Z Energy Limited (ALD) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Z Energy Agrees SIA with Ampol Australia Conference Call. [Operator Instructions] I would now like to hand the conference over to Mr. Matt Hardwick, Corporate Affairs Manager. Please go ahead.

Great. Thank you, Melanie, and good morning, everyone, and welcome to the Z Energy Investor Briefing. If we can just go to the next slide there with our safe harbor statement. Today, we will be discussing Z Energy's entry into a scheme implementation agreement with Ampol, under which it is proposed that Ampol will acquire all the shares of Z by means of the scheme of arrangement. I would note the operator's comment that this call is being recorded and will be available for replay on Z's investor website as soon as practical this afternoon. This investor briefing contains some forward-looking statements and projections. These reflect Z's current expectations based on what we think are reasonable assumptions. For any number of reasons, the future could be different from what we discuss today. This presentation is made in advance of our first half FY '22 results that are due to be released to the NZX and ASX in early November and is in no way a form of guidance for those results. Nothing communicated in this briefing should be misconstrued as an update to guidance. Consistent with the NZX and ASX listing rules and our disclosure obligations, we will communicate with the market if there is a material change to our outlook. I guess that does now for the legal bits. I'd like to now hand over to Mike Bennetts, Chief Executive of Z Energy, and ask him to make some opening remarks. At the end of his comments, we'll open up the call to questions. Thank you, everyone, and now over to you, Mike.

Thanks, Matt. And kia ora koutou to everybody on the call. If Tom could move us through to Slide 4. Much of this you might already have read in the disclosure that we put out this morning. But the points I would bring to your attention is we haven't been able to move the total consideration forward from what eventually -- what originally got Ampol into the data room. So now we have a consideration of $3.78 per share and the first $0.05 per share of any interim FY '22 dividend that Z elects to pay would be in addition to that $3.78 consideration. If Z chooses to pay a higher interim dividend than what's indicated by way of the $0.05 per share that Ampol has allowed for, then that will be deducted off the final price. If the scheme is not implemented by the 31st of March next year, then there's a dividend accumulator that reflects the FY '23 performance up to a limit of $0.10 per share if indeed the transaction did not settle until the 30th of September of next year. From a Board perspective, we unanimously recommend that our shareholders vote in favor of the scheme. We've already appointed Calibre Partners, who some of you may know as KordaMentha, which was their previous name, has been appointed as the independent valuer, and they will provide a valuation and report to our shareholders. The Z Board is bound by the customary exclusionary -- exclusivity provisions, and there are matching rights in favor of Ampol. And that does provide us with the necessary fiduciary carve-out should indeed a competing offer come through at some stage during the regulatory approval process. And there are break fees that are applicable here for both parties, and there's nothing in that, that is actually inconsistent with usual market practice. The scheme is conditional. The conditions are clearly the New Zealand Commerce Commission clearance and the Overseas Investment Office approval. Those are -- the applications for those that are already drafted. Indeed, that was an important part of the Z Board's consideration was to make sure we understood Ampol's approach to those 2 regulatory approval processes so that we could properly assess the risk of being able to secure approval. And we're obviously very happy with the level of risk that exists there. And indeed, we are providing with the necessary support and input into that documentation process and eventually the approval processes once they kick off. Clearly, shareholder approval is required for this, and we are looking to target a shareholder meeting probably around February or March of next year at which we need to secure the necessary 75% of shareholders voting in favor of the scheme for those that actually attend the meeting. Should I recall correctly, it requires it to be over 50% of the total issued capital. So February, March will be the next time that we actually put this one into the hands of our shareholders to decide upon. Ampol have committed to the full divestment of their Gull business in New Zealand. They previously in the -- the announcements announced around the due diligence period, they said that they would divest as required. As we've been through the process, they have now agreed to the full divestment of Gull in New Zealand. And you may see from their disclosures that are now out in the market but that could be by way of a trade sale or they're equally running the alternative of an IPO at this very early stage of that particular process. Let's then move to the next slide. Thanks, Tom. Just a reminder about what are the benefits of this transaction. We clearly recognize that there is scale here. So Tom, if we could go to Slide 5, please. There's, clearly, scale benefits here. And it's sort of obvious that Ampol have a significant trading operation in Singapore, and they've recently established an office in Houston as well. And that really does provide Z with -- Z as a company in New Zealand, a fuel supply security at a time where there's clearly changes taking place in our industry as we look towards an import terminal being established through next year. I'm sure that would be of importance to the government. That's a benefit of the scale. But also we have just an outright downstream play beyond the sort of the supply and trading aspects of it. Ampol is a very, very large company in Australia, it's got 80,000 commercial customers, 8,000 employees. Clearly, Z will be part of that business, and that will confer benefits in a way that you'd expect from any sort of scale play. What we also notice, that Ampol have a similar commitment to the transition or the need to transition to a low-carbon future in the way that Z has done in the past that plays out in slightly different ways. Ampol had far greater or significant experience in hydrogen, for example, as an alternative to fossil fuels whereas Z tended to major more and develop IP around biofuel. Putting the 2 companies together actually provides really, really good transfer of IP and best practice. And Ampol has been very public in their commitment around the low carbon future through some disclosures when they released their strategy for low carbon and the alternatives for fossil fuel. Sort of philosophically, the 2 companies come from similar -- are committed to a similar outcome, are getting there in 2 different ways that I think, again, is another example of the synergy we should be able to expect from this -- when the 2 companies come together. So with that said, I'll pause now and open up the call for any questions that you may have.

[Operator Instructions] Your first question comes from Grant Swanepoel with Jarden.

Almost over the finishing line it would appear. So the earnings risk of $40 million, is there any COVID provisions built into that? In terms of the NTA change, who decides on the revaluation of your NTA? And then your independent valuation report, when can we expect that to be out?

Yes. So any impacts from COVID have been carved out of that amount, Grant. So COVID is an exception to the typical mat clause. Indeed, there are a number of other exceptions that we have carved out as well. Net tangible assets, I actually don't know the answer to that question. I assume it would be as a result of the accounts that we published. So I'm not sure whether any revaluation would be required. It would simply be an outcome of the accounting process. And so whatever happens, it would lead to anyone being able to calculate that number. The independent valuation report, we briefed Calibre a number of weeks ago, so their work has already started. That would just be -- would be coincided with the shareholder vote. So it would be made public as part of that process rather than made public separate to that. My understanding is that it's a necessary part of the documentation for seeking the shareholder approval. So that given [indiscernible] it would be sometime next year.

Just to be clear on the independent report, if it does come out to say that they're underpaying, is there no break fee on that outcome?

Well, actually, I can't recall, Grant, on that particular one. Matt will check on that, and we'll get back to you on that one. But it certainly provides us then with the opportunity to cancel the transaction.

And then the final question, just on the margin point. Is that new to the terms that you would have been aware of before they went through the due diligence? And what's the risk of that actually being pushed out until '23?

Yes. So it is new. And the reason for that is, obviously, the industry has not yet been able to -- sorry, NZR have not made their final investment decision that was anticipated to have been done by the end of September. So within the window that we've been negotiating for, given that, that has not been done, it makes sense for that to be a condition for Ampol. And clearly, you can see from the June '23 date that we've given ourselves plenty of time for that to take place given that most indications from NZR are being sort of sometime in the middle of 2022 as opposed to 2023. But given that FID has not been made, it was sensible to have that as a condition.

Your next question comes from Jeremy Kincaid with UBS.

Just one question from me. Obviously, part of the OIO process involved looking at sensitive land. So I was just wondering if you could talk to your land holdings' approximate size and value? And whether or not any of your parcels of land would be considered sensitive? Or do you think would be sensitive?

Yes, we do have parts of the land that are sensitive. They're not necessarily sensitive in the way in which that clause is typically written, so for farmland or something like that. These would tend to be properties that would have joined or be adjacent to waterways. At the top of my head, I think it's less than about 15 in total, Jeremy. So it would be typically a service station or a truck stop or something. Most of them are actually truck stops, if I recall, what we went through with the Chevron transaction. So a very small number of properties, very small in size are captured by that particular part of the legislation. But in terms of the intent of the legislation, you wouldn't necessarily expect them to be having to work to the Nth degree of sensitivity, given that they are basically industrial properties that are neighboring on waterways.

Your next question comes from Mark Samter with MST.

Mike, I appreciate some of this might be reasonably hard to answer from a commercial sensitivity perspective. But obviously, Ampol this morning have put out some synergy numbers. And I'm just wondering, obviously, you publicly said that you put out a tender for your supply agreement. Did the information you got back from that maybe give you further strength to push for the interim dividend allowance? And I guess also for your view of what you think the combined business can create and your level of confidence personally in those synergies?

Yes. So we've run the procurement process. We obviously haven't finished it yet. We've had initial bids that have come in that were within the ballpark of what we previously disclosed. So we've always felt that if the numbers had come in at a more attractive level, that probably would have prompted a disclosure given the transaction that we've been negotiating. So given that we have not disclosed, I can confirm that the numbers we've received are pretty consistent with what we disclosed at Investor Day. So there is no significant upside there, nor is there a significant downside. We have noted that the market conditions are quite different this year to what they may have been the last year. We think that's a transitionary thing rather than something that's structural. So if anything, that prompts us to continue with that process and look to sign shorter-dated agreements like maybe a 1-year term contract rather than what we've done sometimes in the past, which have been anywhere between 2 or 3 years. In terms of the synergies that are achievable, obviously, I don't know in detail how Ampol have assessed that. I'm not surprised by the number that they've indicated that would be consistent with our thinking. In terms of did that drive us to [ push ] harder on value? We felt excluding synergy that they were a little bit light on value anyway. So we felt it was appropriate to push as we did. Most importantly, because -- and again we had this from -- this feedback from our shareholders that effectively, the cash has already been accumulated in the company for the first half of the year. And it made sense from a principal perspective to reward that -- reward our shareholders by paying that out. In the end, we settled on $0.05 per share as an allowance within the package that Ampol have offered, but Z would be able to pay what it would consider to be fair and appropriate for the first half, albeit that anything above $0.05 gets deducted off the $3.78 headline price. Have I answered everything for you there, Mark?

Yes, that's perfect. I mean I would definitely say be the sycophant who says, congratulations. I guess the share price today is telling you that maybe the Kiwi market, even when you enter a scheme, still doesn't really want to believe someone wants to buy you. But I think it's a great outcome for both markets. So congrats.

Yes, thank you.

[Operator Instructions] Your next question comes from Eamon Rood with Energy News.

Mike, can you elaborate on some of the synergies between biofuel and hydrogen that I believe you alluded to earlier? You mentioned Ampol has great experience in hydrogen. And of course, this already had its biofuels work program underway. Can you elaborate on those 2, please?

Yes, sure. It's mostly in the realm of IP or experience. I mean they have, frankly, no experience in hydrogen. We don't have anyone in the company who's grown up from a strong hydrogen background. We have an understanding of obviously the chemistry of hydrogen market dynamics on a global basis and how that would apply in New Zealand. So if you like, we know all the desktop stuff. Whereas Ampol run a refinery and have announced a hydrogen project. They clearly have engineering capabilities. So I think it's more in the realm of knowledge where I think there was synergy to be gained. So Z doesn't have to start from scratch if we were to enter into some sort of hydrogen activity. We would also be able to bring up the parent company and say, "Look, hey, we need some help on this. So could you check this for us? Or could you lend us some people to do that?" And then the reverse would apply from a biofuel perspective, where Z has built and run a plant and learned a lot in doing that. Z has established a domestic and international supply around biofuels and knows the issues and challenges there are for managing that within the supply chain from a physical perspective. So it's more in that realm of IP knowledge and experience than anything else. And I think in a typical way, we expect parts of one company to help out another part of the company in a different jurisdiction. That's where I think the synergy is gained. And you can either -- that synergy shows that have been quicker to market with reduced risk or indeed lower capital costs simply because one party is already down the experience curve compared to the party that's starting from pretty well a 0 base.

Right. And is there anything about in Z shareholding in the refinery that this transaction has to account for? Is that covered in Ampol's Commerce Commission application?

The Z's shareholding in NZR would be -- is not a consideration within the Commerce Commission in terms of what they would be looking at because that's solely a financial interest. And our interest as a shareholder in the refinery does not confer any advantage over -- for us in terms of our relationship with the customer. They are 2 entirely separate relationships or contracts.

Your next question comes from Daniel Butcher with CLSA.

Just a quick one on the timing. Just obviously looking at the extra dividend -- or sorry, extra payment that you get from Ampol of $0.55 every day up to $0.10. That sort of suggests, if I did my math correctly, you've got -- you're sort of allowing for 180 days of extra time to complete beyond March potentially. I'm just sort of wondering how you think it plays out in terms of regulatory approvals? What's the most likely date? And what do you think is sort of worst realistic date before the completion of the deal?

Yes, that's somewhat difficult to forecast. The work that Ampol has done has given them confidence to indicate that, that would be likely to achieve the 2 regulatory approvals by the middle of '22, so by June of '22. So this dividend accumulator, if you like, the $0.10 sort of half of that would be accumulated by the end of June if indeed, it took that long. It makes sense in our agreement with one another to allow for an extended period of time, just in case. So the dividend accumulator applies until the end of September. There is a 12-month long-stop date in the contract. So if regulatory approvals have not been achieved by clearly the 11th of October of next year, then that gives both parties the chance to consider whether they still want to proceed or not. Typically, you would expect the regulatory approvals to be within the sort of 6- to 9-month window. We're very [ conscious ] here that a little bit of complexity involved in that Ampol are required to make a divestment of Gull, and they've indicated 2 pathways for that. And we are, at this stage, unsure about the way in which Commerce Commission would clear that particular transaction, whether they want to see something by way of a binding offer before they approved it, or whether they were happy to approve something in principle, subject to it simply being executed in time. And the OIO process is equally open-ended in that there is a chance here that the minister will call in this particular transaction. Usually, there are 2 tests that need to be met. One is the good buyer test or the good investor test, and Ampol have obviously clearly met that previously in their purchase of Gull. There's a test around national interest -- sorry, economic benefits, but does this create economic benefits for New Zealand? Because, again, a relatively well-trodden path. The bit that's less well-trodden or understood is the notion of national interest, which purely at the minister's discretion. So it's very difficult to understand what the threshold may be or indeed it's difficult to go to other precedents. My understanding is that this particular application will be the largest and most complex since the national interest test was introduced about 18 months ago. So on that basis, I think it's been sensible for both parties to target a reasonable period of time to complete, but to allow for an additional period of time just in case it gets a little bit extended.

Thank you. There are no further questions at this time. I'll now hand back to Mr. Hardwick for closing remarks.

Great. Well, thank you, everyone, and thank you for your time today. As I said before, Z Energy will be announcing our first half FY '22 results in early November. The recording of this briefing will be available on the Z Investor website this afternoon. Thank you for your time, and this now concludes the briefing.

That does conclude our conference for today. Thank you for participating. You may now disconnect.