in retail and commercial overall. So we're very happy with the underlying performance of the business and how that's translating into sales performance.

The next question comes from Mark Samter from MST Marquee.

Yes. A couple of questions, if I can. Just first one on the crude premium chart. Can you just give us a feel -- I know or at least I think I know with the Cooper Basin contract, and obviously, that's dwindling in terms of volume, but the premiums are set on an annual basis. Obviously, I would have assumed you were buying a bit more Gibson basin crude now Altona is not running. Can you tell us how much of that premium is effectively locked and known for the rest of the year? And how much of it's volatile? Obviously, it stepped up a lot in the back end of last year, which suggests some volatility that's not foreseen here. Can you just talk to how we should expect that to unravel through the course of the year?

Yes. I mean, Mark, we obviously don't give details on the specific commercial contracts that we have with producers. But as you can see in the chart that the crude premiums have started to lift, certainly sort of towards historical levels, maybe a bit further, really just driven by tightness in oil supply globally. We obviously benefit -- look, there are some benefits from -- in terms of lower premiums for local indigenous crudes, but we also obviously heavily import crudes as well. So the overall mix, we are seeing some of the effects of crude premium increases that are coming across the region at the moment. I think it -- yes, how long days are sustained and at what level will really depend on how the crude markets evolve over the next period of time. Obviously, there's a couple of big factors at play there or a few big -- actually, a few big factors at play, one being just the continued recovery in oil demand as markets reopen, both within the region and globally, coupled with availability of supply. That's obviously a little bit driven by OPEC and certainly maybe potentially some upside in terms of supply availability, depending on how the discussions -- negotiations for Iran go on the nuclear agreement. And obviously, overshadowing all of that is just the uncertainty around Ukraine. So I think that the only thing you can take from it is it remains a bit uncertain, a bit volatile at the moment, market as we sort of move through the early part of this year. And we'll have to sort of see how that settles. And the main focus for now is obviously just being as smart as we can be around crude procurement as we go forward and manage our exposures as well as we can as well, and that's a key focus across the business at the moment.

And just next one is on that lazy and ever-more-lazy balance sheet of yours. Can we have an update on the time lines? And I know even with the increased CapEx this year, assuming the import terminal takes FID on time lines, I mean, we still, all else equal, are going to be sitting organically at a much higher net debt position? How long do we give ourselves to find someone to supply? And can we just qualify -- well, the residual $80 million of buyback, you still expect to complete that residual on-market buyback?

Thanks, Mark. So Jevan, can I hand it over to you?

Yes. Thanks, Scott, and thanks for your question, Mark. We like to refer to it as a strong balance sheet, but I take your point. We have set out some targets around adding earnings growth, as you know, so looking to deploy some of that balance sheet capacity to deliver the $50 million-plus uplift in EBITDA. And you can assume that we're working pretty actively on a range of opportunities to support that. There is a little bit of step-up in CapEx, as you mentioned. And I agree, we've got a very strong balance sheet and capacity to absorb that and do a fair bit more. Capital management has always remained an option, and it is part of our capital management framework. And we'll be working pretty actively through the course of this year to try and find opportunities to start to deliver on our target that we've set around earnings uplift. The on-market buyback that you referred to, we announced a tranche of $40 million. Like you say, we've completed about $18 million of that so far. So there's a little bit more left in the tank, and we'll continue to look for opportunities to buy back in the market and just generally be opportunistic about that. And so we'll be on and off, but it's something we're very focused on managing over the course of this year in terms of the balance sheet capacity and our stated target gearing range.

The next question comes from Dale Koenders from Barrenjoey.

Just if I might probe a little bit further on some of Mark's questions, just in terms of refining margin, when we think about how you started relative to the exit rate, your comment about, I guess, crude premium dampening effect. Is the net margin you're realizing up, down or flat this year to date? And also, in terms of production levels, I might have missed it, sort of thoughts towards intake volume guidance for the year.

Yes. Thanks for the question. I think we obviously haven't given and updated you on refining margins. We'll typically do that as part of our sort of trading update at the end of quarter 1. But I mean, you can see from -- I think whilst there's an increase in crude premiums, I think we continue to see strong refining margins. And you can see that from just the raw cracks that you can track fairly readily. And so the refining margin environment, whilst it's always a little bit volatile and particularly during these times, remains quite healthy in -- following on from a good recovery that we saw at the back end of quarter 4. So yes, I think the -- both actual and anticipated recovery in global demand is certainly driving demand for oil and obviously being quite supportive of refining cracks. But at the same time, it does encourage refineries to chase production and chase crudes, and that's really what's driving a bit the crude premiums that we see as well. It's still a good refining environment, particularly compared to where we've been, obviously.

Okay. And then intake volume for the year?

I'm sorry?

Guidance on production from the refinery this year with -- I guess you made the comment that it's more of a normal year post-maintenance, so outlook for volumes.

Yes. We haven't given guidance on that, but we have a pretty light maintenance year this year compared to a turnaround year. So from that point of view, we have a good opportunity to run the refinery pretty hard. So you should expect to see us producing as close to our sort of nameplate capacity as we can. And next year is probably -- is our next biggest -- is a more major turnaround year and when we complete the turnaround of the primary distillation unit. So that's kind of the focus next year, but this year is a relatively quiet one.

Okay. And then just, I guess, finally, building on the question from Mark on balance sheet. You've previously spoken about $500 million to $700 million of balance sheet capacity, which relative to, I guess, the earnings target update that you're targeting using balance sheet capacity, it looks like a sort of high-multiple acquisitions or investments versus where you're trading currently. Just wondering if you sort of can talk about what sort of multiples you're targeting with these investments on a go-forward relative to current business.

Yes. Can I pass that one to you, Jevan?

Yes. Sure. Thanks, Scott. Thanks for the question. Look, we won't go into -- I won't go into specific multiples and details. I think the focus for us is on a few fronts: one, to leverage existing strengths that we have, competitive advantages, areas where we know we can add value to a business. So that's probably first and foremost. Second is to look for opportunities that are accretive, and that means both on an earnings per share basis but also on a return-on-capital-employed basis. And that probably ties a little bit into the multiples comment that you've made. I don't think acquisition opportunities necessarily need to be at multiples that are a discount to our current trading multiple if they're still accretive and they add value. But our focus will be on acquiring opportunities that are attractive relative to our current trading multiple because the alternative is obviously to return that money to shareholders if opportunities that we identify don't add the right levels of value. And so we're very attuned to balancing that between capital management opportunities and also acquisition opportunities that will not only add earnings but add strategic value to the broader business over time as well.

The next question comes from Michael Simotas from Jefferies.

I've got a couple of questions on Coles Express to start. I mean, obviously, volumes have been pretty lumpy given the COVID impact, but you've called out 65 million liters in December. Do you think that is broadly indicative of the underlying performance of the business? I would have thought even December is probably at least somewhat impacted by COVID. But is there anything you could see in terms of restocking empty tanks or anything like that coming out of lockdown? So I'd just be interested in anything you could say on that.

Yes. Michael, I think -- I mean, December was certainly a month that was still impacted or dampened by COVID, as I sort of touched on earlier -- sorry, for the reasons I touched on earlier. So in that context, I was -- to start to reach those levels again was actually a pretty good result. And so I think it's the underlying -- I'm very happy with the underlying performance. So I think increasingly, we also need to recognize the contributions from the other channels as well. And obviously, the collective retail channels that we've got is what's driving the overall sales performance and share growth that we're seeing. So I think a bit like I've been saying through the course of last year, we need to get back to a period of, I guess, a more stable environment and certainly with cities reopened again and people traveling more regularly to work to sort of see what the sort of go-forward run rate really starts to look like. Hopefully, we'll get to see -- experience that a little bit towards the end of this half, I'm sort of optimistic about. And so as we sort of maybe come to talk about first quarter trading results and certainly first half results, we'll be in a better picture -- position to sort of talk about the longer picture, more stable run rate for the Alliance in the context of where the market sort of ends up for retail.

Yes. It looks like a good number in the circumstances, which is why...

Yes.

The second question on the Coles Alliance, I mean, Coles has made commentary around the drag on its shop sales from tobacco. I know we don't know exactly how the kind of revenue share arrangement for that part of the business works. But was that -- did that have a material impact on your numbers in the 2021 year? Or is it pretty minor?

Jevan, can I get you to address that one?

Yes. Sure. Thanks, Michael, for your question. Yes, it doesn't -- the way the Alliance is structured, it doesn't have a material impact on the Viva business. I mean, we're obviously still both jointly incentivized to see shop sales growth for the top line and to see the network continue to perform really well. The structure between us and Coles that underpins the Alliance is really one of a rental income, license fee-type arrangement that Coles pay to us for use and access to the sites and the ability to run the shops, and there is a small royalty that effectively tops that up. But in this scheme of the total number, it's relatively small. So we'll have some impact but not overly material to our business.

Yes. Okay. And just the last one from me, a follow-up to earlier discussions around crude premia. And sorry if you've addressed this, I got a bit -- onto the call a bit late. To what extent can you offset that crude premia increase by procuring a larger proportion of local crudes and condensates, given the refinery closures in Australia?

Yes. Michael, I think, typically -- perhaps the way to answer your question is, typically, we sort of source between sort of 20% to 30% of Geelong's crude requirements from local indigenous sources. That's partly availability, but it's also partly or heavily due to quality of local crudes and getting the right mix of crude selection, which requires us to look further afield. So it's not -- the value of those crudes and -- is obviously an important factor, but it's not the only factor because we obviously -- it doesn't necessarily produce the crude slate that we need. And we need to blend that with other crudes from more -- further afield. So it's not just a case of more crude being available, therefore, we should process more. It really comes to an economic equation, which we can -- we assess continuously based on what else is available and what the market is doing. But there's certainly...

But are there more of the more suitable crudes available? I would have thought there would be given the diet of Altona, in particular, wasn't that different.

Yes. No, for sure, but there's a limit to how much of those crudes we really want to process. That's the simple point here.

The next question comes from Joseph Wong from UBS.

Just one question -- or 2 questions I have. The first one is just on your carbon business solutions. Can you provide any detail on the margin delta between your carbon-neutral fuel versus, I guess, your regular fuel, given you're looking to expand in that area?

Yes. So we probably won't be able to answer that question directly. But Lachlan, perhaps you can give a bit of an overview about how we're approaching it and how we think about the carbon-neutral fuels.

Yes. Absolutely. Yes. As Scott was saying, I mean, considering for that specific commercials on different pricing. But look, we -- I think what we can say, though, is we are seeing a lot of customer interest in these products, and we expect to expand the suite of carbon-neutral fuels beyond the Jet A-1 that we have launched last year. We talk pretty closely with particularly our commercial customers around their lower-carbon options for -- particularly existing drivetrain. So that will be offset fuels but also alternative fuels such as biofuels and others until the end of the mix. So I think, yes, the best thing to take away from this is that there's increased customer appetite for this. And obviously, there's a lot of customers and corporates out there with their ambition to -- motivated to find lower-carbon solutions.

Yes. And just on that carbon solutions business, can you provide a bit more detail on this carbon credit generation you're making? With Australian carbon credit unit prices continuing to lift, does that provide a tailwind or headwind for that business unit?

Yes. So we're investigating a few different projects at the moment of the type I'm sure you're familiar with for carbon credit generation. They will be, as you say, Australian credits. We'd be looking to bring the cost of that generation below the current trading price. I mean, as I'm sure you understand that, that current trading prices have increased a lot in the last 12 to 18 months. That's on relatively small volumes, that price, and trading at the margin. So what we will be focused on is solid projects with good fundamentals, which can underpin our own projects such as the gas terminal project, which we said last year will be fully offset and some of our revenues our as well as providing credits into that carbon solutions business. But ultimately, there will be a suite of different offset and carbon opportunities that are available to us. And so we'll be looking to access the whole of the market as well as what we invest in ourselves.

Just one last question, if I can, just on the LNG import terminal. What level of firm contract commitments do you still need to move to FID? And I guess following on from that, is that the last remaining CP required for Woodside's MOU to move to a binding supply agreement?

Yes. So I think that's ahead of us. That's absolutely what we need to do prior to FID, which we've slated for Q3 this year, is to firm up that customer interest and agree with our customers what the binding commitments will be as well as that sort of solidifying the customer piece. So you should also note, there is, of course, still the regulatory process to play out in the next couple of months. And as Scott touched on a bit earlier, our EES is due to go out for a public hearing hopefully quite shortly. And then we'll get through that process hopefully by middle of the year, early Q3 and then look to finalize the pieces you just highlighted then as quickly as we can thereafter.

The next question comes from Daniel Butcher from CLSA.

A couple of questions. First one was just about the loss of market share in aviation. I was sort of curious if you can sort of comment on what segment or region the aviation volumes were lost. And is that part of the normal ebb and flow of contracts as they roll over? Or is there something else, a sort of theme playing out there?

Yes. Thanks for the question, Daniel. I could say it's a very small market at the moment. So I don't -- wouldn't read too much into movements, and the recovery and how that translates into share really depends on the contracts that you have in the airports that you have those contracts at, obviously, and where the demand happens to sit. So I think it's just off a very low base and very low movement. I'm not too -- wouldn't read too much into that market share outcome. But what I would say is that we are very -- we've done a lot of work in the last couple of years, certainly in 2020, to reset the aviation business, to sort of set ourselves up for a lower-volume environment for a few years as this recovers. And to -- and that's, I think, pretty very successful, and it's one of the key contributors to the results that we published today for commercial last year is just the ability to continue to still deliver material earnings from a sector that's otherwise quite impacted from a volume point of view. So we're probably very -- more focused on achieving the right level of returns given the lower volumes in that sector than necessarily too focused on market share at this point in time but recognizing that as the market fully recovers, that will probably become more important.

Okay. Quick one just on LNG, to follow up on prior questions. I'm just sort of curious, you'll announce the mix of infrastructure versus merchant exposure, I suppose, before you go to FID or as you go to FID. And I'm just sort of curious, the 4x jump in spot LNG prices recently, does that provide much food for thought for you about what sort of merchant risk you're willing to take on, given what goes up usually comes down eventually?

Yes. No. No, Lachlan, do you want to have a crack at that one? Good question.

Yes. I mean, it will be, as you say, leading into or at that time of FID that we will confirm the business model. And look, to be clear, the underlying base case is a terminal model, and our focus will be to get the project approved and commercially underpinned for that terminal model. And then the merchant opportunities above and beyond that are all on the upside, really. Look, the -- obviously, with what's happening in Europe at the moment, we're seeing some extraordinary international prices on the gas market. We would anticipate by the time we're talking about bringing gas to market, which is in the mid-2020s, that sort of impact will have worked its way through the market and potentially more sort of stable times. But I think it does highlight, to be frank, the issues around security of gas supply and ensuring that you've got that stable supply to underpin the pricing in the market. So that's very much the thesis for this project is to ensure that Victoria has that security of supply.

Sure. I appreciate that. Just sort of curious, I mean, can you sort of describe to us how the merchant model side of things, the bonus upside that you're sort of pitching it as would work and how your risk is going to be managed there?

Yes. So we looked to a few different models with regards to that. Obviously, there's opportunity for ourselves to play either directly or together with other participants in the terminal, both in the wholesale and gas marketing side. There's opportunities around gas storage, and there's some flexibility around the structure of the business, the structure of the terminal that we're building to provide some storage solutions to the market there. A very obvious opportunity, which is aligned with our business, is in bunkering for marine vessels. We do see gas as being a transition fuel and a very attractive fuel for the marine sector in its transition. And there's other opportunities which are sort of a bit further to be progressed and investigated around the willingness of markets for more GPG or gas for other transport solutions. So we'll be assessing through -- working through all of those and developing up that model and talking more about that as we come into FID.

All right. Just one final one, if I can. You're seeing there a bit of financial capacity on your balance sheet, and I'm sort of curious whether you have any views on the pros and cons of the gold business that [indiscernible] is selling in New Zealand. What do you see as the pros and cons of that business?

Yes. We don't typically comment on specific acquisition opportunities, obviously. But I think as sort of Jevan has highlighted and I think we've said before is that we certainly are quite active in looking at acquisition opportunities. New Zealand is an interesting market. It's one that we know well and have obviously got some history there and would be a potential market that we may look at for the right opportunity at the right time and for the right opportunities. And obviously, we have looked at gold before in the past. I guess one of the reasons we didn't pursue it in the past was that we felt it was constrained to a particular geographical area. It was a relatively immature convenience business since it's mostly unmanned and, therefore, really more attractive as the supplies shorten. And for us, I think strategically to enter a market like New Zealand, we're probably one of more sophisticated and developed offer around the country, but that's not -- doesn't -- in saying that, that doesn't mean that we wouldn't look at an opportunity like gold in the right circumstances as well.

[Operator Instructions] The next question comes from Scott Ryall from Rimor Equity Research.

Maybe on a similar theme to a couple of questions. I'm looking at Slide 20 on the energy security and transition. I wonder just in terms of the commitments you've made around being net zero, have you looked at carbon capture to take out Scope 1 and Scope 2 emissions faster than what you've expected in terms of your refinery operations? And I guess further to that, I was wondering -- you gave us a bit of an update on some of the potential early focus areas around the broader precinct in Geelong. Just wondering if you could give any updates, if any, on biofuels and how the Jet A-1 carbon-neutral fuel has been taken, even though you've made the very good point that the aviation market is fairly small at the moment. Sorry, that's very long-winded.

Thanks for the various questions within that. There's a bit in that, Lachlan, so maybe I'll hand that to you.

Yes. So I -- in terms of carbon capture, it's not something we've investigated in detail yet for Geelong. I think it is something that would longer term come into the mix to be assessed. We've obviously just worked through the package of the government with regards to maintaining refining operations at Geelong out till 2028 and potentially out to 2030. So while we haven't looked at it directly now, I think in the longer term and thinking about that post-2030 world, it's obviously something you would look at. And you do see some examples of early-stage consideration of it at other refineries around the globe. In terms of the Energy Hub, I think you're getting to there in terms of building out the other opportunities in that space. Yes, with the Jet A-1 fuel, the aviation market's pretty small. And obviously, the cost impacts have been pretty material at the moment. So I touched on it before. We have had good interest in that product. We expect it to grow, but it's still going to be at the smaller end with regards to the proportion of our jet fuel sales, of course. So it's a bit of a growing market. Biofuels is effectively becoming more cost competitive over time, but it is still a higher-priced product to -- as a diesel alternative. We can see opportunities in the market for new products to come online and for securing up that supply chain as well for our growth. It's obviously -- as we think of transition opportunities, there's opportunities which involve changing our fleets and changing our engine types. But where our customers and participants of the market are doing that and are still using traditional energies, biofuels is one of the better opportunities for reducing carbon intensity in those existing vehicles. So we see that as an opportunity in sort of in the medium term as we move through this energy transition. Now there's a few questions there. I'm not sure if I've answered them all, but let me know if I've missed anything.

Yes. I guess the only follow-on, you have answered everything that I asked, but can I follow on, on the biofuels stuff? You talked a little bit about that in November at your Investor Day, and I was just wondering if you've got any further with respect to agreements on some of those things that you're talking about that you need to put together to have a full value chain in that area.

Look, there's nothing further I can say today in terms of agreements. Obviously, we've been a supplier of biofuels for many years in the market. So we can provide those products to market at the moment. What I think our focus is on now is growing out the opportunity in that space and securing out the supply chain, which has been an issue for the biofuels industry outside of us in the past to provide that regularity and security in supply and to look, I think, more widely at different feedstock sources for that market. So nothing particular to update you on today, but it's something we are chasing pretty, pretty closely. And we can see new opportunities coming to the market as the technology for different feedstocks continues to develop and effectively becomes more economical in the market as we look forward.

At this time, we're showing no further questions. I'll hand the conference back to Mr. Wyatt for any closing remarks.

Okay. Thank you all for joining us this morning and for your questions. As I mentioned at the beginning of the session, I'm very pleased with the way the business has performed throughout the pandemic and the results that we have delivered last year and shared with you this morning. Very excited about the opportunities that lie ahead, both in the projects that we're working on and in the recovery and confidence that is emerging in the markets as well. So I feel like we're very well positioned to deliver another strong performance this year and position ourselves for the future, too, in our role in the broader energy transition. So thanks again for joining this morning. I hope you all have a great day.